UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended April 30, 20222023

OR

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

GrantGrant-Valkaria, Florida 32949

 (Address of principal executive offices, including zip code)

(833) 452-4825

 (Registrant’s telephone number, including area code)

N/A

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

June 14, 2023, there were

31,166,09058,169,090 shares of common stock, $0.001 par value, outstanding as of June 13, 2022outstanding.

KAIVAL BRANDS INNOVATIONS GROUP, INC.

FORM 10-Q

TABLE OF CONTENTS

CAUTIONARY NOTE CONCERNINGREGARDING FORWARD-LOOKING STATEMENTS

Certain statements and information included in this Quarterly Report on Form 10-Q for the three and six monthsquarter ended April 30, 2022 (the “Quarterly Report”2023 (this “Report”) contain or may constitutecontain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E21 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. All

We generally use the words “may,” “should,” “believe,” “expect,” “intend,” “plan,” “anticipate,” “likely,” “estimate,” “potential,” “continue,” “will,” and similar expressions to identify forward-looking statements. Forward-looking statements other thanare not 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, business strategy, statements related to the expected effects on our business from the novel coronavirus (“COVID-19”) pandemic, our ability to obtain the products we distribute from Bidi Vapor, LLC (“Bidi”), the timing and outcome of Bidi’s appeal of the U.S. Food and Drug Administration’s (the “FDA”) Premarket Tobacco Product Application (“PMTA”) marketing authorization denials for Bidi’s non-tobacco flavored products, the scope of future FDA enforcement of regulations in the electronic nicotine delivery system (“ENDS”), the FDA’s approach to the regulation and enforcement of synthetic nicotine and our competitors’ use of the substance in their products to avoid the PMTA requirements, the impact of black-market goods on our business, the success of the agreement with Philip Morris Products S.A. (“PMPSA”), a wholly owned affiliate of Philip Morris International Inc. (“PMI”) related to the international distribution of the BIDI^® Stick, the demand for the products we distribute, anticipated product performance, market and industry expectations, significant changes in our relationships with our distributors or sub-distributors, changes in government regulation or laws that affect our business, 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, and other similar matters are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or other comparable terminology. These forward-looking statements are based largely onbut rather reflect our current expectations concerning future events and assumptionsresults, including, without limitation, statements related to:

Forward-looking statements, including those concerning our expectations, involve significant risks, uncertainties and are subject to a number of risks and uncertainties, manyother factors, some of which are beyond our control. These statements are subjectcontrol, which may cause our actual results, performance, or achievements, or industry results to many risks, uncertainties,be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. See the “Management’s Discussion and other importantAnalysis of Financial Condition and Results of Operation” section contained in this Report and the section “Risk Factors” in our Annual Report on Form 10-K for the year ended October 31, 2022, for a listing of some of the factors that could cause the results anticipated by our forward-looking statements to differ from actual future results to differ materially from those expressed inresults. Except as required by applicable law, including the forward-looking statements including, but not limited to, the duration and scopesecurities laws of the COVID-19 pandemic and impact on the demand for the productsUnited States, we distribute; our ability to obtain the products from the manufacturer; actions governments, businesses, and individuals take in response to the pandemic, including 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 publicly update or revise any of the forward-looking statements, contained herein.whether as a result of new information, future events, or otherwise. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this Report.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

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 StatementsStatement of Changes in Stockholders’ Equity

For the Six Months Ended April 30, 20222023

(Unaudited)

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

Kaival Brands Innovations Group, Inc.

Consolidated Statement of Changes in Stockholders’ Equity

For the Six Months Ended April 30, 20212022

(Unaudited)

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

KaivalKaival 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,” “our” or “our”)similar terminology), formerly known as Quick Start Holdings, Inc., was incorporated on September 4, 2018, in the State of Delaware.

As used herein, the term “Common Stock” means the Company’s common stock, par value $0.001 per share.

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 ENDSelectronic nicotine delivery system (“ENDS”) and related components (the “Products”) manufactured by Bidi Vapor, LLC (“Bidi”), a related party company that is also owned by Nirajkumar Patel, the Chief ExecutiveScience and Regulatory Officer and a director of the Company. Mr. Patel also controls Kaival Holdings, LLC, a Delaware limited liability company and the Company’s majority stockholder (“Kaival Holdings”).

On March 9, 2020, the Company entered into an exclusive distribution agreement (the “Distribution Agreement”) with Bidi, which Distribution Agreement was amended and restated on May 21, 2020, and again on April 20, 2021 (collectively, the “A&R Distribution Agreement”). 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 primarilyentirely of the “BIDI^® Stick.” The Company ceased all retail/direct-to-consumer sales in February 2021. Subsequent to April 30,On June 10, 2022, and again on November 17, 2022, the Company and Bidi entered into a third amended and restated exclusive distribution agreement (the “Third A&R Distribution Agreement”). For additional information, see Note 8, Subsequent Events. which memorializes the Company’s current business relationship with Bidi.

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(“Kaival Labs”), as a wholly owned subsidiary of the Company. Company, for the purpose of developing Company-branded and white-label products and services. The Company has not yet launched any Kaival-branded products, nor has it begun to provide white label wholesale solutions for other product manufacturers. The Company may also utilize Kaival Labs to acquire or license complimentary businesses or assets. On May 30, 2023, the Company and Kaival Labs entered into an Asset Purchase Agreement (the “GoFire APA”) with GoFire, Inc. (“GoFire”) to purchase certain vaporizer and inhalation-related intellectual property assets of GoFire in exchange for equity securities of the Company and contingent cash consideration. For a detailed description of this asset acquisition, please refer to “Note 8 – Subsequent Events” below .

On March 11, 2022, the Company formed Kaival Brands International, LLC, a Delaware limited liability company (herein referred to as “KBI”), as a wholly owned subsidiary of the Company.Company, for the purpose of entering into an international licensing agreement with Philip Morris Products S.A. (“PMPSA”), a wholly owned affiliate of Philip Morris International Inc. (“PMI”).

On July 16, 2021,Current Product Offerings

Pursuant to the A&R Distribution Agreement with Bidi, the Company filedsells and resells electronic nicotine delivery systems, which it may refer to herein as “ENDS Products”, or “e-cigarettes”, to non-retail level customers. The sole Product the Company resells is the “BIDI® Stick,” a Certificatedisposable, tamper-resistant ENDS product that comes in a variety of Amendmentflavor options for adult cigarette smokers. The Company does not manufacture any of the Products it resells. The BIDI® Stick is manufactured by Bidi. Pursuant to the Restated Certificate of Incorporation, as amended, with the Secretary of Stateterms of the State of DelawareA&R Distribution Agreement, Bidi provides the Company with all branding, logos, and marketing materials to effect a 1-for-12 reverse stock split (the “Reverse Stock Split”) ofbe utilized by 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 issuedCompany in connection with the Reverse Stock Split. Any fractional shares of Common Stock that would have otherwise resulted from the Reverse Stock Split were rounded up to the nearest whole number. In connection with the Reverse Stock Split, the Board of Directors (the “Board”) approved appropriateits marketing 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 aspromotion of the earliest period presented. The par value per share of the Common Stock was not affected by the Reverse Stock Split.Products.

COVID-19 Impact

In January 2020, the World Health Organization (the “WHO”) announced a global health emergency becausedue to the emergence of a new strain of coronavirus (“COVID-19”) originatingthat originated in Wuhan, China and theChina. This novel strain of coronavirus posed risks to the international community as the virusit 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.

TheDuring the Company’s operations have not been directly impacted by COVID-19. However, we have encountered some logistical delays related to product launchesfiscal year 2021 and distribution in international markets. Thethe beginning of fiscal 2022, the Company was also indirectly impacted by supply chain issues and regulatory oversight. No impairments have been recordedoversight arising out of COVID-19. The Company believes that many retailers and no triggering events or changesdistributers relaxed their ENDS compliance standards as an indirect result of COVID-19 for two reasons: (i) government enforcement of regulations was very limited due to imposed social restrictions, resulting in circumstances had occurred.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 additional revenue. While the spreadimpact of COVID-19 has slowed and social restrictions have been largely lifted, the full impact of the COVID-19 pandemic continues to evolve and remains uncertain, particularly as new variants of the virus emerge. As such, the full magnitude of the COVID-19 pandemic, and the resulting impact, if any, ondecreased during the Company’s financial condition, liquidity,fiscal 2022 year and future resultsboth the first and second quarters of operations is uncertain.its fiscal 2023 year, outbreaks of COVID-19 or its variants, either locally, nationally or globally, as well as related supply chain issues, could adversely impact the Company’s business.

Impact of the FDA PMTA Decision and Subsequent Court Actions

As of MarchJanuary 31, 2022, the FDA announced that it has taken actionacted on over 99% of applications and issued Marketing Denial Orders (“MDOs”) for more than 1,167,000 non-tobacco flavored ENDS products, while issuing zero marketing authorizations for such products.

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^®BIDI® Sticks, including its Arctic (menthol) BIDI^®BIDI® Stick. As a result, beginning in September 2021, Bidi pursued multiple 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 supervisory review request specifically of the decision to include the Arctic (menthol) BIDI^® BIDI® Stick in the MDO. In May 2022, the FDA issued a determination that it views the Arctic BIDI^®BIDI® Stick as a non-tobacco flavored ENDS product, and not strictly a menthol flavored product.

On September 29, 2021, Bidi petitioned the U.S. Court of Appeals for the Eleventh Circuit (the “11^th Circuit”) to review the FDA’s denial of the comprehensive PMTAs for its non-tobacco flavored BIDI^®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 Bidi’s comprehensive applications, as required by the Tobacco Control Act (“TCA”), to determine whether the BIDI^®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.products, and that the FDA should have gone through the notice and comment rulemaking process for this requirement.

Finally, onOn 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 ofConsidering 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.re-review, permitting the Company to continue sales. Subsequently, the FDA decided not to rescind the MDO and 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.

11^th Circuit. On February 1, 2022, the U.S. Court of Appeals for the Eleventh Circuitappellate court granted Bidi’s motion to stay (i.e.(i.e., put on hold) the MDO, again allowing the Company to continue sales 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 not submitted PMTAs, 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 were held on May 17, 2022.

In the event thatOn August 23, 2022, the U.S. Court of Appeals for the Eleventh Circuit issues a ruling adverseset aside the MDO issued to Bidi, or ifthe non-tobacco flavored BIDI® Sticks and remanded Bidi’s back to the FDA otherwise chooses to enforcefor further review. Specifically, the Court held that the MDO was “arbitrary and capricious” in violation of the Administrative Procedure Act (“APA”) because the FDA failed to consider the relevant evidence before it, specifically Bidi’s aggressive and comprehensive marketing and sales-access-restrictions plans designed to prevent youth appeal and access.

The 11^th Circuit’s opinion further indicated that the FDA did not properly review the data and evidence that it has long made clear are critical to the appropriate for the protection of the public health (“APPH”) standard for PMTAs set forth in the Tobacco Control Act including, in Bidi’s case, “product information, scientific safety testing, literature reviews, consumer insight surveys, and details about the company’s youth access prevention measures, distribution channels, and adult-focused marketing practices,” which “target only existing adult vapor product users, including current adult smokers,” as well as our retailer monitoring program and state-of-the-art anti-counterfeit authentication system. Because a MDO must be based on a consideration of the relevant factors, such as the marketing and sales-access-restrictions plans, the denial order was deemed arbitrary and capricious, and vacated by the FDA.

The FDA did not appeal the 11th Circuit’s decision. The FDA had until October 7, 2022 (45 days from the August 23, 2022 decision) to either request a panel rehearing or a rehearing “en banc” (a review by the entire 11^th Circuit, not just the 3-judge panel that issued the decision), and until November 21, 2022 (90 days after the decision) to seek review of the decision by the U.S. Supreme Court. No request for a rehearing was filed, and no petition for a writ of certiorari was made to the Supreme Court. In the meantime, the Company anticipates continued ability to market and sell the non-tobacco flavored BIDI® Sticks, subject to the FDA’s enforcement discretion, for the duration of the PMTA scientific review.

Separately, on or about May 13, 2022, the FDA placed the tobacco-flavored Classic BIDI® Stick into the final Phase III scientific review, and in September 2022 completed a remote regulatory assessment of Bidi and its contract manufacturer in China, SMISS Technology Co. LTD, in relation to the pending PMTA for the Classic BIDI® Stick.

Risks and Uncertainties Regarding FDA Regulation

The FDA has indicated that it is prioritizing enforcement of unauthorized ENDS against companies (1) that never submitted PMTAs, (2) whose PMTAs have been refused acceptance or filing by the FDA, (3) whose PMTAs remain subject to MDOs, and (4) that are continuing to market unauthorized synthetic nicotine products after the July 13, 2022, cutoff. Subject to the FDA’s enforcement discretion, until the scientific review process is complete on each of Bidi’s PMTAs, the Company views the risk of FDA enforcement against Bidi Bidias low. The Company anticipates the FDA will be forced to ceasemove forward with a review of Bidi’s PMTA on remand, as directed by the continued sale of its non-tobacco flavored BIDI^® Stick products inCourt; however, the United States, thereby resulting in the Company being unable to distribute such products, and the Company’s business and financial condition would be materially adversely affected. The Company cannot provide any assurances as to the timing or outcomeoutcome.

Moreover, the Company believes that Bidi’s application is particularly comprehensive, and now includes, among other things, a randomized, crossover, clinical study to assess nicotine pharmacokinetics and subjective effects of the merits-based case.BIDI® Stick, several behavioral, perception and intention studies, as well as a nationally-representative population prevalence study. A complete scientific review of the PMTA would require the FDA to review all this information before making an APPH determination, and while the FDA could narrowly interpret the Court’s ruling as an order to review only Bidi’s marketing and sales-access restrictions plans, the 11^th Circuit’s opinion, in the Company’s view, makes clear that all “relevant evidence” in an application must be considered. For applications that are in scientific review, the FDA typically issues a deficiency letter identifying its questions before making a marketing authorization decision and gives the applicant at least 90 days to respond. This further solidifies the Company’s belief that the scientific review of Bidi’s non-tobacco flavored applications could take 1-2 years or longer. However, the Company cannot provide any assurances as to the timing or outcome.

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 subsidiaries, Kaival Labs Inc. and Kaival Brands International, LLC.KBI. 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 audited financial statements contained within the Company’s Annual Financial StatementsReport on Form 10-K, filed with the SEC on Annual Report on Form 10-K on February 16, 2022January 30, 2023 (the “2021“2022 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 fiscal 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 20212022 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.

Cash and Restricted Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents atand restricted cash as of April 30, 20222023, and October 31, 2021. Cash2022.

The Federal Deposit Insurance Corporation (“FDIC”) insures deposits according to the ownership category in which the funds are insured and restrictedhow the accounts are titled. The standard deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category. The Company had uninsured cash atand cash equivalents of $804,971 and $2,912,793 on April 30, 20222023, and October 31, 2021 were $4,727,037 and $7,825,235,2022, respectively.

Restricted cash consists of cash held in short-term escrow as required. As of April 30, 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 an allowance for doubtful accounts. The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability of accounts receivables.receivable. A considerable amount of judgment is required in assessing 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 April 30, 2023, and October 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 doubtful accounts was required. As of October 31, 2021, the Company also determined that 0 allowance for doubtful accounts wasis 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 FIFOfirst-in, first-out (“FIFO”) method. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. All inventories (i) were purchased from Bidi, a related party, asAs of April 30, 2023, and October 31, 2021 and April 30, 2022, (ii)the inventories only consisted of finished goods (iii) were significant, and (iv) were located in three storage warehouses: (1)locations: the primary leasedCompany’s main warehouse which is owned bylocated in Florida and two customer warehouses whose service agreements are on a related party, Just Pick, LLC (“Just Pick”), (2) a customer/sub distributor warehouse, which is owned by Favs Business LLC (“Favs Business”), and (3) a third-party logistics services warehouse, which is owned by Ranger Enterprises, LLC (“Ranger”).consignment basis with the Company. Based upon fiscal year 20212022 inventory management procedures, and their results, that have continued throughas well as those inventory management procedures performed during the second fiscal quarter ended April 30, 2022,2023, and their results for both periods of time, the Company has determined that no allowance for the inventory valuation was required at April 30, 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 $2,925,000 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 April 2022. On April 29, 2022, the Company and Bidi agreed to cancel the order due to an internal change of approach to international distribution, and Bidi agreed to credit the $2,925,000 against the accounts payable balance owed by the Company to Bidi. Asas of April 30, 2022, the Company has on its balance sheet a zero balance for inventory deposits2023 and inventory deposits related party. October 31, 2022.

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. 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. On October 31, 2021, the Company and 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. As of April 30, 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 orders from wholesale customers, which it holds as deposits or deferred revenue, until the Company has received full payment and orders are shipped to the customer. Revenue for these orders is recognized at the time of shipment to the customer. As of April 30, 2023, and October 31, 2022, the Company had receivedhas $2,38212,099 and $44,973 in deposits from customers, respectively, which is included with the Company’s current liabilities. As of April 30, 2023, and October 31, 2021,2022, the Company had not received any depositshas $129,702 and $235,274 in deferred income from customers.PMI guaranteed royalty revenue prepayments, respectively, which is included with the Company’s current liabilities.

Customer Refunds

The Company infrequently has a need to adjustIn the sizenormal course of an order after it has been shipped, received, and paid for, due to the customer oversizing the order for more product that it can realistically sell at that time. If and when this occurs,business, the Company will ask theissues credits for product returns and certain customer incentives related to return the over allotted Products. Once receivedrebates, discounts and inspected,promotions. When such credits exceed amounts receivable from customers, the Company recognizes such excess amounts as customer refunds which will issue a refund for the Product return.be applied against future product purchases. As of April 30, 20222023, and October 31, 2021,2022, the Company had customer refunds due in the amounts equal to approximately $0921,078 and $316,8000, respectively, which refund was the result of one of the Company’s sub-distributor customers returning Products that had become defective in storage.respectively.

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 determinesdetermined that a customer obtains control of the Product upon shipment when title of such product and risk of loss transfer to the customer. However, when the Company enters a consignment agreement with a new customer, once it ships and delivers the requested amount of ordered Products to its distribution center for its retail sales locations, the Company retains ownership of the delivered Products until they are delivered to the actual retail stores (as opposed to the Company’s consignment 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 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 receivablesreceivable 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.revenue, as noted above.

Royalty Revenue

On June 13, 2022, KBI entered into a Deed of Licensing Agreement (the “PMI License Agreement”), by and between KBI and PMPSA, effective as of May 13, 2022 (the “PMI Commencement Date”). Pursuant to the PMI License Agreement, KBI granted PMPSA an exclusive irrevocable license to use its technology, documentation, and intellectual property to make, distribute, and sell disposable nicotine e-cigarette Products based on the intellectual property in certain international markets set forth in the PMI License Agreement (the “PMI Markets”). The Company has the exclusive international distribution rights to the Products and, in order to allow KBI to fulfill its obligations set forth in the PMI License Agreement, has contributed the international distribution rights for the PMI Markets to KBI as set forth in a Capital Contribution Agreement, dated June 10, 2022. The sublicense granted to PMPSA is exclusive in the PMI Markets and neither KBI nor any of its affiliates can sell, promote, use, or distribute any competing products in the PMI Markets for the duration of the term of the PMI License Agreement and any Sell-Out Period (as defined in the PMI License Agreement). PMSPA will be responsible for any regulatory filings necessary to sell the Products in the PMI Markets. Both KBI and PMPSA agree to work together in the registration and maintenance of the Intellectual Property, but KBI will bear all cost and expense to implement the registration strategy. Finally, PMPSA has agreed to potential future development services with KBI in the PMI Markets and has been granted certain rights with respect to potential future products.

The initial term of the PMI License Agreement is five (5) years and automatically renews for an additional five-year period unless PMPSA has failed to meet the agreed upon minimum key performance indicators set forth in the PMI License Agreement, in which case the PMI License Agreement will automatically terminate at the end of the initial license term.

In consideration for the grant of the licensed rights, PMPSA agreed to pay to KBI a royalty equal to a percentage of the base price of the first sale of each unit of Product manufactured. In addition, before the launch of the first product in a market and each anniversary of such launch, PMPSA agrees to pre-pay to KBI a guaranteed minimum royalty based on the estimated royalties payable by PMPSA to KBI in relation to all markets in the twelve (12)-month period following the first launch or each successive anniversary of the first launch, subject to an aggregate maximum guaranteed royalty payment for all markets for each applicable twelve (12)-month period. PMPSA may require modification of certain products to be sold under the PMI Licensing Agreement to be modified for a PMI Market. Pursuant to the PMI Licensing Agreement, PMPSA has absolute discretion over sales, marketing, product branding and packaging pertaining to sales in the PMI Markets, as well as the right to select the specific PMI Markets in which to launch commercialization and determine what product types are to be promoted in each market, subject to sales and marketing plans and annual business plans set by PMPSA and certain expansion criteria agreed between PMPSA and KBI. Royalty revenue earned from the PMI License Agreement is recognized in the period the sales of the Product manufactured occurs.

The PMI License Agreement contains customary representations, warranties, covenants, and indemnification provisions; however, KBI’s liability under the PMI License Agreement is capped at the greater of: (i) Ten Million Dollars ($10,000,000); or (ii) an amount equal to the total of the royalties due to KBI (but not yet paid) plus the royalties (including the guaranteed royalty payment) paid to KBI pursuant to the PMI License Agreement during the immediately preceding twelve (12) consecutive months, provided that such amount shall not exceed Thirty Million Dollars ($30,000,000). These royalties may be initially offset on a limited basis by jointly agreed upon costs such as development costs incurred for entry to specific international markets.

On June 10, 2022, Bidi entered into a License Agreement (the “KBI License Agreement”) with KBI, pursuant to which KBI has the exclusive irrevocable license to use Bidi’s licensed intellectual property to the extent necessary for KBI to fulfill its obligations set forth in the PMI Licensing Agreement. Such irrevocable license includes: (i) the right of KBI to grant sub-licenses to PMPSA under the PMI License Agreement for the express purposes set forth in the PMI License Agreement, but for no other purpose; (ii) the right of KBI to grant to PMPSA the right to grant sub-sub-licenses in the manner set forth in the PMI License Agreement, but for no other purpose; and (iii) certain branding rights to the extent (but only to the extent) necessary to permit KBI to perform its obligations to PMPSA as set forth in the PMI License Agreement.

The KBI License Agreement provides that KBI shall pay Bidi license fees equivalent to 50% of the adjusted earned royalty payments, after any offsets due to jointly agreed costs such development costs incurred for entry to specific international markets. While PMPSA announced the launch of a product (called VEEBA) under the PMI License Agreement in March 2023,   the Company has determined that no license fees are owed to Bidi as of April 30, 2023.

Concentration of Revenues and Accounts Receivable

For the six months ended April 30, 2023, (i) 21% or $1,169,310 of the revenue from the sale of Products, solely consisting of the BIDI^® Stick, was generated from FAVS Business (“FAVS”), (ii) 19% or $1,054,646 of the revenue from the sale of the Products was generated from H.T. Hackney Co., (iii) approximately 17% or $914,754 of the revenue from the sale of Products, solely consisting of the BIDI Stick, was generated from GPM Investments, LLC (“GPM”), and (iv) approximately 11% or $596,171 of the revenue from the sales of Products was generated from QuikTrip Corporation.

For the six months ended April 30, 2022, approximately 40%, or $2,366,200, of the revenue from the sale of Products was generated from Favs Business, and approximately 15%, or $877,264, of the revenue from the sale of Products was generated from The H.T. Hackney Company.

Favs Business had an outstanding balance of approximately $305,430, which accounted for approximately 26% of the Company’s total accounts receivable from customers as of April 30, 2022. The H.T. Hackney Company had an outstanding balance of approximately $297,629, which accounted for approximately 25% of the Company’s total accounts receivable from customers as of April 30, 2022.  Grocery Supply Warehouse had an outstanding balance of $163,163, which accounting for approximately 14% of the Company’s total accounts receivable from customers as of April 30, 2022. Finally, MMS Distribution, LLC (“MMS Distro”) had an outstanding balance of approximately $116,444, which accounted for approximately 10% of the Company’s total accounts receivable from customers as of April 30, 2022.     

For the six months ended April 30, 2021, approximately 33%, or $18,129,136, of the revenue from the sale of Products was generated from Favs Business, approximately 16%FAVS, and 15%, or $9,069,455877,264, of the revenue from the sale of Products was generated from MMS Distro, and approximately 12%, or $6,820,132, of the revenue from the sale of Products was generated from C Store Master (“C Store Master”).H.T. Hackney Company.

Favs Business,H.T. Hackney Co, with an outstanding balance of approximately $8,590,200545,215, and GPM Investment, LLC,FAVS, with an outstanding balance of approximately $2,482,553499,200, and KwikTrip with an outstanding balance of $216,000, accounted for approximately 47%36%, 33%, and 14%14% of the total accounts receivable from customers, respectively, as of April 30, 2021.2023. Favs Business with an outstanding balance of $375,425 and QuikTrip Corporation, with an outstanding balance of $85,510, accounted for approximately 65% and 15% of the total accounts receivable from customers, respectively, as of October 31, 2022.

Share-Based Compensation

The Company measures the cost of services received in exchange for an award of equity instruments (share-based payments, or SBP)referred to herein as “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 performance 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 asmodel based on certain assumptions which include the underlying options vest.expected term, expected volatility and discount rate.

The fair value of each option granted during the fiscal six-month period ended April 30, 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 wasis based on the volatility in the trading of the Common Stock.Stock over the expected term of the award. The assumed discount rate wasis the default risk-free ten-year interest rate for U.S. Treasury bills. The Company’s stock option expense for the fiscal three and six months ended April 30, 2022 was $2,616,193 and $2,925,892, respectively.

The Company’s stock-based compensation for the fiscal three and six months ended April 30, 2022 was $110,189 and $190,416, 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 six-month period ended April 30, 2022, is necessary to reduce the deferred tax asset to the amount that will more likely than not be realized pursuant to ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.

The Company has completed its federal and state tax returns for the 2020 tax year and intends on filing them shortly. Given the federal and state NOLs, the Company anticipates that its 2020 tax returns will report that it is eligible to apply those NOLs against the federal and state taxes it paid in 2019. The Company anticipates federal and state tax refunds of approximately $1,600,000 and $146,000, respectively, and expects to collect the refunds in the current fiscal year.

During the six months ended April 30, 2022, the Company generated no taxable income and, thus, no federal or state income taxes are accrued for fiscal year 2022.

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 April 30, 2022.2023. 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. As of April 30, 2023, and October 31, 2022, the Company did not have any financial assets or liabilities measured and recorded at fair value on a recurring basis.

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. However, In March 2022, the FASB issued ASU 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for TDRs by creditors that have adopted the CECL model and enhance the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, where an entity has the option to apply a modified retrospective transition method resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. This is not effective for the Company until November 1, 2023.  

Note 3 – Going Concern

In February 2022, the U.S. Court of Appeals for the Eleventh Circuit granted Bidi a judicial stay of the MDO previously issued by the FDA. The ruling means that the MDO is not legally in force pending the outcome of litigation on the merits of Bidi’s challenge to the MDO. 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 not submitted PMTAs, whose PMTAs have been refused acceptance or filing by the FDA, or whose PMTAs remain subject to MDOs. Oral arguments in the merits case were held on May 17, 2022.

IfThe Company’s financial statements are prepared in accordance with U.S. GAAP applicable to a going concern, which contemplates realization of assets and the U.S. Courtsatisfaction of Appeals for the Eleventh Circuit rules in Bidi’s favorliabilities in the merits case,normal course of business within one year after the Company anticipates thatdate the FDA will be compelled to place the non-tobacco flavored ENDS back into the PMTA scientific review process. If this is the outcome of the merits case, the Company anticipates being able to continue marketing and selling the Products, subject to the FDA’s enforcement discretion, until the scientific review process is complete on each of Bidi’s PMTA for non-tobacco flavored ENDS and the FDA issues its decision on each.consolidated financial statements are issued.

If the U.S. CourtIn accordance with Financial Accounting Standards Board (the “FASB”), Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Appeals for the Eleventh Circuit does not ruleFinancial Statements – Going Concern (Subtopic 205-40), our management evaluates whether there are conditions or events, considered in Bidi’s favor on the merits case, if the FDA re-issues the MDO after completing its scientific review process for each of Bidi’s PMTAs for its non-tobacco flavored ENDS, or if the FDA otherwise chooses to enforce the MDO against Bidi, the Company will be forced to cease sales of the non-tobacco flavored BIDI^® Sticks in the United States market, leaving only the Tobacco (Classic) BIDI^® Sticks for sale in the United States. If this is the outcome of the merits case, this combined with a negative cash flow from operations, raisesaggregate, that raise substantial doubt onabout our ability to continue as a going concern within one year after the date that the accompanying financial statements are issued. As shown in the accompanying consolidated financial statements, the Company has incurred significant recurring losses and negative cash flow from operations, which raises substantial doubt about the Company’s ability to continue as a going concern.

ManagementIn response to the above, the Company assessed its management’s plans to continue similar operationsalleviate that doubt. The Company has positive working capital as of April 30, 2023, of $3,714,959.   The Company considered that its losses were due to various factors such as: (i) uncertainty surrounding the PMTA process with increased marketing,the FDA and (ii) the MDO that was issued to Bidi Vapor on its non-tobacco flavored ENDS products. However, the MDO was set aside and vacated by the 11^th Circuit in August 2022, and the ability to appeal such decision has passed, thereby facilitating the continued sales of the non-tobacco flavored BIDI® Sticks for sale in the United States (pending the FDA’s review of the pending PMTAs and subject to FDA enforcement). Concurrently, the PMTA for the tobacco-flavored (Classic) BIDI® Sticks for sale in the United States continues to move through the PMTA scientific review phase. Management’s assessment included the preparation of cash flow forecasts which considered increases in revenues considering the favorable ruling obtained on the MDO as disclosed above.

The Company believes that its available cash and the cash to be provided by future operating activities should enable the Company believes will result in increased revenue and net income. Further,to meet its estimated liquidity needs for the next 12 months after the end ofdate that the three and six months ended April 30, 2022,accompanying financial statements are issued. The Company believes that the above factors alleviate the substantial doubt regarding the Company’s wholly owned subsidiary, KBI, entered into an international licensing agreement with PMPSA, which the Company expects will generate additional revenues. ability to continue as a going concern.

However, there is no assurance that management’s planthe Company’s plans will be successfulable to generate expected or greater amounts of revenues or ever achieve profitability, due to the current economic climate in the United States and globally.

Theseglobally, the regulation and public perception of ENDS products and the various other risks faced by the Company. The accompanying consolidated financial statements do not include any adjustments relating to reflect the possible future effects on the recoverability and classification of recorded assets or the amounts and classification of liabilities that might be necessary inmay result from the event that we cannot continue as a going concern.outcome of these or other risks or uncertainties.

Note 4 – Leases

The Company capitalizes all leased assets pursuant to ASU 2016-02, Leases (Topic 842) (“Topic 842”), which requires lessees to recognize right-of-use (“ROU”) 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 Topic 842 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. The Company does not have financing leases and only one operating lease for office space and inventory storage space with Just Pick, LLC (“Just Pick”), a related party.party owned and controlled by Nirajkumar Patel, the Chief Science and Regulatory Officer and a director of the Company, as of April 30, 2023, and October 31, 2022. Certain of the Company’s leases, have and may in the future, include renewal options, which have been and have not beenmight be in the future, included in the calculation of the lease liabilities and right of use assets aswhen the Company is not reasonably certain to exercise the option.

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. 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 operating lease is for a term of five 5 years, beginning August 1, 2020, with rent of $1,000 payable monthly. As the operating lease does not provide for an implicit interest rate, we estimated a current borrowing rate of 4.5% in determining the present value of the lease.

As of April 30, 2022 and October 31, 2021, the ROU lease asset, net of accumulated amortization, was approximately $48,299 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, 2021 was approximately $14,529 and no payments were made on the ROU liability. The amortization expense for the ROU asset for the six months ended April 30, 2022 was approximately $7,305 and resulted in a change in the ROU liability. At October 31, 2021, short-term ROU lease liability was approximately $13,020 and long-term liability was approximately $46,185, totaling approximately $59,205. At April 30, 2022, short-term ROU lease liability was approximately $13,680 and long-term liability was approximately $39,180 totaling approximately $52,860.

Storage Space

On November 1, 2021, the Company entered into a month-to-month lease agreement with Ranger Enterprises, LLC, located in Seymour, Indiana, to store product inventory at this satellite location. The Company made seven payments on this lease totaling approximately $15,451, duringin the six months ended April 30,amount of $19,959. The lease was terminated in June 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 five payments on this lease in the amount of $19,108. This lease was terminated in April 2022.

On June 10, 2022, the Company entered into a Lease Agreement (the “2022 Lease”) with Just Pick for approximately 21,332 rentable square feet combined in the office building and warehouse located at 4460 Old Dixie Highway, Grant-Valkaria, Florida 32949 (the “Premises”), together with all improvements thereon. The Company must pay Just Pick base rent equal to $19,10817,776.67 per month during the first year of the Lease Term with a five-year lease renewal option. Thereafter, the monthly base rent will be increased annually with a monthly base rent of $18,665.50 in the second year, $19,554.33 in the third year, $20,443.17 in the fourth year, $22,220.83 in the fifth year, $23,998.50 in the sixth year, and one twelfth (1/12^th) of the market annual rent for the seventh through eleventh years, if applicable. In addition to the base rent, on thisthe Company must pay one hundred percent (100%) of operating expenses, insurance costs, and taxes for each calendar year during the Lease term. For both the ROU asset and ROU liability, the lease duringrenewal option was considered in the calculation with an incremental borrowing rate of 4.5%. The Company had $94,347 and $7,305 in operating lease expense for the six months ended April 30, 2022. 2023, and April 30, 2022, respectively.

Cash flow information related to leases was as follows:

The Company terminatedfollowing table summarizes the lease with FFE Solutions Group on April 29, 2022 after returning all inventory previously stored at this location.

For additional information regarding leaseslease-related assets and liabilities recorded in the consolidated balance sheets as of April 30, 2023, and October 31, 2022:

The following table provides the date these unaudited consolidated financial statements were issued, please see Note 8, Subsequent Events.maturities of lease liabilities at April 30, 2023:

At April 30, 2023, the Company had no additional leases which had not yet commenced.

Note 5 – StockholderStockholders’ Equity

Common Stock

No

Additional Paid-In Capital

During the six months ended April 30, 2022, approximately $2,925,892 of stock option expense was recognized and contributed to Additional Paid-In Capital. Also, during the six months ended April 30, 2022, on November 5, 2021 and February 5, 2022, restricted stock units (“RSUs”) previously granted to employees vested and shares of Common Stock were issued which contributed approximately $130,502 to Additional Paid-In Capital. Additionally, during the three and six months ended April 30, 2022, warrants of the Company were exercised for shares of Common Stock resulting in a further contribution to Additional Paid-in Capital of approximately $1,565,316. All of these contributions resulted in a total increase in Additional Paid-In Capital during the six months ended April 30, 2022 of approximately $4,621,710.2023.

Preferred Shares IssuedStock Converted

The authorized preferred stock of the Company consists of 5,000,000 shares with a par value of $0.001 per share, of which 3,000,000 shares were designated as Series A Convertible Preferred Stock (the “Series A Preferred Stock”). Each share of the Series A Preferred Stock was initially convertible into 100 shares of Common Stock; however, as a result of the Reverse Stock Split, the conversion rate was adjusted such that each share of the Series A Preferred Stock is convertible into approximately 8.33 shares of Common StockStock.. All On June 24, 2022, all 3,000,000 shares of Series A Preferred Stock were converted into shares of Common Stock by Kaival Holdings. The conversion of 3,000,000 shares of Series A Preferred Stock, at a conversion rate of 8.33, equaled 25,000,000 shares of Common Stock. As a result, the authorized, preferred stock of the Company consists of 5,000,000 shares with a par value of $0.001 per share, with 0 shares of preferred stock issued andor outstanding as of April 30,October 31, 2022.

Common Shares IssuedStock Options

The Company implemented the Reverse Stock Split, effective prior to the openingSummary of the market on 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 a ratio of 1-for-12, every 12 shares of the Common Stock were 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.stock options information is as follows:

During the three months ended April 30, 2023, and 2022, stockholders of the Company exercised warrantsrecognized $1,352,938 and $2,616,192, respectively of stock option expense related to purchase approximately 873,286 shares ofoutstanding stock options. During the Company’s Common Stock.

The authorized Common Stock of the Company consists of 1,000,000,000 shares with a par value of $0.001 per share. There were 31,166,090 shares of Common Stock issued and outstanding as of April 30, 2022. There were 30,195,312 shares of the Common Stock issued and outstanding as of October 31, 2021.

Warrants Shares Issued

As part of the Company’s underwritten public offering during fiscal 2021, the Company issued warrants to purchase a total of 4,053,750 shares of Common Stock at an exercise price of $1.90 per share. These warrants expire in 2026. Warrants for 873,326 shares of Common Stock were exercised during the six-month periodsix months ended April 30, 2023, and 2022, the Company recognized $2,788,725 and $2,824,892, respectively of stock option expense related to outstanding stock options. On April 30, 2023, the Company had $3,643,178 of unrecognized expenses related to options. The weighted average remaining contractual life is approximately 9.41 years for net proceeds of $1,566,190.stock options outstanding on April 30, 2023. The aggregate intrinsic value of thethese outstanding Common Stock warrantsoptions as of April 30, 2022 and October 31, 20212023, was $0. The weighted average remaining termCompensation expense related to performance-based options is recognized on a straight-line basis over the requisite service period, provided that it is probable that performance conditions will be achieved, with probability assessed on a quarterly basis and any changes in expectations recognized as an adjustment to earnings in the period of the outstanding Common Stock warrantschange. Compensation cost is 4.50 years as of April 30, 2022.

The followingnot recognized for service- and performance-based awards that do not vest because service or performance conditions are not satisfied, and any previously recognized compensation cost is a summaryreversed. If vesting occurs prior to the end of the stock warrant activity duringrequisite service period, expense is accelerated and fully recognized through the fiscal six months ended April 30, 2022 and the year ended October 31, 2021.vesting date.