The expected term of options granted represents the period of time that raise substantial doubt aboutoptions granted are expected to be outstanding. The expected volatility was based on the Company's ability to continue as a going concernvolatility in the trading of the Company’s common stock. The assumed discount rate was the default risk-free five-year interest rate for one year following the issuance of these financial statements. These adverse conditions are negative financial trends, specifically operating loss, working capital deficiency, and other adverse key financial ratios.US Treasury bills.

The Company has not established any source of revenue to cover its operating costs. Management plans to fund operating expensesadopted ASC 606, Revenue from Contracts with related party contributions to capital. There is no assurance that management's plan will be successful. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessaryCustomers (Topic 606) (“ASC 606”), in the eventsecond quarter of fiscal year 2020, as this was the first quarter that the Company cannot continuegenerated revenues. Under ASC 606, the Company recognizes revenue when a customer obtains control of promised goods, in an amount that reflects the consideration that the Company expects to receive in exchange for the goods. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the entity satisfies a going concern.performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods it transfers to the customer. In addition, the Company accounts for rebates and volume discounts that customers will be using to purchase products in the future.

Products Revenue

The Company generates products revenue from the sale of the Products (as defined above) to non-retail customers. The Company recognizes revenue at a point in time based on management’s evaluation of when performance obligations under the terms of a contract with the customer are satisfied and control of the Products has been transferred to the customer. In most situations, transfer of control is considered complete when the products have been shipped to the customer. The Company determined that a customer obtains control of the Product upon shipment when title of such product and risk of loss transfer to the customer. The Company’s shipping and handling costs are fulfillment costs and such amounts are classified as part of cost of sales. The Company offers credit sales arrangements to non-retail (or wholesale) customers and monitors the collectability of each credit sales periodically.

Note 3 – Leases

The Company capitalizes all leased assets pursuant to ASU 2016-02, “Leases (Topic 842),” which requires lessees to recognize right-of-use assets and lease liability, initially measured at present value of the lease payments, on its balance sheet for leases with terms longer than 12 months and classified as either financing or operating leases. The Company does not have financing leases and only one operating lease for office space. The operating lease is for a term of five years, beginning August 1, 2020, with rent of $1,000 payable monthly. As the operating lease does not provide for an implicit interest rate, we estimated a current borrowing rate of 4.5% in determining the present value of the lease. As of April 30, 2021, the right-to-use (“ROU”) lease asset, net of accumulated amortization, was $62,882. The initial recognition of the ROU operating lease was $73,749 for both the ROU asset and ROU liability. The amortization expense for ROU asset for the twelve months ended October 31, 2020 was $3,616 and one payment on the ROU liability was $2,836. The amortization expense for the six months ended April 30, 2021 was $7,905 and two payments on the ROU liability were $6,345. At April 30, 2021, short-term ROU lease liability was $12,363 and long-term liability was $52,859, totaling $65,222. Operating lease expense totaling $9,000 for November 1, 2020 until April 2021 was accrued at April 30, 2021.

Note 34 – Stockholder Equity

Preferred Shares Issued

The authorized preferred stock of the Company consists of 5,000,000 shares with a par value of $0.001 per share, of which 3,000,000 shares were designated as Series A Preferred Stock (the “Series A Preferred Stock”). Each share of the Series A Preferred Stock are initially convertible into 100 shares of common stock. All 3,000,000 shares of Series A Preferred Stock were issued and outstanding as of April 30, 2021.

Common Shares Issued

The authorized common stock of the Company consists of 1,000,000,000 shares with a par value of $0.001. There were 282,803,708 shares of common stock issued and outstanding as of April 30, 2021.

Restricted Stock Unit Awards

During the six months ended April 30, 2021, 1,310,000 shares of common stock were issued to eight employees of the Company pursuant to restricted stock unit (“RSU”) agreements, resulting in $724,161of share-based compensation. Of the shares issued to employees, 457,555 shares were withheld by the Company to satisfy tax withholding obligations equal to $77,975.

Additional Paid-In Capital

The Company’s former officer and director, Paul Moody, paid expenses on behalf ofDuring the Company totaling $7,210 during the threesix months ended January 31, 2019, which is considered a contributionApril 30, 2021, 4,668,633 shares of common stock were issued to 7 non-employee vendors as compensation for professional services rendered to the Company and two officers as additional compensation. These shares were expensed to the Company using the closing share price on the share issue dates to compute an aggregate fair market value total of $7,529,151.

Stock Options

During the six months April 30, 2021, the Company granted 1,100,000 options of which 500,000 fully vest on December 1, 2021,180,000 fully vest on March 15, 2021 and 140,000 vest over the next 3 years on March 15, 2022, 2023 and 2024. The options have exercise prices ranging from $2.165 to $2.39 per share. These options have a weighted average remaining life of 9.88 years as of April 30, 2021 and expire in the year 2031. The aggregate intrinsic value of these outstanding options as of April 30, 2021 was $0.

The Company fair valued the options on the grant date at $2,438,996 using a Black-Scholes option pricing model with no expectationthe following assumptions: stock price range of repayment$2.165-2.28 per share (based on the quoted trading price on the date of grant), volatility of 301.53%, expected term of 10 years, and a risk-free interest rate of 1.62%. The Company is considered additional paid-in capital.amortizing the expense over the vesting terms of each. The total stock option expense for the six months April 30, 2021 was $579,699.

Note 5 – Related-Party Transactions

Note 4 – Related-Party TransactionsRevenue and Accounts Receivable

Office SpaceDuring the six months ended April 30, 2021, the Company recognized revenue of $61,545 from three companies owned by Nirajkumar Patel, the Chief Executive Officer and Chief Financial Officer of the Company, and/or his wife. As of April 30, 2021, the Company has accounts receivable from this related party in the amount of $765.

We utilizePurchases and Accounts Payable

During the six months ended April 30, 2021, the Company purchased Products equal to $75,065,602 from Bidi, a related party company that is also owned by Nirajkumar Patel, the Company’s Chief Executive Officer and Chief Financial Officer. As of April 30, 2021, the Company had accounts payable to Bidi of $38,001,633 and products valued at $28,791,150 were held in inventory at April 30, 2021.

Office Space

On August 1, 2020, the Company began leasing office space for its main corporate office in Grant, Florida. The five-year lease agreement is with a related party, Just Pick, LLC (“Just Pick”). The Company’s Chief Executive Officer is an officer of Just Pick.

Prior to this, the Company utilized the home office space and equipmentwarehouse of ourits management at no cost.cost through July 31, 2020. 

Note 6 - Concentrations

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of purchases of inventories, accounts payable, accounts receivable, and revenue.

Concentration of Purchases and Accounts Payable- Related Party

For the six months ended April 30, 2021, 100% of the inventories of Products, primarily consisting of the “Bidi Stick,” were purchased from Bidi, a related party company that is also owned by Nirajkumar Patel, the Company’s Chief Executive Officer and Chief Financial Officer, in the amount of $75,065,602. It also accounted for 99.3% of the total accounts payable as of April 30, 2021. Products valued at $28,791,150 were held in inventory at April 30, 2021.

Concentration of Revenues and Accounts Receivable

For the six months ended April 30, 2021, approximately 33%, or $18,129,136, of the revenue from the sale of Products, primarily consisting of the “Bidi Stick,” was generated from Favs Business LLC (“Favs Business”), approximately 16%, or $9,069,455, of the revenue from the sale of Products was generated from MMS Distributing, LLC (“MMS Distro”), approximately 12%, or $6,820,132, of the revenue from the sale of Products was generated from Lakshmi Distributing Inc., doing business as C Store Master (“C Store Master”) and approximately 11%, or $5,868,000, of the revenue from the sale of Products was generated by GPM Investment, LLC (“GPM Investment”).

Favs Business, and GPM Investment had outstanding balances of $8,590,200 and $2,482,553, respectively, accounted for approximately 47% and 14%, respectively, of the total accounts receivable from customers as of April 30, 2021.

Note 7 – Commitments and Contingencies

The Company follows ASC 450-20, Loss Contingencies, to report accounting for contingencies. Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. There were no commitments or contingencies as of April 30, 2021 and April 30, 2020 other than the below:

On May 28, 2020, the Board of Directors approved cash bonus awards to each of the Company’s Chief Executive Officer and its Chief Operating Officer. With respect to the Chief Executive Officer, the Board of Directors approved a cash bonus award equal to $30,000 for every $25 million in gross revenues generated by the Company. With respect to the Chief Operating Officer, the Board approved a cash bonus award equal to $20,000 for every $25 million in gross revenues generated by the Company. On May 28, 2020, the Board of Directors also approved an equity bonus award for each of the Chief Executive Officer and the Chief Operating Officer. With respect to the Chief Executive Officer, the Board of Directors approved an award of 90,000 restricted shares of the Company’s common stock for every $50 million in accumulated gross revenues generated by the Company. With respect to the Chief Operating Officer, the Board approved an award of 75,000 restricted shares of the Company’s common stock for every $50 million in accumulated gross revenues generated by the Company. The Company’s accumulated gross revenues will be evaluated on a quarterly basis, beginning with the second quarter of fiscal year 2020. At October 31, 2020, the Company determined that the fair value of the equity bonus shares, or $165,000, should be accrued as it was deemed likely that the $50 million revenue target would be met. The Company issued these shares to the Chief Executive Officer and Chief Operating Office on January 1, 2021. During the quarter ended January 31, 2021, the $75 million and $100 million accumulated revenue targets were both achieved and the Company determined that the fair market value of the 165,000 shares, or $70,785, and the cash bonuses totaling $100,000 should be accrued at January 31, 2021.

During the three and six months ended April 30, 2021 additional revenue targets were not achieved and no related bonuses were accrued.

On March 31, 2020, the Company entered into a service agreement (the “Service Agreement”) with QuikfillRx LLC, a Florida limited liability company (“QuikfillRx”), whereby QuikfillRx provides the Company with certain services and support relating to sales management, website development and design, graphics, content, public communication, social media, management and analytics, and market and other research (collectively, the “Services”). The Services are provided by QuikfillRx as requested from time to time by the Company.

On June 2, 2020, the Company entered into the First Amendment to the Service Agreement (the “First Amendment” and, collectively with the Service Agreement, the “Amended Service Agreement”) with QuikfillRx. Effective as of March 16, 2021, the Company entered into the Second Amendment to Service Agreement (the “Second Amendment” and, collectively with the Amended Service Agreement, the “Further Amended Service Agreement”) with QuikfillRx. Pursuant to the terms of the Further Amended Service Agreement, the parties agreed to the following “General Compensation” payments: (i) for the Services provided in March 2020, the Company paid QuikfillRx an amount equal to $86,000; (ii) for the Services provided in April 2020, the Company paid QuikfillRx an amount equal to $100,000; (iii) each calendar month commencing May 2020 through October 2020, the Company paid QuikfillRx an amount equal to $125,000 per month for the Services to be performed during such calendar month; (iv) for each calendar month between November 1, 2020 and October 31, 2021, the Company will pay QuikfillRx $125,000 per month for the Services to be performed during such calendar month; (iv) if the parties agree to extend the term of the Further Amended Service Agreement beyond October 31, 2021, then for the period between November 1, 2021 and October 31, 2022, the Company will pay QuikfillRx $150,000 per month for the Services to be performed during such calendar month; and (v) if the parties agree to extend the term of the Further Amended Service Agreement beyond October 31, 2022, then for the period between November 1, 2022 and October 31, 2021, the Company will pay QuikfillRx $150,000 per month for the Services to be performed during such calendar month.  In addition, the Company will pay the following quarterly bonuses:

The Company has accrued $212,345 for a quarterly bonus payable to QuikfillRx, based on the Applicable Gross Quarterly Sales results of the three months ended April 30, 2021. 

On March 17, 2021 the Company entered into a consulting agreement with Russell Quick which granted stock options to purchase 500,000 shares of the Company’s common stock in exchange for consulting services. Mr. Quick may exercise the option right on December 1, 2021 when the shares are fully vested. The exercise price per share is $2.39. The Company recognized $190,000 in expense to account for the stock options.Russell Quick is the manager of QuikfillRx.

Note 8 – Income Tax

The Company is subject to federal income taxes and state income tax in the United States. Significant judgment is required in determining the provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws.

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017, and reduced the U.S. federal corporate tax rate from 35% to 21%, eliminated corporate Alternative Minimum Tax, modified rules for expensing capital investment, and limited the deduction of interest expense for certain companies. The Company fulfilled and shipped all of the Products from Florida and, thus, it is subject to the state corporate income tax of Florida with a tax rate of 4.458%.

During the six months ended April 30, 2021, the Company generated no taxable income and, thus no federal or state income taxes are accrued for tax year 2021.

Significant components of the Company’s deferred tax assets and liabilities as of April 30, 2021 and October 31, 2020 after applying enacted corporate income tax rate, is net operating loss carryforward of $0 and $15,377, and a valuation allowance of $0 and $15,377, respectively, which is a total deferred tax asset of $0. The Company’s tax returns for 2018 and 2019 remain open to examination.

Note 59 – Subsequent Events

Management has reviewed financial transactions forPatent Contribution Agreement

On May 4, 2021, Next Generation Labs, LLC (“Next Generation”) notified the Company subsequentthat a “reversion event” had occurred under that certain Patent Contribution Agreement, dated September 28, 2020 (the “Patent Contribution Agreement”). Pursuant to January 31, 2019the Patent Contribution Agreement, Next Generation agreed to contribute certain patents, patent applications, and has found that, withpatent data, described on Exhibit “A” of the exception of a contribution by Eric MosserPatent Contribution Agreement (the “Patents”), to the Company and the Company would subsequently transfer the Patents to Kaival Labs.

Pursuant to the Patent Contribution Agreement, the Company agreed to pay Next Generation a purchase price of $3 million for the Patents (the “Purchase Price”), which was expected to be paid over-time upon two events. First, the Company expected to pay part of the Purchase Price from proceeds generated from a future securities offering (the “Offering Payment”). Additionally, on the first date that Kaival Labs sold a product that was developed using any portion of the Patents or based on the Patents, the Company agreed to pay Next Generation the difference between the Purchase Price and the Offering Payment.

Pursuant to the terms of the Patent Contribution Agreement, the parties agreed that the Company would file a Form 1-A offering statement no later than January 31, 2021, unless extended in writing by the Company in good faith to no later than March 15, 2021 (the “Filing Date”). The Patent Contribution Agreement further provided that in the amountevent the Company or Kaival Labs materially breached the terms of $600the Patent Contribution Agreement and the material breach is not cured within fifteen (15) business days after Next Generation provides written notice of such material breach, then a reversion event would occur, and the Patents would revert from Kaival Labs to Next Generation.

The Company did not undertake a securities offering by filing a Form 1-A offering statement by the Filing Date. The Company attempted to negotiate an amendment to the Patent Contribution Agreement, which would allow the Company additional time to undertake a securities offering. However, on April 14, 2019, which contribution is to be used for accounting expenses, there was nothing material to disclose.  This is considered to be a contribution to8, 2021, Next Generation notified the Company with no expectationthat it was in material breach of repayment.the Patent Contribution Agreement and that the Company would have fifteen (15) business days, or April 30, 2021, to cure such breach. Ultimately, the Company decided not to cure such breach within the requisite time and, on May 4, 2021, Next Generation notified the Company that a reversion event occurred.

The Company is in the process of completing the necessary documentation to transfer the Patents from Kaival Labs to Next Generation. Neither the Company, nor Kaival Labs, has developed or otherwise relied on the Patents to date and does not expect the reversion of the Patents to materially affect the Company’s business.

Share-based Compensation

On May 5, 2021, 775,000 shares of common stock were issued to eight employees of the Company pursuant to RSU agreements, resulting in the recognition of $487,514 of share-based compensation. Of the shares issued to employees, 372,096 shares were withheld by the Company to satisfy tax withholding obligations equal to $123,536.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of the financial statements with a narrative report on our financial condition, results of operations, and liquidity. This discussion and analysis should be read in conjunction with the attached unaudited Financial Statements and notes thereto for the three and six months ended April 30, 2021 included under Item 1 – Financial Statements in this Quarterly Report and our Registration Statement on Form 10-12G, which contains audited Financial Statements and notes thereto for the periodyear ended October 31, 2018.2020 contained in our Annual Report on Form 10-K. The following discussion contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Our actual results could differ materially from those discussed in the forward-looking statements. Please also see the cautionary language at the beginning of this Quarterly Report regarding forward-looking statements.

The discussions of our results as presented in this Quarterly Report include use of the non-GAAP term “gross profit.” Gross profit is determined by deducting the cost of goods sold from operating revenue. Cost of goods sold includes direct and indirect labor, materials, services, fixed costs, and variable overhead. Gross profit should not be considered an alternative to operating income or net income, which are determined in accordance with GAAP. We believe that gross profit, although a non-GAAP financial measure, is useful and meaningful to investors as a basis for making investment decisions. It provides investors with information that demonstrates our cost structure and provides funds for our total costs and expenses. We use gross profit in measuring the performance of our business. Other companies may calculate gross profit in a different manner.

Potential Impact of COVID-19

In March 2020, the WHO declared the outbreak of COVID-19 as a pandemic based on the rapid increase in global exposure. COVID-19 continues to spread throughout the world, including the United States. Our business operations, which commenced during this pandemic, continue to be operational and, to date, we have not seen any significant direct negative impact of COVID-19 to our newly commenced business. However, we have encountered some logistical delays related to product launches and distribution in international markets due to COVID-19 While the spread of COVID-19 has begun to slow and social restrictions have begun to ease, the full impact of the COVID-19 pandemic continues to evolve and remains uncertain. The COVID-19 pandemic continues to impact economic conditions, which could impact the short-term and long-term demand from our customers and, therefore, has the potential to negatively impact our results of operations, cash flows, and financial position in the future. Management is actively monitoring this situation and any impact on our financial condition, liquidity, and results of operations. However, given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, we are not presently able to estimate the effects of the COVID-19 pandemic on our future results of operations, financial condition, or liquidity for the remainder of fiscal year 2021 and, possibly, beyond.

Corporate History

We were incorporated on September 4, 2018 in the State of Delaware. We are focused on growing and incubating innovative and profitable products into mature, dominant brands.

USSE Corp. and USSE Delaware Merger

USSE Corp., a Nevada corporation (“USSE Nevada”) was incorporated with the Nevada Secretary of State on July 8, 1998 under the original name C&A Restaurants.Restaurants, Inc. (“C&A Restaurants”). On June 15, 2009, C&A Restaurants changed its name to USSE Corp.

Effective September 19, 2018, USSE Corp.Nevada re-domiciled from Nevada to Delaware pursuant to a merger of USSE Corp.Nevada with and into USSE Delaware, Inc. (“USSE Delaware”), with USSE Delaware as the surviving entity. Each share of USSE Corp.’s capital stock issued and outstanding immediately prior to the effective date of the Re-domestication Merger was automatically converted into one fully paid and nonassessable share of USSE Delaware.

Immediately following the Re-domestication Merger, USSE Delaware was authorized to issue up to 1,005,000,000 shares, which consisted of: (i) 1,000,000,000 shares of common stock, par value $0.001 per share, of which 66,397,574 shares were issued and outstanding at such date; and (ii) 5,000,000 shares of preferred stock, par value $.001 per share, of which (a) 1,000,000 shares were designated as Convertible Series A, all of which were issued and outstanding at that date; and (b) 500,000 shares were designated as Convertible Series B, of which 71,700 shares of Convertible Series B preferred stock were issued and outstanding at that date.

Holding Company Reorganization

On September 4, 2018, USSE Delaware acquired 1,000 shares of our common stock, of the Company, which represented 100% of the Company’sour then-outstanding shares of common stock, for no consideration, resulting in the Companyus becoming a wholly-owned subsidiary of USSE Delaware. Also, immediately prior to the Holding Company Reorganization (as defined below), USSE Merger Sub, Inc., a Delaware corporation (“USSE Merger Sub”), was our wholly-owned subsidiary.

At the Effective Time,On September 19, 2018, and in accordance with the provisions set forth in Section 251(g) of the DGCL, USSE Delaware our then parent, merged with and intoGeneral Corporation Law, USSE Merger Sub, an indirect wholly-owned subsidiary of USSE Delaware and our direct wholly-owned subsidiary, merged with and into USSE Delaware, asour then-parent. USSE Delaware was the surviving corporation and our wholly-owned subsidiary. At the Effective Time, and as a result of the Holding Company Reorganization, the separate corporate existence of USSE Merger Sub ceased, and USSE Delaware also changed its name to USSE Corp., which then became the our wholly-owned subsidiary. The Holding Company Reorganization also resulted in the conversion of securities of USSE Delaware into identical and equivalent securities of the Company and the stockholders of USSE Delaware became the stockholders of the Company. following this holding company reorganization.

Upon completionChange of the Holding Company Reorganization, by virtue of the merger, and without any action on the part of the holder thereof, each share of USSE Delaware’s common stock issued and outstanding immediately prior to the Effective Time of the Holding Company Reorganization was automatically converted into one validly issued, fully paid, and non-assessable share of the Company’s common stock. Additionally, each share of USSE Delaware’s preferred stock issued and outstanding immediately prior to the Effective Time was converted into one validly issued, fully paid, and non-assessable share of the Company’s preferred stock, having the same designations, rights, powers, and preferences, and the qualifications, limitation, and restrictions thereof, as the corresponding share of USSE Delaware’s preferred stock. Control

Additionally, any shares held by the Company in the Predecessor were cancelled. This resulted in the Company being authorized to issue up to 1,005,000,000 shares, which consisted of: (i) 1,000,000,000 shares of common stock, par value $0.001 per share of which 66,397,574 shares were issued and outstanding; (ii) 5,000,000 shares of preferred stock, par value $0.001 per share, of which (a) 1,000,000 shares were designated as Convertible Series A, all of which were issued and outstanding; and (b) 500,000 shares were designated as Convertible Series B, of which 71,700 shares of Convertible Series B preferred stock were issued and outstanding.

Post-Holding Company Reorganization

On October 19, 2018, the Company issued 500,000,000 shares of restricted common stock and 400,000 shares of Convertible Series B preferred stock to GMRZ for services rendered to the Company.

Commensurate with the filing of our Amended and Restated Certificate of Incorporation with the Delaware Secretary of State on October 22, 2018, every issued and outstanding share of Convertible Series A preferred stock was converted into 1.25 shares of common stock with stockholders’ economic rights preserved. Additionally, at the same time, every share of Convertible Series B preferred stock issued and outstanding was converted into ten shares of common stock with stockholders’ economic rights adversely affected in the conversion. Immediately following the conversion of the aforementioned shares, and upon filing of the Amended and Restated Certificate of Incorporation, the authorized and unissued shares of Convertible Series A and Convertible Series B preferred stock were cancelled. As of October 22, 2018, the Convertible Series A and Series B preferred stock were removed from the status of authorized but unissued preferred stock.

On February 6, 2019, the Companywe entered into the non-bindinga Share Purchase Agreement (the “Share Purchase Agreement”), by and among the Company,us, GMRZ Holdings LLC, a Nevada limited liability company (“GMRZ”), our then-controlling stockholder, and KBIG,Kaival Holdings, LLC, a Delaware limited liability company (“KH”), pursuant to which, on February 20, 2019, GMRZ sold 504,000,000 shares of the Company’sour restricted common stock, representing approximately 88.06 percent of the Company’sour then issued and outstanding shares of common stock, to KBIG,KH, and KBIGKH paid GMRZ consideration in the amount set forth in the Share Purchase Agreement. The consummation of the transactions contemplated by the Share Purchase Agreement resulted in a change in control, of the Company, with KBIGKH becoming the Company’sour largest controlling stockholder. The sole members of KBIG are Nirajkumar Patel and Eric Mosser.Mosser are the sole voting members of KH.

Name Change

Effective July 12, 2019, we changed our corporate name from Quick Start Holdings, Inc. to Kaival Brands Innovations Group, Inc. The Purchase Pricename change was effected through a parent/subsidiary short-form merger of Kaival Brands Innovations Group, Inc., our wholly-owned Delaware subsidiary formed solely for the purpose of the name change, with and into us. We were the surviving entity.

Share Cancellation and Exchange Agreement

On August 19, 2020, we entered into a Share Cancellation and Exchange Agreement (the “Exchange Agreement”) with our controlling stockholder, KH. Nirajkumar Patel and Eric Mosser, our current officers and directors, are the only voting members of KH. Pursuant to the Exchange Agreement, KH returned to us 300,000,000 shares of our common stock (the “Cancellation Shares”), which were cancelled and retired by us.

On August 19, 2020, we filed a Certificate of Designation of Preferences, Rights, and Limitations of the Series A Preferred Stock (the “Series A Certificate of Designation”) with the Secretary of State of the State of Delaware, which authorized a total of 3,000,000 shares of Series A Preferred Stock.

In exchange for the Cancellation Shares, we issued 3,000,000 shares (the “Preferred Shares”) of our newly designated Series A Preferred Stock to KH. The exchange of the Cancellation Shares and the issuance of the Preferred Shares is intended to comply with Section 3(a)(9) of the Securities Act of 1933, as amended (the “Act”), in that the issuance is exempt from the registration requirements of the Act because the exchange of the Cancellation Shares for the Preferred Shares was an exchange between us, as issuer, with an existing stockholder, and no commission or other remuneration was paid with personal funds ofor given directly for the members of KBIG.

exchange.

ConcurrentlyOur Business

Currently, we market and place the Products into national distribution channels through long-standing industry relationships in accordance with the closing ofA&R Distribution Agreement entered into with Bidi, a related party, in March 2020 (and subsequently amended and restated in May 2020  and again in April 2021). Pursuant to the transactions contemplated byA&R Distribution Agreement, we sell and resell the Agreement, on February 20, 2019, Mr. Paul Moody resigned asProducts to both retail level customers and non-retail level customers. Bidi’s primary product is the Company’s“Bidi Stick” and, once launched, the “Bidi Pouch.” Bidi is considered a related party to us because our Chief Executive Officer, Chief Financial Officer, President, Secretary, Treasurer, and sole director. The resignation was not the result of any disagreement with the Company on any matter relating to its operations, policies, or practices.  On February 20, 2019,director, Mr. Nirajkumar Patel, was appointed as Chief Executive Officer, Chief Financial Officer, President, Treasurer,owns and director. There was no arrangement or understanding amongcontrols Bidi. Mr. Patel is also a beneficial owner of KH, the entity that is our largest controlling stockholder. Thus, Bidi and any other personwe are under common control.

We process all sales made to retail customers and non-retail customers, with all sales to retail customers historically made through the website, www.bidivapor.com; however, we recently engaged goPuff who will handle sales to retail customers going forward. We provide all customer service and support at our own expense. Bidi sets the minimum prices for all sales made by us. With respect to sales to non-retail customers, we submit purchase orders to Bidi, Bidi delivers the Products to us, and we ship the Products directly to these non-retail customers. In the case of retail customers, we maintain adequate inventory levels of the Products in order to meet these customers’ demand, and deliver the Products sold to these retail customers. Pursuant to the terms of the A&R Distribution Agreement, Bidi provides us with all branding, logos, and marketing materials to be utilized by us in connection with our marketing and promotion of the Products.

In connection with the A&R Distribution Agreement, we entered into the A&R Sub-Distribution Agreements with certain counterparties, pursuant to which he waswe appointed such counterparties as a director and officernon-exclusive sub-distributors of the Company. Also on February 20, 2019, Mr. Eric Mosser was appointed as Chief Operating Officer, Secretary, and director. There was no arrangement or understanding among Mr. Mosser and any other person, pursuantProducts to which he was appointed as a director and officernon-retail customers within the Territory. Each of the Company.

Business Overview

Since inception, the Company has been engaged in limited organizational efforts; however, the Company intends to commence business operations in the near term. Currently, the Company is exploring and evaluating various business opportunities, which may include entering into distribution or other contractual arrangements, or acquiring the assets of an existing company. As of the date of this Quarterly Report, the Company has not entered into any agreements concerning any business activities.

The Company, based on current and proposed business activities, is considered a “blank check” company. The SEC defines a “blank check” company as “any development stage company that is issuing a penny stock, within the meaning of Section 3(a)(51)-1 of the Exchange Act, and that has no specific business plan or purpose, or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies or other entity or person.” Pursuant to Rule 12b-2 promulgated under the Exchange Act, the Company also qualifies as a shell company, because it has no or nominal assets (other than cash) and no or nominal operations. In addition, many states have enacted statutes, rules, and regulations limiting the sale of securities of “blank check” companies in their respective jurisdictions.

In addition, the Company is an “emerging growth company” (“EGC”), that is exempt fromA&R Sub-Distribution Agreements set forth certain financial disclosure and governance requirements for up to five years as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), that eases restrictions on the sale of securities, and increases the number of stockholders a company must have before becoming subject to the SEC’s reporting and disclosure rules. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the Jobs Act, that allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.minimum purchase obligations.

We are currently exploring and evaluating business opportunities, which may include entering into distribution or other contractual arrangements or acquiringbelieve that over the assetscourse of an existing company. Our principal business objective for the next 12twelve months, and beyond such timeour business operations will begenerate the capital needed to achieve long-term growth potential through a combination with aour business or commencement of business operations, rather than immediate, short-term earnings. We anticipate exploring potential business opportunities within the electronic cigarettes and vaporizers and CBD industries as a result of our management’s prior and current business experience within such industries. Management envisions that such business opportunities would result in us commencing business operations without having to otherwise consummate a business combination. We have not entered into any definitive agreements with any party;objectives; however, we have engaged in discussions with various parties regarding potential business opportunities.

In the event that management is unable to otherwise commence business operations, and determines that it is necessary to engage in one or more business combinations, we may consider a business that has recently commenced operations, is in need of additional funds for expansion into new products or markets, is seeking to develop a new product or service, or is an established business that maythere can be experiencing financial or operating difficulties and is in need of additional capital. Our management believes that the public company status that results from a combination with us could provide such company greater access to the capital markets, increase its visibility in the investment community, and offer the opportunity to utilize its stock to make acquisitions. However, there is no assurance that our business operations will continue to generate the cash flows required for us to achieve our business objectives. If we will have greater access to capital due to our public company status and, therefore, a business combination with an operating company in need ofrequire additional capital, may expose us to additional risks and challenges. In the alternative, a business combination may involve the acquisition of, or merger with, a company which does not need substantial additional capital, but which desires to establish a public trading market for its shares, while avoiding, among other things, the time delays, significant expense, and loss of voting control that may occur in a public offering. We do not anticipate paying a finder’s fee, either in cash or through the issuance of securities, for the consummation of any business acquisition the Company makes pursuant to its current business plan.

Any target business that is selected may be a financially unstable company or an entity in its early stages of development or growth, including entities without established records of sales or earnings. In that event, we will be subject to numerous risks inherent in the business and operations of financially unstable and early stage or potential emerging growth companies. In addition, we may commence business opportunities or combine with an entity in an industry characterized by a high level of risk, and, although our management will endeavor to evaluate the risks inherent in a particular target business, there can be no assurance that we will properly ascertainbe able to raise any required capital or assess all significant risks.

We intend to search for business opportunities by contacting various sources including, but not limited to, our affiliates, lenders, investment banking firms, private equity funds, financial advisors and similar persons, accounting firms, and attorneys notwithstanding us contacting any business directly. The approximate number of persons or entities that capital will be contacted is unknown and dependent on whether any opportunities are presentedavailable to us at acceptable terms, or at all. We believe that our cash provided by the sources that we contact. However, there is no assurance that weoperations will identify any viable business opportunities.

The risks we may face if we are unable to commence business operations, if such business operations are unsuccessful, if we are unable to acquire or merger with another entity, or if such acquisition or merger is unsuccessful, include, but are not limited to, difficulty in achieving future financing, continuing operations, bankruptcy, litigation, and increasing business operations on a limited or no budget.

We do not currently engage in any business activities that provide cash flow. The costs of investigating and analyzing business combinations and opportunitiesbe sufficient for the next 12 months and beyond such time will be paid with money in our treasury, if any, or with additional amounts, as necessary, to be loaned to or invested in us by our stockholders, management, or other investors. At this time, we are entirely reliant upon cash contributions made by our officers and directors to pay for any and all expenses.twelve months.

DuringAs a result of the next 12 monthscommencement of business operations, in March 2020, we anticipate incurring costs relatedbegan hiring employees and intend to hire additional independent contractors and/or employees in the future. We cannot provide any assurance as to the filingtiming of Exchange Act reports (legal, accounting,the hiring of any additional independent contractors or employees, the number of independent contractors or employees that we may hire, and auditing fees) in the amount of approximately between $5,000 and $10,000,whether acceptable independent contractors or more. If we pursue any mergers or acquisitions, we anticipate incurring expenses of approximately between $10,000 and $20,000, or more, to pay for legal fees and audit fees. We believe weemployees will be able to meet the costs of filing Exchange Act reports during the next 12 months through use of funds to be loaned to or invested in us by Mr. Nirajkumar Patel and Mr. Eric Mosser, our officers and directors, or other stockholders. However, there is no guarantee that such additional funds will be made available to us or on termsat that are favorable to us. If we enter into a business combination with a target entity, we will attempt to require the target company to pay the acquisition related fees and expenses as a condition precedent to such an agreement.time.

To date, we have had no discussions with our officers and directors, Mr. Nirajkumar Patel and Mr. Eric Mosser, or other investors, regarding funding and no funding commitment for future expenses has been obtained. If in the future we need funds to pay expenses, we will consider these and other yet to be identified options for raising funds and/or paying expenses. Obviously, if Mr. Patel, Mr. Mosser, or other investors do not loan to or invest sufficient funds in us, then we will not be able to meet our SEC reporting obligations

We have negative working capital, a stockholder deficit, and have no source of revenues. These conditions raise substantial doubt about our ability to continue as a going concern. For the foreseeable future, we will be devoting our efforts to exploring and evaluating business opportunities, which may include merger or acquisition candidates. Our ability to continue as a going concern is dependent upon our ability to develop additional sources of capital, locate and complete a merger with another company or otherwise commence business operations, and ultimately, achieve profitable operations.

Liquidity and Capital Resources

We have no known demands or commitments and are not aware of any events or uncertainties as of January 31, 2019April 30, 2021 that will result in or that are reasonably likely to materially increase or decrease our current liquidity.

At April 30, 2021, we had working capital of approximately $9.2 million and total cash of approximately $2.1 million.

As

Now that we have commenced business operations, we intend to generally rely on cash from operations and equity and debt offerings, to the extent necessary and available, to satisfy our liquidity needs. There are a number of January 31, 2019,factors that could result in the need to raise additional funds, including a decline in revenue or a lack of anticipated sales growth and increased costs. Our efforts are directed toward generating positive cash flow and profitability. If these efforts are not successful, we may need to raise additional capital. Should capital not be available to us at reasonable terms, other actions may become necessary in addition to cost control measures and continued efforts to increase sales. These actions may include exploring strategic options for the sale of the Company, had no assets. The Company’s current liabilities as January 31, 2019 totaled $9,750,the creation of joint ventures or strategic alliances under which consistedwe will pursue business opportunities, or other alternatives. We believe we have the financial resources to weather any short-term impacts of accrued expenses.COVID-19; however, we are unable to presently estimate any potential future impacts from COVID-19 and an extended impact could have a material and adverse effect on our sales, earnings, and liquidity.

Cash Flows:

Cash flow used in operations was approximately $5.2 million for the first six months of fiscal year 2021, compared to $1.9 million provided by operations for the first six months of fiscal year 2020. The Company had nodecrease in cash flow from operations for the first six months of fiscal year 2021 was mainly due to the net loss during the first six months of fiscal year 2021 as compared to the net profit during the comparable period for fiscal 2020. We anticipate improvement in our cash flows from operatingprovided by operations in future years based on the minimum purchase obligations set forth in the A&R Sub-Distribution Agreements, partially offset by increases in costs as we ramp up our sales and marketing efforts. Cash flow used in financing activities was approximately $77,975 for the first six months of fiscal year 2021, compared to $0 for the first six months of fiscal year 2020. The cash used in financing activities for the three months ended January 31, 2019. The Company has generated no revenues since inception. The Company is dependent uponfirst two quarters of fiscal year of 2021 consisted of the receiptsettlement of capital investment or other financing to fund its ongoing operations and to execute its business plan. In addition, the Company is dependent upon certain related parties to provide continued funding and capital resources. If continued funding and capital resources are unavailable at reasonable terms, the Company may not be able to implement its plan of operations. The Company can provide no assurance that it can continue to satisfy its cash requirementsRSUs for at least the next twelve months.cash.

Results of Operations

The Company has not conducted any active operations since inception, except for its effortsThree months ended April 30, 2021, compared to identify suitable business opportunities. The Company has not generated any revenue from September 4, 2018 (inception), through January 31, 2019. It is unlikely that the Company will have any revenues unless it is able to identify suitable business opportunities and commence operations, of which there can be no assurance. Management believes that these circumstances may hinder the Company’s ability to continue as a going concern. The Company’s plan of operation for the next twelve months shall be to continue its efforts to locate suitable business opportunities.

For the three months ended January 31, 2019,April 30, 2020

Revenues:

Revenues for the second quarter of fiscal year 2021 were approximately $18.1 million, compared to $22.5 million in the same period of the prior fiscal year. During the second quarter of fiscal year 2020, we entered into the A&R Distribution Agreement, pursuant to which we were granted the exclusive, worldwide right to distribute the Products. In connection therewith, we entered into the A&R Sub-Distribution Agreements and other agreements with counterparties and granted such sub-distributors the right to distribute the Products to non-retail customers within the Territory. We have continued to enter into additional A&R Sub-Distribution Agreements, thereby increasing our distribution of the Products and, ultimately, we expect our revenues to increase during the remainder of the current fiscal year. We recognize revenue when a customer obtains control of promised goods. In some cases, we provide customers with 120-day payment terms, with the ability for a full refund for products not sold during that 120-day period. During such periods the risk of loss on the products delivered remains with the Company. In such case, the customer typically obtains control on the products when the customer purchases and ships the product to their customer or pays the Company hadfor the product.

Cost of Revenue and Gross Profit:

Gross profit in the second quarter of fiscal year 2021 was approximately $6.3 million, compared to $4.2 million for the second quarter of fiscal year 2020. Total cost of revenue was approximately $11.9 million for the second quarter of fiscal year 2021, compared to $18.3 million for the second quarter of fiscal year 2020. The increase in gross profit is entirely driven by the decrease in the cost of the Products sold in fiscal year 2021 as compared to the previous year.

Operating Expenses:

Total operating expenses were approximately $10.4  million for the second quarter of fiscal year 2021, compared to approximately $458,000 for the second quarter of fiscal year 2020. For the second quarter of fiscal year 2021, operating expenses consisted of commissions paid pursuant to the Further Amended Service Agreement of approximately $801,000  and general and administrative expenses of approximately $9.6  million . General and administrative expenses in the second quarter of fiscal year 2021 consisted primarily of legal fees, salaries, other professional fees, merchant fees, and other service fees. The increase in general and administrative expenses is mostly attributable to the expense related to the issuance of 2,000,000 shares of common stock as compensation for investor relations consulting services. Total operating expenses for the second quarter of fiscal 2020 were approximately $458,000, which included approximately $260,000 in commissions paid pursuant to the Further Amended Service Agreement.

Income Taxes:

During the second quarter of fiscal year 2021, we expensed approximately $186,800 for prior year income taxes, compared to the accrual of income taxed of approximately $950,400 for the second quarter of fiscal year 2020. The decrease in the accrual for income taxes is as a result of having no taxable income during fiscal year 2021, as compared to the previous fiscal year. Please refer to Note 8, Income Tax, in the Notes to the Consolidated Financial Statements in this Quarterly Report for additional information related to our income taxes.

Net Income (Loss):

Net loss for the second quarter of fiscal year 2021 was approximately $4.3  million, or $(0.02)  basic and diluted earnings per share, compared to net income of approximately $2.8 million, or $0.00 basic and diluted earnings per share, for the second quarter of fiscal year 2020. The decrease in net income for the second quarter of fiscal year 2021, as compared to the second quarter of fiscal year 2020, is attributable to the increase in operating expenses and commissions and the decrease in revenues.

Weighted-average common stock shares outstanding were 282,143,504 in the second quarter of fiscal year 2021 and 572,364,574 for the second quarter of fiscal year 2020.

Six months ended April 30, 2021, compared to six months ended April 30, 2020

Revenues:

Revenues for the second quarter of fiscal year 2021 were approximately $18.1 million, compared to $22.5 million in the same period of the prior fiscal year. During the second quarter of fiscal year 2020, we entered into the A&R Distribution Agreement, pursuant to which we were granted the exclusive, worldwide right to distribute the Products. In connection therewith, we entered into the A&R Sub-Distribution Agreements and other agreements with counterparties and granted such sub-distributors the right to distribute the Products to non-retail customers within the Territory. We have continued to enter into additional A&R Sub-Distribution Agreements, thereby increasing our distribution of the Products and, ultimately, we expect our revenues to increase during the remainder of the current fiscal year. We recognize revenue when a customer obtains control of promised goods. In some cases, we provide customers with 120-day payment terms, with the ability for a full refund for products not sold during that 120-day period. During such periods the risk of loss on the products delivered remains with the Company. In such case, the customer typically obtains control on the products when the customer purchases and ships the product to their customer or pays the Company for the product.

Cost of $13,960, whichRevenue and Gross Profit:

Gross profit in the first six months of fiscal year 2021 was approximately $11.1 million, compared to approximately $4.2 million for the first six months of fiscal year 2020. Total cost of revenue was approximately $44.4 million for the first six months of fiscal year 2021, compared to $18.3 million for the first six months of fiscal year 2020 and the decrease in cost of products sold.

Operating Expenses:

Total operating expenses were approximately $14.7 million for the first six months of fiscal year 2021, compared to approximately $471,000 for the first six months of fiscal year 2020. For the first six months of fiscal year 2021, operating expenses consisted of commissions paid pursuant to the Further Amended Service Agreement of approximately $1.8 million and general and administrative expenses of approximately $13.0 million. General and administrative expenses in the first six months of fiscal year 2021 consisted primarily of legal fees, salaries, other professional fees, merchant fees, and other service fees. Total operating expenses for the first six months of fiscal 2020 were approximately $471,000 and consisted of general and administrative expenses.expenses, which were primarily from professional fees, and approximately $260,000 in commissions paid pursuant to the Further Amended Service Agreement.

Income Taxes:

During the first six months of fiscal year 2021, we expensed approximately $293,100 for prior year income taxes, compared to the approximately $950,400 accrual for the first six months of fiscal year 2020. Please refer to Note 8, Income Tax, in the Notes to the Consolidated Financial Statements in this Quarterly Report for additional information related to our income taxes.

Net Income (Loss):

Net loss for the first six months of fiscal year 2021 was approximately $3.9 million, or $(0.01) basic and diluted earnings per share, compared to net income of approximately $2.8 million, or $0.00 basic and diluted earnings per share, for the first six months of fiscal year 2020. The decrease in net income for the first six months of fiscal year 2021, as compared to the first six months of fiscal year 2020, is attributable to the increase in operating expenses and commissions and the decrease in revenues.

Weighted-average common stock shares outstanding were 280,242,288 in the first six months of fiscal year 2021 and 572,364,574 for the first six months of fiscal year 2020.