UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)One)

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30,July 31, 2021

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, Florida32949

(Address (Address of principal executive offices, including zip code)

(833)452-4825

(Registrant’s (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 CORPORATECORPORATE ISSUERS:

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

283,206,612 23,628,187 shares of common stock, $0.001 par value, outstanding as of June 16,September 9, 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 quarterthree and nine months ended April 30,July 31, 2021 (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,”“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.

Kaival Brands Innovations Group, Inc.

Consolidated Balance Sheets

(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 Changes in Stockholders’ Equity

For the SixNine Months Ended April 30,July 31, 2021

(Unaudited)

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

(Unaudited)

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

 Kaival Brands Innovations Group, Inc.(Unaudited)

Consolidated Statements of Cash Flows

(Unaudited)

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

Kaival Brands Innovations Group, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

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.

Description of Business

The Company is focused on growing and incubating innovative and profitable products into mature, dominant brands. In March 2020, the Company commenced business operations as a result of becoming the exclusive distributor of certain electronic nicotine delivery systems (“ENDS”) and related components (the “Products”) manufactured by Bidi Vapor, LLC, 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 and 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“BIDI^® Stick” and, once launched, the “Bidi“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 August 31, 2020, the Company formed Kaival Labs, Inc., a Delaware corporation (herein referred to as “Kaival Labs”), as a wholly owned subsidiary of the Company.

On July 16, 2021, the Company filed a Certificate of Amendment to the Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a 1-for-12 reverse stock split (the “Reverse Stock Split”) of the shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”). The Reverse Stock Split was effective as of 12:01 a.m. Eastern time on July 20, 2021. No fractional shares were issued in connection with the Reverse Stock Split. Any fractional shares of Common Stock that would have otherwise resulted from the Reverse Stock Split will be rounded up to the nearest whole number. In connection with the Reverse Stock Split, the Board of Directors (the “Board”) approved appropriate and proportional adjustments to all outstanding securities or other rights convertible or exercisable into shares of Common Stock, including, without limitation, all preferred stock, warrants, options, and other equity compensation rights. All historical share and per-share amounts reflected throughout our consolidated financial statements and other financial information in this Quarterly Report have been adjusted to reflect the Reverse Stock Split as if the split occurred as of the earliest period presented. The par value per share of the Common Stock was not affected by the Reverse Stock Split.

Recent DevelopmentsCOVID-19 Impact

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.

OurThe Company’s operations have not been significantly impacted. No impairments have been recorded and no triggering events or changes in circumstances had occurred. 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. As such, the full magnitude of the COVID-19 pandemic, and the resulting impact, if any, on the Company’s financial condition, liquidity, and future results of operations is uncertain. Management is actively monitoring the global situation on ourthe Company’s 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 the Company’s suppliers) could have a material adverse effect on its business operations and financial performance. Given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, the Company is not presently able to estimate the effects of the COVID-19 pandemic on its results of operations, financial condition, or liquidity for the current fiscal year. As of the date of this filing, the Company’s recently commenced business operations have not been materially impacted, however, we have encountered some logistical delays related to product launches and distribution in international markets. The Company was also indirectly impacted by supply chain issues and regulatory oversight.

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 (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s most recent Annual Financial Statements filed with the SEC on Annual Report on Form 10-K 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 most recent fiscal period, as reported in the 2020 Annual Report have been omitted.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In the opinion of management, all adjustments necessary in order to make the financial 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,July 31, 2021 and 2020 was estimated on the date of 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.Common Stock. The assumed discount rate was the default risk-free five-year interest rate for US Treasury bills.

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 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 5years, beginning August 1, 2020, with rent of $1,000$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%4.5% in determining the present value of the lease. As of April 30,July 31, 2021, the right-to-use (“ROU”) lease asset, net of accumulated amortization, was $62,882.$59,246. The initial recognition of the ROU operating lease was $73,749$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$3,616 and one payment on the ROU liability was $2,836.$2,836. The amortization expense for the sixnine months ended April 30,July 31, 2021 was $7,905$10,887 and twothree payments on the ROU liability were $6,345.$8,547. At April 30,July 31, 2021, short-term ROU lease liability was $12,363$12,691 and long-term liability was $52,859,$49,675, totaling $65,222.$62,366. Operating lease expense totaling $9,000$11,000 for November 1, 2020 until AprilJuly 2021 was accrued at April 30,July 31, 2021.

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$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.Common Stock. As a result of the Reverse Stock Split, the conversion rate was adjusted such that each share of the Series A Preferred Stock are convertible into approximately 8.33 shares of Common Stock. All 3,000,000 shares of Series A Preferred Stock were issued and outstanding as of April 30,July 31, 2021.

Common Shares Issued

The Company implemented the Reverse Stock Split, effective prior to the opening of the market on Tuesday, July 20, 2021. The Reverse Stock Split was implemented by the Company in support of its application to list on the Nasdaq Capital Market (“Nasdaq”). As a result of the Reverse Stock Split at the 1-for-12 ratio, every 12 shares of the Common Stock was exchanged for one share of the Common Stock. The Company has retroactively adjusted all share amounts and per share data herein to give effect to the Reverse Stock Split.

The authorized common stockCommon Stock of the Company consists of 1,000,000,000 shares with a par value of $0.001. There$0.001. As a result of the Reverse Stock Split, effective July 20, 2021, and the issuance of RSUs (as defined below) during May 2021 there were 282,803,70823,600,597 shares of common stockCommon Stock issued and outstanding as of April 30,July 31, 2021.

Restricted Stock Unit Awards

During the sixnine months ended April 30,July 31, 2021, 1,310,000165,416 shares of common stockCommon Stock were issued to eight employees of the Company pursuant to restricted stock unit (“RSU”) agreements, resulting in $724,161$740,695of share-based compensation. Of the shares issued to employees, 457,55560,758 shares were withheld by the Company to satisfy tax withholding obligations equal to $77,975.$201,688.

During the sixnine months ended April 30,July 31, 2021, 4,668,633389,053 shares of common stockCommon 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 issueissuance dates to compute an aggregate fair market value total of $7,529,151.$7,529,151.

Stock Options

During the sixnine months April 30,July 31, 2021, the Company granted 1,100,000 options exercisable for up to 150,000 shares of Common Stock of which 500,00041,667 fully vestvested on December 1, 2021,180,0002021, 15,000 fully vestvested on March 15,17, 2021, and 140,0007,500 fully vested on June 30, 2021, 68,333 vest over the next 32 years on March 15,17, 2022, and 2023, and 2024.17,500 vest over the next 2 years on June 30, 2022 and 2023. The options have exercise prices ranging from $2.165$9.12 to $2.39$28.68 per share. These options have a weighted average remaining life of 9.889.62 years as of April 30,July 31, 2021 and expire in the year 2031. On July 19, 2021, two of the stock option agreements, exercisable for an aggregate of  50,000 shares of Common Stock, were modified to accelerate the full vesting period from 3 years to 2 years. The aggregate intrinsic value of these outstanding options as of April 30,July 31, 2021 was $0.$0.

The Company fair valued the options on the grant date at $2,438,996 $3,088,002 using a Black-Scholes option pricing model with the following assumptions: stock price range of $2.165-2.28 $9.12 to $27.36 per share (based on the quoted trading price on the date of grant), volatility range of 301.53%294.57% to 301.53%, expected term of 10 years, and a risk-free interest rate range of 1.62%1.19% to 1.63%. The Company is amortizing the expense over the vesting terms of each. The total stock option expense for the sixnine months April 30,ended July 31, 2021 was $579,699.$1,268,210. The total unamortized stock option expense at July 31, 2021 was $1,819,792.

Note 5 – Related-Party Transactions

Revenue and Accounts Receivable

During the sixnine months ended April 30,July 31, 2021, the Company recognized revenue of $61,545$132,145 from three companies owned by Nirajkumar Patel, the Chief Executive Officer and Chief Financial Officer of the Company, and/or his wife. As

During the nine months ended July 31, 2021, Lakshmi Distributors Inc., doing business as C Store Master (“C Store Master”), a large customer of April 30, 2021, the Company, has accounts receivable fromelected to return the inventory associated with the consignment order placed on April 1, 2021, which was located at the staging warehouse in California, to the Company at no cost. The Company then returned this related partysame inventory to Bidi’s warehouse in Florida at no cost. This reduced the Company’s inventory and reduced the related-party amount of $765.due to Bidi Vapor by $13,846,950.

Purchases and Accounts Payable

During the sixnine months ended April 30,July 31, 2021, the Company purchased Products equal to $75,065,602$62,394,093 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,July 31, 2021, the Company had accounts payable to Bidi of $38,001,633$16,813,962 and products valued at $28,791,150$14,947,200 were held in inventory at April 30,July 31, 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 warehouse of its management at no 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 sixnine months ended April 30,July 31, 2021, 100%100% of the inventories of Products, primarily consisting of the “Bidi“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.$62,394,093. It also accounted for 99.3%100% of the total accounts payable-related party and 99.3% of the total accounts payable of the Company as of April 30,July 31, 2021. Products valued at $28,791,150$14,947,200 were held in inventory at April 30,July 31, 2021.

Concentration of Revenues and Accounts Receivable

For the sixnine months ended April 30,July 31, 2021, approximately 33%30%, or $18,129,136,$18,435,648, of the revenue from the sale of Products, primarily consisting of the “Bidi“BIDI^® Stick,” was generated from Favs Business LLC (“Favs Business”), approximately 16%16%, or $9,069,455,$9,598,426, of the revenue from the sale of Products was generated from MMS Distributing, LLC (“MMS Distro”), approximately 12%13%, or $6,820,132,$7,663,490, 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%8%, or $5,868,000,$4,648,659, of the revenue from the sale of Products was generated by GPM Investment, LLC (“GPM Investment”).

Favs Business, C Store Master, MMS Distro and GPM Investment had outstanding balances of $8,590,200$6,641,912, $545,879, $255,620 and $2,482,553,$178,756, respectively, accounted for approximately 47%85%, 7%, 3% and 14%2%, respectively, of the total accounts receivable from customers as of April 30,July 31, 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,July 31, 2021 and April 30,July 31, 2020 other than the below:

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 has completed 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.

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 90,0007,500 restricted shares of the Company’s common stockCommon 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 75,0006,250 restricted shares of the Company’s common stockCommon 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 165,00013,750 shares, or $70,785, and the cash bonuses totaling $100,000 should be accrued at January 31, 2021.

During the three and sixnine months ended April 30,July 31, 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“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$40,283 for a quarterly bonus payable to QuikfillRx, based on the Applicable Gross Quarterly Sales results of the three months ended April 30,July 31, 2021.

On March 17, 2021 the Company entered into a consulting agreement with Russell Quick which granted stock options to purchase 500,00041,667 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.$28.68. The Company recognized $190,000 in expense to account for the stock options.Russell Quick is the managerChief Executive Officer 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%35% to 21%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%4.458%.

During the sixnine months ended April 30,July 31, 2021, the Company generated no taxable income and, thus no0 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,July 31, 2021 and October 31, 2020 after applying enacted corporate income tax rate, is net operating loss carryforward of $0$721,771 and $15,377,$15,377, respectively, and a valuation allowance of $0$721,771 and $15,377,$15,377, respectively, which is a total deferred tax asset of $0.$737,148. The Company’s tax returns for 2018 and 2019 remain open to examination.

Note 9 – Subsequent Events

Patent Contribution AgreementShare-based Compensation

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,On August 8, 2021, 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, 775,000issued 56,250 shares of common stock were issuedCommon Stock to eight employees ofin accordance with the Company pursuant tovesting schedules set forth in RSU agreements previously entered into with such employees, resulting in the recognition of $487,514$352,137 of share-based compensation. Of the shares issued to employees, 372,09628,660 shares were withheld by the Company to satisfy tax withholding obligations equaland/or satisfy cash settlement options to $123,536employees, equaling $179,412.

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 sixnine months ended April 30,July 31, 2021 included under Item 1 – Financial Statements in this Quarterly Report and our audited Financial Statements and notes thereto for the year ended October 31,30, 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 operationaloperational; however, we were indirectly negatively impacted by COVID-19.

We were indirectly impacted by supply chain issues and regulatory oversight. First, COVID-19 impacted Bidi’s ability to quality test and develop its new product, the BIDI^® Pouch, in line with its targeted release date, which negatively impacted our ability to begin distribution of the BIDI^® Pouch. Throughout the year and during the Premarket Tobacco Product Application (“PMTA”) process, the Food and Drug Administration (“FDA”) reiterated their enhanced scrutiny over ENDS products and raised the bar. Together with Bidi, we have not seen anyonly invested significant direct negative impactfinancial resources into developing state of COVID-19the art procedures, policies and technology around compliance but had also refused to relax our newly commenced business. However,own internal standards when we have encounteredobserved some logistical delays related to product launchesdistributers and distribution in international marketsretailers relaxing their standards. We believe that retailers and distributers relaxed their standards for two reasons: (i) due to COVID-19, While the spreadgovernment enforcement of COVID-19 has begunregulations were very limited due to slow andimposed social restrictions, have begunresulting in less in-person monitor enforcement by government officials and (ii) retail stores experienced light foot traffic from customers due to ease,COVID-19 restrictions and fears, which resulted in relaxed compliance in an effort to generate revenue. The relaxation of standards by certain retailers significantly impacted our revenues.

Impact of FDA PMTA Decision

Prior to the full impactSeptember 9, 2021 court-order deadline for the FDA to make PMTA determinations for pending applications, we believe that many retailers and distributors were reluctant to take on new inventory. We believe these retailers, were concerned with the potential for sitting on inventory that after September 9, 2021 could be ruled adulterated or misbranded by the FDA and, thus, illegal to sell.

Separately, we believe there were other retailers willing to purchase counterfeit or sub-optimal products from manufacturers who were selling these products at significantly reduced prices. These manufacturers were willing, we believe, to significantly reduce sales prices because they realized they would likely not receive the FDA’s PMTA authorization on September 9, 2021 and were attempting to recognize any revenues associated with what they believe will likely be unsellable product following the deadline. Both of these unanticipated consequences resulted in the third quarter of fiscal 2021 being an extremely challenging quarter for us.

Due to increased pressure from, among others, tobacco control and public health groups, members of Congress, academic institutions, family advocacy organizations and attorneys general, we believe that the FDA has used the September 9, 2021 PMTA deadline to effectively “ban” flavored ENDS by denying nearly all pending PMTAs for such products. As of September 10, 2021, the FDA announced that it has taken action on over 93% of applications and issued Marketing Denial Orders (“MDOs”) for more than 992,000 flavored ENDS products, while issuing zero marketing authorizations. Unfortunately, despite submitting a comprehensive PMTA and continuing to develop robust and reliable product-specific scientific evidence demonstrating the public health benefit of its flavored ENDS products, Bidi, along with nearly every other company in the ENDS industry, received a MDO for its non-tobacco flavored BIDI^® Sticks, including its Arctic (menthol) BIDI^® Stick, which the FDA mischaracterized as “flavored”. However, because its Arctic BIDI^® Stick is menthol, Bidi believes its menthol BIDI^® Stick is not subject to the MDO. This position is aligned with the FDA’s public statements and press releases stating that tobacco and menthol ENDS are not deemed flavored products subject to the MDOs. Accordingly, along with the Classic (tobacco) BIDI^® Stick, Bidi intends to continue to manufacture and market its Arctic (menthol) BIDI^® Stick for distribution by us.

Historically, substantially all of our revenues were derived from sales of flavored BIDI^® Sticks, including the Arctic (menthol) BIDI^® Stick, sales of which constituted approximately 15.2% and 18.5%, respectively, of our total sales of BIDI® Sticks for the three and nine months ended July 31, 2021. Generally, substantially all of the COVID-19 pandemic continuesENDS industry revenue is derived from the sales of flavored products.

Following the issuance of the MDOs, nearly all manufacturers, not only BIDI, will be limited to evolvemanufacturing and remains uncertain. The COVID-19 pandemic continuesselling only tobacco and menthol ENDS products. Accordingly, we believe that consumers are likely to impact economic conditions,modify their purchases to shift to products that are available and, thus, that a substantial amount of our revenue that had previously been generated from sales of flavored BIDI^® Sticks (other than Arctic) may be replaced through sales of the Classic (tobacco) and Arctic (menthol) BIDI^® Sticks, given that consumers will only be able to purchase, on a legal basis, non-flavored ENDS products. Accordingly, we believe revenues for tobacco and menthol ENDS products will restore some or all of the revenue we derived from the sale of flavored products. Moreover, based on sales and consumer data, we believe that our consumers are loyal to the Bidi brand and BIDI^® Sticks and that they thus are likely to continue to purchase our Classic (tobacco) and Arctic (menthol) BIDI^® Sticks in lieu of the flavored BIDI® Sticks they may have bought in the past.

If the FDA disagrees with Bidi’s position, issues a warning letter, or takes other action against Bidi resulting in us not being able to distribute the menthol (Arctic) BIDI^® Stick in the United States, or consumers do not purchase the tobacco (Classic) or menthol (Arctic) BIDI^® Sticks, our revenues and, thereby our financial results and condition, would be materially adversely affected. Our financial results and condition will also be significantly impacted by our ability to continue to sell the Arctic (menthol) BIDI^® Stick and the degree to which could impactsales of the short-termClassic (tobacco) and long-term demandArctic (menthol) BIDI® Sticks replace sales of flavored products that are now prohibited.

In addition, Bidi informed us that it is not wavering in its commitment to demonstrating that all its BIDI^® Stick products are appropriate for the protection of the public health and proving to the FDA that these products should remain on the market as an alternative for adult cigarette smokers. In this regard, Bidi is appealing the MDO and plans on continuing to complete multiple ongoing studies, including a clinical pharmacokinetic, or PK, study, and several actual use and perception and intention studies to support its PMTA. Preliminary results from our customersthese studies indicate that, compared to tobacco-flavored ENDS, the flavored BIDI^® Sticks do indeed provide an added benefit for adult cigarette smokers while outweighing any risks to youth posed by flavored ENDS, particularly when considering Bidi’s stringent youth access prevention measures. In addition, as FDA is currently focusing on non-tobacco and therefore,non-menthol ENDS, Bidi will continue to market its Classic (tobacco) and Arctic (menthol) BIDI^® Sticks, respectively.

As has become clear, the PMTA decision process will result in the elimination of the vast majority of all ENDS products from the marketplace, as these applications did not include the product specific scientific evidence needed to justify marketing authorization, which Bidi is developing.

Despite this MDO, we continue to believe that Bidi has the potential to negatively impact our resultsbe one of operations, cash flows,only a handful of companies that will not only survive but rise above the demanding scrutiny of the new regulatory world while continuing to deliver a premium and financial positionpreferred vape experience, as reflected by the BIDI^® Stick leading the market share in the future. Management is actively monitoringdisposable ENDS category confirmed by Nielsen reports dated June 29, 2021.

Future Strategic Opportunities

With the FDA’s effective ban of flavored ENDS products through its denial of nearly all pending PMTAs for such products, we expect that only tobacco and menthol ENDS products will be available for marketing and distribution in the United States. While this situationwill clearly change the traditional and any impactfuture industry landscape, for manufacturers whose tobacco and/or menthol ENDS products remain on our financial condition, liquidity, and resultsthe market as their pending PMTAs undergo FDA scientific review, it represents a much larger market opportunity per-formulation due to the elimination of operations. However, givenflavors.

As the daily evolutionFDA continues to issue MDOs, we believe Bidi will be one of the COVID-19 pandemiconly remaining players in the disposable ENDS market, since many of Bidi’s competitors in this space only marketed flavored disposable ENDS. Based upon information released by the FDA, we believe that only 7% of the domestic players in this industry remain. Prior to these recent PMTA determinations, we captured an approximately 37% market share within the ENDS market. That market share was captured from a market containing more than one hundred other brands.

In addition to the continued domestic opportunity, we believe that international markets provide an exciting growth opportunity for us. The estimated total addressable global market for ENDS products is approximately $36.7 billion. As previously announced, Bidi has received approval to market and distribute products within 11 international markets, including the United Kingdom, France, Russia, and the global responsesCzech Republic. Bidi has also secured significant intellectual property protections similar to curb its spread, wethose received in the United States from the European Union, China, and several other regions and countries. It is also important to note that the nicotine formulation in the Bidi^® Stick has been modified and approved at the 2% level to meet the criteria for distribution in the United Kingdom and Europe.

These international market approvals Bidi has previously secured 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 2021full formulation lineup, including all flavors. Because the FDA’s PMTA restrictions and possibly, beyond.guidelines do not pertain to international markets, Bidi intends to continue manufacturing its full product lineup, for distribution by us in these international markets.  

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.,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 Nevada corporation (“USSE Nevada”) 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 aparent/subsidiary short-form merger of USSE NevadaKaival Brands Innovations Group, Inc., our wholly-owned Delaware subsidiary formed solely for the purpose of the name change, with and into USSE Delaware, Inc. (“USSE Delaware”), with USSE Delaware asus. We were the surviving entity.

Holding Company Reorganization

On September 4, 2018, USSE Delaware acquired 1,000 shares of our common stock, which represented 100% of our then-outstanding shares of common stock, for no consideration, resulting in us 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.

On September 19, 2018, and in accordance with the provisions set forth in Section 251(g) of the Delaware General 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, our then-parent. USSE Delaware was the surviving corporation and our wholly-owned subsidiary. USSE Delaware also changed its name to USSE Corp. following this holding company reorganization.

Change of Control

On February 6, 2019, we entered into a Share Purchase Agreement (the “Share Purchase Agreement”), by and among us, GMRZ Holdings LLC, a Nevada limited liability company (“GMRZ”), our then-controlling stockholder, and Kaival Holdings, LLC, a Delaware limited liability company (“KH”), pursuant to which, on February 20, 2019, GMRZ sold 504,000,000 shares of our restricted common stock, representing approximately 88.06 percent of our then issued and outstanding shares of common stock, to KH, and KH 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, with KH becoming our largest controlling stockholder. Nirajkumar Patel and Eric 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 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.

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 Securities 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 or given directly for the exchange.

Our Business

Currently,We are focused on growing and incubating innovative and profitable products into mature, category-dominant brands. In March 2020, we market and placecommenced business operations after becoming the exclusive distributor of the Products into national distribution channels through long-standing industry relationships in accordance withmanufactured by Bidi, and a related party company that is also owned by Nirajkumar Patel, our Chief Executive Officer.

Pursuant to the A&R Distribution Agreement, entered into with Bidi a related party, in March 2020 (and subsequentlygranted to us an exclusive worldwide right to distribute the Products for sale and resale to both retail level customers and non-retail level customers. The newly amended and restated distribution agreement extends the previous one-year, annual renewable term to an initial term of ten years, which automatically renews for another five-year term; provided, that we satisfy certain minimum purchase thresholds. The newly amended and restated distribution agreement also provides us with a right of first refusal in May 2020the event Bidi receives an offer that would constitute a “change of control transaction,” as well as a right of first refusal to act as the exclusive distributor of any and again in April 2021). all future products of Bidi that arise out of or related to ENDS and components related to ENDS, arise out of or relate to the synthetic nicotine industry, or arise out of or related to the tobacco-derived nicotine industry.

Current Product Offerings

Pursuant to the A&R Distribution Agreement, we sell and resell the Productselectronic nicotine delivery systems, which we may refer to herein as “ENDS Products”, or “e-cigarettes”, to both retail level customers and non-retail level customers. Bidi’sOur primary Product we resell is the “BIDI^® Stick,” a disposable, tamper-resistant ENDS product that comes in a variety of flavor options for adult cigarette smokers. In addition to the BIDI^® Stick, we anticipated launching distribution of the “BIDI^® Pouch” in the fall of 2021. The initial, planned February 2021 BIDI^® Pouch roll out had been delayed due to COVID-19 based manufacturing and supply chain constraints. Due to these complications and in effort to prevent future bottlenecks, Bidi decided to move manufacturing in-house. The BIDI^® Pouch provided a tobacco-free nicotine formulation, which contains natural fibers and a chew-base filler in six different flavors. However, the BIDI^® Pouch product is now being placed on temporary hold domestically due to the “Bidi Stick”likelihood of the FDA enforcement of synthetic nicotine products as drugs, which will require a PMTA determination from the FDA. More specifically, while the BIDI^® Pouch, which made with synthetic (tobacco-free) nicotine, would not fall within the meaning of a tobacco product as set forth in the Food, Drug and once launched,Cosmetic Act (“FDCA”), the “Bidi Pouch.”FDA could take the position that such product is a drug. A drug is defined in Section 201(g) of the FDCA, in pertinent part, as “articles intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease in man or other animals” (i.e., the “disease” or “therapeutic benefit” prong) or “articles (other than food) intended to affect the structure or function of the body of man or other animals” (i.e., the “structure/function” prong). Given nicotine’s well-known structure/function effect on the body there is a chance the FDA will take the position that synthetic nicotine products, such as the BIDI^® Pouch, are subject to the FDA’s drug authority and can only be marketed with an approved New Drug Application (even if no disease or therapeutic benefit claims are made). Indeed, prior to the enactment of the Tobacco Control Act, the FDA historically took the position that any product with added nicotine (other than traditional tobacco products) was a drug, even when marketed for recreational use and without specific claims of smoking cessation or other therapeutic benefit.  It is, of course, illegal to distribute a drug without the FDA’s approval. Given these concerns, Bidi is consideredhas decided not to launch the synthetic-nicotine BIDI^® Pouch at this time but will instead seek 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,PMTA marketing authorization from the entity that is our largest controlling stockholder. Thus, Bidi and we are under common control.

FDA for the BIDI^® Pouch made with tobacco-derived nicotine. 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 levelsdo not manufacture any of the Products in order to meet these customers’ demand,we resell. The BIDI^® Stick and deliver the Products sold to these retail customers.BIDI^® Pouch are manufactured by Bidi. 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 theour Products.

On July 14, 2021, we announced plans to launch our first Kaival-branded product, a Hemp CBD product. In connection with the A&R Distribution Agreement,addition to our Kaival-branded formulation, 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, 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 assuranceanticipate that we will be able to raise any required capital or that capitalalso provide white label, wholesale solutions for other product manufacturers through our subsidiary, Kaival Labs.

All CBD products will be availableproduced and distributed strictly in compliance under the 2018 Farm Bill, which defines hemp as the plant Cannabis sativa and any part of the plant with a delta-9 THC concentration of not more than 0.3 percent by dry weight. According to us at acceptable terms, or at all.the 2018 Farm Bill, hemp-derived products can be offered for retail sale in the many forms: smoke, pouch, tinctures, topicals, capsules, vape oil and gummies/edibles. We believe thatplan to utilize Bidi’s patented BIDI^® Stick delivery mechanism in order to provide a similar, premium experience in the initial CBD product line. We expect our cash provided by operations will be sufficient for the next twelve months.industrial-grade hemp CBD formula to provide greater bioavailability than many market peers, resulting in a better consumer experience in less usage.

As a result of the commencement of business operations, in March 2020, we began 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.

Liquidity and Capital Resources

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

At April 30,July 31, 2021, we had working capital of approximately $9.2$6.4 million and total cash of approximately $2.1 million.$938,000.

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 used in operations was approximately $5.2$6.3 million for the first sixnine months of fiscal year 2021, compared to $1.9$2.7 million provided by operations for the first sixnine months of fiscal year 2020. The decreaseincrease in cash flow fromused in operations for the first sixnine months of fiscal year 2021 was mainly duecompared to the net loss during the first sixnine months of fiscal year 2021 as compared2020 was primarily due to thedecreased revenues and increased operating expenses, resulting in a net profit during the comparable period for fiscal 2020. We anticipate 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. loss.

Cash flow used in financing activities was approximately $77,975$202,000 for the first sixnine months of fiscal year 2021, compared to $0 for the first sixnine months of fiscal year 2020. The cash used in financing activities for the first two quartersnine months of fiscal year of 2021 consisted of cash used for the settlement of RSUs for cash.issued to employees.

Results of Operations

Three months ended April 30,July 31, 2021, compared to three months ended April 30,July 31, 2020

Revenues:

Revenues for the secondthird quarter of fiscal year 2021 were approximately $18.1$3.4 million, compared to $22.5$32.4 million in the same period of the prior fiscal year. DuringRevenues decreased in the secondthird quarter of fiscal year 2020, we entered into2021 primarily due to increased competition resulting from 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 Agreementslack of enforcement by federal and other agreements with counterpartiesstate authorities against sub-par and granted such sub-distributors the right to distribute the Products to non-retail customers within the Territory. We havelow-priced vaping products that 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.market illegally without FDA authorization.

Cost of Revenue and Gross Profit:Profit (Loss):

Gross profitloss in the secondthird quarter of fiscal year 2021 was approximately $6.3 million,$84,000, or approximately 2.5% of gross revenues, compared to $4.2$4.4 million gross profit, or approximately 13.6% of gross revenues, for the secondthird quarter of fiscal year 2020. Total cost of revenue was approximately $11.9$3.5 million, or approximately 102.5% of gross revenues, for the secondthird quarter of fiscal year 2021, compared to $18.3$28.0 million, or approximately 86.4% of gross revenues, for the secondthird quarter of fiscal year 2020. The increasedecrease in gross profit is entirelyprimarily driven by the decrease in overall sales and the costrecognition of accumulated year-to-date credits/discounts taken by customers, resulting in an offset to gross revenues during the Products sold inthird quarter of fiscal year 2021 as compared to the previous year.2021. 

Operating Expenses:

Total operating expenses were approximately $10.4$3.4 million for the secondthird quarter of fiscal year 2021, compared to approximately $458,000$1.5 million for the secondthird quarter of fiscal year 2020. For the secondthird quarter of fiscal year 2021, operating expenses consisted primarily of commissions paid pursuant to the Further Amended Service Agreementadvertising and promotion fees of approximately $801,000$711,000, professional fees totaling $945,000 and general and administrative expenses of approximately $9.6  million .$1.7 million. General and administrative expenses in the secondthird quarter of fiscal year 2021 consisted primarily of legalsalaries and wages, stock option expense, insurance, banking fees, salaries, other professional fees, merchantbusiness 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. TotalWe expect future 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.continue to increase while we generate increased sales growth.

Income Taxes:

During the secondthird quarter of fiscal year 2021, we expensedaccrued approximately $186,800$300 for prior yearstate income taxes, compared to the accrual of income taxed of approximately $950,400$320,000 for the secondthird quarter of fiscal year 2020. The decrease inreduction from the accrual for income taxes is as a resultthird quarter of having no taxable income during fiscal year 2021, as compared2020 was due to the previouspre-tax operating loss recognized during the third quarter of fiscal year.year 2021. 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

As a result of the items noted above, the net loss for the secondthird quarter of fiscal year 2021 was approximately $4.3$3.4 million, or $(0.02)$(0.15) basic and diluted earningsloss per share, compared to net income of approximately $2.8$2.6 million, or $0.00$0.05 basic and diluted earnings per share, for the secondthird quarter of fiscal year 2020. The decrease in net income for the secondthird quarter of fiscal year 2021, as compared to the secondthird quarter of fiscal year 2020, is primarily attributable to the increase in operatingdecreased revenues, customer credits/discounts used and increased expenses, and commissions and the decrease in revenues.as noted above.

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.

SixNine months ended April 30,July 31, 2021, compared to sixnine months ended April 30,July 31, 2020

Revenues:

Revenues for the second quarterfirst nine months of fiscal year 2021 werewas approximately $18.1$59.0 million, compared to $22.5$54.9 million in the same period of the prior fiscal year. DuringThis 7.5% revenue increase year-over-year was achieved, despite the second quarter of fiscal year 2020,disruption in the industry, primarily due to the strong business partnerships 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 agreementshave 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.major customers.

Cost of Revenue and Gross Profit:

Gross profit in the first sixnine months of fiscal year 2021 was approximately $11.1$11.0 million, or approximately 18.6% of gross revenues, compared to $6.9 million, or approximately $4.2 million12.6% of gross revenues, for the first sixnine months of fiscal year 2020. Total cost of revenue was approximately $44.4$48.0 million, or approximately 81.4% of gross revenues, for the first sixnine months of fiscal year 2021, compared to $18.3$48.0 million, or approximately 87.4% of gross revenues, for the first sixnine months of fiscal year 2020 and the decrease in cost of products sold.2020.

Operating Expenses:

Total operating expenses were approximately $14.7 $18.1 million for the first sixnine months of fiscal year 2021, compared to approximately $471,000$1.9 million for the first sixnine months of fiscal year 2020. For the first sixnine months of fiscal year 2021, operating expenses consisted of commissions paid pursuant to the Further Amended Service Agreementadvertising and promotion expenses of approximately $1.8$2.5 million and general and administrative expenses of approximately $13.0 million.$4.9 million and $10.7 million of professional fees. General and administrative expenses in the first sixnine months of fiscal year 2021 consisted primarily of legal fees, salaries, otherbonuses, professional fees, merchant fees, and other service fees. Total operating expenses for the first sixnine months of fiscal year 2020 wereconsisted of approximately $471,000 and consisted$1.0 million of general and administrative expenses,, which were primarily from professionallegal fees incurred and approximately $260,000$916,000 in commissions paid pursuantadvertising and promotion expenses. We expect future operating expenses to the Further Amended Service Agreement.continue to increase while we generate increased sales growth.

Income Taxes:

During the first sixnine months of fiscal year 2021, we expensedaccrued approximately $293,100$292,844 for prior year income taxes, compared to the approximately $950,400 accrual$1.3 million for the first sixnine months of fiscal year 2020.2020, due to the overall decrease in taxable income between the two fiscal years. 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

As a result of the items noted above, the net loss for the first sixnine months of fiscal year 2021 was approximately $3.9 $7.4 million, or $(0.01)$(0.32) basic and diluted loss per share, compared to the net income for first nine months of fiscal year 2020 of approximately $3.7 million, or $0.08 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.share. The decrease in net income for the first sixnine months of fiscal year 2021, as compared to the first sixnine months of fiscal year 2020, is attributable to the increase indecreased sales, customer credits/discounts used and increased overall operating expenses, and commissions and the decrease in revenues.as noted above.

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. 

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 Consolidated 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 sixthree and nine months ended April 30,July 31, 2021 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, 2020.

Recently Adopted Accounting Pronouncements

See Note 2, Basis of Presentation and Significant Accounting Policies, to the unaudited Consolidated 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 SEC’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.

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

UnderUnder the supervision and with the participation of our management, including our Chief Executive Officer and Interim 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,July 31, 2021, the end of the period covered by this report.Quarterly Report. Based on that evaluation, the Chief Executive Officer and Interim 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,July 31, 2021. Management will continue to work to improve its disclosure controls and procedures in fiscal 2021 and is committed to the improvement in the effectiveness of its systems in its internal controls during the next 12 months. The Company intends to hire additional staff and to take such other actions as may be necessary to address its material weaknesses.

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.

Changes in Internal Control over Financial Reporting

During the quarter ended April 30,July 31, 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,August 8, 2021, wethe Company issued an aggregate of 575,00056,250 shares of our common stockCommon Stock to sixeight employees as equity compensation pursuant to certainin accordance with the vesting schedules set forth in RSU agreements previously entered into with each employee. Thesesuch employees, resulting in the recognition of $352,137 of share-based compensation. Of the shares had a fair market value at the date of grant of $0.14, which was closing price on the grant date as reportedissued to employees, 28,660 shares were withheld 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 priorCompany to the issuance date as reported by the OTCM. We issued the shares in reliance on the exemption from registration pursuantsatisfy tax withholding obligations and/or satisfy cash settlement options 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).employees, equaling $179,412.

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

None.

Item 6. Exhibits

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

*filed herewith

SIGNATURES