i

F-1

F-2

F-3

 (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 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^® Stick” and, once launched, the “BIDI^® Pouch”.Stick.” The Company ceased all retail/direct-to-consumer sales in February 2021.

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”).

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 $0.001per 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 bewere 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.

COVID-19 Impact

COVID-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.

The 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 slowslowed and social restrictions have begun to ease,largely been lifted, 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 the 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,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.

Impact of the FDA PMTA Decision

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 1,167,000 flavored ENDS products, while issuing zero marketing authorizations.

Bidi, along with nearly every other company in the ENDS industry, received a MDO for its non-tobacco flavored ENDS products. With respect to Bidi, the MDO covered all non-tobacco flavored BIDI® Sticks, including its Arctic (menthol) BIDI® Stick, which Bidi believes the FDA mischaracterized as “flavored.” BIDI believes that because its Arctic BIDI® Stick is menthol, it should not be subject to the MDO. Bidi and the Company believe 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.

As a result, beginning in September 2021, Bidi pursued three avenues to challenge the MDO. First, on September 21, 2021, separate from the judicial appeal of the MDO in its entirety, Bidi filed a 21 C.F.R. § 10.75 internal FDA review request specifically of the decision to include the Arctic (menthol) BIDI® Stick in the MDO. The Company anticipates a decision from the FDA on the internal review in the second or third quarter of 2022, although we cannot provide any assurances as to the timing or outcome.

Separately, on September 29, 2021, Bidi petitioned the U.S. Court of Appeals for the Eleventh Circuit to review the FDA’s denial of the PMTAs for its non-tobacco flavored BIDI® Stick ENDS, arguing that it was arbitrary and capricious under the Administrative Procedure Act (“APA”), as well as ultra vires, for the FDA not to conduct any scientific review of the company’s comprehensive applications, as required by the Tobacco Control Act, to determine whether the BIDI® Sticks are “appropriate for the protection of the public health”. Bidi further argued that the FDA violated due process and the APA by failing to provide fair notice of the FDA’s new requirement for ENDS companies to conduct long-term comparative smoking cessation studies for their flavored products. On February 1, 2022, U.S. Court of Appeals for the Eleventh Circuit granted Bidi’s motion to stay (i.e., put on hold) the MDO, pending the litigation on the merits. The court-ordered stay means that the MDO is not legally in force. Accordingly, we anticipate being able to continue marketing and selling the Products, subject to the FDA’s enforcement discretion, while Bidi continues with its merits case challenging the legality of the MDO. The FDA has indicated that it is prioritizing enforcement against companies that have either not submitted PMTAs, or whose PMTAs have been refused acceptance or filing by the FDA, or whose PMTAs remain subject to MDOs. Oral arguments in the merits-based proceeding are currently scheduled for May 2022.

Finally, on October 14, 2021, Bidi requested that the FDA re-review the MDO and reconsider its position that Bidi did not include certain scientific data in its applications sufficient to allow the PMTAs to proceed to scientific review. In light of this request, on October 22, 2021 pursuant to 21 C.F.R. § 10.35(a), the FDA issued an administrative stay of Bidi’s MDO pending its re-review. Subsequently, the FDA lifted its administrative stay on December 17, 2021. Following the lifting of the FDA’s administrative stay, Bidi filed a renewed motion to stay the MDO with the U.S. Court of Appeals for the Eleventh Circuit, which was granted on February 1, 2022.

In the event that the U.S. Court of Appeals issues for the Eleventh Circuit a ruling adverse to Bidi, or if the FDA otherwise chooses to enforce against Bidi, Bidi will be forced to cease the continued sale of its non-tobacco flavored BIDI® Stick products in the United States, thereby resulting in the Company being unable to distribute such products, the Company’s business and financial condition would be materially adversely affected. The Company cannot provide any assurances as to the timing or outcome of the merits-based case.

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, 202116, 2022 (the “2020“2021 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 20202021 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 CompensationCash and Restricted Cash

The Company measuresconsiders all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents at January 31, 2022 and October 31, 2021. Cash and restricted cash at January 31, 2022 and October 31, 2021 were $5,655,962 and $7,825,235, respectively.

Cash and restricted consist of cash and cash held short-term in escrow as required. As of January 31, 2022, and October 31, 2021, the Company had $65,542 and $65,007 in restricted cash, respectively, for amounts held in escrow.

The following table sets forth a reconciliation of cash, and restricted cash reported in the consolidated balance sheet and the consolidated statements of cash flows that agrees to the total of those amounts presented in the consolidated statements of cash flows.

Advertising and Promotion

All advertising, promotion and marketing expenses, including commissions, are expensed when incurred.

Accounts Receivable and Allowance for Doubtful Accounts

Receivables are stated at cost, net of services receivedan allowance for doubtful accounts. The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability of accounts receivables. A considerable amount of judgment is required in exchangeassessing the amount of the allowance and the Company considers the historical level 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 losses 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 January 31, 2022, based upon management’s assessment of the accounts receivable aging and the customers’ payment history, the Company has determined that no allowance for an awarddoubtful accounts was required. As of equity instruments (share-based payments, or SBP)October 31, 2021, the Company also determined that 0 allowance for doubtful accounts was required.

Inventories

All product inventory is purchased from a related party, Bidi. 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. The Company determines cost based on the grant-date fairFIFO method. Net realizable value is the estimated selling price in the ordinary course of business less the award. That cost is recognized overestimated costs of completion and the period during whichestimated costs necessary to make the sale. All inventories are purchased from 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 probablerelated party as 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 JulyOctober 31, 2021 and 2020January 31, 2022, the inventories only consisted of finished goods, were significant, and were located in four storage locations, one of which was estimated ona related party, Bidi, and the other location was with a customer/sub distributor, Favs Business LLC (“Favs Business”). Based upon fiscal year 2021 inventory management procedures and their results, that have continued through the quarter ended January 31, 2022, the Company has determined that no allowance for the inventory valuation was required at January 31, 2022, nor October 31, 2021.

Inventory deposit related party

In the fourth quarter of fiscal 2021, the Company placed an order for BIDI^® Sticks in anticipation of the distribution launch in the United Kingdom. In connection with this order, the Company paid $2.9 million from its capital financing raise to Bidi, a related party, in advance to have the BIDI^® Sticks manufactured in compliance with the regulatory product requirements in the United Kingdom, which differs from the regulatory product requirements in the United States. The parties originally contemplated that delivery of the BIDI^® Sticks to the Company would occur by the end of February 2022. Once delivered the BIDI^® Sticks to be distributed in the United Kingdom will be maintained in appropriate warehousing for distribution and sale. As of the date these unaudited consolidated financial statements were issued, this has not been completed and no inventory has been transferred to the Company; thus, this remains a deposit. The parties anticipate that such delivery will occur by the end of grant using the Black-Scholes-Merton option-pricing model withsecond quarter of 2022 or beginning of the weighted average assumptionsthird quarter of 2022, dependent upon the timing of the launch of distribution in the following table:

The expected termUnited Kingdom. In the event that delivery of options granted represents the periodBIDI^® Sticks and corresponding launch of time that options granted are expected to be outstanding. The expected volatility was based on the volatilitydistribution in the trading ofUnited Kingdom is further delayed, the Common Stock. The assumed discount rate wasparties intend that Bidi will return the default risk-free five-year interest rate for US Treasury bills.inventory deposit to the Company. 

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,Under ASC 606, disaggregated revenue from contracts with customers depicts the nature, amount, timing, and uncertainty of revenue and cash flows affected by economic factors. The Company has evaluated revenues recognized and substantially all of our revenues were derived from sales of flavored BIDI® Sticks, including the Arctic (menthol) BIDI® Stick, sales of which constituted approximately 12.5% and 19.9% of our total sales of BIDI® Sticks for the fiscal quarters ended January 31, 2022 and 2021, respectively. On October 31, 2021, the Company accountsand one of its customers, Favs Business, entered into a Consignment Agreement. As of October 31, 2021, the value of the Products stored at Favs Business under the Consignment Agreement was approximately $2,556,930. At January 31, 2022, the value of the Products stored at Favs Business under the Consignment Agreement was approximately $1,433,730.

Deferred Revenue

The Company accepts partial payments for rebatesorders from wholesale customers, which it holds as deposits or deferred revenue, until the Company has received full payment and volume discountsorders are shipped to the customer. Revenue for these orders is recognized at time of shipment to the customer. As of January 31, 2022 and October 31, 2021, the Company had not received any deposits from customers, respectively, which would be included with the Company’s current liabilities, if they existed.

Customer Refunds

The Company infrequently has a need to adjust the size of an order after it has been shipped, received and paid for, due to the customer oversizing the order for more product that customersit can realistically sell at that time. If and when this occurs, the Company will be usingask the customer to purchase productsreturn the over allotted Products. Once received and inspected, the Company will issue a refund for the Product return. As of January 31, 2022 and October 31, 2021, the Company had customer refunds due in the future.amounts equal to approximately $147,690 and $316,800, respectively, which was the result of one of the Company’s sub-distributor customers returning Product that had become defective in storage. The approximately $147,690 due at January 31, 2022 represents the amount of the refund the Company will make to this customer.

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 productsProducts have been shipped to the customer. The Company determineddetermines 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’s sales arrangements for retail sales usually require full prepayment before delivery of the Products. The advance payment is not considered a significant financing component because the period between when the Company transfers a promised good to a customer and when the customer pays for that good is short. The Company offers credit sales arrangements to non-retail (or wholesale) customers and monitors the collectability of each credit sale routinely.

Revenue is measured by the transaction price, which is defined as the amount of consideration expected to be received in exchange for providing goods to customers. The transaction price is adjusted for estimates of known or expected variable consideration, which includes refunds and returns as well as incentive offers and promotional discounts on current orders. Estimates for sales periodically.returns are based on, among other things, an assessment of historical trends, information from customers, and anticipated returns related to current sales activity. These estimates are established in the period of sale and reduce revenue in the period of the sale. Variable consideration related to incentive offers and promotional programs are recorded as a reduction to revenue based on amounts the Company expects to collect. Estimates are regularly updated and the impact of any adjustments are recognized in the period the adjustments are identified. In many cases, key sales terms such as pricing and quantities ordered are established at the time an order is placed and incentives have very short-term durations.

Amounts billed and due from customers are short term in nature and are classified as receivables since payments are unconditional and only the passage of time related to credit terms is required before payments are due. The Company does not grant payment financing terms greater than one year. Payments received in advance of revenue recognition are recorded as deferred revenue.

Concentration of Revenues and Accounts Receivable

For the three months ended January 31, 2022, approximately 45%, or $1,287,180, of the revenue from the sale of Products was generated from Favs Business, approximately 12%, or $352,554, of the revenue from the sale of Products was generated from Lakshmi Distributor Inc., doing business as C Store Master (“C Store Master”), and approximately 12%, or $332,595, of the revenue from the sale of Products was generated from The H.T. Hackney Company.

Favs Business and C Store Master had outstanding balances of approximately $374,400 and $282,414, respectively, which accounted for approximately 29% and 22%, respectively, of the total accounts receivable from customers as of January 31, 2022.

For the three months ended January 31, 2021, approximately 37%, or $13,888,376, of the revenue from the sale of Products was generated from Favs Business, approximately 18%, or $6,708,752, of the revenue from the sale of Products was generated from MMS Distribution, LLC (“MMS Distro”), and approximately 13%, or $4,879,427, of the revenue from the sale of Products was generated from C Store Master.

Favs Business, with an outstanding balance of approximately $8,601,200, and GPM Investment, LLC, with an outstanding balance of approximately $1,262,985, accounted for approximately 68% and 10% of the total accounts receivable from customers, respectively, as of January 31, 2021.

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 fiscal three month period ended January 31, 2022 and at October 31, 2021 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 Common Stock. The assumed discount rate was the default risk-free ten-year interest rate for U.S. Treasury bills. The Company stock option expense for the fiscal three months ended January 31, 2022 and for the fiscal year October 31, 2021 was approximately $309,700 and $1,773,947, respectively.

The Company’s stock-based compensation for the fiscal three months ended January 31, 2022 and fiscal year October 31, 2021 was approximately $110,250 and $9,449,421, respectively.

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.

The Company has Federal net operating loss (“NOL”) carryforwards of approximately $4,000,000 and state NOL carryforwards of approximately $1,800,000. With the changes instituted by the CARES Act, the Federal NOLs have an indefinite life and will not expire. The Company’s federal and state tax returns for the 2018 and 2019 tax years generally remain subject to examination by U.S. and various state authorities. A valuation allowance is recorded to reduce the deferred tax asset if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. After evaluation of the evidence, management determined that a valuation allowance of approximately $1,256,059 for the year ended on October 31, 2021, and the fiscal three month period ended January 31, 2022, is necessary to reduce the deferred tax asset to the amount that will more likely than not be realized pursuant to ASC 740.

Fair Value of Financial Instruments

The Company’s balance sheet includes certain financial instruments. The carrying amounts of current assets and current liabilities approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization.

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of January 31, 2022. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash, restricted cash, accounts receivable, inventory, accounts payable and accrued expenses.

Recent Accounting Pronouncements

The Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements.

Note 3 – Going Concern

A recent court ruling on behalf of Bidi in the U.S. Court of Appeals for the Eleventh Circuit, granted a judicial stay of the MDO previously issued by the FDA to Bidi in September 2021. The ruling, issued on February 1, 2022, means that all BIDI^® Stick flavors remain marketable by the Company in the United States, subject to the FDA’s enforcement discretion, while Bidi continues with its merits case challenging the legality of the MDO. As the FDA has indicated that it is prioritizing enforcement against companies that have not submitted PMTAs or who have MDOs in place, the Company views the risk of FDA enforcement against Bidi as low. Oral arguments in the merits case are currently scheduled in May 2022.

If the U.S. Court of Appeals for the Eleventh Circuit agrees with Bidi in the merits case, the Company anticipates that the FDA will be compelled to place the flavored ENDS back into the PMTA scientific review process. If this is the outcome of the merits case, the Company will be able to fully market and sell the Products, subject to the FDA’s enforcement discretion, until the scientific review process is complete on each of Bidi’s PMTA for flavored ENDS and the FDA issues its decision on each.

If the U.S. Court of Appeals for the Eleventh Circuit disagrees with Bidi on the merits case, or if the FDA otherwise chooses to enforce against Bidi, the Company will be forced to cease sales on the flavored ENDS in the United States market, leaving only the Tobacco and Menthol (Arctic) ENDS products for sale in the United States (pending the outcome of the specific PMTA filings and the administrative review request for the classification of “Arctic” as a standard menthol ENDS). If this is the outcome of the merits case, this combined with the negative cash flows from operations, raises substantial doubt on the Company’s ability to continue as a going concern.

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.

These consolidated 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 we cannot continue as a going concern.

Note 4 – 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 excludes short-term leases having initial terms of 12 months or less from Topic 842 as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term. The Company adopted the standard in the fourth quarter of fiscal year 2020. The adoption of the amended ASU 2016-02 did not have any impact on the Company’s previously reported financial statements in any prior period nor did it result in a cumulative effect adjustment to retained earnings.

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. The Company does not have financing leases and only one operating lease for office space.space, with a related party. The operating lease is for a term of five 5 five years, beginning August 1, 2020, with rent of $1,000 payable monthly. Certain of the Company’s leases include renewal options and have not been included in the calculation of the lease liabilities and right of use assets as the Company is not reasonably certain to exercise the option. As the operating lease does not provide for an implicit interest rate, we estimated a current borrowing rate of 4.5% in determining the present value of the lease. As of JulyJanuary 31, 2022 and October 31, 2021, the right-to-use (“ROU”) lease asset, net of accumulated amortization, was approximately $59,24651,955. and $55,604, respectively. The initial recognition of the ROU operating lease was approximately $73,749 for both the ROU asset and ROU liability. The amortization expense for ROU asset for the twelve months ended October 31, 20202021 was approximately $3,61614,529 and one paymentno payments were made on the ROU liability was $2,836.liability. The amortization expense for the nineROU asset for the three months ended JulyJanuary 31, 20212022 was approximately $10,8873,649 and threeno payments were made on the ROU liability were $8,547.liability. At JulyOctober 31, 2021, short-term ROU lease liability was approximately $12,69113,020 and long-term liability was approximately $49,67546,185, totaling approximately $62,36659,205. OperatingAt January 31, 2022, short-term ROU lease expenseliability was approximately $13,349 and long-term liability was approximately $42,686, totaling approximately $11,00056,035 for.

Storage Space

On November 1, 2020 until July 2021, was accruedthe Company entered into a month-to-month lease agreement with Ranger Enterprises, LLC, located in Seymour, Indiana, to store product inventory at Julythis satellite location. The Company made four payments on this lease, totaling approximately $10,139, during the three months ended January 31, 2021.2022. On November 11, 2021, the Company entered into a month-to-month lease agreement with FFE Solutions Group, located in Salt Lake City Utah, to store additional product inventory at this satellite location. The Company made one payment in the amount of approximately $10,713 on December 15, 2021 for the rent on this lease during the three months ended January 31, 2022.

Note 45 – Stockholder Equity

Additional Paid-In Capital

During the three months ended January 31, 2022, approximately $309,700 of stock option expense was recognized and contributed an addition to Additional Paid-In Capital. Also, during the three months ended January 31, 2022, on November 1, 2021, RSUs previously granted to employees vested and shares of Common Stock were issued, which contributed approximately $74,451 to Additional Paid-In Capital, resulting in a total increase in Additional Paid-In Capital during the three months ended January 31, 2022 of approximately $384,151.

Preferred Shares Issued

The authorized preferred stock of the Company consists of 5,000,000 shares with a par value of $0$.0010.001 per share, of which 3,000,000 shares were designated as Series A Convertible Preferred Stock (the “Series A Preferred Stock”). Each share of the Series A Preferred Stock arewas initially convertible into 100 shares of Common Stock.Stock; however, Asas a result of the Reverse Stock Split, the conversion rate was adjusted such that each share of the Series A Preferred Stock areis convertible into approximately 8.33 shares of Common Stock.Stock. All 3,000,000 shares of Series A Preferred Stock were issued and outstanding as of JulyJanuary 31, 2021.2022.

Common Shares Issued

The Company implemented the Reverse Stock Split, effective prior to the opening of the market on Tuesday, July 20, 2021. The ReverseReverse 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 waswere 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 Stock of the Company consists of 1,000,000,000 shares with a par value of $0$.0010.001. As a result of the Reverse Stock Split, effective July 20, 2021, and the issuance of RSUs (as defined below) during May 2021 thereThere were 23,600,59730,236,696 shares of Common Stock issued and outstanding as of JulyJanuary 31, 2021.2022.

Restricted Stock Unit AwardsWarrants Shares Issued

During

As part of the nine months ended July 31,Company’s firm underwritten public offering during fiscal 2021, the Company issued warrants to purchase a total of 165,4164,053,750 shares of Common Stock at an exercise price of $1.90 per share. These warrants expire in the year 2026. During the year ended October 31, 2021, warrants for 879,828 shares were issued to eight employeesexercised for $1,665,113. No warrants were exercised during the three-month period ended January 31, 2022. The aggregate intrinsic value of the outstanding Common Stock warrants as of January 31, 2022 and October 31, 2021 was $0. The weighted average remaining term of the outstanding Common Stock warrants is 4.68 years as of January 31, 2022.

The following is a summary of the stock warrant plan activity during the fiscal three months ended January 31, 2022 and the year ended October 31, 2021.

Restricted Stock Unit Awards

On November 5, 2021, the Company pursuantissued 61,250 shares of Common Stock to restricted stock unit (“RSU”)7 employees in accordance with the vesting schedules set forth in RSU agreements previously entered into with such employees, resulting in $740,695the recognition of approximately $110,250 of share-based compensation. Of the shares issued to employees, 60,75819,866 shares were withheld by the Company to satisfy tax withholding obligations equaland/or satisfy cash settlement options to $201,688employees, equaling approximately $35,759. As of January 31, 2022, there remained 437,917 unvested RSUs with approximately $900,769 of related unvested compensation..

During the nine months ended July 31, 2021, 389,053 shares of Common Stock were issued to 7 non-employee vendors as compensation for professional services rendered to the Company and two officers as additional compensation. These shares were expensed to the Company using the closing share price on the share issuance dates to compute an aggregate fair market value total of $7,529,151.

Stock Options

During the nine months July 31,fiscal year 2021, the Company granted options exercisable for up to 150,000 shares of Common Stock of which 41,667 fully vested on December 1, 2021, 15,000 fully vested on March 17, 2021, 7,500 fully vested on June 30, 2021, 41,667 fully vested on December 1, 2021, 68,333 vest over the next 2 years on March 17, 2022, and 2023, and 17,500 vest over the next 2 years on June 30, 2022 and 2023. The options have exercise prices ranging from $9.12$9.12 to $28.68$28.68 per share. These options have a weighted average remaining life of 9.629.43 years as of JulyOctober 31, 2021 and of 9.08 years as of January 31, 2022. The options 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 Company granted no new options during the three months ended January 31, 2022. The aggregate intrinsic value of these outstanding options as of JulyOctober 31, 2021 and January 31, 2022 was $$0.

0.

The Company fair valuedvalues of the options on the grant date atdates was approximately $3,088,002using a Black-Scholes option pricing model with the following assumptions: stock price range of $9.12 to $27.36per share (based on the quoted trading price on the date of grant), volatility range of 294.57294.57%% to 301.53301.53%%, expected term of 10years, and a risk-free interest rate range of 1.191.19%% to 1.631.63%%. The Company is amortizing the expense over the vesting terms of each.each option. The total stock option expense for the ninethree months ended JulyJanuary 31, 20212022 was $1,268,210.approximately $309,700. The fiscal year 2021 total unamortized stock option expense at JulyOctober 31, 2021 was approximately $1,819,7921,314,056. The fiscal year 2022 unamortized stock option expense at January 31, 2022 was approximately $1,004,356.

Note 56 – Related-Party Transactions

Revenue and Accounts Receivable

During the ninethree months ended JulyJanuary 31, 2022, the Company recognized revenue of approximately $23,765 from four companies owned by Nirajkumar Patel, the Chief Executive Officer of the Company, and/or his wife. As of January 31, 2022, the Company has accounts receivable from this related party in the amount of approximately $245.

During the three months ended January 31, 2021, the Company recognized revenue of approximately $132,14550,300 from three companies owned by Nirajkumar Patel, the Chief Executive Officer of the Company, and/or his wife.

During the nine months ended July 31, 2021, Lakshmi Distributors Inc., doing business as C Store Master (“C Store Master”), a large customer of the Company, elected 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 same inventory to Bidi’s warehouse in Florida at no cost. This reduced the Company’s inventory and reduced the related-party amount due to Bidi Vapor by $13,846,950.

Concentration Purchases and Accounts Payable

During the ninethree months ended JulyJanuary 31, 2021,2022, the Company purchaseddid not purchase Products equal to $62,394,093 from Bidi, a related party company that is also owned by Nirajkumar Patel, the Company’s Chief Executive Officer. As of JulyJanuary 31, 2022, the Company had accounts payable to Bidi of approximately $9,129,759 and Products valued at approximately $11,841,750 were held in inventory.

During the three months ended January 31, 2021, the Company purchased Products of approximately $32,479,100 from Bidi, a related party company. As of January 31, 2021, the Company had accounts payable to Bidi of approximately $16,813,9626,247,882 and products valued at $14,947,200. During the three months ended January 31, 2021, 100% of all Product purchases were held in inventory at July 31, 2021.made by the Company from Bidi.

Leased Office Space and Storage 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”).Pick. The Company’s Chief Executive Officer is an officer of Just Pick.

Prior to this, During fiscal year 2021, the Company utilizedwas not charged for the home officeleased space under the terms and warehouseconditions of its management at no cost through July 31, 2020.

Note 6 - Concentrations

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

Concentration of PurchasesJust Pick and Accounts Payable- Related Party

Forwas not charged for the nineseparate warehouse space provided by Just Pick; thus, no payments were made on the lease. During the three months ended JulyJanuary 31, 2021, 100% of2022, no payments were made on the inventories of Products, primarily consisting of the “BIDI^® Stick,” were purchased from Bidi, a related party company that is also owned by Nirajkumar Patel, the Company’s Chief Executive Officer, in the amount of $62,394,093. It also accounted for 100% of the total accounts payable-related party and 99.3% of the total accounts payable oflease because the Company as of July 31, 2021. Products valued at $14,947,200 were held in inventory at July 31, 2021.

Concentration of Revenuescontinued to not be charged under the five-year lease agreement for this office and Accounts Receivablestorage space.

For the nine months ended July 31, 2021, approximately 30%, or $18,435,648, of the revenue from the sale of Products, primarily consisting of the “BIDI^® Stick,” was generated from Favs Business LLC (“Favs Business”), approximately 16%, or $9,598,426, of the revenue from the sale of Products was generated from MMS Distributing, LLC (“MMS Distro”), approximately 13%, or $7,663,490, of the revenue from the sale of Products was generated from C Store Master, and approximately 8%, or $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 $6,641,912, $545,879, $255,620 and $178,756, respectively, accounted for approximately 85%, 7%, 3% and 2%, respectively, of the total accounts receivable from customers as of 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 JulyJanuary 31, 20212022 and JulyJanuary 31, 20202021 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”), and 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.

Cash and Equity Bonus Awards

On May 28, 2020, the Board 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 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 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 approved an award of 7,500 restricted shares of the 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 6,250 restricted shares of the 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 13,750 shares, or approximately $70,785, and the cash bonuses totaling $100,000 should be accrued at January 31, 2021.

During the three and nine monthsquarter ended JulyJanuary 31, 2021 additional2022, the $125 million accumulated revenue targets were not achieved and no relatedthe Company determined that cash bonuses were accrued.totaling $50,000 should be accrued at January 31, 2022.

Service Agreement

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 paypaid 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. On November 1, 2021, the parties agreed to extend the term for an additional one-year period. In addition, the Company will pay the following quarterly bonuses:

The Company has accrued $40,283 for a quarterly bonus payable to QuikfillRx, based on the Applicable Gross Quarterly Sales results of the three months ended July 31, 2021.

On March 17, 2021, the Company entered into a consulting agreement with Russell Quick which granted stock options to purchase 41,667 shares of the Company’s common stock in exchange for consulting services. Mr. Quick may exerciseThe shares underlying the stock option rightfully vested on December 1, 2021 when the shares are fully vested.2021. The exercise price per share is $28.68. The Company recognized approximately $190,000 in expense to account for the stock options. Russell Quick is the Chief Executive Officer of QuikfillRx.

Note 8 – Income Tax

The Company is subjectaccrued approximately $34,524 for a quarterly bonus payable to federal income taxes and state income tax inQuikfillRx, based on the United States. Significant judgment is required in determining the provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws.

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017, and reduced the U.S. federal corporate tax rate from 35% to 21%, eliminated corporate Alternative Minimum Tax, modified rules for expensing capital investment, and limited the deduction of interest expense for certain companies. The Company fulfilled and shipped allApplicable Gross Quarterly Sales results 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 ninethree months ended JulyJanuary 31, 2021, the Company generated no taxable income and, thus 0 federal or state income taxes are accrued for tax year 2021.2022.

Significant components of the Company’s deferred tax assets and liabilities as of July 31, 2021 and October 31, 2020 after applying enacted corporate income tax rate, is net operating loss carryforward of $721,771 and $15,377, respectively, and a valuation allowance of $721,771 and $15,377, respectively, which is a total deferred tax asset of $737,148. The Company’s tax returns for 2018 and 2019 remain open to examination.

Note 98 – Subsequent Events

Share-based Compensation

On August 8, 2021,February 4, 2022, the Company entered into a Consulting Agreement with Oakhill Europe Ltd (“Oakhill Europe”), pursuant to which the Company engaged Oakhill Europe to provide strategic advising and negotiation assistance for potential international distribution agreements (collectively, the “Oakhill Services”), in exchange for a $15,000 monthly retainer, incentive compensation bonuses of up to $175,000, and an incentive compensation bonus value of $75,000 paid in fully-vested non-qualified stock options, upon the achievement of certain events.

On February 5, 2022, the Company issued 56,25061,250 shares of Common Stock to eight7 employees in accordance with the vesting schedules set forth in RSU agreements previously entered into with such employees, resulting in the recognition of $352,137 of share-based compensation.employees. Of the shares issued to employees, 28,66024,058 shares were withheld by the Company to satisfy tax withholding obligations and/or satisfy cash settlement options to employees, equaling approximately $23,336.

On February 27, 2022, the Company’s Compensation Committee (the “Committee”) and the Board approved the grant of a stock option award to Mark Thoenes, Interim Chief Financial Officer, to acquire up to 100,000 shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan. The option shares are exercisable at a price of $179,4122.45 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. At the grant date, 50,000 option shares became immediately vested, with the remaining 50,000 option shares vesting on the one-year anniversary of the grant date. The option has a ten-year term.

On February 27, 2022, the Committee and the Board approved the grant of a stock option award to Russell Quick, as an independent consultant providing strategic advising and negotiation assistance for potential international distribution agreements, to acquire up to 100,000 shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan. The option shares are exercisable at a price of $2.45 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. At the grant date, 50,000 option shares became immediately vested, with the remaining 50,000 option shares vesting on the one-year anniversary of the grant date. The option has a ten-year term.

On March 5, 2022, the Committee and the Board approved the grant of a stock option award to Nirajkumar Patel, Chief Executive Officer, to acquire up to 600,000 shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan. The option shares are exercisable at a price of $2.85 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. At the grant date, 300,000 option shares became immediately vested, with the remaining 300,000 option shares vesting on the one-year anniversary of the grant date. The option has a ten-year term.

Previously, the Company granted Mr. Patel 250,000 RSUs , which vest over a three-year period (the “Patel Time Vesting RSUs”), and 500,000 RSUs that vest only upon a change of control of the Company or if the Company achieves in excess of $1 billion in accumulated total gross revenues (the “Patel Event Vesting RSUs”). On March 5, 2022, the Company and Mr. Patel agreed to terminate the (i) 120,833 unvested Patel Time Vesting RSUs and (ii) 500,000 unvested Patel Event Vesting RSUs.

On March 5, 2022, the Committee and the Board approved the grant of stock option awards to Eric Mosser, Chief Operating Officer, to acquire up to 500,000 shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan. The option shares are exercisable at a price of $2.85 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. At the grant date, 250,000 option shares became immediately vested, with the remaining 250,000 option shares vesting on the one-year anniversary of the grant date. The option has a ten-year term.

Similarly, the Company previously granted Mr. Mosser 250,000 RSUs, which vest over a three-year period (the “Mosser Time Vesting RSUs”), and 333,334 RSUs that vest only upon a change of control of the Company or if the Company achieves in excess of $1 billion in accumulated total gross revenues (the “Mosser Event Vesting RSUs”). On March 5, 2022, the Company and Mr. Mosser agreed to terminate the (i) 120,833 unvested Mosser Time Vesting RSUs and (ii) 333,334 unvested Mosser Event Vesting RSUs.

On March 5, 2022, the Committee and the Board approved the grant of stock option awards to 5 employees, to acquire up to 285,600 shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan. The option shares are exercisable at a price of $2.85 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. At the grant date, 142,800 option shares became immediately vested, with the remaining 142,800 option shares vesting on the one-year anniversary of the grant date. The options have a ten-year term.

Previously, we granted these 5 employees 317,499 RSUs, which vest over a three-year period (the “Employee Vesting RSUs”), and 317,499 RSUs that vest only upon a change of control of the Company or if the Company achieves in excess of $1 billion in accumulated total gross revenues (the “Employee Event Vesting RSUs”). On March 5, 2022, the Company and the 5 employees each agreed to terminate the (i) 135,001 unvested Employee Time Vesting RSUs and (ii) 317,499 unvested Employee Event Vesting RSUs.

On March 9, 2022, the Committee approved an annual base salary equal to $300,000 for Mr. Patel and $240,000 for Mr. Mosser. The annual base salaries will be reviewed by the Committee on an annual basis.

Further, the Board previously approved a cash bonus award to (i) Mr. Patel equal to $30,000 for every $25 million in gross revenues generated by us (the “Patel Cash Bonus Award”) and (ii) Mr. Mosser equal to $20,000 for every $25 million in gross revenues generated by us (the “Mosser Cash Bonus Award” and, together with the Patel Cash Bonus Award, the “Cash Bonus Awards”). On March 9, 2022, the Committee terminated the Cash Bonus Awards.

On February 28, 2022 and on March 3, 2022 the Company issued 10,000 shares and 2,963 shares, respectively, of the Company’s Common Stock to Mr. Rudy Singh as payment for the EDGAR filing services.

Warrants Shares Exercised

Between February 14, 2022 and March 1, 2022, 800,355 shares of Common Stock were issued upon the exercise of warrants, and the Company received approximately $1,520,693 in proceeds.

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 nine months ended JulyJanuary 31, 20212022 included under Item 1 – Financial Statements in this Quarterly Report and our audited Financial Statements and notes thereto for the yearyear ended October 30, 202031, 2021 contained in our2021 Annual Report on Form 10-K.Report. 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.

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; 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,Secondly, we have not only invested significant financial resources into developing state of the art procedures, policies and technology around compliance but had also refused to relax our own internal standards when we observed some distributers and retailers relaxing their standards. We believe that many retailers and distributers relaxed their compliance standards as an indirect result of COVID-19 for two reasons: (i) due to COVID-19, government enforcement of regulations werewas very limited due to imposed social restrictions, resulting in less in-person monitor enforcement by government officials and (ii) retail stores experienced light foot traffic from customers due to COVID-19 restrictions and fears, which resulted in relaxed compliance in an effort to generate revenue. TheWe believe this relaxation of standards by certain retailers significantly impacted our revenues.

Impact of the FDA PMTA Decision

Prior toIn September 2021, in connection with the September 9, 2021 court-order deadline forPMTA process, 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”“banned” flavored ENDS by denying nearly all pendingthen-pending PMTAs for such products. Following the issuance of an MDO, manufacturers are required to stop selling non-tobacco flavored ENDS product. As of September 10, 2021, the FDA announced that it has taken action on over 93% of applications and issued Marketing Denial Orders (“MDOs”)MDOs for more than 992,0001,167,000 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^®ENDS products. With respect to Bidi, the MDO covered all non-tobacco flavored BIDI® Sticks, including its Arctic (menthol) BIDI^®BIDI® Stick, which Bidi believes the FDA mischaracterized as “flavored”. However,“flavored.” BIDI believes that because its Arctic BIDI^®BIDI® Stick is menthol, Bidi believes its menthol BIDI^® Stick isit should not be subject to the MDO. ThisBidi and the Company believe 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

As a result, beginning in September 2021, Bidi pursued three avenues to challenge the Classic (tobacco) BIDI^® Stick,MDO. First, on September 21, 2021, separate from the judicial appeal of the MDO in its entirety, Bidi intendsfiled a 21 C.F.R. § 10.75 internal FDA review request specifically of the decision to continue to manufacture and market its Arctic (menthol) BIDI^® Stick for distribution by us.