UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedApril 30, 20202021

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ____________

Commission file number 000-56016

KAIVAL BRANDS INNOVATIONS GROUP, INC.

(Exact name of registrant as specified in its charter)

4460 Old Dixie Highway

Grant, Florida 32949

(Address of principal executive offices, including zip code)

(833) 452-4825

(Registrant’s telephone number, including area code)

N/A

(Former name, former address, and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

572,364,574283,206,612 shares of common stock, $0.001 par value, outstanding as of May 27, 2020June 16, 2021

KAIVAL BRANDS INNOVATIONS GROUP, INC.

FORM 10-Q

TABLE OF CONTENTS

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements and information in this Quarterly Report on Form 10-Q for the quarter ended April 30, 20202021 (the “Quarterly Report”) may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, which address activities, events, or developments that we expect or anticipate will or may occur in the future, including such things as future capital expenditures, commencement of business operations, business strategy, statements related to the expected effects on our business from the novel coronavirus (“COVID-19”) pandemic, and other similar matters are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or other comparable terminology. These forward-looking statements are based largely on our current expectations and assumptions and are subject to a number of risks and uncertainties, many of which are beyond our control. These statements are subject to many risks, uncertainties, and other important factors that could cause actual future results to differ materially from those expressed in the forward-looking statements including, but not limited to, the duration and scope of the COVID-19 pandemic and impact on the demand for the products we distribute; our ability to obtain the products from the manufacturer; actions governments, businesses, and individuals take in response to the pandemic, including mandatory business closures and restrictions on onsite commercial interactions; the impact of the COVID-19 pandemic and action taken in response to the pandemic on global and regional economies and economic activity; the pace of recovery when the COVID-19 pandemic subsides; general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth; our inability to sustain profitable sales growth; changes in government regulations or laws that affect our business; significant changes in our relationships with our distributor or sub-distributors; and circumstances or developments that may make us unable to implement or realize the anticipated benefits, or that may increase the costs, of our current and planned business initiatives. In light of these risks and uncertainties, all of the forward-looking statements made herein are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by us will be realized. We undertake no obligation to update or revise any of the forward-looking statements contained herein.

PART I Financial Information

Item 1. Financial Statements

Kaival Brands Innovations Group, Inc.

Consolidated Balance Sheets

(Unaudited)(Unaudited)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Kaival Brands Innovations Group, Inc.

Consolidated Statements of Operations

(Unaudited)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Kaival Brands Innovations Group, Inc.

Consolidated Statements of Cash FlowsChanges in Stockholders’ Equity

For the Six Months Ended April 30, 2021

(Unaudited)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Kaival Brands Innovations Group, Inc.(Unaudited)

Statement of Changes in Stockholders’ Equity (Deficit)

For the Three and Six Months Ended April 30, 2020

(Unaudited)

Kaival Brands Innovations Group, Inc.

Statement of Changes in Stockholders’ Deficit

For the Three and Six Months Ended April 30, 2019

(Unaudited)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Kaival Brands Innovations Group, Inc.

The accompanying notes are an integral part of these unaudited consolidated financial statements.

KAIVAL BRANDS INNOVATIONS GROUP, INC. 

Notes to Unaudited Consolidated Financial Statements

Note 1 – Organization and Description of Business

Kaival Brands Innovations Group, Inc. (the “Company,” the “Registrant,” “we,” “us,” or “our”), formerly known as Quick Start Holdings, Inc., was incorporated on September 4, 2018 in the State of Delaware.

USSE Corp. and USSE Delaware Merger

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

Effective September 19, 2018, USSE Nevada re-domiciled from Nevada to Delaware pursuant to a merger of USSE Nevada with and into USSE Delaware, Inc., a Delaware corporation (“USSE Delaware”), with USSE Delaware as the surviving entity (the “Re-domestication Merger”). Each share of USSE Nevada’s common 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; (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 at that date; and (b) 500,000 shares were designated as Convertible Series B, of which 71,700 Convertible Series B preferred shares were issued and outstanding at that date.

Holding Company Reorganization

On September 4, 2018, USSE Delaware acquired 1,000 shares of common stock of the Company, which represented 100% of the Company’s then-outstanding shares of common stock, for no consideration, resulting in the Company 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 the Company’s wholly-owned subsidiary.

On September 19, 2018 (the “Effective Time”), and in accordance with the provisions set forth in Section 251(g) of the Delaware General Corporation Law (“DGCL”), USSE Merger Sub, an indirect wholly-owned subsidiary of USSE Delaware and the Company’s direct wholly-owned subsidiary merged with and into USSE Delaware, the Company’s then parent (the “Holding Company Reorganization”). USSE Delaware was the surviving corporation and the Company’s wholly-owned subsidiary. USSE Delaware also changed its name to USSE Corp. following the Holding Company Reorganization.

Upon completion 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, limitations, and restrictions thereof, as the corresponding share of USSE Delaware’s preferred stock. Each share of the Company’s common stock issued and outstanding and held by USSE Delaware immediately prior to the Effective Time was 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 Holdings LLC, a Nevada limited liability company (“GRMZ”), for services rendered to the Company.

Commensurate with the filing of the Company’s 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 shareholders’ 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, Convertible Series A and Series B preferred stock were removed from the status of authorized but unissued preferred stock.

On February 6, 2019, the Company entered into a non-binding Share Purchase Agreement (the “Agreement”), by and among the Company, GMRZ, and Kaival Holdings, LLC (formerly known as Kaival Brands Innovations Group, LLC), a Delaware limited liability company (formerly known as Kaival Brands Innovations Group, LLC) (“KH”), pursuant to which, on February 20, 2019, GMRZ sold 504,000,000 shares of the Company’s restricted common stock, representing approximately 88.06 percent of the Company’s issued and outstanding shares of common stock, to KH, and KH paid GMRZ consideration in the amount set forth in the Agreement (the “Purchase Price”). The consummation of the transactions contemplated by the Agreement resulted in a change in control of the Company, with KH becoming the Company’s largest controlling stockholder. The sole members of KH are Nirajkumar Patel and Eric Mosser. The Purchase Price was paid with personal funds of the members of KH.

Effective July 12, 2019, we changed our corporate name from Quick Start Holdings, Inc. to Kaival Brands Innovations Group, Inc. The name 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.

On the effective date of the merger, our name was changed to “Kaival Brands Innovations Group, Inc.” and our Amended and Restated Certificate of Incorporation, as amended (the “Charter”), was further amended to reflect our new legal name. There were no other changes to our Charter.

Currently, we have 572,364,574 shares of common stock issued and outstanding and no shares of preferred stock issued and outstanding. KH, which is owned and controlled by Nirajkumar Patel and Eric Mosser, is our controlling stockholder, owning 504,000,000 shares of our restricted common stock.

During the quarter ended April 30, 2020, the Company commenced business operations.

Description of Business

The Company is focused on growing and incubating innovative and profitable products into mature, dominant brands. During the quarter ended April 30,In March 2020, the Company commenced business operations as a result of becoming anthe exclusive distributor of certain electronic nicotine delivery systems and related components (the “Products”) manufactured by Bidi Vapor, LLC, (“Bidi”), a Florida limited liability company (“Bidi”), a related party company that is also owned by Nirajkumar Patel, the Chief Executive Officer and Chief Financial Officer of the Company.

On March 9, 2020, the Company entered into an exclusive distribution agreement (the “Distribution Agreement”) with Bidi, a related party company, which Distribution Agreement was amended and restated on May 21, 2020 (theand again on April 20, 2021 (collectively the “A&R Distribution Agreement”) in order to clarify some of the provisions. Pursuant to the A&R Distribution Agreement, Bidi granted the Company an exclusive worldwide right to distribute the Products for sale and resale to both retail level customers and non-retail level customers. Currently, the Products consist primarily of the “Bidi Stick.”Stick” and, once launched, the “Bidi Pouch”.

In connection with the A&R Distribution Agreement, the Company entered into non-exclusive sub-distribution agreements, some of which were subsequently amended and restated by the parties in order to clarify certain provisions (all such agreements, as amended and restated, are collectively referred to as the “A&R Sub-Distribution Agreements”), whereby the Company appointed the counterparties as non-exclusive sub-distributors. Pursuant to the A&R Sub-Distribution Agreements, the sub-distributors agreed to purchase for resale the Products in such quantities as they should need to properly service non-retail customers within the continental United States (the “Territory”“Territory”).

On MarchAugust 31, 2020, the Company entered intoformed Kaival Labs, Inc., a service agreement (the “Service Agreement”Delaware corporation (herein referred to as “Kaival Labs”) with QuikfillRx LLC,, as a Florida limited liability company (“QuikfillRx”), whereby QuikfillRx has agreed to provide 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 will be provided by QuikfillRx as requested from time to time bywholly owned subsidiary of the Company.

Recent Developments

In January 2020, the World Health Organization (the “WHO”) announced a global health emergency because of a new strain of coronavirus (“COVID-19”) originating in Wuhan, China and the risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in global exposure.

As of the date of issuance of these unaudited financial statements, ourOur operations have not been significantly impacted. No impairments werehave been recorded as of April 30, 2020 and no triggering events or changes in circumstances had occurred. However,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 subsequent to the three and six months ended April 30, 2020 and as of the date these unaudited financial statements are issued.remains uncertain. As such, the full magnitude of the COVID-19 pandemic, and the resulting impact, if any, on ourthe Company’s financial condition, liquidity, and future results of operations is uncertain. Management is actively monitoring the global situation on our financial condition, liquidity, operations, suppliers, industry, and customers. Reduced demand for products or impaired ability to meet customer demand (including as a result of disruptions at ourthe Company’s suppliers) could have a material adverse effect on ourits business operations and financial performance. Given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, we arethe Company is not presently able to estimate the effects of the COVID-19 pandemic on ourits results of operations, financial condition, or liquidity for the remainder ofcurrent fiscal year 2020 and beyond.year. As of the date of this filing, ourthe Company’s recently commenced business operations have not been impacted.materially impacted, however, we have encountered some logistical delays related to product launches and distribution in international markets.

Note 2 – Basis of Presentation and Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the financial statements of the Company’s wholly-owned subsidiary, Kaival Labs. Intercompany transactions are eliminated.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the Securities and Exchange Commission (the “SEC”(“SEC”) and should be read in conjunction with the audited financial statements and notes thereto forcontained in the year ended October 31, 2019Company’s most recent Annual Financial Statements filed with the SEC on Annual Report on Form 10-K filed with the SEC.on February 12, 2021 (the “2020 Annual Report”). In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim period presented have been reflected herein. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements, which would substantially duplicate the disclosures contained in the audited financial statements for the year ended October 31, 2019,most recent fiscal period, as reported in the 2020 Annual Report on Form 10-K filed with the SEC on January 27, 2020, have been omitted.

Significant Accounting PoliciesUse of Estimates

Accounts ReceivableThe preparation of financial statements in conformity with GAAP requires management to make estimates and Allowance for Doubtful Accounts

Receivables are statedassumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at cost, net of an allowance for doubtful accounts. The Company establishes an allowance for doubtful accounts based on management’s assessmentthe date of the collectability of accounts receivables. A considerable amount of judgment is required in assessing the amount of the allowancefinancial statements and the Company considersreported amounts of revenues and expenses during the historical levelreporting period. In the opinion of credit losses and collection history and applies percentages to aged receivable categories. The Company makes judgments about the creditworthiness of debtors based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit lossesmanagement, all adjustments necessary in the future. If the financial condition of the debtors were to deteriorate, resulting in their inability to make payments, a larger allowance may be required. As of April 30, 2020, the Company did not have any allowance for doubtful accounts based on management’s assessment.

Inventories

Inventories are stated at the lower of cost and net realizable value. Cost includes all costs of purchase and other costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessaryorder to make the sale. Asfinancial statements not misleading have

been included. Actual results could differ from those estimates.

Share-Based Compensation

The Company measures the cost of services received in exchange for an award of equity instruments (share-based payments, or SBP) based on the grant-date fair value of the award. That cost is recognized over the period during which a recipient is required to provide service in exchange for the SBP award—the requisite service period (vesting period). For SBP awards subject to conditions, compensation is not recognized until the performance condition is probable of occurrence. The grant-date fair value of share options is estimated using the Black-Scholes-Merton option-pricing model. Compensation expense for SBP awards granted to nonemployees is remeasured each period as the underlying options vest.

The fair value of each option granted during the period ended April 30, 2021 and 2020 was estimated on the inventories only consisteddate of finished goods.grant using the Black-Scholes-Merton option-pricing model with the weighted average assumptions in the following table:

The expected term of options granted represents the period of time that options granted are expected to be outstanding. The expected volatility was based on the volatility in the trading of the Company’s common stock. The assumed discount rate was the default risk-free five-year interest rate for US Treasury bills.

Revenue Recognition

Revenue Recognition

The Company adopted ASC 606,Revenue from Contracts with Customers (Topic 606) (“ASC 606”), in the second quarter of fiscal year 2020, as this was the first quarter that the Company generated 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 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 retail and 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’s sales arrangements for retail sales usually require full prepayment before deliveryCompany determined that a customer obtains control of the Products.Product upon shipment when title of such product and risk of loss transfer to the customer. The advance payment is not considered a significant financing component because the period between the Company transfers a promised good to a customerCompany’s shipping and when the customer pays for that good is short.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.

Income Tax

Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the recorded book basis and the tax basis of assets and liabilities for financial and income tax reporting. Deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income and tax credits that are available to offset future federal income taxes. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on the Company’s financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740.

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU 2014-09, “Revenue from Contracts with Customers(ASC 606),” and issued subsequent amendments to the initial guidance or implementation guidance between August 2015 and November 2017 within ASU 2015-04, ASU 2016-08, ASU 2016-10, ASU 2016-12, ASU 2016-20, ASU 2017-13, and ASU 2017-14 (collectively, including ASU 2014-09, “ASC 606”). Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted the standard from the second quarter of fiscal year 2020. The adoption of ASC 606 did not have any impact on our previously reported consolidated financial statements in any prior period nor did it result in a cumulative effect adjustment to retained earnings.

Note 3 – Going ConcernLeases

The Company’s financial statements are prepared in accordance with generally accepted accounting principles applicableCompany capitalizes all leased assets pursuant to a going concern that contemplates the realization ofASU 2016-02, “Leases (Topic 842),” which requires lessees to recognize right-of-use assets and liquidationlease liability, initially measured at present value of liabilitiesthe 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 normal coursepresent value of business.

Prior to Marchthe 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 Company demonstrated adverse conditions that raised substantial doubt about the Company’s ability to continue as a going concern. These adverse conditions were negative financial trends, specifically operating loss, working capital deficiency, and other adverse key financial ratios. Also, the Company had not established any source of revenue to cover its operating costs.ROU liability was $2,836. The Company’s management funded operating expenses with related party contributions to capital.

However, on March 9, 2020, the Company commenced business operations upon entering into the A&R Distribution Agreement with Bidi, a related party company, whereby Bidi granted the Company an exclusive worldwide right to distribute the Productsamortization expense for sale and resale to both retail level customers and non-retail level customers.

In April, in connection with the A&R Distribution Agreement, the Company entered into the A&R Sub-Distribution Agreements with certain third-party counterparties, whereby we appointed such counterparties as non-exclusive sub-distributors. Pursuant to the A&R Sub-Distribution Agreements, the sub-distributors agreed to purchase for resale the Products in such quantities as they should need to properly service non-retail customers within the Territory.

With these agreements in effect, the Company has established sources of revenue to cover its operating costs and achieved net income of $2,782,900 during the six months ended April 30, 2020. As of2021 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 the Company hasa positive working capital of $2,765,171.until April 2021 was accrued at April 30, 2021.

Management plans to continue similar operations with increased marketing, which the Company believes will result in increased revenue and net income. However, there is no assurance that management’s plan will be successful due to the current economic climate in the United States and globally. At the time of filing this Quarterly Report, the previously reported going concern has been alleviated based on the reasons above, and management does not have substantial doubt of the Company’s ability to continue as a going concern.

These 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 necessary in the event that the Company cannot continue as a going concern. 

Note 4 – 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

Additional Paid-In Capital

The Company’s Chief Executive Officer and Chief Financial Officer, Mr. Nirajkumar Patel, paid expenses on behalf of the Company totaling $16,257 duringDuring the six months ended April 30, 2020, which is considered a contribution2021, 1,310,000 shares of common stock were issued to eight employees of the Company with no expectation pursuant to restricted stock unit (“RSU”) agreements, resulting in $724,161of repayment and is recorded as additional paid-in capital.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.

The Company’s Chief Operating Officer, Mr. Eric Mosser, paid expenses on behalf of the Company totaling $10,900 duringDuring the six months ended April 30, 2020, which is considered a contribution2021, 4,668,633 shares of common stock were issued to 7 non-employee vendors as compensation for professional services rendered to the Company with no expectation of repayment and is recordedtwo officers as additional paid-in capital.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 the following assumptions: stock price range of $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 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

Revenue and Accounts Receivable

During the six months ended April 30, 2020,2021, the Company generated $22,460, $9,030, $880, and $110recognized revenue of revenue$61,545 from Cloud Nine 2012, Inc., JC Products of USA, LLC, Shree Maharaj, Inc., and Bhawani Krupa, Inc., respectively. All of thesethree companies are owned by Nirajkumar Patel, the Chief Executive Officer and Chief Financial Officer of the Company, and/or his wife. As of April 30, 2020,2021, the Company has accounts receivable from Cloud Nine 2012, Inc., Shree Maharaj, Inc., and Bhawani Krupa, Inc.this related party in the amount of $4,080, $880, and $110, respectively.$765.

Purchases and Accounts Payable

During the six months ended April 30, 2020, the Company purchased $18,318,219 of products from Bidi and sold $18,301,800 of goods to retail and non-retail customers. As of April 30, 2020, the Company had accounts payable to Bidi of $1,278,638.

Contributed Capital

During the six months ended April 30, 2020,2021, 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 OfficerOfficer. As of April 30, 2021, the Company had accounts payable to Bidi of $38,001,633 and Chief Operating Officer provided contributed capital of $16,257 and $10,900, respectively, to the Company. For additional information, see Note 4,Additional Paid-in Capital.products valued at $28,791,150 were held in inventory at April 30, 2021.

Office Space

We utilizeOn 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 warehouse of ourits management at no cost.cost through July 31, 2020. 

Note 6 - ConcentrationConcentrations

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 PayablePayable- Related Party

For the six months ended April 30, 2020,2021, 100% of the inventories of products,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 $18,318,219.$75,065,602. It also accounted for 100%99.3% of the total accounts payable as of April 30, 2020.2021. 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, 2020,2021, approximately 36%33%, or $18,129,136, of the revenue from the sale of products,Products, primarily consisting of the “Bidi Stick,” was generated from Favs Business LLC in(“Favs Business”), approximately 16%, or $9,069,455, of the amountrevenue from the sale of $8,003,396.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, LLC, Midwest Distribution, and GW Trading Inc.GPM Investment had outstanding balances of $8,590,200 and $2,482,553, respectively, accounted for approximately 32%, 13%,47% and 11%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 78 – Income Tax

The Company is subject to federal income taxes and state income tax in the U.S.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, 2020,2021, the Company generated no taxable income of $2,782,900 and, thus accrued $784,000 ofno federal income tax and $166,432 ofor state income tax.taxes are accrued for tax year 2021.

Significant components of the Company’s deferred tax assets and liabilities as of April 30, 20202021 and October 31, 20192020 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 9 – Subsequent Events

Patent Contribution Agreement

On May 4, 2021, Next Generation Labs, LLC (“Next Generation”) notified the Company that a “reversion event” had occurred under that certain Patent Contribution Agreement, dated September 28, 2020 (the “Patent Contribution Agreement”). Pursuant to the Patent Contribution Agreement, Next Generation agreed to contribute certain patents, patent applications, and patent data, described on Exhibit “A” of the Patent 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 event the Company or Kaival Labs materially breached the terms of the 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 8, 2021, Next Generation notified the Company that it was in material breach of 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 unaudited Financial Statements and notes thereto for the three and six months ended April 30, 20202021 included under Item 1 – Financial Statements in this Quarterly Report and our audited Financial Statements and notes thereto for the year ended October 31, 20192020 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,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 20202021 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 Nevada re-domiciled from Nevada to Delaware pursuant to a merger of USSE Nevada with and into USSE Delaware, Inc. (“USSE Delaware”), with USSE Delaware as the surviving entity.

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 the Company’sour 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,Delaware General Corporation Law, USSE Merger Sub, an indirect wholly-owned subsidiary of USSE Delaware and the Company’sour direct wholly-owned subsidiary, merged with and into USSE Delaware, the Company’s then parent.our then-parent. USSE Delaware was the surviving corporation and the Company’sour wholly-owned subsidiary. USSE Delaware also changed its name to USSE Corp. following the Holding Company Reorganization.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, limitations, and restrictions thereof, as the corresponding share of USSE Delaware’s preferred stock. Each share of the Company’s common stock issued and outstanding and held by USSE Delaware immediately prior to the Effective Time was 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 ReorganizationControl

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 the Company’s 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 shareholders’ 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, 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 thea 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 KH,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 KH, and KH paid GMRZ consideration in the amount set forth in the Share Purchase Price.Agreement. The consummation of the transactions contemplated by the Share Purchase Agreement resulted in a change in control, of the Company, with KH becoming the Company’sour largest controlling stockholder. Nirajkumar Patel and Eric Mosser are the sole voting members of KH. The Purchase Price was paid with personal funds of the members of KH.

Name Change

Effective July 12, 2019, the Companywe changed itsour corporate name from Quick Start Holdings, Inc. to Kaival Brands Innovations Group, Inc. The name change was effected through a parent/subsidiary short-form merger of Kaival Brands Innovations Group, Inc., the Company’sour wholly-owned Delaware subsidiary formed solely for the purpose of the name change, with and into the Company. The Companyus. 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 effective dateonly 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 merger,Series A Preferred Stock (the “Series A Certificate of Designation”) with the Company’s name was changedSecretary 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 “Kaival Brands Innovations Group, Inc.”KH. The exchange of the Cancellation Shares and the Charter,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 further amended to reflectan exchange between us, as issuer, with an existing stockholder, and no commission or other remuneration was paid or given directly for the Company’s new legal name. There were no other changes to its Charter.exchange.

During the quarter ended April 30, 2020, the Company commenced business operations.

Our Business

Currently, we market and place the Products into national distribution channels through long-standing industry relationships in accordance with the A&R Distribution Agreement entered into with Bidi, a related party, in March 2020 (and subsequently amended and restated in May 2020.2020  and again in April 2021). Pursuant to the A&R Distribution Agreement, we sell and resell the Products to both retail level customers and non-retail level customers. Bidi’s primary product is the “Bidi Stick.Stick” and, once launched, the “Bidi Pouch.” Bidi is considered a related party to us because our Chief Executive Officer, Chief Financial Officer, and director, Mr. Nirajkumar Patel, owns and controls Bidi. Mr. Patel is also a beneficial owner of KH, the entity that is our largest controlling stockholder. Thus, Bidi and we are under common control.

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. We engaged QuikfillRx in March 2020 and, pursuant to the Service Agreement, QuikfillRx agreed to provide us with the Services, as we may request from time to time.

We process all sales made to retail customers and non-retail customers, with all sales to retail customers to behistorically made through the website, www.bidivapor.com.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 we appointed such counterparties as non-exclusive sub-distributors of the Products to non-retail customers within the Territory. Each of the A&R Sub-Distribution Agreements set forth certain minimum purchase obligations.

We believe that over the course of the next twelve months, our business operations will generate the capital needed to achieve our business objectives; however, because we recently commenced business operations, there can be no assurance that our business operations will continue to generate the cash flows required for us to achieve our business objectives. If we require additional capital, there can be no assurance that we will be able to raise any required capital or that capital will be available to us at acceptable terms, or at all. We believe that our cash provided by operations will be sufficient for the next twelve months.

As a result of the commencement of business operations, in March 2020, we have begunbegan hiring employees and intend to hire additional independent contractors and/or employees in the future. We cannot provide any assurance as to the timing of the hiring of any additional independent contractors or employees, the number of independent contractors or employees that we may hire, and whether acceptable independent contractors or employees will be available to us at that time.

Going Concern

Historically, we have had a negative working capital, no revenues, and negative cash flows from operating activities. In the past, 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 our recently commenced business operations. However, we cannot provide any assurances that management’s plan with respect to our newly commenced business operations will be successful. At the time of filing this Quarterly Report, the previously reported going concern has been alleviated, and management does not have substantial doubt of the Company’s ability to continue as a going concern. The unaudited financial statements filed as part of this Quarterly Report do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that we cannot continue as a going concern.

Liquidity and Capital Resources

We have no known demands or commitments and are not aware of any events or uncertainties as of April 30, 20202021 that will result in or that are reasonably likely to materially increase or decrease our current liquidity.

At April 30, 2020,2021, we had working capital of approximately $2.8$9.2 million and total cash of approximately $2.0$2.1 million.

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 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, the creation of joint ventures or strategic alliances under which we will pursue business opportunities, or other alternatives. We believe we have the financial resources to weather any short-term impacts of 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 provided byused in operations was approximately $2.0$5.2 million for the first six months of fiscal year 2020,2021, compared to $0$1.9 million provided by operations for the first six months of fiscal year 2019.2020. The increasedecrease in cash flow from operations for the first six months of fiscal year 20202021 was mainly due to the increase in net income.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 continued improvement in our cash flows provided 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 first two quarters of fiscal year of 2021 consisted of the settlement of RSUs for cash.

Results of Operations

Three months ended April 30, 2020,2021, compared to three months ended April 30, 20192020

Revenues:

Revenues for the second quarter of fiscal year 20202021 were approximately $22.5$18.1 million, compared to $0$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 Revenue and Gross Profit:

Gross profit in the second quarter of fiscal year 20202021 was approximately $4.2$6.3 million, compared to $0$4.2 million for the second quarter of fiscal year 2019.2020. Total cost of revenue – related party 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, compared to $0 for the second quarter of fiscal year 2019.2020. The increase in gross profit is entirely driven by the commencement of salesdecrease in the cost of the Products duringsold 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 2020.

Operating Expenses:

Total operating expenses were2021, compared to approximately $458,000 for the second quarter of fiscal year 2020, compared to approximately $4,000 for the second quarter of fiscal year 2019.2020. For the second quarter of fiscal year 2020,2021, operating expenses consisted of advertising and promotion expensescommissions paid pursuant to the Further Amended Service Agreement of approximately $186,000, shipping expenses of approximately $74,000,$801,000  and general and administrative expenses of approximately $198,000. Advertising and promotion expenses in the second quarter of fiscal year 2020 consisted primarily of the expenses incurred for marketing the Products and fees paid to QuikfillRx for the Services.$9.6  million . General and administrative expenses in the second quarter of fiscal year 20202021 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 2019 consisted solely of general and administrative expenses,2020 were approximately $458,000, which were primarily from legal fees incurred. We expect future operating expensesincluded approximately $260,000 in commissions paid pursuant to continue to increase while we generate increased sales growth.the Further Amended Service Agreement.

Income Taxes:

During the second quarter of fiscal year 2020,2021, we accruedexpensed approximately $950,000$186,800 for prior year income taxes, compared to $0the accrual of income taxed of approximately $950,400 for the second quarter of fiscal year 2019.2020. 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 incomeloss for the second quarter of fiscal year 20202021 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, compared to net loss of approximately $4,000, or $0.00 basic and diluted loss per share, for the second quarter of fiscal year 2019.2020. The increasedecrease in net income for the second quarter of fiscal year 2020,2021, as compared to the second quarter of fiscal year 2019,2020, is attributable to the commencement of sales ofincrease in operating expenses and commissions and the Products.decrease in revenues.

Weighted-average common stock shares outstanding were 572,364,574282,143,504 in the second quartersquarter of fiscal year 20202021 and 572,364,574 for the second quarter of fiscal year 2019.2020.

Six months ended April 30, 2020,2021, compared to six months ended April 30, 20192020

Revenues:

Revenues for the first halfsecond quarter of fiscal year 2020 was2021 were approximately $22.5$18.1 million, compared to $0$22.5 million in the same period of the prior fiscal year. During the first halfsecond 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 Revenue and Gross Profit:

Gross profit in the first halfsix months of fiscal year 20202021 was approximately $11.1 million, compared to approximately $4.2 million compared to $0 for the first halfsix months of fiscal year 2019.2020. Total cost of revenue – related party was approximately $44.4 million for the first six months of fiscal year 2021, compared to $18.3 million for the first halfsix months of fiscal year 2020 compared to $0 forand the first halfdecrease in cost of fiscal year 2019. The increase in gross profit is entirely driven by the commencement of sales of the Products during the first half of fiscal year 2020.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 halfsix months of fiscal year 2020, compared to approximately $18,000 for2020. For the first halfsix months of fiscal year 2019. For the first half of fiscal year 2020,2021, operating expenses consisted of advertising and promotion expensescommissions paid pursuant to the Further Amended Service Agreement of approximately $186,000, shipping expenses of approximately $74,000,$1.8 million and general and administrative expenses of approximately $211,000. Advertising and promotion expenses in the first half of fiscal year 2020 consisted primarily of the expenses incurred for marketing the Products and fees paid to QuikfillRx for the Services.$13.0 million. General and administrative expenses in the first halfsix months of fiscal year 20202021 consisted primarily of legal fees, salaries, paid of bonuses,other professional fees, merchant fees, and other service fees. Total operating expenses for the first halfsix months of fiscal year 20192020 were approximately $471,000 and consisted solely of general and administrative expenses, which were primarily from legalprofessional fees, incurred. We expect future operating expensesand approximately $260,000 in commissions paid pursuant to continue to increase while we generate increased sales growth.

the Further Amended Service Agreement.

Income Taxes:

During the first halfsix months of fiscal year 2020,2021, we accruedexpensed approximately $950,000$293,100 for prior year income taxes, compared to $0the approximately $950,400 accrual for the first halfsix months of fiscal year 2019.2020. 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 incomeloss for the first halfsix months of fiscal year 20202021 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, compared to net loss of approximately $18,000, $0.00 basic and diluted loss per share, for the first halfsix months of fiscal year 2019.2020. The increasedecrease in net income for the first halfsix months of fiscal year 2020,2021, as compared to the first halfsix months of fiscal year 2019,2020, is attributable to the commencement of sales ofincrease in operating expenses and commissions and the Products.decrease in revenues.

Weighted-average common stock shares outstanding were 572,364,574280,242,288 in the first halfsix months of fiscal year 20202021 and 572,364,574 for the first six months of fiscal year 2019.2020. 

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.

Critical Accounting Policies and Estimates

Other than the policy changes disclosed in Note 2,Basis of Presentation and Significant Accounting Policies,to the unaudited Financial Statements in Item 1 of Part I of this Quarterly Report, there have been no material changes to our critical accounting policies and estimates during the six months ended April 30, 20202021 from those disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended October 31, 2019.2020.

Recently Adopted Accounting Pronouncements

See Note 2,Basis of Presentation and Significant Accounting Policies, to the unaudited Financial Statements in Item 1 of Part I of this Quarterly Report for a description of recent accounting pronouncements and accounting changes.

Emerging Growth Company

We are an “emerging growth company,” that is exempt from 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”). The JOBS Act eases restrictions on the sale of securities and increases the number of stockholders a company must have before becoming subject to the Securities and Exchange Commission’sSEC’s reporting and disclosure rules. We have not 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of April 30, 2020,2021, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that because of material weakness in our internal control over financial reporting, our disclosure controls and procedures were not effective as of April 30, 2020.2021.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitations, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, to allow timely decisions regarding required disclosure.

ChancesChanges in Internal Control over Financial Reporting

During the quarter ended April 30, 2020,2021, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 1. Legal Proceedings

There are no material pending legal proceedings as defined by Item 103 of Regulation S-K, to which we are a party or of which any of our property is the subject, other than ordinary routine litigation incidental to the Company’s business.

Item 1A. Risk Factors

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On May 5, 2021, we issued an aggregate of 575,000 shares of our common stock to six employees as equity compensation pursuant to certain RSU agreements entered into with each employee. These shares had a fair market value at the date of grant of $0.14, which was closing price on the grant date as reported by the OTC Markets Group, Inc. (“OTCM”). On the vesting and issuance date, the shares were valued at $1.21 per share, which was the highest closing price of our common stock during the three days prior to the issuance date as reported by the OTCM. We issued the shares in reliance on the exemption from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”)(in that the issuance of shares of our common stock issued did not involve any public offering).

None.On May 5, 2021, we issued 60,000 shares of our common stock to an employee as equity compensation pursuant to a RSU agreement. These shares had a fair market value at the date of grant of $0.17, which was closing price on the grant date as reported by the OTCM. On the vesting and issuance date, the shares were valued at $1.21 per share, which was the highest closing price of our common stock during the three days prior to the issuance date as reported by the OTCM. We issued the shares in reliance on the exemption from registration pursuant to Section 4(a)(2) of the Securities Act (in that the issuance of shares of our common stock issued did not involve any public offering).

On May 5, 2021, we issued 140,000 shares of our common stock to an employee as equity compensation pursuant to a RSU agreement. These shares had a fair market value at the date of grant of $0.43, which was closing price on the grant date as reported by the OTCM. On the vesting and issuance date, the shares were valued at $1.21 per share, which was the highest closing price of our common stock during the three days prior to the issuance date as reported by the OTCM. We issued the shares in reliance on the exemption from registration pursuant to Section 4(a)(2) of the Securities Act (in that the issuance of shares of our common stock issued did not involve any public offering).   

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

Amended and Restated Exclusive Distribution AgreementNone.

On May 21, 2020, we entered into the A&R Distribution Agreement with Bidi, which amended and restated that certain Exclusive Distribution Agreement, dated March 9, 2020, previously entered into by Bidi and us. The A&R Distribution Agreement clarified certain provisions as to when risk of loss and title transfer to us, the shipping procedures for the Products purchased from Bidi, as well as other matters.

Amended and Restated Non-Exclusive Sub-Distribution Agreements

On May 21, 2020, we entered into an A&R Sub-Distribution Agreement with Favs Business, LLC (“Favs”), which amended and restated that certain Non-Exclusive Sub-Distribution Agreement, dated April 3, 2020, previously entered into by Favs and us. The A&R Sub-Distribution Agreement clarified certain provisions as to when risk of loss and title transfer with respect to the Products purchased by Favs, the shipping procedures for the Products purchased pursuant to the A&R Sub-Distribution Agreement, as well as other matters.

On May 26, 2020, we entered into an A&R Sub-Distribution Agreement with Colonial Wholesale Distributing, Inc. (“Colonial”), which amended and restated that certain Non-Exclusive Sub-Distribution Agreement, dated April 11, 2020, previously entered into by Colonial and us. The A&R Sub-Distribution Agreement clarified certain provisions as to when risk of loss and title transfer with respect to Products purchased by Colonial, the shipping procedures for the Products purchased pursuant to the A&R Sub-Distribution Agreement, as well as other matters.

The foregoing descriptions do not purport to be complete and are qualified in their entirety by the full text of such A&R Distribution Agreement and the A&R Sub-Distribution Agreements, which are filed as Exhibits 10.5, 10.6, and 10.7, respectively, to this Quarterly Report and is incorporated herein by reference.

Item 6. Exhibits

The following exhibits are filed herewith as a part of this Quarterly Report.

*filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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