# EDGAR Filing Document

**Accession Number:** 0001762239
**File Stem:** 0001731122-23-000093
**Filing Date:** 2023-1
**Character Count:** 362808
**Document Hash:** 2eefffb21e07d0106071c19041c41649
**Contains OCR:** False
**Source Format:** 

## Filing Content

## Filing Summary
**0001731122-23-000093.hdr.sgml**: 20230130

**ACCESSION NUMBER**: 0001731122-23-000093

**CONFORMED SUBMISSION TYPE**: 10-K

**PUBLIC DOCUMENT COUNT**: 57

**CONFORMED PERIOD OF REPORT**: 20221031

**FILED AS OF DATE**: 20230130

**DATE AS OF CHANGE**: 20230130

**FILER**: 

**COMPANY DATA:**
- **COMPANY CONFORMED NAME:** Kaival Brands Innovations Group, Inc.
- **CENTRAL INDEX KEY:** 0001762239
- **STANDARD INDUSTRIAL CLASSIFICATION:** RETAIL-NONSTORE RETAILERS [5960]
- **IRS NUMBER:** 833492907
- **FISCAL YEAR END:** 1031

**FILING VALUES:**
- **FORM TYPE:** 10-K
- **SEC ACT:** 1934 Act
- **SEC FILE NUMBER:** 001-40641
- **FILM NUMBER:** 23565296

**BUSINESS ADDRESS:**
- **STREET 1:** 4460 OLD DIXIE HIGHWAY
- **CITY:** GRANT
- **STATE:** FL
- **ZIP:** 32949
- **BUSINESS PHONE:** (833) 452-4825

**MAIL ADDRESS:**
- **STREET 1:** 4460 OLD DIXIE HIGHWAY
- **CITY:** GRANT
- **STATE:** FL
- **ZIP:** 32949

**FORMER COMPANY:**
- **FORMER CONFORMED NAME:** Quick Start Holdings, Inc.
- **DATE OF NAME CHANGE:** 20181218

?xml version="1.0" encoding="utf-8"?

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**FORM 10-K**

**(Mark One)**

**☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**FOR THE FISCAL YEAR ENDED OCTOBER 31, 2022**

**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**

**<u>Kaival Brands Innovations Group, Inc.</u>**

**(Exact name of registrant as specified in its charter)**

---

| | |
|:---|:---|
| **Delaware** | **83-3492907** |
| (State or other jurisdiction<br> of incorporation or organization) | (I.R.S. Employer Identification No.) |
| **4460 Old Dixie Highway**<br> **Grant, Florida** | **32949** |
| (Address of Principal Executive Offices) | (Zip Code) |

---

**(833) 452-4825**

Registrant's telephone number, including area code

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

---

| | | |
|:---|:---|:---|
| &nbsp;&nbsp;Title of each class | &nbsp;&nbsp;Trading Symbol(s) | &nbsp;&nbsp;Name of each exchange on which registered |
| &nbsp;&nbsp;**Common Stock, par value $0.001 per share** | &nbsp;&nbsp;**KAVL** | &nbsp;&nbsp;**The Nasdaq Stock Market, LLC** |

---

Securities to be registered under Section 12(g) of the Exchange Act:

**None**

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

☐Yes ☒ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

☐ Yes ☒ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

☒ Yes ☐ No

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

Large, accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ <br> Smaller reporting company ☒ Emerging growth company ☒

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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

☐ Yes ☒ No

As of April 30, 2022, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the voting common stock held by non-affiliates of the registrant was approximately $14,476,455 based on the closing price per share (or $1.08), of the registrant's common stock as reported by The NASDAQ Stock Market LLC.

As of January 27, 2023, there were 56,169,090 shares of the registrant's common stock, par value $0.001 per share, issued and outstanding.

**DOCUMENTS INCORPORATED BY REFERENCE**

None.

**TABLE OF CONTENTS**

**KAIVAL BRANDS INNOVATIONS GROUP, INC.**

---

| | | |
|:---|:---|:---|
|  |  | **PAGE** |
|  | &nbsp;&nbsp;&nbsp;[Cautionary Statement Regarding Forward-Looking Statements](#a_001) | iii |
| &nbsp;&nbsp;&nbsp;&nbsp;[**PART I**](#a_002) |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;Item 1 | &nbsp;&nbsp;&nbsp;[Business](#a_003) | 1 |
| &nbsp;&nbsp;&nbsp;&nbsp;Item 1A | &nbsp;&nbsp;&nbsp;[Risk Factors](#a_004) | 11 |
| &nbsp;&nbsp;&nbsp;&nbsp;Item 1B | &nbsp;&nbsp;&nbsp;[Unresolved Staff Comments](#a_005) | 23 |
| &nbsp;&nbsp;&nbsp;&nbsp;Item 2 | &nbsp;&nbsp;&nbsp;[Properties](#a_006) | 23 |
| &nbsp;&nbsp;&nbsp;&nbsp;Item 3 | &nbsp;&nbsp;&nbsp;[Legal Proceedings](#a_007) | 23 |
| &nbsp;&nbsp;&nbsp;&nbsp;Item 4 | &nbsp;&nbsp;&nbsp;[Mine Safety Disclosures](#a_008) | 23 |
| &nbsp;&nbsp;&nbsp;&nbsp;[**PART II**](#a_009) |  | 24 |
| &nbsp;&nbsp;&nbsp;&nbsp;Item 5 | &nbsp;&nbsp;&nbsp;[Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](#a_010) | 24 |
| &nbsp;&nbsp;&nbsp;&nbsp;Item 7 | &nbsp;&nbsp;&nbsp;[Management's Discussion and Analysis of Financial Condition and Results of Operations](#a_011) | 25 |
| &nbsp;&nbsp;&nbsp;&nbsp;Item 7A | &nbsp;&nbsp;&nbsp;[Quantitative and Qualitative Disclosures about Market Risk](#a_012) | 31 |
| &nbsp;&nbsp;&nbsp;&nbsp;Item 8 | &nbsp;&nbsp;&nbsp;[Financial Statements and Supplementary Data](#a_013) | F-1 |
| &nbsp;&nbsp;&nbsp;&nbsp;Item 9 | &nbsp;&nbsp;&nbsp;[Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](#a_014) | 32 |
| &nbsp;&nbsp;&nbsp;&nbsp;Item 9A | &nbsp;&nbsp;&nbsp;[Controls and Procedures](#a_015) | 32 |
| &nbsp;&nbsp;&nbsp;&nbsp;Item 9B | &nbsp;&nbsp;&nbsp;[Other Information](#a_016) | 33 |
| &nbsp;&nbsp;&nbsp;&nbsp;Item 9C | &nbsp;&nbsp;&nbsp;[**Disclosure Regarding Foreign Jurisdictions that Prevent Inspections**](#l_001) | 33 |
| &nbsp;&nbsp;&nbsp;&nbsp;<u>**PART III**</u> |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;Item 10 | &nbsp;&nbsp;&nbsp;[Directors, Executive Officers and Corporate Governance](#a_017) | 34 |
| &nbsp;&nbsp;&nbsp;&nbsp;Item 11 | &nbsp;&nbsp;&nbsp;[Executive Compensation](#a_018) | 38 |
| &nbsp;&nbsp;&nbsp;&nbsp;Item 12 | &nbsp;&nbsp;&nbsp;[Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](#a_019) | 42 |
| &nbsp;&nbsp;&nbsp;&nbsp;Item 13 | &nbsp;&nbsp;&nbsp;[Certain Relationships and Related Transactions, and Director Independence](#a_020) | 45 |
| &nbsp;&nbsp;&nbsp;&nbsp;Item 14 | &nbsp;&nbsp;&nbsp;[Principal Accounting Fees and Services](#a_021) | 46 |
| &nbsp;&nbsp;&nbsp;&nbsp;[**PART IV**](#a_022) |  | 47 |
| &nbsp;&nbsp;&nbsp;&nbsp;Item 15 | &nbsp;&nbsp;&nbsp;[Exhibits, Financial Statement Schedules](#a_023) | 47 |
| &nbsp;&nbsp;&nbsp;&nbsp;Item 16 | &nbsp;&nbsp;&nbsp;[Form 10-K Summary](#a_024) | 49 |
|  | &nbsp;&nbsp;&nbsp;[Signatures](#a_025) | 50 |

---

ii

**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

Certain statements and information included in this Annual Report on Form 10-K for the year ended October 31, 2022 (this "Report") contain or may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), Section 21 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Private Securities Litigation Reform Act of 1995. 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 are not statements of historical facts, but rather reflect our current expectations concerning future events and results, including, without limitation, statements related to:

● our substantial reliance on, and efforts to diversify our business from, that of our affiliate Bidi Vapor, LLC ("Bidi");

● our ability to obtain the products we distribute from Bidi;

● the impact of Bidi's August 2022 11<sup>th</sup>Circuit Court of Appeals victory overturning the U.S. Food and Drug Administration's ("FDA") previous denial of Bidi's Premarket Tobacco Product Application ("PMTA") for its non-tobacco flavored BIDI® Stick electronic nicotine delivery system ("ENDS"), which we have the U.S. license to distribute;

● our substantial reliance on QuikfillRx, LLC to provide key sales, marketing and other support services to us;

● the scope of future FDA enforcement of regulations in the ENDS products generally;

● 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 demand for the products we distribute;

● anticipated product performance, and our market and industry expectations;

● our relationships with key third party vendors and commercial collaborators such as QuikfillRx (now known as Kaival Marketing Services) and Phillip Morris International;

● our ability or plans to diversify our product offerings;

● 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, including matters over which we have little or no control such as the COVID-19 pandemic.

Such forward-looking statements, including those concerning our expectations, involve significant risks, uncertainties and other factors, some of which are beyond our control, which may cause our actual results, performance, or achievements, or industry results to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. See the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operation" sections contained in this Report 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. Except as required by applicable law, including the securities laws of the United States, we undertake no obligation to publicly update or revise any forward-looking statements, 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.

iii

**PART I**

**Item 1. Business.**

*As used in this Report, the terms "we," "us," "our," "the Registrant," the "Company," and "Kaival" refer to Kaival Brands Innovations Group, Inc., unless otherwise indicated.*

***Description of Business***

 ****

We are focused on growing and incubating innovative and profitable products into mature, dominant brands, with a current focus on the distribution of electronic nicotine delivery systems ("ENDS"), also known as "e-cigarettes". Our business plan is to seek to diversify into distributing other nicotine and non-nicotine delivery system products (including those related to hemp-derived cannabidiol (known as CBD) products.

On March 9, 2020, we entered into an exclusive distribution agreement (the "Distribution Agreement") with our affiliate Bidi Vapor, LLC ("Bidi"), which Distribution Agreement was amended and restated on May 21, 2020, April 20, 2021, on June 10, 2022, and on November 17, 2022 (collectively, the "A&R Distribution Agreement"). Pursuant to the A&R Distribution Agreement, Bidi granted us an exclusive worldwide right to distribute Bidi's ENDS as well as non-electronic nicotine delivery systems and related components (as more particularly set forth in the A&R Distribution Agreement, the "Products") for sale and resale to both retail level customers and non-retail level customers. Currently, the Products consist solely of the "***BIDI<sup>®</sup> Stick***", Bidi's disposable, tamper resistant ENDS product made with medical-grade components, a UL-certified battery and technology designed to deliver a consistent vaping experience for adult smokers 21 and over. We presently distribute Products to wholesalers and retailers of ENDS products, having ceased all direct-to-consumer sales in February 2021.Nirajkumar Patel, our Chief Science and Regulatory Officer and director and an indirect controlling shareholder of our company, owns Bidi.

BIDI<sup>®</sup> Stick comes in a variety of flavor options for adult cigarette smokers. We do not manufacture any of the Products we resell. The BIDI® Stick is manufactured by Bidi. Pursuant to the terms of the A&R Distribution Agreement, Bidi provides us with all branding, logos, and marketing materials to use with our commercial partners use in connection with our marketing and promotion of the Products.

The A&R Distribution Agreement extends the previous one-year, annual renewable term to an initial term of ten years, which automatically renews for another ten-year term if we satisfy certain minimum purchase thresholds. The A&R Distribution Agreement also provides us with a right of first refusal in the event Bidi receives an offer that would constitute a "change of control transaction," as well as a right of first refusal to act as the exclusive distributor of any and all future products of Bidi that arise out of or related to ENDS and components related to ENDS, or arise out of or related to the tobacco-derived nicotine industry.

In connection with the A&R Distribution Agreement, we 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 sub-distribution agreements, as amended and restated, are collectively referred to as the "Sub-Distribution Agreements"), whereby we appointed the counterparties as non-exclusive sub-distributors. Pursuant to the 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").

We process all sales made only to non-retail customers, with all sales to non-retail customers made through Bidi's age-restricted website, www.wholesale.bidivapor.com. We ceased all direct-to-consumer sales in February 2021 in order to better ensure youth access prevention and to comply with the Prevent All Cigarette Trafficking ("PACT") Act. We provide all customer service and support at our own expense. We set the minimum prices for all sales made by us. We maintain adequate inventory levels of the Products in order to meet the demands of our non-retail customers, and deliver the Products sold to these customers.

A key third party collaborator of ours is QuikfillRx, LLC, ("QuikfillRx") a Florida limited liability company which recently began doing business as "Kaival Marketing Services" to better reflect its contributions to our company. QuikfillRx provides us 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. QuikfillRx provides these services to us pursuant to a Services Agreement, most recently amended on November 9, 2022, which has a current term ending on October 31, 2025 (subject to potential one-year extensions) and pursuant to which QuikfillRx receives monthly cash compensation and was granted certain equity compensation in the form of options.

We have also entered into key international licensing agreements with Philip Morris Products S.A. ("PMPSA"), a wholly owned affiliate of Philip Morris International Inc. ("PMI") as described further below.

On August 31, 2020, we formed Kaival Labs, Inc., a Delaware corporation (herein referred to as "Kaival Labs"), as a wholly owned subsidiary for the purpose of developing our own branded and white-label products and services, of which none has commenced as of the date of this Report. On March 11, 2022, we formed Kaival Brands International, LLC, a Delaware limited liability company (herein referred to as "KBI"), as a wholly owned subsidiary for the purpose of entering into an international licensing agreement with PMPSA as described further below.

 **

***FDA PMTA Determinations, 11<sup>th</sup> Circuit Decision and Impact on Our Business***

 **

In September 2021, in connection with the Bidi's Premarket Tobacco Product Application ("PMTA") process for BIDI<sup>®</sup> Stick, the U.S. Food and Drug Administration's ("FDA") effectively "banned" flavored ENDS by denying nearly all then-pending PMTAs for such products (including Bidi's). Following the issuance of by the FDA of a related Marketing Denial Order ("MDO") regarding these ENDS products, manufacturers were required to stop selling non-tobacco flavored ENDS 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® Sticks, including its Arctic (menthol) 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 review request specifically of the decision to include the Arctic (menthol) BIDI® Stick in the MDO. In May 2022, the FDA issued a determination that it views the Arctic BIDI® Stick as a 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 "11th Circuit") to review the FDA's denial of the PMTAs for its non-tobacco flavored BIDI® Stick ENDS (including the Arctic BIDI® Stick), 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® 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, and that the FDA should have gone through the notice and comment rulemaking process for this requirement.

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 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 11th Circuit. On February 1, 2022, the 11<sup>th</sup> Circuit granted Bidi's motion to stay (i.e., put on hold) the MDO, pending the litigation on the merits. Oral arguments in the merits-based proceeding were held on May 17, 2022.

On August 23, 2022, the 11<sup>th</sup> Circuit set aside (i.e., vacated) the MDO issued to the non-tobacco flavored BIDI® Sticks and remanded Bidi's PMTA back to the FDA for further review. Specifically, the 11<sup>th</sup> Circuit held that the MDO was "arbitrary and capricious" in violation of the 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<sup>th</sup> Circuit's opinion further found 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 to 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 11th 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 light of the 11th Circuit decision, the Company anticipates having the continued ability to market and sell the non-tobacco flavored BIDI® Sticks, subject to FDA's enforcement discretion, for the duration of the PMTA scientific review. 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. As none of these scenarios apply to Bidi, the Company believes the current risk of FDA enforcement is low.

Separately, on or about May 13, 2022, the FDA placed the tobacco-flavored Classic BIDI® Stick into the final Phase III scientific review.

***Other Potential Product Offerings***

 ****

In addition to the BIDI<sup>®</sup> Stick, we anticipated launching distribution of the "BIDI<sup>®</sup> Pouch," initially outside of the United States. The initial planned February 2021 roll-out of the BIDI<sup>®</sup> Pouch was delayed due to COVID-19 based manufacturing and supply chain constraints. Due to these complications, and in an effort to prevent future bottlenecks, Bidi decided to move manufacturing in-house. In 2021, Bidi modified the planned formulation of the BIDI<sup>®</sup> Pouch. The original BIDI<sup>®</sup> Pouch formulation (which never came to market) intended to utilize a tobacco-free (synthetic) nicotine formulation, along with natural fibers and a chew-base filler in six different flavors. However, production of the BIDI<sup>®</sup> Pouch was placed on hold domestically due to concerns about the safety of synthetic nicotine and the likelihood of the FDA enforcement of synthetic nicotine products either as unapproved drugs or unauthorized tobacco products. Subsequently, the Consolidated Appropriations Act of 2022, signed by President Biden on March 15, 2022, amended the definition of a "tobacco product" in the Food, Drug and Cosmetic Act and gave the FDA authority to regulate products containing nicotine from any source, including synthetic nicotine. The legislation also gave manufacturers of synthetic nicotine products 60 days to prepare and submit PMTAs by May 14, 2022. Synthetic nicotine products subject to timely submitted PMTAs were allowed to remain on the market without the threat of enforcement for another 60 days, until July 13, 2022. After July 13, 2022, all synthetic nicotine products, regardless of PMTA status, are illegal and subject to FDA enforcement (unless the product has actually been authorized and is subject to a PMTA Marketing Grant Order).

Also, on July 14, 2021, we announced plans to launch its first Kaival-branded product, a hemp CBD vaping product. In addition to our branded formulation, we anticipate that we will also provide white label, wholesale solutions for other product manufacturers through its subsidiary, Kaival Labs. We have not yet launched any branded product, nor has have begun to provide white label wholesale solutions for other product manufacturers, but the diversification of the types of products we distribute is an important part of our growth strategy.

Assuming we launch a hemp CBD product, of which there can be no assurances, we intend that all CBD products will be produced and distributed strictly in compliance under the Agriculture Improvement Act of 2018 (known as the 2018 Farm Bill), which defines hemp as the plant cannabis sativa and any part of the plant with a delta-9 THC concentration of not more than 0.3 percent by dry weight. According to the 2018 Farm Bill, hemp-derived products can be offered for retail sale in many forms: smoke, pouch, tinctures, topicals, capsules, vape oil and gummies/edibles. We plan to utilize Bidi's patented BIDI<sup>®</sup> Stick delivery mechanism in order to provide a similar, premium experience in the initial CBD product line. We expect our industrial-grade hemp CBD formula to provide greater bioavailability than many market peers, resulting in a better consumer experience in less usage. On January 26, 2023, FDA announced that it would not initiate rulemaking to regulate CBD as a dietary food ingredient. Rather, after careful review, the FDA has concluded that a new regulatory pathway for CBD is needed that balances individuals' desire for access to CBD products with the regulatory oversight needed to manage risks. FDA further indicated that it is prepared to work with Congress on this matter.

***Recycling Program***

 ****

In addition to our current product offerings, we launched our recycling program, Bidi Cares, in the spring of 2020, that provides an opportunity for its adult (21 years of age or older) customers to recycle their BIDI<sup>®</sup> Sticks and be rewarded with a free BIDI<sup>®</sup> Stick after recycling ten used BIDI<sup>®</sup> Sticks. Each BIDI<sup>®</sup> Stick contains UL 8139 Certified batteries, which are high-quality, recyclable batteries that are distinguishable from batteries used in other ENDS Products. Bidi invests in recyclable batteries as a more sustainable solution to reduce electronic waste. This program is currently on-hold pending the outcome of negotiations with the USPS to allow for the shipment of recycled ENDS products.

***Marketing Strategy***

 ****

Currently, we market and place our Products into national distribution channels through long-standing industry relationships in accordance with the A&R Distribution Agreement and with the assistance of QuikfillRx. We process all sales made to non-retail customers.

Our long-term marketing strategy remains based on FDA compliance and our commitment to preventing underage access to our Products. As such, we steer away from social media marketing and, instead, are more focused on ground-level marketing and advertising within authorized retailer locations (i.e., advertisement on retail partners' back-bar tobacco products area). Part of this ground-level marketing effort focuses on supporting our authorized partner stores and distributors in spreading brand awareness of our Products to their adult (21 years of age and older) consumer base by providing in-store marketing materials. Additionally, we supplement these efforts with informational videos on Bidi's fight against underage access to vape products and content on what makes the BIDI<sup>®</sup> Stick unique, among other types of content.

Retail stores also have access to online informative videos about the Bidi story, which can be used to educate and assist in training all of their staff members about the core values of Bidi. From the recycling initiative to the commitment to preventing underage ENDS use, and stand against the illicit market of ENDS products, we believe that together with Bidi, we are taking the necessary steps to ensure that our partners are aligned with our community goals.

We also attend trade shows at established expos throughout the United States, such as the Tobacco Plus Expo (TPE), held February 22-24, 2022 in Las Vegas, the CSP Outlook Leadership Conference in Asheville, N.C., August 8-10, 2022, and the National Association for Convenience Stores (NACS) Show held from October 2-4, 2022, also in Las Vegas. Further, we have a dedicated marketing team that focuses on these marketing efforts and more.

We conduct our sales and marketing activities in close coordination with our consultant QuikfillRx. Pursuant to our Service Agreement with QuikfillRx (most recently amended as of November 9, 2022), QuikfillRx provides services and support relating to our sales management function (including, without limitation, services and support relating to business planning and strategy development, staffing and recruitment, training and onboarding, direct sales and marketing, and monitoring and results evaluation), website development and design, graphics, content, public communication, social media, management and analytics, and market and other research.

***KBI License Agreements***

 ****

On June 10, 2022, Bidi entered into a License Agreement (the "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 Deed of Licensing Agreement, dated June 13, 2022 (the "PMI License Agreement"), by and between KBI and PMPSA. 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.

Pursuant to the License Agreement, if at any time, KBI receives any license of PMPSA intellectual property from PMPSA or any of its affiliates in the manner contemplated by the PMI License Agreement, KBI will grant Bidi an irrevocable sub-license of all right, title, and interest of KBI in and to that PMPSA intellectual property. In addition, Bidi and KBI agree that any amount payable and all net royalties payable to KBI under the PMI License Agreement will be apportioned equally between Bidi and KBI in a manner such that each will ultimately receive fifty percent (50%) thereof.

The License Agreement contains customary representations, warranties, covenants, and indemnification provisions.

***Philip Morris Deed of Licensing Agreement***

 ****

On June 13, 2022, KBI entered into the PMI License Agreement with 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-cigarettes 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 costs and expenses 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 payment for the sale of each unit of Product manufactured and sold. 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, equal to a percentage of 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.

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.

In connection with the PMI License Agreement, the Company, Bidi, and PMPSA also entered into a deed of letter ("Deed of Letter") to require specific performance of the duties and obligations set forth in the PMI License Agreement if KBI is unable or fails to sublicense the intellectual property to PMPSA pursuant to the PMI License Agreement and/or is unable or fails to perform certain of its obligations or grant the rights pursuant to the PMI License Agreement. In addition, the Company, Bidi, and PMPSA entered into a guarantee ("Guarantee"), whereby each of the Company and Bidi guarantees to PMPSA up to 50% of all of KBI's monetary obligations set forth in the PMI License Agreement if KBI fails to perform or discharge certain of its obligations in the PMI License Agreement.

***Resellers***

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Currently, our potential distribution network reach is approximately 48,000 stores in the United States. Our Products can be found in many national and regional convenience-store chains, such as QuikTrip and GPM Investments, as well as at convenience stores (known in the industry as "c-stores") serviced through distributors such as S. Abraham and Sons and H.T. Hackney Co. Finally, our Products are also accessible to adults 21 years of age and older through the age-gated digital delivery service mobile application, GoPuff, in more than 50 cities across the United States.

***Concentrations***

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*Concentration of Purchases and Other Receivable* *- Related Party:*

For the year ended October 31, 2022, 100% of the inventories of Products, consisting solely of the BIDI<sup>®</sup> Stick, were purchased from Bidi, a related party company that is owned by Nirajkumar Patel, our Chief Science and Regulatory Officer and director, in the amount of approximately $1.5 million, as compared to $61.9 million for the year ended October 31, 2021. There was no related party accounts payable balance as of October 31, 2022. In fiscal year 2021, such inventories accounted for 100% of the total related party accounts payable.

On April 29, 2022, our company and Bidi agreed to cancel the $2.9 million inventory order paid in advance in fiscal year 2021 and this was a credit against the accounts payable due to Bidi. Inventory quality control expenses were paid by us on behalf of Bidi during the year ended October 31, 2022in the amount of approximately $0.7 million, and were offset as a credit against the existing accounts payable balance-related party. A credit of $2.9 million was applied on August 1, 2022, resulting in a related-party receivable balance due from Bidi of $2.1 million, to be applied on future orders of Product. On October 31, 2022, our company and Bidi agreed to a return for short-coded or expiring inventory. An additional credit of $1.5 million and $108,000 for recycling costs was applied on October 31, 2022, to the related-party receivable balance due from Bidi.

As of October 31, 2022, we had a related-party receivable balance due from Bidi of $3,704,132. $1,539,486 of the receivable is classified as current and $2,164, 646 is classified as non-current. The receivable balance will be realized though Bidi applying 5% credit on all future orders of Product until the entire balance is extinguished.

*Concentration of Revenues and Accounts Receivable:*

For the year ended October 31, 2022, a substantial portion (over 50%) of our revenues from the sale of Products, solely consisting of the BIDI® Stick were derived from the following customers: (i) Favs Business, LLC ("Favs Business") generated approximately 31%, (ii) H.T. Hackney Co. generated approximately 15%, and (iii) GPM generated approximately 12%. For the year ended October 31, 2021, a substantial portion of our revenues from the sale of Products, solely consisting of the BIDI® Stick were derived from the following customers: (i) Favs Business generated approximately 23% and, (ii) MMS Distributing, LLC ("MMS Distro") generated approximately 16%, and (iii) C Store Master generated approximately 14%.

In addition, Favs Business and QuikTrip Corporation accounted for approximately 65% and 15% of the total accounts receivable from customers, respectively, as of October 31, 2022. Favs Business and C Store Master accounted for approximately 50% and 16% of the total accounts receivable from customers, respectively, as of October 31, 2021.

***Employees***

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As of the date of this Report we have ten employees, all of whom are full-time, including our officers. In addition to our officers, we have employees who fulfill the roles of sales staff, information technology, web development, warehouse staff, and financial accounting and reporting management. All our employees are eligible to enroll, or have already enrolled, in our medical plan.

***Environment and Government Regulation Related to our Operations***

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Because we are only a wholesale distributor of the Products, namely the BIDI<sup>®</sup> Stick, we believe that we are only subject to Federal, state, and international laws pertaining to a distributor, not a manufacturer, of ENDS Products.

Our business is dependent entirely on the resale of the Products provided by Bidi; thus, there is a significant risk that our business could be materially adversely affected if Bidi, as the manufacturer, does not properly abide by any Federal, state, or international laws that regulate ENDS Products. Any lapse in production or availability of the Products from Bidi would hamper our ability to operate as we would be limited in our ability to supply our customers if our inventory ran low or ceased to exist entirely.

As a manufacturer of ENDS Products, Bidi is responsible for abiding by and following various rules and regulations pertaining to the manufacturing of the ENDS Products we sell and any lapse in abiding by any pertinent rules and regulations may negatively impact our ability to operate. As a distributor, we are also subject to various rules and regulations. Some of the below may not directly apply to us at this time due to the nature of our present operations. These rules and regulations include, but are not limited to, the following:

*FDA and Related Regulations Relating to ENDS Products*

Effective August 8, 2016, the FDA's regulatory authority under The Family Smoking Prevention and Tobacco Control Act was extended to all remaining tobacco products, including: (i) certain "new generation" products (such as electronic cigarettes, vaporizers, and e-liquids) and their components or parts (such as tanks, coils, and batteries); (ii) cigars and their components or parts (such as cigar tobacco); (iii) pipe tobacco; (iv) hookah products; or (v) any other tobacco product "newly deemed" by the FDA (the "Deeming Rule"). The Deeming Rule applies to all products made or derived from tobacco intended for human consumption but excluding accessories of tobacco products (such as lighters). Furthermore, starting in April 2022, FDA was also granted authority to regulate products containing synthetic (non-tobacco) nicotine as tobacco products. Specifically, the Consolidated Appropriations Act of 2022 amended the definition of a "tobacco product" in the Food, Drug and Cosmetic Act and gave the FDA authority to regulate products containing nicotine from any source, including synthetic nicotine.

The Deeming Rule requires (i) United States manufactured products be registered with the FDA and that products include ingredient listings; (ii) newly deemed products be marketed only after FDA review and authorization, subject to FDA's compliance enforcement policy; (iii) products only make direct and implied claims of reduced risk if the FDA authorizes after finding that scientific evidence supports the claim and that marketing the product will benefit public health as a whole; (iv) sellers of such products refrain from distributing free samples; (v) sellers of such products implement minimum age and identification restrictions to prevent sales to individuals under age 18 (later extended to 21); (vi) packaging of and advertisements for products include prescribed health warnings; and (vii) sellers refrain from selling the products in vending machines, unless the machine is located in a facility that never admits youth. We, along with Bidi, must comply with these regulations. Any lapse in compliance by us, or Bidi, could hamper our ability to operate, which would adversely affect the results of operations.

Newly deemed tobacco products are also subject to the other requirements of the Tobacco Control Act, such as the products cannot be adulterated or misbranded. The FDA could in the future promulgate good manufacturing practice regulations for these and our other Products, which could have a material adverse impact on Bidi's ability to, and the cost to, manufacture our Products, which would adversely affect our financial condition and results of operations.

Failure to comply with the Tobacco Control Act and or with any FDA regulatory requirements could result in litigation, criminal convictions or significant financial penalties and could impair our ability to market and sell our electronic and vaporizer products. At present, we are unable to predict whether the Tobacco Control Act will impact our Products to a greater degree than competitors in the industry, thus affecting our competitive position.

As part of the "Consolidated Appropriations Act, 2021," signed into law on December 27, 2020, Congress amended the PACT Act to apply to ENDS, which includes the BIDI<sup>®</sup> Stick. The PACT Act regulates the sale, transfer, or shipment of cigarettes, roll-your-own tobacco, smokeless tobacco, and now ENDS, for both business-to-business transactions as well as online sales. The PACT Act imposes substantial restrictions on sellers and shippers of ENDS products, including, but not limited to registration with the Bureau of Alcohol, Tobacco, Firearms and Explosives (the "ATF"), registration with state Tobacco Tax Administrators, and monthly reporting requirements to state and local Tobacco Tax Administrators. Delivery sellers are subject to substantial additional restrictions, including, but not limited to, compliance with state excise tax collection requirements, licensing requirements, shipping, and packaging requirements. Companies were required to comply with PACT Act requirements beginning on or about March 28, 2021.

We have adopted the following compliance measures:

● We have retained a team of legal, tax and accounting experts to advise on state and local tax, licensing, and regulatory matters associated with the distribution of the BIDI<sup>®</sup>Stick;

● We are appropriately licensed or registered in every state which requires it;

● We calculate and remit excise taxes where required;

● We have made a substantial investment in excise tax reporting and compliance software to ensure that all applicable taxes are properly calculated and remitted to the appropriate taxing authorities. The software is now completely integrated with our systems;

● We have registered with the ATF and the states into which we ship the Products;

● We have implemented processes to ensure timely filing of all required reporting; and

● In February 2021, we ceased all direct-to-consumer sales.

*Federal Trade Commission* 

 

The Federal Trade Commission (FTC) routinely requests various industry sectors to provide information on marketing and advertising practices, and typically summarizes the aggregate information provided by all respondents in a public report. The FTC issued what is known as an "Order to File Special Report" to a number of vaping industry members, including Bidi, on June 2, 2022. Upon being advised of the exclusive distribution arrangement between Bidi and the Company, the FTC withdrew the request directed to Bidi on August 22, 2022 and issued a request to the Company on August 29, 2022. The Company responded timely to the FTC request on November 30, 2022.

 *State and Local Regulations*

As a retail seller and/or wholesale distributor of ENDS and related products, we must follow several state and local regulations. Individual U.S. state laws and regulations concerning e-cigarette and related products are also relatively new and developing. Currently, certain state laws about e-cigarette and related products serve to define and/or tax tobacco products or e-cigarette and related products, restrict access to youth and/or retail sale, require a license to sell such products, ban e-cigarette use in certain public spaces, and require child resistant packaging on products containing e-liquids. In addition, a number of states and localities have banned the sale of non-tobacco flavored tobacco products. Recently, for example, California passed Proposition 31, which prohibits the sale of non-tobacco flavored tobacco products, including e-cigarettes, in retail locations. Thus, the non-tobacco flavored BIDI® Sticks are not permitted to be sold in California retail locations. We anticipate more states and localities will take this approach. As a distributor, we hold all required state licenses and permits, and pay all applicable state e-cigarette and related products excise taxes. We work closely with Bidi to ensure that it is compliant with applicable manufacturer specific state requirements, such as any warning requirements (e.g., California Proposition 65).

*Excise Taxes on Vapor Products*

Vapor products are currently subject to excise taxes at the state and local level. Currently, approximately 31 states, plus various localities and jurisdictions, impose a tax on vapor products. We anticipate that state and localities will likely continue to impose new excise taxes on these products and / or increase existing excise taxes for the purpose of funding various legislative initiatives, filling revenue shortfalls, and / or to reduce consumption. In addition, while ENDS products are not currently subject to excise tax at the federal level, legislation to impose excise taxes at the federal level has been introduced in the past and could potentially be adopted in the future. Any future enactment of excise tax increases at the federal, state, or local level could potentially result in lower consumption, a shift in sales to discount brands, illicit trade channels or alternatives as consumers seek lower priced products, any of which could result in a decline of our shipment volume, revenue, and profit. The Company ceased all direct-to-consumer sales in February 2021.

*International Regulations and Pertinent Information*

The World Health Organization's Framework Convention on Tobacco Control ("FCTC") is the first international public health treaty that establishes a global agenda to reduce initiation of tobacco use and regulate tobacco to encourage tobacco cessation. Over 170 governments worldwide have ratified the FCTC. The FCTC has led to increased efforts to reduce the supply and demand of tobacco products and to encourage governments to further regulate the tobacco industry. The tobacco industry expects significant regulatory developments to take place over the next few years, driven principally by the FCTC. Regulatory initiatives that have been proposed, introduced, or enacted include:

● the levying of substantial and increasing tax and duty charges;

● restrictions or bans on advertising, marketing, and sponsorship;

● restrictions or bans on advertising, marketing, and sponsorship;

● the display of larger health warnings, graphic health warnings, and other labeling requirements;

● restrictions on packaging design, including the use of colors and generic packaging;

● restrictions or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines;

● requirements regarding testing, disclosure, and performance standards for tar, nicotine, carbon monoxide, and other smoke constituents' levels;

● requirements regarding testing, disclosure, and use of tobacco product ingredients;

● increased restrictions on smoking in public and workplaces and, in some instances, in private places and outdoors;

● elimination of duty-free allowances for travelers; and

● encouraging litigation against tobacco companies.

If the United States becomes a signatory to the FCTC and/or national laws are enacted in the United States that reflect the major elements of the FCTC, our business, results of operations and financial condition could be materially and adversely affected.

*Environmental Laws*

We may be subject to federal, state, and local environmental laws and regulations. Compliance with these provisions has not had, nor do we expect such compliance will have any, material adverse effect upon our capital expenditures, financial condition, or competitive position. We believe that we are not subject to any material costs for compliance with any environmental laws.

***Competition***

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Because we solely distribute Bidi's Products, which comprises all our business operations, Bidi's competitors in the ENDS industry are indirect competitors of ours. Many of these competitors in the ENDS industry are better capitalized than we are and have access to greater resources, financial, and otherwise. We believe that our ability, and Bidi's ability, to effectively compete in the industry and acquire a strong market position is, and will continue to be, in large part due to the growing recognition of the Bidi brand name, the perceived quality of each of our Products, and the ongoing efforts of our sales, marketing, and distribution teams. We, through Bidi, compete against, just to name a few, what we refer to as "big tobacco" companies, including Altria Group, Inc. (formerly Philip Morris); British American Tobacco p.l.c. (formerly Reynolds); Swedish Match; Swisher International; and manufacturers including U.K. based Imperial Brands, PLC, NJOY, and Logic Technology. "Big tobacco" has substantially greater resources, and a customer base that has historically demonstrated loyalty to their brands, which can pose a significant hurdle to competitors operating in the same, or similar, industries.

Competition in the ENDS industry is based upon not only brand quality and positioning but also on price, packaging, promotion, and retail availability and visibility. Given the decreasing prevalence and public acceptance of cigarette consumption, the "big tobacco" companies continue to demonstrate an increased interest and participation in other/additional tobacco industries/markets. As such, we consider the "big tobacco" companies to be our primary competitors now, but it is our belief that we have the capability to compete successfully.

Based on Goldman Sachs' Equity Research Report using Nielsen data for total nicotine volumes (the "Goldman Report"), the BIDI® Stick was the top disposable ENDS Product based on retail sales for the 52-week period ending on December 17, 2022. The BIDI® Stick has decreased its absolute-dollar market share of the disposable ENDS market share to 3.2% during the 52-week period ending on December 17, 2022, from 24.2% absolute dollar market share for the 52-week period ending January 28, 2022. According to the Goldman Report, total dollar sales have decreased 54.8% for the 52-week period ended December 17, 2022. We believe our market position as the top disposable ENDS Product based on retail sales for the last year underscores the unique customer experience the BIDI® Stick provides.

***Intellectual Property***

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Currently, as of the date of this Report, we have no intellectual property rights other than the trademarks KAIVAL BRANDS AND KAIVAL LABS. We rely on certain intellectual property rights, including logos, trademarks, and trade names, of Bidi that were granted to us pursuant to the A&R Distribution Agreement to be used in connection with the marketing, advertisement, and sale of the Products. We also indirectly rely on Bidi's intellectual property rights related to the Products, such as patents. If a third-party challenged Bidi's patents, or infringed upon such rights, our business would be materially adversely affected.

***Emerging Growth Company***

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We are an emerging growth company ("EGC"), that is exempt from certain financial disclosure and governance requirements for up to five years as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). The JOBS Act eases restrictions on the sale of securities and increases the number of stockholders a company must have before becoming subject to the reporting and disclosure rules of the Securities and Exchange Commission (the "SEC"). We have not elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the JOBS Act, which allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies.

***Corporate History***

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We were incorporated on September 4, 2018, in the State of Delaware. Effective July 12, 2019, we changed our corporate name from Quick Start Holdings, Inc. to Kaival Brands Innovations Group, Inc. The name change was affected through a parent-subsidiary short-form merger of Kaival Brands Innovations Group, Inc., our wholly-owned Delaware subsidiary formed solely for the purpose of the name change, with and into us. We were the surviving entity.

*2018 Holding Company Reorganization*

 

On September 4, 2018, USSE Delaware, Inc., a Delaware corporation ("USSE Delaware") acquired all of our then-outstanding shares of common stock, par value $0.001 per share (our "Common Stock"), resulting in us becoming its wholly owned subsidiary. On September 19, 2018, our wholly owned subsidiary, USSE Merger Sub, Inc., a Delaware corporation ("USSE Merger Sub"), merged with and into USSE Delaware, our then parent, effected a reorganization (the "Holding Company Reorganization") in accordance with the provisions set forth in Section 251(g) of the Delaware General Corporation Law ("DGCL"). USSE Delaware was the surviving corporation and our wholly owned subsidiary. USSE Delaware also changed its name to USSE Corp. following the Holding Company Reorganization.

Upon completion of the Holding Company Reorganization, by virtue of the merger, and without any action on the part of the holder thereof, each share of USSE Delaware's common stock issued and outstanding immediately prior to the effective time of the Holding Company Reorganization was automatically converted into one validly issued, fully paid, and non-assessable share of our Common Stock. Additionally, each share of USSE Delaware's preferred stock issued and outstanding immediately prior to the effective time was converted into one validly issued, fully paid, and non-assessable share of our preferred stock, having the same designations, rights, powers, and preferences, and the qualifications, limitation, and restrictions thereof, as the corresponding share of USSE Delaware's preferred stock. Each share of our Common Stock issued and outstanding and held by USSE Delaware immediately prior to the effective time was canceled.

*2018 Change of Control*

 

On October 19, 2018, we issued 500,000,000 shares of restricted Common Stock and 400,000 shares of Convertible Series B preferred stock to GMRZ Holdings LLC, a Nevada limited liability company ("GMRZ"), for services rendered to us. GMRZ became our controlling stockholder as a result of such issuances. On February 6, 2019, we entered into a non-binding Share Purchase Agreement (the "Agreement") by and among GMRZ, Kaival Holdings, LLC (formerly known as Kaival Brands Innovations Group, LLC), a Delaware limited liability company ("KH"), and us, pursuant to which, on February 20, 2019, GMRZ sold 504,000,000 shares of our restricted Common Stock, representing approximately 88.06 percent of our then-issued and outstanding shares of Common Stock, to KH, and KH paid GMRZ consideration in the amount set forth in the Agreement (the "Purchase Price"). The consummation of the transactions contemplated by the Agreement resulted in a change in control of us, with KH becoming our largest controlling stockholder. The sole voting members of KH are Nirajkumar Patel and Eric Mosser. The Purchase Price was paid with personal funds of the members of KH.

*2020 Share Cancellation and Exchange Agreement*

 

On August 19, 2020, we entered into a Share Cancellation and Exchange Agreement (the "Share Cancellation and Exchange Agreement") with our controlling stockholder, KH.

Pursuant to the Share Cancellation and Exchange Agreement, KH returned to us 300,000,000 shares of our Common Stock (the "Cancellation Shares"), which Cancellation Shares were canceled and retired by us. Following such cancellation, KH owns 204,000,000 shares of our Common Stock.

On August 19, 2020, we filed a Certificate of Designation of Preferences, Rights, and Limitations of the Series A Preferred Stock (the "Series A Certificate of Designation") with the Secretary of State of the State of Delaware, which authorized a total of 3,000,000 shares, par value $0.01 per share, of Series A Preferred Stock (the "Series A Preferred Stock").

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

*2021 Reverse Stock Split*

 

On July 16, 2021, we filed a Certificate of Amendment to the Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to affect a 1-for-12 reverse stock split (the "Reverse Stock Split") of the shares of our 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 our 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, our Board approved appropriate and proportional adjustments to all outstanding securities or other rights convertible or exercisable into shares of our 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 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 our Common Stock was not affected by the Reverse Stock Split.

*2022 Preferred Shares 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 Stock. On June 24, 2022, all 3,000,000 shares of Series A Preferred Stock were converted into shares of Common Stock by Kaival Holdings, LLC, a related party. 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 or outstanding as of October 31, 2022.

**Item 1A. Risk Factors.**

***Our business and an investment in our company is speculative and subject to significant risks****. We caution you that the following important factors, among others, could cause our actual results to differ materially from those expressed in forward-looking statements made by us or on our behalf in filings with the SEC, press releases, communications with investors and oral statements. Any or all of our forward-looking statements contained in this Report and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may differ materially from those anticipated in forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosure we make in our reports filed with the SEC.*

 **Risks Related to Our Business and Industry**

***We rely exclusively on Bidi as the supplier of the Products that we distribute. The loss of this relationship, or any negative impacts on Bidi's ability to manufacture the Products, would severely harm our business.*** Pursuant to the A&R Distribution Agreement between us and Bidi, Bidi has engaged us to act as the sole distributor of the ENDS products and related components, including the BIDI® Stick, manufactured by Bidi. Any failure by Bidi to fulfil its obligation under the A&R Distribution Agreement could have a material adverse effect on our revenue and operating results and operating cash flows; and could impair the strength of our brand.

In addition, because of our dependence on Bidi as the exclusive supplier of Products, any loss of our relationship with Bidi, or any adverse change in the financial health of Bidi that would affect its ability to perform its obligations under the A&R Distribution Agreement, would have a material adverse effect on our revenue, operating results, and ability to run our business.

Further, Bidi is subject to supply shortages and interruptions, long lead times, and act-of-God events such as global pandemics, weather related catastrophes, or conflict, any of which could disrupt the operations of Bidi and have a material adverse impact on our results of operations. We may be unable to identify or contract with new suppliers or producers in the event of a disruption to our supply and could experience a material adverse effect on our revenue, operating results, and ability to run our business.

 ***The terms of our agreements with Bidi, including our A&R Distribution Agreement, may not always be as favorable to us as the terms that may be obtained by arms' length negotiation.*** We currently are, and we anticipate that we will continue to be, substantially dependent on our relationships with our affiliated entities, including Bidi. We believe that our current arrangement with Bidi provides our business with stability and transparency. Although we believe that the terms of the A&R Distribution Agreement are as favorable to us as what we could have obtained in an arm's length transaction, there can be no assurance that this arrangement or any future agreements that we enter with Bidi, or any other affiliated entity, will be as favorable to us as we may be able to negotiate with unaffiliated parties.

***Our relationship with Bidi is subject to change.*** We currently have no intellectual property rights (other than the trademarks KAIVAL BRANDS and KAIVAL LABS) and rely on the intellectual property rights, including logos, trademarks, and trade names, of Bidi that were granted to us pursuant to the A&R Distribution Agreement to be used in connection with the marketing, advertisement, and sale of the Products. We also indirectly rely on Bidi's intellectual property rights related to the Products, such as patents. We have from time to time considered, and discussed with Bidi, potential alterations to this arrangement, including a potential acquisition by us of all or a portion of the intellectual property owned by Bidi and related to the Products. Should we pursue such a transaction, it would be a "related party transaction," as defined by the listing rules of The Nasdaq Stock Market, LLC (the "Nasdaq") and, thus, subject to the review of the Audit Committee of our Board. Further, should we undertake such a transaction, then we would become responsible to respond if a third-party challenged Bidi's patents, or infringed upon such rights, in which case our business could be materially adversely affected.

***We outsource key sales and marketing and other key functions to QuikfillRx, and the loss of this relationship would damage our business.*** We conduct our sales and marketing activities in close coordination with our consultant QuikfillRx. Pursuant to our agreement with QuikfillRx (most recently amended in November 2022), QuikfillRx provides key services to us. We are therefore reliant on our relationship with QuikfillRx, and the loss of that relationship for any reason would significantly damage our ability to operation our business.

***We have a limited operating history, and our historical operating and financial results may not be indicative of future performance, which, along with the relative early stage of the ENDS industry, makes it difficult to predict our future business prospects and financial performance.*** Our current business model is relatively new, and so business and prospects may be difficult to evaluate. Our limited operating history makes it difficult to evaluate both our operating history and our future potential. We have yet to demonstrate a consistent ability to generate revenue, and are still subject to many of the risks common to early-stage companies operating in the nicotine and non-nicotine delivery system products sector, including the uncertainty as to our ability to implement our business plan, market acceptance of business plan, under-capitalization, cash shortages, limitations with respect to personnel, financing and other resources and uncertainty of our ability to generate revenues. There is therefore a significant risk that our activities will not result in any material revenues or profit, and the likelihood of our business viability and long-term prospects must be considered in light of the stage of our development. There can be no assurance that we will be able to fulfill our stated business strategy and plans, or that financial, technological, market, or other limitations may force us to modify, alter, significantly delay, or significantly impede the implementation of such plans. We have insufficient results of operations in our current business model for investors to use to identify historical trends. Investors should consider our prospects considering the risk, expenses and difficulties we will encounter as an early-stage company. Our revenue and income potential is unproven and our business model is continually evolving. We are therefore subject to the risk that we will be unable to address these risks, and our inability to address these risks could lead to the failure of our business.

Moreover, the ENDS industry is relatively new and is rapidly evolving. Changes in existing laws, regulations and policies and the issuance of new laws, regulations, policies, and any other entry barriers in relation to the ENDS industry may materially and adversely affect our business operations. Bidi was among the many companies that received a MDO for its non-tobacco flavored BIDI<sup>®</sup> Sticks. On August 23, 2022, the U.S. Court of Appeals for the Eleventh Circuit set aside (i.e., vacated) the MDO issued to the non-tobacco flavored BIDI® Sticks and remanded Bidi's Premarket Tobacco Product Application ("PMTA") back to FDA for 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 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 the Company's 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 Agency 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 11th 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, we anticipate that Bidi will be able to continue marketing and selling the non-tobacco flavored BIDI® Sticks, subject to FDA's enforcement discretion, for the duration of the PMTA scientific review. 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. As none of these scenarios apply to Bidi, we believe the risk of FDA enforcement is low.

Separately, on or about May 13, 2022, FDA placed the tobacco-flavored Classic BIDI® Stick into the final Phase III scientific review.

***If Bidi's planned PMTA for the tobacco-derived nicotine-based formulation of the BIDI<sup>®</sup> Pouch is not submitted to or authorized by the FDA, we will not be able to sell the BIDI<sup>®</sup> Pouch in the United States*.** We are currently planning to initiate distribution of the BIDI<sup>®</sup> Pouch initially outside the United States. Bidi is also planning to submit a PMTA for a BIDI<sup>®</sup> Pouch manufactured using a tobacco-derived nicotine formula. The BIDI<sup>®</sup> Pouch cannot be distributed in the United States unless the PMTA is authorized.

***If it is determined or perceived that the usage of ENDS products poses long-term health risks, the use of ENDS products may decline significantly, which may materially and adversely affect our business, financial condition, and results of operations.*** Negative publicity on the health consequences of ENDS products or other similar devices may also adversely affect the usage of ENDS products. For example, the FDA and the United States Centers for Disease Control and Prevention ("CDC") issued a joint statement on August 30, 2019, linking a number of cases of respiratory illnesses to ENDS product use. On November 8, 2019, the CDC announced that it had preliminarily linked cases of severe respiratory illness to the presence of Vitamin E acetate, which was found in certain Tetrahydrocannabinol (THC)-containing ENDS cartridges for non-electronic nicotine delivery systems (non-ENDS) products that may have been obtained illegally. However, evidence is not sufficient to rule out the contribution of other chemicals of concern, including chemicals in either THC or non-THC products. In January 2020, after further research, the FDA and CDC recommended against the use of THC-containing ENDS products, especially those from unofficial sources, and that the underage, pregnant women and adults who do not currently use tobacco products should not start using ENDS products. On February 25, 2020, the CDC issued a final update, stating that the number of cases of severe respiratory illnesses had declined to single digits as of February 9, 2020. The CDC also reconfirmed that (i) Vitamin E acetate, which was found in some THC-containing ENDS cartridges for non-ENDS ENDS products that were mostly obtained illegally, was strongly linked to and indicated to be the primary cause of the severe respiratory illnesses, and (ii) THC-containing ENDS products from informal sources were linked to most cases of severe respiratory illnesses. Furthermore, there have been recent claims that users of ENDS products may suffer a greater risk of more serious COVID-19 complications. However, it remains unclear whether the exposure to toxic chemicals through ENDS product usage will increase the risk of COVID-19.

Research regarding the actual causes of these illnesses is still ongoing. If ENDS product usage is determined or perceived to pose long-term health risks or to be linked to illnesses, the usage of ENDS products may significantly decline, which would have a material adverse effect on our business, financial condition, and results of operations. Although we currently do not offer products containing THC, any perceived correlation between THC and Vitamin E acetate may adversely affect the public's perception of ENDS products in general, regardless of whether such products contain THC and/or Vitamin E.

***We may not be successful in maintaining the consumer brand recognition and loyalty of our Products and face intense competition and may fail to compete effectively.*** We compete in a market that relies on innovation and the ability to react to evolving consumer preferences and, thus, are subject to significant competition in the ENDS market, and larger tobacco industry and compete against companies in such market and industry that have access to significant resources in terms of technology, relationships with suppliers and distributors and access to cash flow and financial markets.

Consumer perceptions of the overall safety of tobacco and nicotine-based products is likely to continue to shift, and our success depends, in part, on our ability to anticipate these shifting tastes and the rapidity with which the markets in which we compete will evolve in response to these changes on a timely and affordable basis. If we are unable to respond effectively and efficiently to changing consumer preferences, the demand for our Products may decline, which could have a material adverse effect on our business, results of operations, and financial condition.

Regulations may be enacted in the future, particularly considering increasing restrictions on the form and content of marketing of tobacco products, that would make it more difficult to appeal to our consumers or to leverage existing recognition of the Bidi brand, or other brands that we own or license in the future. Furthermore, even if we can continue to distinguish our Products, there can be no assurance that the sales, marketing, and distribution efforts of our competitors will not be successful in persuading consumers of our Products to switch to their products. Many of our competitors have greater access to resources than we do, which better positions them to conduct market research in relation to branding strategies or to launch costly marketing campaigns. Any loss of consumer brand loyalty to our Products or reduction of our ability to effectively brand our Products in a recognizable way will have a material effect on our ability to continue to sell our Products and maintain our market share, which could have a material adverse effect on our business, results of operations, and financial condition.

The competitive environment and our competitive position are also significantly influenced by economic conditions, the state of consumer confidence, competitors' introduction of low-priced products or innovative products, higher taxes, higher absolute prices, and larger gaps between price categories and product regulation that diminishes the consumer's ability to differentiate tobacco products. Due to the impact of these factors, as well as higher state and local excise taxes and the market share of deep discount brands, the tobacco industry has become increasingly price competitive. As we seek to adapt to the price competitive environment, our competitors that are better capitalized may be able to sustain price discounts for long periods of time by spreading the loss across their expansive portfolios, with which we are not positioned to compete.

"Big tobacco" has also established its presence in the ENDS market and has begun to make investments in the alternative space. There can be no assurance that our Products will be able to compete successfully against these companies or any of our other competitors, some of which have far greater resources, capital, experience, market penetration, sales and distribution channels than do we.

***Our distribution efforts rely in part on our ability to leverage relationships with large retailers and national chains.*** Our distribution efforts rely in part on our ability to leverage relationships with large retailers and national chains to sell and promote our Products, which is dependent upon the strength of the Bidi brand name and, in the future, any brand names that we may own or license, and our salesforce effectiveness. To maintain these relationships, we must continue to supply products that will bring steady business to these retailers and national chains. We may not be able to sustain these relationships or establish other relationships with such entities, which could have a material adverse effect on our ability to execute our branding strategies, our ability to access the end-user markets with our Products, or our ability to maintain our relationships with the manufacturer and sub-distributors of our Products. For example, if we are unable to meet benchmarking provisions in certain of our contracts or if we are unable to maintain and leverage our retail relationships on a scale sufficient to make us an attractive distributor, it would have a material adverse effect on our ability to act as sole distributor for Bidi, and on our business, results of operations and financial condition.

In addition, there are factors beyond our control that may prevent us from leveraging existing relationships, such as industry consolidation. If we are unable to develop and sustain relationships with large retailers and national chains or are unable to leverage those relationships due to factors such as a decline in the role of brick-and-mortar retailers in the North American economy, our capacity to maintain and grow brand and product recognition and increase sales volume will be significantly undermined. In such an event, we may ultimately be forced to pursue and rely on local and more fragmented sales channels, which will have a material adverse effect on our business, results of operations and financial condition.

***Competition from illicit sources may have an adverse effect on our overall sales volume, restricting the ability to increase selling prices and damaging brand equity.*** Illicit trade and tobacco trafficking in the form of counterfeit products, smuggled genuine products, and locally manufactured products on which applicable taxes or regulatory requirements are evaded, represent a significant and growing threat to the legitimate tobacco industry. Factors such as increasing tax regimes, regulatory restrictions, and compliance requirements are encouraging more consumers to switch to illegal, cheaper tobacco-related products, and providing greater rewards for smugglers. Illicit trade can have an adverse effect on our overall sales volume, restrict the ability to increase selling prices, damage brand equity, and may lead to commoditization of our Products.

Although we combat counterfeiting of our Products by engaging in certain tactics, such as requiring all sales force personnel to randomly collect our Products from retailers in order to be tested by our quality control team, maintaining a quality control group that is responsible for identifying counterfeit products and surveillance of retailers we suspect are selling counterfeit Products through our own secret shopper force, no assurance can be given that we will be able to detect or stop sales of all counterfeit products. In addition, we have in the past and will continue to bring suits against retailers and distributors that sell certain counterfeit products. While we have been successful in securing financial recoveries from and helping to obtain criminal convictions of counterfeiters in the past, no assurance can be given that we will be successful in any such suits or that such suits will be successful in stopping other retailers or distributors from selling counterfeit products. Even if we are successful, such suits could consume a significant amount of management's time and could also result in significant expenses to us. Any failure to track and prevent counterfeiting of our Products could have a material adverse effect on our ability to maintain or effectively compete for our Products we distribute under the Bidi brand names, which would have a material adverse effect on our business, results of operations and financial condition.

***Our Products are regulated by the FDA, which has broad regulatory powers. Increases in tobacco-related taxes have been proposed or enacted and are likely to continue to be proposed or enacted in numerous jurisdictions.*** Tobacco products, premium cigarette papers, and tubes have long been subject to substantial federal, state, and local excise taxes. Such taxes have frequently been increased or proposed to be increased, in some cases significantly, to fund various legislative initiatives or further disincentivize tobacco usage. Since 1986, smokeless products have been subject to federal excise tax. Federally, smokeless products are taxed by weight (in pounds or fractional parts thereof) manufactured or imported. Any increases in tobacco-related taxes may materially adversely affect the demand for the Products.

***The market for ENDS products is subject to a great deal of uncertainty and is still evolving.*** ENDS products, having recently been introduced to market over the past 10 to 15 years, are at a relatively early stage of development, and represent core components of a market that is evolving rapidly, highly regulated, and characterized by a number of market participants. Rapid growth in the use of, and interest in, ENDS products is recent, and may not continue on a lasting basis. The demand and market acceptance for these products is subject to a high level of uncertainty. Therefore, we are subject to all the business risks associated with a new enterprise in an evolving market.

For example, ENDS products that are non-tobacco flavored continue to face the threat of prohibition at the local level, as many state and local authorities and attorneys general push for bans or request the FDA to deny a PMTA for flavored ENDS. To date, at least four states have banned the sale of flavored ENDS (e.g., New York, New Jersey, Rhode Island, and Massachusetts), with several more considering similar bans (e.g., Maryland, California, and Connecticut). As the September 9, 2021, PMTA review deadline has now passed, the FDA has implemented a de facto ban of flavored ENDS by denying over 93% of pending applications, while issuing zero marketing authorizations.

If flavors are ultimately prohibited to be sold by Bidi, because of the FDA's decision on the Section 10.75 review regarding the inclusion of the Arctic BIDI® Stick in the MDO, or otherwise, the use of ENDS products may decline significantly, which may materially and adversely affect our business, financial condition, and results of operations. Continued evolution, uncertainty, and the resulting increased risk of failure of our new and existing product offerings in this market could have a material adverse effect on our ability to build and maintain market share and on our business, results of operations and financial condition.

For more information, see Item 1. Business -- FDA PMTA Determinations, 11<sup>th</sup> Circuit Decision and Impact on Our Business.

***Some of our Product offerings through Bidi are subject to developing and unpredictable regulation.*** Our Products are sold through our distribution network and may be subject to uncertain and evolving federal, state, and local regulations, including hemp, non-THC cannabidiol (CBD) and other non-tobacco consumable products. Enforcement initiatives by those authorities are therefore unpredictable and impossible to anticipate. We anticipate that all levels of government, which have not already done so, are likely to seek in some way to regulate these products, but the type, timing, and impact of such regulations remains uncertain. These regulations include or could include restrictions including prohibitions on certain form factors, such as smokable hemp products, or age restrictions. On January 26, 2023, FDA announced that it would not initiate rulemaking to regulate CBD as a dietary food ingredient. Rather, after careful review, the FDA has concluded that a new regulatory pathway for CBD is needed that balances individuals' desire for access to CBD products with the regulatory oversight needed to manage risks. The FDA further indicated that it is prepared to work with Congress on this matter. Accordingly, we cannot give any assurance that such actions would not have a material adverse effect on this emerging business.

Significant increases in state and local regulation of our Products have been proposed or enacted and are likely to continue to be proposed or enacted in numerous jurisdictions. The PACT Act, which went into effect in June 2010, amended the Jenkins Act and initially only applied to the sales of cigarettes, roll-your-own tobacco, and smokeless tobacco. Specifically, the PACT Act regulates the sale, transfer, or shipment of these products for both business-to-business transactions as well as "delivery sales," which are defined as any sale of cigarettes, roll-your-own tobacco, or smokeless tobacco where the consumer orders the product remotely and prohibits such deliveries through the U.S. Postal Service ("USPS"), except in certain circumstances (*e.g.,* business-to-business deliveries).

Under the enactment of the Preventing Online Sales of E-Cigarettes to Children Act (part of the larger 2021 Consolidated Appropriations Act), effective March 27, 2021, the definition of "cigarettes" in the PACT Act was amended to include ENDS, which is defined as "any electronic device that, through an aerosolized solution, delivers nicotine, flavor, or any other substance to the user inhaling from the device," including "an e-cigarette; an e-hookah; an e-cigar; a vape pen; an advanced refillable personal vaporizer; an electronic pipe; and any component, liquid, part, or accessory of a device described above, without regard to whether the component, liquid, part, or accessory is sold separately from the device." As such, delivery sales of the BIDI<sup>®</sup> Stick are subject to the PACT Act.

The PACT Act requires all sellers to register with the ATF, as well as the tobacco tax administrators of the states into which a shipment is made or in which an advertisement or offer is disseminated. Delivery sellers who ship cigarettes (including ENDS) or smokeless tobacco to consumers are further required to label packages as containing tobacco, verify the age, and identity of the customer at purchase, use a delivery method (other than through the USPS) that checks ID and obtains adult customer signature at delivery, and maintain records of delivery sales for a period of four years after the date of sale, among other things. Delivery sellers are also required to file a monthly report with the state tobacco tax administrator and any other local or tribal entity that taxes the sale of the products. Such reports must include the name and address of the persons delivering and receiving the shipment and the brand and quantity of the "cigarettes" that were shipped. These requirements apply to all sales, including sales to consumers and sales between businesses.

In addition to the de facto FDA flavor ban that has resulted from the denial of nearly all PMTAs for flavored ENDS, ENDS products that are non-tobacco flavored continue to face the threat of prohibition at the local level, as many state and local authorities and attorneys general push for bans or request the FDA to deny PMTAs for flavored ENDS. To date, at least four states have banned the sale of flavored ENDS (e.g., New York, New Jersey, Rhode Island, and Massachusetts), with several more considering similar bans (e.g., Maryland, California, and Connecticut).

***Our supply to our wholesalers and retailers is dependent on the demands of their customers who are sensitive to increased sales taxes and economic conditions affecting their disposable income.*** Consumer purchases of tobacco products are historically affected by economic conditions, such as changes in employment, salary and wage levels, the availability of consumer credit, inflation, interest rates, fuel prices, sales taxes, and the level of consumer confidence in prevailing and future economic conditions. Discretionary consumer purchases, such as the BIDI<sup>®</sup> Stick, may decline during recessionary periods or at other times when disposable income is lower, and taxes may be higher.

***We may be subject to increasing international control and regulation.*** The FCTC is the first international public health treaty that establishes a global agenda to reduce initiation of tobacco use and regulate tobacco to encourage tobacco cessation. Over 170 governments worldwide have ratified the FCTC. The FCTC has led to increased efforts to reduce the supply and demand of tobacco products and to encourage governments to further regulate the tobacco industry. The tobacco industry expects significant regulatory developments to take place over the next few years, driven principally by the FCTC. Regulatory initiatives that have been proposed, introduced or enacted include:

● the levying of substantial and increasing tax and duty charges;

● restrictions or bans on advertising, marketing and sponsorship;

● the display of larger health warnings, graphic health warnings and other labeling requirements;

● restrictions on packaging design, including the use of colors and generic packaging;

● restrictions or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines;

● requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituents levels;

● requirements regarding testing, disclosure and use of tobacco product ingredients;

● increased restrictions on smoking in public and workplaces and, in some instances, in private places and outdoors;

● elimination of duty-free allowances for travelers; and

● encouraging litigation against tobacco companies.

***Our business may be damaged by events outside of our own or Bidi's control, such as the impact of epidemics (e.g., COVID-19), political changes, or natural disasters. COVID-19 could adversely impact our business, including several key activities that are critical to our success.*** The global outbreak of COVID-19 and variants of the virus continues to rapidly evolve. While business interruption due to COVID-19 began to abate during 2022, global businesses have continued to be subject to intermittent closures and countries around the world have continued to sporadically limit travel. The extent to which COVID-19 may impact our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate impact of the disease on specific geographies, the duration of the outbreak, travel restrictions and social distancing in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the disease.

The spread of COVID-19 throughout the world has also created global economic uncertainty, which may cause partners, suppliers, and potential customers to closely monitor their costs and reduce their spending budget. Either of the foregoing could materially adversely affect our research and development activities, clinical trials, supply chain, financial condition and cash flows.

If the COVID-19 outbreak continues to spread, we may need to limit operations or implement other limitations on our activities. There is a risk that other countries or regions may be less effective at containing COVID-19, in which case the risks described herein could be elevated significantly.

***Reliance on information technology means a significant disruption could affect our communications and operations.*** We increasingly rely on information technology systems for our internal communications, controls, reporting and relations with customers and suppliers, and information technology is becoming a significantly important tool for our sales staff. In addition, our reliance on information technology exposes us to cyber-security risks, which could have a material adverse effect on our ability to compete. Security and privacy breaches may expose us to liability and cause us to lose customers or may disrupt our relationships and ongoing transactions with other entities with whom we contract throughout our network. The failure of our information systems to function as intended, or the penetration by outside parties' intent on disrupting business processes, could result in significant costs, loss of revenue, assets or personal or other sensitive data and reputational harm.

***Security and privacy breaches may expose us to liability and cause us to lose customers.*** Federal and state laws require us to safeguard our wholesalers', retailers', and consumers' financial information, including credit information. Although we have established security procedures to protect against identity theft and the theft of our customers' financial information, our security and testing measures may not prevent security breaches. We cannot guarantee that a future breach will not result in material liability or otherwise harm our business. In the event of any such breach, we may be required to notify governmental authorities or consumers under breach disclosure laws, indemnify consumers, or other third parties for losses resulting from the breach, and expend resources investigating and remediating any vulnerabilities that contributed to the occurrence of the breach. We rely on third-party technology to safeguard the security of sensitive information in our possession. Advances in computer capabilities, new discoveries in the field of cryptography, inadequate facility security or other developments may result in a compromise or breach of the technology used by us to protect customer data. Any compromise of our security, even a security breach that does not result in a material liability could harm our reputation and, therefore, our business and financial condition. In addition, a party who can circumvent our security measures or exploit inadequacies in our security measures, could, among other effects, misappropriate proprietary information, cause interruptions in our operations or expose customers and other entities with which we interact to computer viruses or other disruptions. Actual or perceived vulnerabilities may lead to claims against us. Any insurance coverage that we obtain to cover such risks may be insufficient to cover all claims or losses. To the extent the measures we have taken prove to be insufficient or inadequate, we may become subject to litigation or administrative sanctions, which could result in significant fines, penalties or damages and harm to our reputation.

***We may fail to manage our growth.*** We have grown significantly in a short amount of time and intend to continue to grow in the future. However, any future growth will place additional demands on our resources, and we cannot be sure we will be able to manage our growth effectively. If we are unable to manage our growth while expanding the distribution of our Products and increasing profit margins, or if new systems that we implement to assist in managing our growth do not produce the expected benefits, our business, financial position, results of operations and cash flows could be adversely affected. We may not be able to support, financially or otherwise, future growth, or hire, train, motivate and manage the required personnel. Our failure to manage growth effectively could also limit our ability to achieve our goals as they relate to streamlined sales, marketing and distribution operations and the ability to achieve certain financial metrics.

***We are subject to fluctuations in our results that make it difficult to track trends and develop strategies in the short term.*** In response to competitor actions and pricing pressures, we have engaged in significant use of promotional and sales incentives. We regularly review the results of our promotional spending activities and adjust our promotional spending programs to maintain our competitive position as well as to confirm compliance with our adult-focused marketing policies. Accordingly, unit sales volume and sales promotion costs in any period are not necessarily indicative of sales and costs that may be realized in subsequent periods. Additionally, promotional activity significantly increases net sales in the month in which it is initiated, and net sales are adversely impacted in the month after a promotion. Accordingly, based upon the timing of our marketing and promotional initiatives, we have and may continue to experience significant variability in our results, which could affect our ability to formulate strategies that allow us to maintain our market presence across volatile periods. If our fluctuations obscure our ability to track important trends in our key markets, it may have a material adverse effect on our business, results of operations and financial condition.

***Adverse U.S. and global economic conditions could negatively impact our business, prospects, results of operations, financial condition or cash flows.*** Our business and operations are sensitive to global economic conditions. These conditions include interest rates, energy costs, inflation, recession, fluctuations in debt and equity capital markets, and the general condition of the United States and world economies, including as a result of the effect of the COVID-19 pandemic. A material decline in the economic conditions affecting consumers, which cause a reduction in disposable income for the average consumer, may change consumption patterns, and may result in a reduction in spending on our Product offerings or a switch to cheaper products or products obtained through illicit channels. As such, demand for our Products may be particularly sensitive to economic conditions such as inflation, recession, high energy costs, unemployment, changes in interest rates and money supply, changes in the political environment, the ultimate effect on the economy of the COVID-19 pandemic and other factors beyond our control, any combination of which could result in a material adverse effect on our business, results of operations, and financial condition.

***The departure of key management personnel and the failure to attract and retain talent could adversely affect our operations.*** Our success depends upon the continued contributions of our senior management, especially our President and Chief Operating Officer, Eric Mosser, and our Chief Science & Regulatory Officer, Nirajkumar Patel. If one or more of our executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all. Additionally, we may incur additional expenses to recruit and retain new executive officers. If any of our executive officers join a competitor or forms a competing company, we may lose some or all of our customers. Finally, we do not maintain "key person" life insurance on any of our executive officers. Because of these factors, the loss of the services of any of these key persons could adversely affect our business, financial condition, and results of operations.

***Our insurance may be insufficient to cover losses that may occur as a result of our operations.*** We currently maintain directors' and officers' liability insurance and property and general liability insurance. This insurance or other insurance we may elect to obtain may not be or remain available to us or be obtainable by us at commercially reasonable rates, and the amount of our coverage may not be adequate to cover any liability we incur. Future increases in insurance costs, coupled with the increase in deductibles, will result in higher operating costs and increased risk. If we were to incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, or if we were to incur such liability at a time when we were not able to obtain liability insurance, our business, results of operations and financial condition could be materially adversely affected.

**Risks Related to our Securities**

***Our Restated Certificate of Incorporation, as amended (our "Certificate of Incorporation"), and our Bylaws (our "Bylaws"), as well as the DGCL and certain regulations, could discourage or prohibit acquisition bids or merger proposals, which may adversely affect the market price of our Common Stock.*** Provisions of our Certificate of Incorporation and Bylaws and the DGCL may discourage, delay or prevent a merger, acquisition, or other change in control that stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares of our Common Stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management.

In addition, Section 203 of the DGCL prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, which generally refers to a person which together with its affiliates owns, or within the last three years has owned, 15 percent or more of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.

The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of Common Stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that our stockholders could receive a premium for their Common Stock in an acquisition.

***Future offerings of debt or equity securities may rank senior to our Common Stock.*** We may seek to raise new funding from time to time through the issuance of debt or equity securities. Our Board of Directors has the ability, without further approval of our stockholders, to issue debt or equity securities in the future ranking senior to our Common Stock or otherwise incur additional indebtedness, it is possible that these securities or indebtedness will be governed by an indenture or other instrument containing covenants restricting our operating flexibility and limiting our ability to pay dividends to stockholders. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences, and privileges, including with respect to dividends, more favorable than those of our Common Stock and may result in dilution (perhaps significant) to our stockholders. Because our decision to issue debt or equity securities in any future offering or otherwise incur indebtedness will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, or nature of our future offerings or financings, any of which could reduce the market price of our Common Stock and dilute its value.

***Raising additional capital may cause dilution to our existing stockholders, restrict our operations, or require us to relinquish rights to our technologies, if any, or Products.*** We may seek additional capital through a combination of private and public equity offerings, debt financings, strategic partnerships, and alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, existing ownership interests will be diluted, and the terms of such financings may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financing may be coupled with an equity component, such as warrants to purchase shares, which could also result in dilution of our existing stockholders' ownership. The incurrence of indebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights, and other operating restrictions that could adversely impact our ability to conduct our business and may result in liens being placed on our assets and intellectual property. If we were to default on such indebtedness, we could lose such assets and intellectual property. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our Products or grant licenses on terms that are not favorable to us.

***We may issue preferred stock whose terms could adversely affect the voting power or value of our Common Stock.*** Our Certificate of Incorporation authorizes us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designations, preferences, limitations, and relative rights, including preferences over our Common Stock respecting dividends and distributions, as our Board may determine. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our Common Stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or dividend or liquidation preferences we might assign to holders of preferred stock could affect the residual value of our Common Stock.

***The market prices for our Common Stock are volatile and will fluctuate.*** The market price for shares of our Common Stock may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond our control, including the following: (i) actual or anticipated fluctuations in our quarterly financial results; (ii) recommendations by securities research analysts; (iii) changes in the economic performance or market valuations of other issuers that investors deem comparable to ours; (iv) addition or departure of our executive officers or members of our Board and other key personnel; (v) release or expiration of lock-up or other transfer restrictions on outstanding shares of Common Stock; (vi) sales or perceived sales of additional shares of our Common Stock; (vii) liquidity of our Common Stock; (viii) significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or involving us or our competitors; and (ix) news reports relating to trends, concerns, technological or competitive developments, regulatory changes, and other related issues in our industry or target markets. Financial markets often experience significant price and volume fluctuations that affect the market prices of equity securities of public entities and that are, in many cases, unrelated to the operating performance, underlying asset values or prospects of such entities. Accordingly, the market price of our shares of Common Stock may decline even if our operating results, underlying asset values or prospects have not changed.

***Our Common Stock is listed on the Nasdaq Capital Market ("Nasdaq") but there can be no assurance that we will be able to comply with the continued listing standards of Nasdaq in the future.*** We cannot assure you that we will be able to comply with the standards that we are required to meet in order to maintain a listing of our Common Stock on Nasdaq in the future. Nasdaq listing rules require us to maintain certain closing bid price, stockholders' equity, and other financial metric criteria, as well as certain corporate governance requirements, for our Common Stock to continue trading on Nasdaq. If we fail to comply with the continued listing standards, our Common Stock could be delisted. We have been subject to Nasdaq listing deficiency issues in the past on January 26, 2022, Nasdaq notified the Company that it was not in compliance with the requirement to maintain a minimum closing bid price of $1.00 per share, as set forth in Nasdaq Listing Rule 5550(a)(2), because the closing bid price of the Company's common stock (the "Common Stock") was below $1.00 per share for 30 consecutive business days. While this listing deficiency was cured during 2022, we may become subject to potential delisting if the price of our Common Stock again falls below $1.00, or for other reasons. A failure to maintain listing on Nasdaq could have a material adverse effect on the liquidity and price of the Common Stock

***Future sales of shares of our Common Stock by our controlling shareholder H or by our officers and directors may negatively impact the market price for our Common Stock.*** Subject to compliance with applicable securities laws, our controlling shareholder KH as well as our directors and officers and their affiliates may sell some or all of their shares of our Common Stock in the future. No prediction can be made as to the effect, if any, such future sales of shares of our Common Stock may have on the market price of the shares of our Common Stock prevailing from time to time. However, the future sale of a substantial number of shares of our Common Stock by our directors and officers and their affiliates, or the perception that such sales could occur, could adversely affect prevailing market prices for our shares of our Common Stock.

***The concentration of ownership among our officers, directors, and principal stockholders may prevent other stockholders from influencing significant corporate decisions and depress our stock price.*** Based on the number of shares outstanding as of January 27, 2023, our officers, directors, and stockholders who hold at least 5% of our stock beneficially own a combined total of approximately 77.1% percent of our outstanding Common Stock, including shares of our Common Stock subject to stock options that are currently exercisable or are exercisable and that vest within 60 days after January 27, 2023. If these officers, directors, and principal stockholders or a group of our principal stockholders act together, they will be able to exert a significant degree of influence over our management and affairs and control matters requiring stockholder approval, including the election of directors and approval of mergers, business combinations, or other significant transactions. The interests of one or more of these stockholders may not always coincide with our interests or the interests of other stockholders. For instance, officers, directors, and principal stockholders, acting together, could cause us to enter into transactions or agreements that we would not otherwise consider. Similarly, this concentration of ownership may have the effect of delaying or preventing a change in control of our company otherwise favored by our other stockholders. This, in turn, could have a negative effect on the market price of our Common Stock. It could also prevent our stockholders from realizing a premium over the market price for their shares of our Common Stock. The concentration of ownership also may contribute to the low trading volume and volatility of our Common Stock.

***Our Common Stock may become the target of a "short squeeze."*** Beginning in 2021, the securities of several companies have increasingly experienced significant and extreme volatility in stock price due to short sellers of shares of common stock and buy-and-hold decisions of longer investors, resulting in what is sometimes described as a "short squeeze." Short squeezes have caused extreme volatility in those companies and in the market and have led to the price per share of those companies trading at a significantly inflated rate that is disconnected from the underlying value of the company. Sharp rises in a company's stock price may force traders in a short position to buy the stock to avoid even greater losses. Many investors who have purchased shares in those companies at an inflated rate face the risk of losing a significant portion of their original investment as the price per share has declined steadily as interest in those stocks has abated. We may be a target of a short squeeze, and investors may lose a significant portion or all their investment if they purchase our shares at a rate that is significantly disconnected from our underlying value.

***If securities or industry analysts fail to continue publishing research about our business, if they change their recommendations adversely or if our results of operations do not meet their expectations, our stock price and trading volume could decline.*** The trading market for our Common Stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. In addition, it is likely that in some future period our operating results will be below the expectations of securities analysts or investors. If one or more of the analysts who cover us downgrade our Common Stock, or if our results of operations do not meet their expectations, our stock price could decline.

***We do not currently pay dividends on our shares of our Common Stock and have no intention of paying dividends on shares of our Common Stock for the foreseeable future.*** No dividends on the shares of our Common Stock have been paid by us to date. We do not intend to declare or pay any cash dividends in the foreseeable future. Payment of any future dividends will be at the discretion of our Board, after considering a multitude of factors appropriate in the circumstances, including our operating results, financial condition, and current and anticipated cash needs. In addition, the terms of any future debt or credit facility may preclude us from paying any dividends unless certain consents are obtained, and certain conditions are met. There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend. Unless our Board decides to pay dividends, our stockholders will be required to look at appreciation of our Common Stock to realize a gain on their investment. There can be no assurance that this appreciation will occur.

***For as long as we are an "emerging growth company" we intend to take advantage of reduced disclosure and governance requirements applicable to emerging growth companies, which could result in our Common Stock being less attractive to investors and could make it more difficult for us to raise capital as and when we need it.*** We are an "emerging growth company," as defined in the JOBS Act, and we have taken advantage, and intend to continue to take advantage, of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

Investors may find our Common Stock less attractive because we rely on these exemptions, which could contribute to a less active trading market for our Common Stock or volatility in our share price. In addition, we may be less attractive to investors, and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.

We may take advantage of these reporting exemptions until we are no longer an emerging growth company.

***We have identified material weaknesses in our system of internal controls over financial reporting and, if we cannot remediate these material weaknesses, we may not be able to accurately report our financial condition, results of operations, or cash flows, which may adversely affect investor confidence in us and, as a result, the value of our Common Stock.*** A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting that results in more than a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. Section 404 of Sarbanes-Oxley also generally requires an attestation from our independent registered public accounting firm on the effectiveness of our system of internal controls over financial reporting. However, if we remain an emerging growth company as defined in the JOBS Act, we intend to take advantage of the exemption permitting us not to comply with the independent registered public accounting firm attestation requirement.

Our management has identified, and we have disclosed, certain material weaknesses in our system of internal controls over financial reporting as of our fiscal year ended October 31, 2022. Specifically, our management has found that our internal control system over financial reporting was ineffective as of October 31, 2022, based on a determination that there was a lack of sufficient resources to provide adequate segregation of duties consistent with control objectives, the lack of sufficient and consistent real time remote communications, and the lack of a fully developed formal review process that includes multiple levels of review over financial disclosure and reporting processes.

To address these material weaknesses, and subject to the receipt of additional financing or cash flows, we have undertaken, and intend to continue to undertake, remediation measures to address such material weaknesses, including implementing prevent and detect internal control procedures pursuant to which we can ensure segregation of duties and hire additional resources to ensure appropriate review and oversight.

Our compliance with Section 404 of Sarbanes-Oxley will require that we incur substantial accounting expenses and spend significant management efforts. We may not be able to complete our evaluation, testing, and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our system of internal control over financial reporting is effective. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, results of operations, or cash flows. This may expose us, including individual executives, to potential liability which could significantly affect our business.

We cannot assure you that we will, in the future, identify areas requiring improvement in our system of internal controls over financial reporting. We cannot assure you that the measures we will take to remediate any areas in need of improvement will be successful or that we will implement and maintain adequate controls over our financial process and reporting in the future as we continue to grow. If we are unable to establish appropriate internal financial reporting controls and procedures, if we are unable to conclude that our system of internal controls over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our system of internal controls over financial reporting once that firm begins its audits of our systems of internal controls over financial reporting, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, cause investors to lose confidence in the accuracy and completeness of our financial reports, the market price of our common shares could decline, and we could be subject to sanctions or investigations by Nasdaq, the SEC, or other regulatory authorities. Failure to remedy any material weakness in our system of internal controls over financial reporting, or to implement or maintain other effective internal control systems required of public companies, could also restrict our future access to the capital markets.

***Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.*** Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management, recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. As of October 31, 2022, our President and Chief Operating Officer and our Interim Chief Financial Officer concluded that the disclosure controls and procedures were not effective as of such date due to material weaknesses in internal controls identified above.

These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our internal controls system, misstatements, or insufficient disclosures due to error or fraud may occur and not be detected.

***We have incurred, and will continue to incur, increased costs as a result of operating as a public company, and our management has been required, and will continue to be required, to devote substantial time to new compliance initiatives.*** As a public company, we have incurred and are continuing to incur significant legal, accounting, and other expenses and these expenses may increase even more after we are no longer an "emerging growth company" and "smaller reporting company." We are subject to the reporting requirements of the Exchange Act and the rules adopted, and to be adopted, by the SEC. Our management and other personnel devote a substantial amount of time to these compliance initiatives.

Moreover, these rules and regulations have substantially increased our legal and financial compliance costs and made some activities more time-consuming and costly. The increased costs can result in our reporting a net loss. These rules and regulations may make it more difficult and more expensive for us to maintain sufficient directors' and officers' liability insurance coverage. We cannot predict or estimate the amount or timing of additional costs we may continue to incur to respond to these requirements. The ongoing impact of these requirements could also make it more difficult for us to attract and retain qualified people to serve on our Board, our Board committees, or as executive officers.

**Item 1B. Unresolved Staff Comments.**

None.

**Item 2. Properties.**

On August 1, 2020, we began leasing office space consisting of 1,595 square feet as our main corporate office in Grant, Florida for $1,000 per month. The five-year lease agreement is with a related party, Just Pick, LLC ("Just Pick"). Nirajkumar Patel, our Chief Science and Regulatory Officer and director, is also an officer of Just Pick. We believe our office space is sufficient to meet our current needs.

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 payments on this lease in the 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 payments on this lease in the amount of $19.108. This lease was terminated in April 2022.

On June 10, 2022, we entered into a Lease Agreement (the "2022 Lease") with Just Pick, LLC (a related party) 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. Just Pick, LLC is considered a related party as it is owned controlled by our Chief Science and Regulatory Officer and director, Nirajkumar Patel. We believe our office space is sufficient to meet our current needs. We must pay the Just Pick lease base rent equal to $17,776.67 per month during the first year of the lease term. 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<sup>th</sup>) of the market annual rent for the seventh through eleventh years, if appliable. In addition to the base rent, we must pay Just Pick one hundred percent (100%) of operating expenses, insurance costs, and taxes for each calendar year during the lease term.

**Item 3. Legal Proceedings.**

From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not currently involved in legal proceedings that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition, or results of operations. To the best of our knowledge, no adverse legal activity is anticipated or threatened.

While we are not a party to the legal or regulatory proceedings involving Bidi described in Item 1 – Business – FDA PMTA Determinations, 11<sup>th</sup> Circuit Decision and Impact on Our Business, the outcome of those or related proceedings could have a material adverse or positive impact on our ability to operate our business given our reliance on Bidi.

**Item 4. Mine Safety Disclosures.**

Not applicable.

**PART II**

**Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.**

**Market Information**

On July 20, 2021, our Common Stock began trading on the Nasdaq Capital Market under the trading symbol "KAVL." On January 27, 2023, the last reported sales price of our Common Stock was $0.82.

**Holders**

As of January 27, 2023, we had 56,169,090 shares of Common Stock issued and outstanding and no shares of Series A Preferred Stock issued and outstanding. As of January 27, 2023, we had approximately 7,400 record holders of our Common Stock.

**Dividends**

We have not paid any dividends to our stockholders and do not intend to pay cash dividends on our Common Stock for the foreseeable future. Any future determination related to the Company's dividend policy will be made at the discretion of our Board. Also, there are no restrictions which would limit our ability to pay dividends on common stock.

**Recent Sales of Unregistered Securities; Uses of Proceeds from Registered Securities**

***Common Stock Issued***

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 56,169,090 shares of Common Stock issued and outstanding as of October 31, 2022, as compared to 30,195,312 shares of the Common Stock issued and outstanding as of October 31, 2021.

During the fiscal year ended October 31, 2022, stockholders of the Company exercised warrants to purchase 855,605 shares of the Company's common stock for net proceeds of $1,625,650.

During the fiscal year ended October 31, 2022, the Company issued 123,256 shares of Common Stock with the fair value of $172,379 to employees for services RSUs that were settled with common shares. Of the shares issued to employees, 44,720 shares were withheld by the Company to satisfy tax withholding obligations equal to $59,862.

During the fiscal year ended October 31, 2022, 12,963 shares of our Common Stock were issued to an individual as compensation for Consulting services rendered to us. We issued the shares in reliance on the exemption from registration pursuant to Section 4(a)(2) of the Securities Act (in that the issuance of shares of our Common Stock did not involve any public offering).

During the fiscal year ended October 31, 2022, 15,351 shares of our Common Stock were issued to QuikfillRx, LLC as compensation for marketing and promotion services rendered to us. We issued the shares in reliance on the exemption from registration pursuant to Section 4(a)(2) of the Securities Act (in that the issuance of shares of our Common Stock did not involve any public offering).

During the fiscal year ended October 31, 2022, 11,323 shares of our Common Stock were issued to an individual as compensation for professional legal services rendered to us. We issued the shares in reliance on the exemption from registration pursuant to Section 4(a)(2) of the Securities Act (in that the issuance of shares of our Common Stock did not involve any public offering).

During the fiscal year ended, October 31, 2022, all 3,000,000 shares of Series A Preferred Stock were converted into shares of Common Stock by Kaival Holdings, LLC, a related party. 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 or outstanding as of October 31, 2022.

In September 2021, the Company completed a firm commitment underwritten offering, which offering was made pursuant to its Registration Statement on Form S3 (File No. 333-258339) (the "Registration Statement"). The Securities and Exchange Commission (the "SEC") declared the Registration Statement effective on August 10, 2021. The Company sold 4,700,000 million shares of our Common Stock and warrants, with an exercise price of $1.90 per share and an expiration of five years, to purchase an additional 3,525,000 shares of its Common Stock. The Company sold each share of its Common Stock and warrants to purchase 0.75shares of its Common Stock at a combined public offering price of $1.70. The Company also granted the underwriter the option to purchase an additional 705,000 shares of its Common Stock and warrants to purchase an additional 528,750 shares of its Common Stock. As of October 31, 2021, the Company had received net proceeds from the offering of approximately $8,305,772, net of offering cost. The Company had also received approximately $1,665,113 from the exercise of 879,828 warrants.

During the year ended October 31, 2021, 674,803 shares of Common Stock were issued to 8 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 grant dates to compute an aggregate fair market value total of $8,944,100, of which 308,333 shares and $1,597,667 compensation is related to shares issued to Inflection Partners.

**Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.**

*This 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 audited Financial Statements and notes thereto for the year ended October 31, 2022, included under Item 8 – Financial Statements and Supplementary Data in this 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 Report regarding forward-looking statements.*

 

We are focused on growing and incubating innovative and profitable products into mature, dominant brands, with a current focus on the distribution of electronic nicotine delivery systems ("ENDS"), also known as "e-cigarettes". Our business plan is to diversify into distributing other delivery system products.

Our principal business activity is presently focused around our A&R Distribution Agreement with Bidi, pursuant to which Bidi granted us an exclusive worldwide right to distribute Bidi's ENDS as well as non-electronic nicotine delivery systems and related components for sale and resale to both retail level customers and non-retail level customers. Currently, such products consist solely of the "***BIDI<sup>®</sup> Stick***", Bidi's disposable, tamper resistant ENDS product made with medical-grade components, a UL-certified battery and technology designed to deliver a consistent vaping experience for adult smokers 21 and over. We presently distribute products to wholesalers and retailers of ENDS products, having ceased all direct-to-consumer sales in February 2021.

**Potential Impact of COVID-19**

In March 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.

We were indirectly impacted by supply chain issues and regulatory oversight in the fiscal year 2022. We believe that many retailers and distributers relaxed their 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 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.

**FDA PMTA Determinations, 11<sup>th</sup> Circuit Decision and Impact on Our Business**

As the principal manufacturer of the products we distribute, Bidi's interactions with FDA and related legal proceedings are of significant importance to our business. Please see Item 1 – Business – FDA PMTA Determinations, 11<sup>th</sup> Circuit Decision and Impact on Our Business for information on this important topic.

**Phillip Morris License Agreement**

On June 13, 2022, we, through our wholly owned subsidiary, KBI, entered into the PMI License Agreement with PMPSA, a wholly owned affiliate of PMI, for the development and distribution of ENDS products in certain markets outside of the United States, subject to market (or regulatory assessment). The PMI License Agreement grants to PMPSA a license of certain intellectual property rights relating to Bidi's ENDS device, known as the BIDI® Stick in the United States, as well as potentially newly developed devices, to permit PMPSA to manufacture, promote, sell, and distribute such ENDS device and newly developed devices, in international markets, outside of the United States.

On July 25, 2022, we announced the launch of PMPSA's custom-branded self-contained e-vapor product, pursuant to the licensing agreement. The product, a self-contained e-vapor device, VEEBA, has been custom developed and is now being distributed in Canada and in the United Kingdom, with additional market launches planned this fiscal year.

**Reverse Stock Split**

We effected the 1-for-12 Reverse Stock Split of our Common Stock on July 20, 2021. As a result of the Reverse Stock Split, every twelve (12) shares of our pre-Reverse Stock Split Common Stock were combined and reclassed into one share of our Common Stock. 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 were rounded up to the nearest whole number. In connection with the Reverse Stock Split, 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 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.

**Going Concern**

Our financial statements are prepared in accordance with U.S. GAAP applicable to a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date the consolidated financial statements are issued.

In accordance with Financial Accounting Standards Board (the "FASB"), Accounting Standards Update ("ASU") No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40), our management evaluates whether there are conditions or events, considered in aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. As shown in the accompanying consolidated financial statements, the Company has incurred significant recurring losses and negative cash flows from operations. These factors raised substantial doubt about our ability to continue as a going concern.

In response to the above, we assessed our management's plans to alleviate that doubt. We had positive working capital as of October 31, 2022 of $7.5 million. We considered that our losses and negative cash flows were due to various factors such as: (i) uncertainty surrounding the PMTA process with FDA and (ii) the MDO that was issued to Bidi Vapor on its flavored ENDS product. However, the MDO was set aside and remanded by the 11<sup>th</sup> Circuit and the ability to appeal such decision has passed thereby facilitating the advancement of the flavored BIDI® Sticks for sale in the United States (pending FDA's review of the flavored PMTAs). Concurrently, the PMTA of the tobacco-flavored (Classic) BIDI® Sticks for sale in the United States continues to move through scientific review (pending FDA's review of that PMTA). 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.

We believe that our available cash and the cash to be provided by future operating activities should enable us to meet our estimated liquidity needs for the next 12 months after the date that the financial statements are issued. Because of the above factors, we believe that this alleviates the substantial doubt in connection with our ability to continue as a going concern.

However, there is no assurance that our plans will be achieve their desired results due to the current economic climate in the United States and globally. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties.

**Liquidity and Capital Resources**

We believe we have sufficient cash on hand as of January 20, 2023. We had been awaiting the outcome of Bidi's merit-based case pending in the Eleventh Circuit Court of Appeals with respect to the MDO issued by the FDA in September 2021. The Eleventh Circuit Court of Appeals finally ruled in favor of Bidi on August 23, 2022, so our business and financial condition will not be materially adversely affected, including our ability to generate increased revenues from sales of all Bidi stick flavors and our liquidity in Fiscal year ("FY") 2023 and likely FY 2024 and beyond. Bidi's scientific study has now gone into review by the FDA, which can take a considerable length of time, in which period allows us to market and sell. Other than the ongoing PMTA reviews, we have no known current demands or commitments and are not aware of any events or uncertainties as of October 31, 2022 that will result in or that are reasonably likely to materially increase or decrease our current requirements for cash and resulting improved liquidity.

As of October 31, 2022, we had working capital of approximately $7.5 million and total cash of approximately $3.7 million.

We intend to generally rely on cash from operations and equity and debt offerings to the extent necessary and available, to satisfy our liquidity needs. There are several factors that could result in the need to raise additional funds, including a decline in revenue or a lack of anticipated sales growth and increased costs. Our efforts are directed toward generating positive cash flow and profitability. If these efforts are not successful, we may need to raise additional capital. Should capital not be available to us at reasonable terms, other actions may become necessary in addition to cost control measures and continued efforts to increase sales. These actions may include exploring strategic options for the sale of the Company, the creation of joint ventures or strategic alliances under which we will pursue business opportunities, or other alternatives.

We believe we have the financial resources to weather any short-term impacts of COVID-19; however, we are unable to presently estimate any potential future impacts from COVID-19 and an extended impact could have a material and adverse effect on our sales, earnings, and liquidity. The Company was indirectly impacted by supply chain issues and regulatory oversight. In FY 22 , the Company believes that many retailers and distributers relaxed their 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 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.

We had also been impacted by Bidi's receipt of a MDO from the FDA. However, in the fiscal fourth quarter of FY 2022 that MDO was eliminated for Bidi by the Eleven Circuit Court of Appeals decision. For additional information regarding the impact to our revenues during the last fiscal quarter of fiscal year 2022, please see the section entitled "Revenues" below. At this time, we do not foresee the need for further strategic financing for the next twelve months, given the financing we completed in September 2021, as indicated below, other working capital financing that will be available to us in FY 2022 and our continual and increasing sales efforts and results.

In September 2021, we completed a firm commitment underwritten offering, which offering was made pursuant to our Registration Statement on Form S-3 (File No. 333-258339) (the "Registration Statement"). The SEC declared the Registration Statement effective on August 10, 2021. We sold 4,700,000 shares of our Common Stock and warrants to purchase an additional 3,525,000 shares of our Common Stock. We sold each share of our Common Stock and warrants to purchase 0.75 shares of our Common Stock at a combined public offering price of $1.90. We also granted the underwriter the option to purchase an additional 705,000 shares of our Common Stock and warrants to purchase an additional 528,750 shares of our Common Stock. We received net proceeds from the offering of approximately $8.3 million. We have also received approximately $1.7 million from the exercise of the warrants. We used the proceeds for general corporate purposes.

However, there is no assurance that our plans will be achieve their desired results due to the current economic climate in the United States and globally. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties.

*Cash Flows:*

Cash flow used in operations was approximately ($5.7) million for fiscal year 2022, compared to cash flow used in operations of approximately ($9.3) million for fiscal year 2021. The decrease in cash flow used in operations for the fiscal year 2022 was primarily due to the decrease in inventory purchases and inventory deposits in the current year, partially offset by the decrease in accounts payable – related party. We anticipate that our cash flows from operations and sales in fiscal year 2023 will improve based on the minimum purchase obligations set forth in the Sub-Distribution Agreements, partially offset by minimal increases in costs as we ramp up our sales and marketing efforts. Additionally, we are in the process of developing a working capital line of credit with a third-party financial firm, which can supply us with short-term cash needs as our customer growth requires many more orders of product for interim short time intervals.

Cash flow provided by financing activities was approximately $1.6 million for fiscal year 2022, compared to cash flow provided by financing activities of approximately $9.7 for fiscal year 2021. The decrease in cash flow from financing activities for the fiscal year 2022 was primarily due to the $8.3 million in net proceeds from the firm commitment underwritten offering in September 2021, which consisted of shares of Common Stock and warrants to purchase shares of Common Stock, and the approximately $1.7 million in cash received from the exercise of warrants, offset by approximately $0.3 million, which was the cash amount that was paid in connection with the withholding of 92,871 shares to satisfy tax obligations due upon such issuances to certain employees.

**Results of Operations**

***Year ended October 31, 2022, compared to year ended October 31, 2021***

*Revenues:*

Revenues for fiscal year 2022 were approximately $12.8 million, compared to approximately $58.8 million in the prior fiscal year. Revenues decreased in fiscal year 2022, primarily in the first two fiscal quarters, generally due to (i) increased competition, which we believe was the result of the lack of enforcement by federal and state authorities against sub-par and low-priced vaping products that continued to enter the market illegally without FDA authorization and (ii) Bidi's receipt of the MDO, which limited our ability in most of fiscal year 2022 to sell flavored BIDI<sup>®</sup> Sticks in the United States. On August 23, 2022, the 11<sup>th</sup> Circuit set aside (i.e., vacated) the MDO issued to the non-tobacco flavored BIDI® Sticks and remanded Bidi's PMTA back to the FDA for further review. In light of the 11<sup>th</sup> Circuit decision, the Company anticipates having the continued ability to market and sell the non-tobacco flavored BIDI® Sticks, subject to FDA's enforcement discretion, for the duration of the PMTA scientific review. We also anticipate that if the FDA begins enforcement against illegally marketed or synthetic-nicotine vaping products, there may be an increased demand for compliant and legal vaping products, such as the BIDI<sup>®</sup> Stick.

*Cost of Revenue and Gross Profit:*

Gross profit in fiscal year 2022 was approximately $1.2 million, compared to approximately $11.9 million for fiscal year 2021. Total cost of revenue was approximately $11.5 million for fiscal year 2022, compared to approximately $46.8 million for fiscal year 2021. The decrease in gross profit volume is primarily driven by the downturn in sales of the Products, beginning in the fiscal year 2021 and continuing through the end of fiscal year 2022, which was primarily the result of the negative impact the PMTA and the impact the regulatory landscape had on our business. Additionally, the cost of the discounts, coupons and promotions programs, that we implemented in the third quarter of fiscal year 2021 to assist in growing and retaining the customer base and store shelf space, which continued through current year contributed a lower gross profit margin per unit of Products sales, as these discounts, coupons and promotions decreased our revenues.

*Operating Expenses:*

 

Total operating expenses were approximately $15.6 million for fiscal year 2022, compared to approximately $22.4 million for fiscal year 2021. For the fiscal year 2022, operating expenses consisted primarily of advertising and promotion fees of approximately $2.7 million, stock option compensation expense of approximately $6.0 million, professional fees of approximately $3.2 million, salaries and wages of $1.7 million, and all other general and administrative expenses of approximately $2.0 million. In fiscal year 2021, operating expenses consisted of advertising and promotional expenses of approximately $3.2 million, which included commissions paid to QuikfillRx pursuant to the Service Agreement dated March 31, 2020, as amended on June 2, 2020 (the "Amended Service Agreement"), and general and administrative expenses of approximately $10.2 million. General and administrative expenses in the fiscal year 2021 consisted primarily of legal fees, salaries, professional fees, merchant fees, and other service fees, and were necessary for our Reverse Stock Split process, the process for the uplisting to Nasdaq, and to a lesser degree some of the indirect costs incurred relating to our Common Stock and warrants offering in September 2021. Additionally, we incurred legal and other costs related to the FDA's PMTA/MDO process for limiting the sales of flavored BIDI sticks. We expect future operating expenses to increase while we generate increased sales growth and invest in the Company's infrastructure to support the planned business growth.

*Income Taxes:*

We have Federal net operating loss ("NOL") carryforwards of approximately $12.3 million and state NOL carryforwards of approximately $85 thousand. With the changes instituted by the CARES Act, the Federal NOLs have an indefinite life and will not expire. Our federal and state tax returns for the 2020 and 2021 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 the deferred tax assets will not be realized. Management determined that a valuation allowance of approximately $4.2 million for the year ended on October 31, 2022, was necessary to reduce the deferred tax asset to the amount that will more likely than not be realized.

Please refer to Note 7, Income Tax, in the Notes to the Consolidated Financial Statements in this Report for additional information related to our income taxes.

*Net Income (Loss):*

Net loss for fiscal year 2022 was approximately $(14.4) million, or $(0.36) basic and diluted net loss per share, compared to a net loss of approximately $(9.0) million, or $(0.38) basic and diluted net loss per share, for fiscal year 2021. The increase in net loss for the fiscal year 2022, as compared to net loss in fiscal year 2021, is attributable to the revenues and expenses factors noted above. Weighted-average common stock shares outstanding were 39,710,389 on October 31, 2022, as compared to 24,000,246 on October 31, 2021. The increase in the weighted-average shares in fiscal year 2022 was primarily attributable to the conversion of 3,000,000 shares of Series A Convertible Preferred Stock to 25,000,000 shares of common stock and the exercise of 855,605 common stock warrants issued in connection with our 2021 public underwritten offering.

*Accrued Expenses:*

During fiscal year 2022, we accrued approximately $33,900 for a quarterly bonus and approximately $18,000 for approved expenses payable to QuikfillRx based on our applicable gross quarterly sales for the three months ended October 31, 2022. During fiscal year 2021, we accrued approximately $3,800 for a quarterly bonus and approximately $180,000 for a monthly retainer plus approved expenses payable to QuikfillRx based on our applicable gross quarterly sales for the three months ended October 31, 2021.

Excise taxes totaling approximately $6,600 were accrued based on taxable sales during the fourth quarter of fiscal year 2022, compared to excise taxes of approximately $2,200 that were accrued in fiscal year 2021 based on taxable sales during the fourth quarter of fiscal year 2021.

*Concentrations:*

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

*Concentration of Purchases and Accounts Payable- Related Party:*

For the year ended October 31, 2022, 100% of the inventories of Products, consisting solely of the BIDI<sup>®</sup> Stick, were purchased from Bidi, a related party company that is owned by Nirajkumar Patel, our Chief Science and Regulatory Officer and director, in the amount of approximately $1.5 million, as compared to $61.9 million for the year ended October 31, 2021. There was no related party accounts payable balance as of October 31, 2022. In fiscal year 2021, such inventories accounted for 100% of the total related party accounts payable.

On April 29, 2022, our company and Bidi agreed to cancel the $2.9 million inventory order paid in advance in fiscal year 2021 and this was a credit against the accounts payable due to Bidi. Inventory quality control expenses were paid by us on behalf of Bidi during the year ended October 31, 2022 in the amount of approximately $0.7 million and were offset as a credit against the existing accounts payable balance-related party. A credit of $2.9 million was applied on August 1, 2022, resulting in a related-party receivable balance due from Bidi of $2.1 million, to be applied on future orders of Product. On October 31, 2022, our company and Bidi agreed to a return for short-coded or expiring inventory. An additional credit of $1.5 million and $108,000 for recycling costs was applied on October 31, 2022, to the related-party receivable balance due from Bidi.

As of October 31, 2022, we had a related-party receivable balance due from Bidi of $3.7 million, in which $1.5 million of the receivable is classified as current and $2.2 million is classified as non-current. The receivable balance will be realized through Bidi applying 5% credits on all future orders of Product until the entire balance is extinguished.

*Concentration of Revenues and Accounts Receivable:*

For the fiscal year 2022, (i) approximately 31% of the revenue from the sale of Products, solely consisting of the BIDI<sup>®</sup> Stick, was generated from Favs Business in the amount of approximately $3.9 million, (ii) approximately 15% of the revenue from the sale of the Products was generated from H.T. Hackney Co. in the amount of approximately $1.9 million, and (iii) approximately 12% of the revenue from the sale of Products, solely consisting of the BIDI Stick, was generated from GPM, in the amount of approximately $1.5 million. In Fiscal year 2021, approximately 23% of the revenue from the sale of Products, solely consisting of the BIDI<sup>®</sup> Stick, was generated from Favs Business in the amount of approximately $13.9 million and approximately 16% of the revenue from the sale of the Products was generated from MMS Distro in the amount of approximately $9.6 million.

Favs Business with an outstanding balance of approximately $375,000 and QuikTrip Corporation, with an outstanding balance of approximately $85,000, accounted for approximately 65% and 15% of the total accounts receivable from customers, respectively, as of October 31, 2022. Favs Business with an outstanding balance of approximately $1.0 million and C Store Master, with an outstanding balance of approximately $322,000, accounted for approximately 50% and 16% of the total accounts receivable from customers, respectively, as of October 31, 2021.

**Cash and Restricted Cash**

We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents on October 31, 2022, or October 31, 2021. Cash and restricted cash on October 31, 2022, and October 31, 2021, were $3.7 million and $7.8 million, respectively.

Restricted cash consists of cash held short-term in escrow as required. As of October 31, 2022, and October 31, 2021, we had $0 and $65,007 in restricted cash, respectively, for amounts held in escrow.

**Critical Accounting Policies and Estimates**

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, (or GAAP). The preparation of the consolidated financial statements in conformity with GAAP requires our management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure or inclusion of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the period. We evaluate our significant estimates on an ongoing basis, including, but not limited to, estimates related to allowance for doubtful accounts, and income tax provisions. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

We believe that the assumptions associated with our revenue recognition have the greatest potential impact on our financial statements. Therefore, we consider this to be our only critical accounting policy and we do not consider any of our estimates to be critical accounting estimates.

However, we consider Revenue Recognition the most critical accounting policy for the Company that could create a material misevaluation of Product Revenue if not adhered to and implemented successfully. We 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 we generated revenues. Under ASC 606, we recognize revenue when a customer obtains control of promised goods, in an amount that reflects the consideration that we expect to receive in exchange for the goods. To determine revenue recognition for arrangements within the scope of ASC 606, we perform 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. We only apply 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.

**Revenue Recognition Policy**

***Products Revenue***

We generate product revenue from the sale of the Products (as defined above) to non-retail customers. We recognize revenue at a point in time based on management's evaluation of when performance obligations under the terms of a contract with the customer are satisfied and control of the Products has been transferred to the customer. In most situations, transfer of control is considered complete when the products have been shipped to the customer. However, when we enter a consignment agreement with a new customer, once we ship and deliver the requested amount of the Products the customer ordered to it distribution center for its retail sales location, we retain ownership of the delivered Products until they are delivered to their retail stores. When the Products are sold in the stores and the funds, as stated in the consignment agreement, are remitted to us, then we record the revenues in our financial records. We determined that a customer obtains control of the Product upon shipment when title of such product and risk of loss transfer to the customer. Our shipping and handling costs are fulfillment costs, and such amounts are classified as part of cost of sales. The advance payment is not considered a significant financing component because the period between when we transfer a promised good to a customer and when the customer pays for that good is short. We offer credit sales arrangements to non-retail (or wholesale) customers and monitor the collectability of each credit sale routinely.

**Item 7A. Quantitative and Qualitative Disclosures about Market Risk.**

We qualify as a smaller reporting company, as defined by Item 10 of Regulation S-K and, thus, are not required to provide the information required by this Item.

**Item 8. Financial Statements and Supplementary Data.**

**KAIVAL BRANDS INNOVATIONS GROUP, INC.**

**CONSOLIDATED FINANCIAL STATEMENTS**

**INDEX TO FINANCIAL STATEMENTS**

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| | |
|:---|:---|
|  | <u>**Pages**</u> |
| [Report of Independent Registered Public Accounting Firm (PCAOB ID:206)](#a_026) | F-2 |
| [Consolidated Balance Sheets](#a_027) | F-3 |
| [Consolidated Statements of Operations](#a_028) | F-4 |
| [Consolidated Statements of Changes in Stockholders' Equity](#a_029) | F-5 |
| [Consolidated Statements of Cash Flows](#a_030) | F-6 |
| [Notes to Consolidated Financial Statements](#a_031) | F-7 |

---

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Shareholders and Board of Directors of

Kaival Brands Innovations Group, Inc.

***Opinion on the Financial Statements***

We have audited the accompanying consolidated balance sheets of Kaival Innovations Group, Inc. and its subsidiaries (collectively, the "Company") as of October 31, 2022, and 2021, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 2022, and 2021, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

***Basis for Opinion***

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

*/s/ MaloneBailey, LLP*

www.malonebailey.com

We have served as the Company's auditor since 2018.

Houston, Texas

January 27, 2023

**Kaival Brands Innovations Group, Inc.**

**Consolidated Balance Sheets**

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| | | |
|:---|:---|:---|
|  | **October <br> 31,<br> 2022** | **October 31,<br> 2021** |
| ASSETS |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;CURRENT ASSETS: |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cash | $3685893 | $7760228 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Restricted cash |  | 65007 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accounts receivable | 574606 | 1985186 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other receivable – related parties – short term | 1539486 |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Inventory deposit – related party |  | 2925000 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Inventories | 1239725 | 15326370 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Prepaid expenses | 426407 | 319531 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Income tax receivable | 1607302 | 1753594 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total current assets | 9073419 | 30134916 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Other receivable – related party – net of current portion | 2164646 |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Right of use asset- operating lease | 1198969 | 55604 |
| TOTAL ASSETS | $12437034 | $30190520 |
| LIABILITIES AND STOCKHOLDERS' EQUITY |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;CURRENT LIABILITIES: |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Accounts payable | $40023 | $242829 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Accounts payable- related party |  | 12667769 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accrued expenses | 1099157 | 579604 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Customer deposits | 44973 |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Deferred revenue | 235274 |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating lease obligation, short term | 166051 | 13020 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Customer refund due |  | 316800 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total current liabilities | 1585478 | 13820022 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; LONG TERM LIABILITIES |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating lease obligation, net of current portion | 1050776 | 46185 |
| TOTAL LIABILITIES | $2636254 | $13866207 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;STOCKHOLDERS' EQUITY: |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Preferred stock 5,000,000 shares authorized; Series A Convertible Preferred stock ($0.001 par value, 3,000,000 shares authorized, 0 and 3,000,000 shares issued and outstanding as of October 31, 2022, and October 31, 2021, respectively) |  | 3000 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Common stock ($0.001 par value, 1,000,000,000 shares authorized, 56,169,090 and 30,195,312 issued and outstanding as of October 31, 2022, and October 31, 2021, respectively) | 56169 | 30195 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Additional paid-in capital | 29375787 | 21551959 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accumulated deficit | (19631176) | (5260841) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total Stockholders' Equity | 9800780 | 16324313 |
| TOTAL LIABILITIES & STOCKHOLDERS' EQUITY | $12437034 | $30190520 |

---

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

**Kaival Brands Innovations Group, Inc.**

**Consolidated Statements of Operations**

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| | | |
|:---|:---|:---|
|  | **For the Years<br> Ended October 31,** | **For the Years<br> Ended October 31,** |
|  | **2022** | **2021** |
| Revenues |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenues, net | $12701539 | $59378208 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenues – related parties | 68139 | 154560 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Royalty revenue | 117292 |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Excise tax on products | (125513) | (756338) |
| Total revenues, net | 12761457 | 58776430 |
| Cost of revenue |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cost of revenue – related party | 11345912 | 46528501 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cost of revenue – other | 174520 | 314049 |
| Total cost of revenue | 11520432 | 46842550 |
| Gross profit | 1241025 | 11933880 |
| Operating expenses |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Advertising and promotions | 2679308 | 3195883 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;General and administrative expenses | 12950373 | 19207028 |
| Total operating expenses | 15629681 | 22402911 |
| Other income |  |  |
| Interest income | 4 | 395 |
| Total other income | 4 | 395 |
| Loss before income taxes | (14388652) | (10468636) |
| Provision (benefit) for income taxes | (18317) | (1435198) |
| Net loss | $(14370335) | $(9033438) |
| Net loss per common share – basic and diluted | $(0.36) | $(0.38) |
| Weighted average number of common shares outstanding – basic and diluted | 39710389 | 24000246 |

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

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| |
|:---|
| **Kaival Brands Innovations Group, Inc.** |
| **Consolidated Statements of Changes in Stockholders' Equity** |
| **For the years ended October 31, 2022 and 2021** |

---

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| | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|
|  | **Convertible Preferred Shares** | **Par Value Convertible Preferred Shares** | **Common Shares** | **Par Value Common Shares** | **Additional Paid-in Capital** | **Accumulated Deficit** | **Total** |
|  | **(Series A)** | (Series A) | | | |  |  |
| **Balances, October 31, 2020** | 3000000 | $3000 | 23106886 | $23107 | $618904 | $3772597 | $4417608 |
| Stock issued for services – RSUs |  |  | 221666 | 221 | 505100 |  | 505321 |
| Common stock settled and canceled |  |  | (92871) | (93) | (254017) |  | (254110) |
| Common stock issued for compensation |  |  | 674803 | 675 | 8943425 |  | 8944100 |
| Stock option expense |  |  |  |  | 1773947 |  | 1773947 |
| Common stock issued for cash, net of financing cost |  |  | 5405000 | 5405 | 8300367 |  | 8305772 |
| Common stock issued for warrant exercise |  |  | 879828 | 880 | 1664233 |  | 1665113 |
| Net loss |  |  |  |  |  | (9033438) | (9033438) |
| **Balances, October 31, 2021** | 3000000 | $3000 | 30195312 | $30195 | $21551959 | $(5260841) | $16324313 |
| Stock issued for services – RSUs |  |  | 123256 | 123 | 172256 |  | 172379 |
| Common shares settled and cancelled |  |  | (44720) | (45) | (59817) |  | (59862) |
| Common stock issued for compensation |  |  | 39637 | 40 | 65283 |  | 65323 |
| Exercise of common stock warrants |  |  | 855605 | 856 | 1624794 |  | 1625650 |
| Converted Series A Convertible Preferred Stock | (3000000) | (3000) | 25000000 | 25000 | (22000) |  |  |
| Stock option expense |  |  |  |  | 6043312 |  | 6043312 |
| Net loss |  |  |  |  |  | (14370335) | (14370335) |
| **Balances, October 31, 2022** |  | $— | 56169090 | $56169 | $29375787 | $(19631176) | $9800780 |

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

**Kaival Brands Innovations Group, Inc.**

**Consolidated Statements of Cash Flows**

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| | | |
|:---|:---|:---|
|  | For the Year Ended<br>October 31, 2022 | For the Year Ended<br>October 31, 2021 |
| <u>CASH FLOWS FROM OPERATING ACTIVITIES</u> |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net loss | $(14370335) | $(9033438) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Adjustments to reconcile net loss to net cash provided by operating activities: |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Stock based compensation | 237702 | 9449421 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Stock options expense | 6043312 | 1773947 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;ROU operating lease expense | 132890 | 14529 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Write off of inventory | 259563 |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Changes in current assets and liabilities: |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accounts receivable | 1410580 | (583624) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other receivable – related party | (3704132) | 15360 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Prepaid expenses | (106876) | (319531) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Inventory | 13827082 | (15319987) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Inventory deposit – related party | 2925000 | (2925000) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Income tax receivable | 146292 | (1753594) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accounts payable | (202806) | 242829 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accounts payable – related party | (12667769) | 11258208 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accrued expenses | 519553 | (482501) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Deferred revenue | 235274 | (623096) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Income tax accrual |  | (1331856) |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Customer deposits | 44973 |  |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Customer refund due | (316800) | 316800 |
| &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Payments on operating lease liability | (118633) | (11708) |
| Net cash used in operating activities | (5705130) | (9313241) |
| <u>CASH FLOWS FROM FINANCING ACTIVITIES</u> |  |  |
| Common stock issued for cash, net of financing cost |  | 8305772 |
| Proceeds from the exercise of warrants | 1625650 | 1665113 |
| Settled RSU shares with cash | (59862) | (254110) |
| Net cash provided by financing activities | 1565788 | 9716775 |
| Net change in cash and restricted cash | $(4139342) | $403534 |
| Beginning cash and restricted cash balance | 7825235 | 7421701 |
| Ending cash and restricted cash balance | $3685893 | $7825235 |
| <u>SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:</u> |  |  |
| Interest paid | $— | $— |
| Income taxes paid | $— | $1637102 |
| <u>NON-CASH INVESTING AND FINANCING ACTIVITIES:</u> |  |  |
| Conversion of Series A Preferred Stock Shares to Common Stock Shares | $25000 | $— |
| ROU asset and operating lease obligation recognized under Topic 842 | $1276255 | $— |

---

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

**KAIVAL BRANDS INNOVATIONS GROUP, INC.**

**NOTES TO THE 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.

**<u>Current Description of Business</u>**

The Company is focused on growing and incubating innovative and profitable products into mature, dominant brands. On March 9, 2020, the Company entered into an exclusive distribution agreement (the "Distribution Agreement") of certain electronic nicotine delivery systems ("ENDS") and related components (the "Products") with Bidi Vapor, LLC, a Florida limited liability company ("Bidi"), a related party company that is also owned by Nirajkumar Patel, the Chief Science and Regulatory Officer and director of the Company. The Distribution Agreement was amended and restated on May 21, 2020, again on April 20, 2021, again on June 10, 2022, and again on November 17, 2022 (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 non-retail level customers. Currently, the Products consist primarily of the "Bidi Stick." The Company ceased all 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, for the purpose of developing Company-branded and white-label products and services The Company has not yet launched any Kaival-branded product, nor has it begun to provide white label wholesale solutions for other product manufacturers. 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, 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, 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 affect a 1-for-12 reverse stock split (the "Reverse Stock Split") of the shares of the Company's common stock, par value $0.001 per share (the "Common Stock"). The Reverse Stock Split was effective as of 12:01 a.m. Eastern time on July 20, 2021. No fractional shares were issued in connection with the Reverse Stock Split. Any fractional shares of Common Stock that would have otherwise resulted from the Reverse Stock Split will be rounded up to the nearest whole number. In connection with the Reverse Stock Split, the Board of Directors (the "Board") approved appropriate and proportional adjustments to all outstanding securities or other rights convertible or exercisable into shares of Common Stock, including, without limitation, all preferred stock, warrants, options, and other equity compensation rights. All historical share and per-share amounts reflected throughout our consolidated financial statements and other financial information herein 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.

On June 13, 2022, the Company's wholly owned subsidiary, KBI, entered into the PMI License Agreement with PMPSA, a wholly owned affiliate of PMI, for the development and distribution of ENDS products in certain markets outside of the United States, subject to market (or regulatory) assessment. The PMI License Agreement grants to PMPSA a license of certain intellectual property rights relating to Bidi's ENDS device, known as the BIDI® Stick in the United States, as well as potentially newly developed devices, to permit PMPSA to manufacture, promote, sell, and distribute such ENDS device and newly developed devices, in international markets, outside of the United States.

On July 25, 2022, the Company announced the launch of PMPSA's custom-branded self-contained e-vapor product, pursuant to the licensing agreement. The product, a self-contained e-vapor device, VEEBA, has been custom developed and is now being distributed in Canada and in the United Kingdom.

***Current Product Offerings***

Pursuant to the A&R Distribution Agreement, The Company sells 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<sup>®</sup> Stick," a disposable, tamper-resistant ENDS product that comes in a variety of flavor options for adult cigarette smokers. The Company does not manufacture any of the Products it resells. The BIDI<sup>®</sup> Stick is manufactured by Bidi. Pursuant to the terms of the A&R Distribution Agreement, Bidi provides the Company with all branding, logos, and marketing materials to be utilized by the Company in connection with its marketing and promotion of the Products.

**<u>COVID-19</u>**

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 was indirectly impacted by supply chain issues and regulatory oversight. The Company believes that many retailers and distributers relaxed their 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 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.

**Impact of FDA PMTA Determinations and August 2022 11<sup>th</sup> Circuit Decision** &nbsp;&nbsp;&nbsp;&nbsp;

In September 2021, in connection with the PMTA process, the FDA effectively "banned" flavored ENDS by denying nearly all then-pending PMTAs for such products. Following the issuance of Marketing Denial Orders ("MDO"), manufacturers are required to stop selling non-tobacco flavored ENDS 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® Sticks, including its Arctic (menthol) BIDI® Stick. As a result, beginning in September 2021, Bidi challenged 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 the FDA review request specifically of the decision to include the Arctic (menthol) BIDI® Stick in the MDO. In May 2022, the FDA issued a determination that it views the Arctic BIDI® Stick as a 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<sup>th</sup> 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 Bidi's comprehensive applications, as required by the Tobacco Control Act ("TCA"), 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, and that the FDA should have gone through the notice and comment rulemaking process for this requirement.

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 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 11th Circuit. On February 1, 2022, the appellate court granted Bidi's motion to stay (i.e., put on hold) the MDO, pending the litigation on the merits. Oral arguments in the merits-based proceeding were held on May 17, 2022.

On August 23, 2022, the U.S. Court of Appeals for the Eleventh Circuit set aside the MDO issued to the non-tobacco flavored BIDI® Sticks and remanded Bidi's Premarket Tobacco Product Application ("PMTA") back to the FDA for 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 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 the Company's 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 Agency 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<sup>th</sup> 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.

**Risks and Uncertainties**

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 FDA's enforcement discretion, until the scientific review process is complete on each of Bidi's PMTA's, the Company views the risk of FDA enforcement against Bidi as low. The Company anticipates FDA will move forward with a review of Bidi's PMTA on remand, as directed by the Court; however, the Company cannot provide any assurances as to the timing or outcome.

Accordingly, the Company anticipates FDA will move forward with a review of Bidi's PMTA on remand, as directed by the Court.

&nbsp;&nbsp;&nbsp;&nbsp;

Moreover, 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 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 FDA to review all of this information before making an APPH determination, and while FDA could narrowly interpret the Court's ruling as an order to review only Bidi's marketing and sales-access restrictions plans, the 11<sup>th</sup> 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, 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**

**<u>Principles of Consolidation</u>**

The consolidated financial statements include the financial statements of the Company's wholly-owned subsidiaries, Kaival Labs and Kaival Brands International. Intercompany transactions are eliminated.

**<u>Basis of Presentation</u>**

This summary of significant accounting policies is presented to assist in understanding the Company's consolidated financial statements. These accounting policies conform to accounting principles, generally accepted in the United States of America ("GAAP") and have been consistently applied in the preparation of the consolidated financial statements.

**<u>Use of Estimates</u>**

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.

**<u>Cash and Restricted Cash</u>**

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 on October 31, 2022, and October 31, 2021. Cash and restricted cash as of October 31, 2022, and October 31, 2021, were $3,685,893 and $7,825,235, respectively.

Cash and restricted cash consist of cash and cash held short-term in escrow as required. As of October 31, 2022, and October 31, 2021, the Company had $0 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.

---

| | | |
|:---|:---|:---|
| Restrictions on Cash and Cash Equivalents |  |  |
|  | **October 31,** | **October 31,** |
|  | **2022** | **2021** |
| Cash | $3685893 | $7760228 |
| Restricted cash |  | 65007 |
| Total cash and restricted cash shown in statement of cash flows | $3685893 | $7825235 |

---

**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 the management's assessment of the collectability of accounts 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 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 is required. The Company also had no allowance for doubtful accounts as of October 31, 2021.

**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 first-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. As of October 31, 2022, the inventories only consisted of finished goods and were located in three locations; the Kaival main warehouse and two customer warehouses whose service agreements are on a consignment basis with Kaival. The Company had a write-off of $259,563 related to short-coded Bidi sticks that were no longer able to be sold. Based upon fiscal year 2022 inventory management procedures and their results, the Company has determined that no allowance for inventory is required as of October 31, 2022 and 2021.

**Inventory deposit – related party** 

During the fiscal year 2021, the Company paid $2,925,000 million from its capital financing raise to Bidi, a related party, to have BIDI<sup>®</sup> Sticks manufactured with regulatory product requirements, different from the United States, as stipulated by the United Kingdom. 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. As of October 31, 2022, the Company has on its balance sheet a zero balance for inventory deposits and inventory deposits related party.

**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. The Company has evaluated revenues recognized and substantially all our revenues were derived from sales of flavored BIDI® Sticks, including the Arctic (menthol) BIDI® Stick, sales of which constituted approximately 13.4% and 18.4% of our total sales of BIDI® Sticks for the fiscal years ended October 31, 2022, and 2021, respectively.

**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 October 31, 2022, and October 31, 2021, the Company has received $44,973 and $0 in deposits from customers, respectively, which is included with the Company's current liabilities. As of October 31, 2022, and October 31, 2021, the Company has received $235,274 and $0 in deferred income from PMI guaranteed royalty revenue prepayments, respectively, which is included with the Company's current liabilities.

**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 it can realistically sell at that time. If and when this occurs, the Company will ask the customer to return the over allotted product. Once received and inspected, the Company will issue a refund for the product return. As of October 31, 2022 and October 31, 2021, the Company had $0 and $316,800 refunds due to one customer, which was the result of one of the Company's sub-distributor customers returning Product that had become defective in storage.

**Products Revenue**

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

**Royalty Revenue**

 ****

On June 13, 2022, KBI entered into the PMI License Agreement with 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-cigarettes 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.

***Concentration of Revenues and Accounts Receivable***

For the fiscal year 2022, (i) approximately 30% or $3,945,534 of the revenue from the sale of Products, solely consisting of the BIDI<sup>®</sup> Stick, was generated from Favs Business, (ii) approximately 15% or $1,892,245 of the revenue from the sale of the Products was generated from H.T. Hackney Co., and (iii) approximately 11% or $1,472,888 of the revenue from the sale of Products, solely consisting of the BIDI Stick, was generated from GPM.

In Fiscal year 2021, approximately 23% or $13,888,376 of the revenue from the sale of Products, solely consisting of the BIDI<sup>®</sup> Stick, was generated from Favs Business, approximately 16% or $9,575,711 of the revenue from the sale of the Products was generated from MMS Distro, and approximately 14% or $8,206,792 of the revenue from the sale of the Products was generated from C Store Master.

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.

Favs Business with an outstanding balance of $1,000,000 and C Store Master, with an outstanding balance of $321,534, accounted for approximately 50% and 16% of the total accounts receivable from customers, respectively, as of October 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 Company uses the Black-Scholes option-pricing model to estimate the fair value of stock-based awards on the date of grant and on each modification date. Compensation expense for SBP awards granted to non-employees is re-measured each period as the underlying options vest.

The fair value of each option granted during the year ended October 31, 2022 and 2021 was estimated on the date of grant using the Black-Scholes option-pricing model with the weighted average assumptions in the following table:

---

| | | |
|:---|:---|:---|
|  | **2022** | **2021** |
| Expected dividend yield | 0% | 0% |
| Expected option term (years) | 10 | 10 |
| Expected volatility | 279.81%-288.93 | 294.55%-301.53 |
| Risk-free interest rate | 1.74%-3.13 | 1.19%-1.63 |

---

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 US Treasury bills. The Company's stock option expense for the year ended October 31, 2022, and October 31, 2021, was $6,043,312 and $1,773,947, respectively.

The Company's stock-based compensation for common stock issued for services for the fiscal years ended October 31, 2022 and October 31, 2021, was $237,702 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, consisting of total deferred tax assets, totaling approximately $4.5 million and state NOL carryforwards, consisting of total deferred tax liabilities, totaling approximately $0.4 million. 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 2019, 2020, and 2021 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 consideration of all the evidence, both positive and negative, management has determined that a valuation allowance of $4,286,289 for the -year ended on October 31, 2022, and a valuation allowance of $1,256,059 for the year ended on October 31, 2021 were necessary to reduce the total net deferred tax asset to the amount that will more likely than not be realized pursuant to ASC 740 for those fiscal years.

**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:

● Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

● Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

● Level 3 – Inputs that are both significant to the fair value measurement and unobservable.

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of October 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. As of October 31, 2022 and 2021, the Company did not have any financial assets or liabilities measured and recorded at fair value on a recurring basis.

**<u>Recent Accounting Pronouncements</u>**

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**

The Company's financial statements are prepared in accordance with U.S. GAAP applicable to a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date the consolidated financial statements are issued.

In accordance with Financial Accounting Standards Board (the "FASB"), Accounting Standards Update ("ASU") No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40), our management evaluates whether there are conditions or events, considered in aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. As shown in the accompanying consolidated financial statements, the Company has incurred significant recurring losses and negative cash flows from operations. These factors raised substantial doubt about the Company's ability to continue as a going concern.

In response to the above, the Company assessed its management's plans to alleviate that doubt. The Company has positive working capital as of October 31, 2022 of $7,487,941. The Company considered that its losses and negative cash flows were due to various factors such as: (i) uncertainty surrounding the PMTA process with FDA and (ii) the MDO that was issued to Bidi Vapor on its flavored ENDS product. However, the MDO was set aside and remanded by the 11<sup>th</sup> Circuit and the ability to appeal such decision has passed thereby facilitating the advancement of the flavored BIDI® Sticks for sale in the United States (pending FDA's review of the flavored PMTAs). Concurrently, the PMTA <sup>of</sup> the tobacco-flavored (Classic) BIDI® Sticks for sale in the United States continues to move through scientific review (pending FDA's review of that PMTA). 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 to meet its estimated liquidity needs for the next 12 months after the date that the financial statements are issued. Because of the above factors, the Company believes that this alleviates the substantial doubt in connection with the Company's ability to continue as a going concern.

However, there is no assurance that the Company's plans will be successful due to the current economic climate in the United States and globally. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these 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 does not have financing leases and only one operating lease for office space and inventory storage space with a related party, as of October 31, 2022. Certain of the Company's leases, have and may in the future, include renewal options, which have been and might be in the future, included in the calculation of the lease liabilities and right of use assets when the Company is reasonably certain to exercise the option.

On August 1, 2020, we began leasing office space consisting of 1,595 square feet as our main corporate office in Grant, Florida for $1,000 per month. The five-year lease agreement is with a related party, Just Pick, LLC ("Just Pick"). Nirajkumar Patel, our Chief Science and Regulatory Officer and director, is also an officer of Just Pick. We believe our office space is sufficient to meet our current needs.

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 payments on this lease in the 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 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. Just Pick is considered a related party to the Company because the Company's Chief Science and Regulatory Officer and director, Mr. Nirajkumar Patel, owns and controls Just Pick.

The Company must pay Just Pick base rent equal to $17,776.67 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 (1/12th) of the market annual rent for the seventh through eleventh years, if applicable. In addition to the base rent, the 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 renewal option was considered in the calculation with an incremental borrowing rate of 4.5% The Company has $118,633 and $11,708 in operating lease expense for the years ended October 31, 2022 and 2021, respectively.

Cash flow information related to leases was as follows:

---

| | | |
|:---|:---|:---|
|  | October 31, 2022 | October 31, 2021 |
| **Other Lease Information** |  |  |
| Cash paid for amounts included in the measurement of lease liabilities: |  |  |
| &nbsp;&nbsp;&nbsp;&nbsp;Operating cash flows from operating leases | $(118633) | $(11708) |

---

The following table summarizes the lease-related assets and liabilities recorded in the consolidated balance sheets on October 31, 2022, and 2021:

---

| | | |
|:---|:---|:---|
| Lease Position | October 31, 2022 | October 31, 2021 |
| Operating Leases |  |  |
| Operating lease right-of-use assets | $1198969 | $55604 |
| Right of use liability operating lease, current portion | $166051 | $13020 |
| Right of use liability operating lease, long term | 1050776 | 46185 |
| Total operating lease liabilities | $1216827 | $59205 |

---

The following table provides the future minimum operating lease payments as of October 31, 2022:

---

| | |
|:---|:---|
| | Operating<br>Leases |
| Future minimum operating lease liabilities on October 31, 2022 |  |
| 2023 | $217468 |
| 2024 | 228134 |
| 2025 | 238800 |
| 2026 | 253614 |
| 2027 and thereafter | 450934 |
| Total future undiscounted lease payments | $1388950 |
| Less: Imputed interest | (172123) |
| Present value of lease liabilities | $1216827 |

---

As of October 31, 2022, the Company had no additional leases which had not yet commenced.

**Note 5 – Stockholders' Equity**

***Common Shares***

During the fiscal year ended October 31, 2022:

During the year, the Company issued 39,637 common shares for services rendered with a fair value of $65,323. There were 25,000,000 common shares issued for the conversion of Series A Convertible Preferred Stock to Common Stock, see preferred shares converted below. The Company issued 855,605 for $1,625,650 proceeds for the exercise of warrants.

During the fiscal year ended October 31, 2021:

During the year ended October 31, 2021, 674,803 shares of Common Stock were issued to 8 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 grant dates to compute an aggregate fair market value total of $8,944,100, of which 308,333 shares and $1,597,667 compensation is related to shares issued to Inflection Partners disclosed above.

In September 2021, the Company completed a firm commitment underwritten offering, which offering was made pursuant to its Registration Statement on Form S-3 (File No. 333-258339) (the "Registration Statement"). The Securities and Exchange Commission (the "SEC") declared the Registration Statement effective on August 10, 2021. The Company sold 4,700,000 million shares of our Common Stock and warrants, with an exercise price of $1.90 per share and an expiration of five years, to purchase an additional 3,525,000 shares of its Common Stock. The Company sold each share of its Common Stock and warrants to purchase 0.75 shares of its Common Stock at a combined public offering price of $1.70. The Company also granted the underwriter the option to purchase an additional 705,000 shares of its Common Stock and warrants to purchase an additional 528,750 shares of its Common Stock. As of October 31, 2021, the Company had received net proceeds from the offering of approximately $8,305,772, net of offering cost. The Company had also received approximately $1,665,113 from the exercise of 879,828 warrants.

On November 1, 2020, the Company entered into a Consulting Agreement with Inflection Partners LLC ("Inflection Partners"), pursuant to which the Company engaged Inflection Partners to provide investor relations, corporate communication, marketing, strategic advising, and operational activities (collectively, the "Inflection Services"), in exchange for a $45,000 deposit, a $60,000 monthly retainer, 83,333 shares of restricted Common Stock due upon the execution of the agreement, and an incentive compensation of 83,333 shares of restricted Common Stock or warrants to purchase 125,000 shares of restricted Common Stock. On January 6, 2021, the Company entered into a new Consulting Agreement with Inflection Partners which replaced the original Consulting Agreement, pursuant to which the Company engaged Inflection Partners to provide "the Inflection Services", in exchange for a $45,000 deposit, a $60,000 monthly retainer, 83,333 shares of restricted Common Stock due upon the execution of the agreement, and an incentive compensation of an aggregate of 166,667 shares of restricted Common Stock On October 15, 2021, the Company paid $100,000 and 225,000 shares of restricted Common Stock. The Consulting Agreement was terminated on October 31, 2021 and no further compensation is due. During the year ended October 31, 2021, 308,333 shares of restricted Common Stock were issued to Inflection Partners as compensation for services provided to the Company. The fair value of the shares of Common Stock issued was $1,597,667.

***Preferred Shares 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 Stock. On June 24, 2022, all 3,000,000 shares of Series A Preferred Stock were converted into shares of Common Stock by Kaival Holdings, LLC, a related party. 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 or outstanding as of October 31, 2022.

***Restricted Stock Unit Awards***

 ****

<u>During the fiscal year October 31, 2022:</u> 

During the twelve months ended October 31, 2022, 123,256 shares of Common Stock were issued to seven employees of the Company pursuant to restricted stock unit ("RSU") agreements, resulting in $172,379 of share-based compensation. Of the shares issued to employees, 44,720 shares were withheld by the Company to satisfy tax withholding obligations equal to $59,862.

On March 4, 2022, the Company's Board approved the termination of the RSU agreements with the consent of the employees. At the time these agreements were terminated, there remained 1,564,166 unvested RSUs with approximately $4,457,875 of related unvested compensation. See Common Stock Compensation Transition Plan below for additional details.

During the fiscal year October 31, 2021:

During the twelve months ended October 31, 2021, 221,666 shares of Common Stock were issued to eight employees of the Company pursuant to restricted stock unit ("RSU") agreements, resulting in $505,321 of share-based compensation. Of the shares issued to employees, 92,871 shares were withheld by the Company to satisfy tax withholding obligations equal to $254,110 as of October 31, 2021. Additionally, one employee resigned her employment from the Company and forfeited 23,333 RSUs Accordingly, there remains 499,167 unvested employee RSUs corresponding to $1,011,019 of unamortized stock expenses as of October 31, 2021.

On January 1, 2021, the Board of Directors approved the award of 41,667 "RSUs" under the 2020 Stock and Incentive Compensation Plan (the "Incentive Plan") and made a grant to one employee. The RSUs had a fair value of $315,000 at the time of grant. The RSUs were awarded pursuant to restricted stock unit agreements ("RSU Agreement"), which provide for vesting over the course of three years, with a portion of the RSUs vesting every three months. The vesting schedules are set forth in the applicable RSU Agreements.

***Stock Options***

 ****

*Summary of stock options information is as follows:*

---

| | | | | |
|:---|:---|:---|:---|:---|
|  |<br>Aggregate<br>Number |<br>Aggregate<br>Exercise Price |<br>Exercise<br>Price Range | Weighted<br>Average<br>Exercise Price |
| Outstanding, October 31, 2020 |  | $— | $— | $— |
| Granted | 150000 | 3074010 | 9.12-28.68 | 20.49 |
| Exercised |  |  |  |  |
| Cancelled, forfeited, or expired |  |  |  |  |
| Outstanding, October 31, 2021 | 150000 | 3074010 | 9.12-28.68 | 20.49 |
| Granted | 3110600 | 6708460 | 1.03-2.85 | 2.16 |
| Exercised |  |  |  |  |
| Cancelled, forfeited, or expired | (58335) | (861041) | 9.12-25.98 | 14.76 |
| Outstanding, October 31, 2022 | 3202265 | $8921429 | $1.03-28.68 | 2.79 |
| Exercisable, October 31, 2022 | 2460270 | $7386509 | $1.03-28.68 | $3.00 |

---

During the fiscal year ended October 31, 2021, the Company recognized $1,773,947 related to outstanding stock options. On October 31, 2021, the Company had $1,314,055 of unrecognized expenses related to options. The weighted average remaining contractual life is approximately 9.43 years for stock options outstanding on October 31, 2022. The aggregate intrinsic value of these outstanding options as of October 31, 2021 was $0.

During fiscal year 2021, the Company granted options exercisable for up to 150,000 shares of Common Stock of which 15,000 fully vested on March 17, 2021, 7,500 fully vested on June 30, 2021, 41,667 fully vested on December 1, 2021, 17,500 vested on March 17, 2022, 8,750 vest on June 30, 2022, and 1,248 vest over the next year on March 17, 2023, and June 30, 2023. The options have exercise prices ranging from $9.12 to $28.68 per share. 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 fair valued the options on the grant date at $3,088,002 using a Black-Scholes option pricing model with the following assumptions: stock price range of $9.12 to $27.36 per share (based on the quoted trading price on the date of grant), volatility range of 294.55% to 301.53%, expected term of 10 years, and a risk-free interest rate range of 1.19% to 1.63%. The Company is amortizing the expense over the vesting terms of each. On June 24, 2022, 33,333 of the stock options referenced above were canceled and a further 25,002 were cancelled. The unamortized expense when cancelled was $214,398.

During the year ended October 31, 2022, the Company recognized stock option expense of $6,043,312 related to outstanding stock options. On October 31, 2022, the Company had $1,716,795 of unrecognized expenses related to options. The weighted average remaining contractual life is approximately 9.52 years for stock options outstanding on October 31, 2022. As of October 31, 2022 and 2021, the intrinsic value was $50,000 and $0, respectively, to the outstanding stock options.

On February 27, 2022, non-qualified stock options exercisable for up to 200,000 shares of Common Stock were awarded to two consultants of the Company. These stock options have a ten-year term from the grant date, with one-half of the shares vesting on the grant date and the remaining one-half of the shares vesting on the first anniversary of the grant date. The fair value of the options on the grant dates was $489,998 using a Black-Scholes option pricing model with the following assumptions: stock price $2.45 per share (based on the quoted trading price on the date of grant), a computed volatility of 288.93%, expected term of 10 years, and a risk-free interest rate of 1.83%.

On April 22, 2022, non-qualified stock options exercisable for up to 75,000 shares of Common Stock were awarded to one consultant of the Company. These stock options have a ten-year term from the grant date, with one-half of the shares vesting on June 30, 2022 and the remaining one-half of the shares vesting on October 31, 2022. The fair value of the options on the grant date was 106,499 using a Black-Scholes option pricing model with the following assumptions: stock price $1.42 per share (based on the quoted trading price on the date of grant), a computed volatility of 286.00%, expected term of 10 years, and a risk-free interest rate of 2.90%.

On May 18, 2022, non-qualified stock options exercisable for up to 500,000 shares of Common Stock were awarded to one consultant of the Company. These stock options have a ten-year term from the grant date, with the shares fully vesting on December 1, 2022. The fair value of the options on the grant date was $514,997 using a Black-Scholes option pricing model with the following assumptions: stock price $1.03 per share (based on the quoted trading price on the date of grant), a computed volatility of 284.70%, expected term of 10 years, and a risk-free interest rate of 2.89%.

On August 1, 2022, non-qualified stock options exercisable for up to 25,000 shares of Common Stock were awarded to one employee of the Company. These stock options have a ten-year term from the grant date, with the shares fully vesting on August 1, 2023. The fair value of the options on the grant date was $29,000 using a Black-Scholes option pricing model with the following assumptions: stock price $1.16 per share (based on the quoted trading price on the date of grant), a computed volatility of 281.14%, expected term of 10 years, and a risk-free interest rate of 2.60%.

On August 24, 2022, non-qualified stock options exercisable for up to 50,000 shares of Common Stock were awarded to one consultant of the Company. These stock options have a ten-year term from the grant date, with the shares fully vesting on grant date. The fair value of the options on the grant date was $65,999 using a Black-Scholes option pricing model with the following assumptions: stock price $1.32 per share (based on the quoted trading price on the date of grant), a computed volatility of 279.81%, expected term of 10 years, and a risk-free interest rate of 3.11%.

On March 4, 2022, options exercisable for up to an aggregate of 1,385,600 shares of Common Stock were granted from this new stock option program to the executive officers and employees, as a result of the transition. The fair values of the options on the grant dates, as noted above, were approximately $3,948,948 using a Black-Scholes option pricing model with the following assumptions: stock price $2.85 per share (based on the quoted trading price on the date of grant), volatility of 294.55%, expected term of 10 years, and a risk-free interest rate range of 1.62%. The Company is amortizing the expense over the vesting terms of each option. Please reference the Common Stock Compensation Transition Plan below.

On June 24, 2022, non-qualified stock options exercisable for up to 875,000 shares of Common Stock were awarded to two officers and three board members of the Company. These stock options have a ten-year term from the grant date, with 375,000 fully vested on June 24, 2022, and 500,000 vest over the next 2 years on June 23, 2023, and June 23, 2024. The fair value of the options on the grant dates was $1,504,990 using a Black-Scholes option pricing model with the following assumptions: stock price $1.72 per share (based on the quoted trading price on the date of grant), a computed volatility of 283.12%, expected term of 10 years, and a risk-free interest rate of 3.13%.

***Common Stock Compensation Transition Plan***

 ****

During the second quarter of fiscal year 2021 the Board and executive management began cost reduction discussions, including the reduction of non-cash items such as equity compensation awards. Those discussions stalled primarily due to the focus on other corporate events of significant value.

In the first and second fiscal quarters of 2022, the Board resumed discussions, assessments, and evaluations regarding the equity compensation awarded to its officers and employees. The Board ultimately approved a stock option program for equity awards granted to its officers and employees. The Compensation Committee finalized the program in February 2022 and approved it in March 2022. While evaluating and designing this program, the Compensation Committee did not utilize any aspects of value to the employees or other features. Therefore, the termination of the RSU program and the newly adopted stock option program were developed completely independent of each other and terminated and implemented, respectively, distinctly and simultaneously. Management concluded under ASC 718 these transactions are a cancelation and replacement whereby total compensation cost measured at the date of a cancellation and replacement is the portion of the grant-date fair value of the original award for which the service is expected to be rendered at that date plus the incremental cost resulting from the cancellation and replacement. Incremental cost is measured as the excess of the fair value of the replacement award over the fair value of the cancelled award at the cancellation date in which there was none since the fair value of the replacement award was less than the fair value of the canceled award.

The outcomes of this decision and the transition on March 4, 2022, resulting in: (i) the termination of the RSU program for all executive officers and employees, consisting of 1,564,166 unvested RSUs and (ii) the implementation a new stock option program for executive officers and employees. The stock options granted pursuant to the program will have ten-year terms from the grant date, with one-half of the shares vesting on the grant date and the remaining one-half of the shares vesting on the first anniversary of the grant date. Please reference the Stock Options disclosure above.

***Warrants Shares***

*Summary Warrant Shares information is as follows:*

---

| | | | | |
|:---|:---|:---|:---|:---|
|  | Aggregate<br>Number | Aggregate<br>Exercise Price | Exercise<br>Price Range | Average<br>Exercise Price |
| Outstanding, October 31, 2020 |  | $— | $— | $— |
| Granted | 4053750 | 7702125 | 1.90 | 1.90 |
| Exercised | (879828) | (1671673) | 1.90 | 1.90 |
| Cancelled, forfeited, or expired |  |  |  |  |
| Outstanding, October 31, 2021 | 3173922 | 6030452 | 1.90 | 1.90 |
| Granted |  |  |  |  |
| Exercised | (855605) | (1625650) | 1.90 | 1.90 |
| Cancelled, forfeited, or expired |  |  |  |  |
| Outstanding, October 31, 2022 | 2318317 | $4404802 | $1.90 | $1.90 |
| Exercisable, October 31, 2022 | 2318317 | $4404802 | $1.90 | $1.90 |

---

As part of the Company's underwritten public offering in September 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 879,828 shares of Common Stock were exercised during the fiscal year ended October 31, 2021 for proceeds of $1,665,113. Warrants for 855,605 shares of Common Stock were exercised during the fiscal year ended October 31, 2022, for proceeds of $1,625,650.

The weighted average remaining contractual life is approximately 3.92 years for stock warrants outstanding as of October 31, 2022. As of October 31, 2022, there was no intrinsic value of outstanding stock warrants. The weighted average remaining contractual life is approximately 4.92 years for stock warrants outstanding as of October 31, 2021. As of October 31, 2021, there was no intrinsic value of outstanding stock warrants.

 

**Note 6 – Related-Party Transactions**

***Revenue and Accounts Receivable***

During the fiscal year ended October 31, 2022, the Company recognized revenue of $68,139 from five companies owned by Nirajkumar Patel, the Chief Science Officer and Regulatory Officer and director of the Company, and/or his wife.

During the fiscal year ended October 31, 2021, the Company recognized revenue of $154,560 from seven companies owned by Nirajkumar Patel, the Chief Science and Regulatory Officer and director of the Company, and/or his wife.

***Purchases and Accounts Payable***

During the fiscal year ended October 31, 2022, the Company purchased Products equal to $1,505,390 from Bidi, a related party company that is also owned by Nirajkumar Patel, the Company's Chief Science and Regulatory Officer and director. As of October 31, 2022, the Company did not have an accounts payable balance to Bidi.

During the fiscal year ended October 31, 2021, the Company purchased Products equal to $91,149,783 from Bidi, a related party company that is also owned by Nirajkumar Patel, the Company's Chief Science and Regulatory Officer and director, and after returns of $29,283,452, resulted in the net amount of $61,866,332 in product purchases. As of October 31, 2021, the Company had accounts payable to Bidi of $12,667,769.

  ****

During the fiscal year ended October 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 by $13,846,950.

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. Consequently, the Company has determined that no license fees are owed to Bidi as of October 31, 2022.

 ****

***Office Space and Other Leases***

On June 10, 2022, the Company entered into a Lease Agreement (the "2022 Lease") with Just Pick, LLC 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. Just Pick, LLC is considered a related party to the Company because the Company's Chief Science Officer and director, Mr. Nirajkumar Patel, owns and controls Just Pick, LLC. See also Note 4. We believe our office space is sufficient to meet our current needs.

During the fiscal year ended October 31, 2021, the Company was part of a five-year lease agreement with Just Pick, LLC (a related party), which began on August 1, 2020. The Company was not yet being charged for the leased space under the terms and conditions of the lease between the Company and Just Pick, LLC. Accordingly, no payments were made on the lease during the fiscal year ended October 31, 2022. The lease ended in the current year upon signing the previously mentioned lease with Just Pick, LLC on June 10, 2022.

***Concentration of Purchases and Other Receivable - Related Party***

For the year ended October 31, 2022, 100% of the inventories of Products, consisting solely of the BIDI<sup>®</sup> Stick, were purchased from Bidi, a related party company that is owned by Nirajkumar Patel, our Chief Science and Regulatory Officer and director, in the amount of approximately 1,505,390, as compared to $61,866,332 for the year ended October 31, 2021. There was no related party accounts payable balance as of October 31, 2022. In fiscal year 2021, such inventories accounted for 100% of the total related party accounts payable.

On April 29, 2022, the Company and Bidi agreed to cancel the $2,295,000 inventory order paid in advance in fiscal year 2021 and this was a credit against the accounts payable due to Bidi. Inventory quality control expenses were paid by the Company on behalf of Bidi during the year ended October 31, 2022, in the amount of approximately $723,000, and were offset as a credit against the accounts payable balance-related party. A credit of $2,924,655 was applied on August 1, 2022, resulting in a related-party receivable balance due from Bidi of $2,134,413, to be applied on future orders of Product. On October 31, 2022, the Company and Bidi agreed to a return for short-coded or expiring inventory. An additional credit of $1,543,545 and $108,841 for recycling cost was applied on October 31, 2022, to the related-party receivable balance due from Bidi.

As of October 31, 2022, the Company has a related-party receivable balance due from Bidi of $3,704,132, in which $1,539,486 of the receivable is classified as current and $2,164,646 is classified as non-current. The receivable balance will be realized though Bidi applying 5% credits on all future orders of product purchased until the entire balance is extinguished.

**Note 7 – Income Tax**

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

The Tax Cuts and Jobs Act (the "Tax Act") was enacted on December 22, 2017 and reduced the U.S. federal corporate tax rate from 35% to 21%, eliminated corporate Alternative Minimum Tax, modified rules for expensing capital investment, and limited the deduction of interest expense for certain companies. The Company fulfilled and shipped all the Products from Florida and, thus, it is subject to the state corporate income tax of Florida with a tax rate of 4.458%. There is no difference between the income tax computed at the combined federal and state statutory rate to the income tax effective rate.

Significant components of the tax expense (benefit) recognized in the accompanying statements of operations for the years ended October 31, 2022, and October 31, 2021, are as follows:

---

| | | |
|:---|:---|:---|
| Schedule of Components of Income Tax Expense (Benefit) |  |  |
|  | **October 31,** | **October 31,** |
|  | **2022** | **2021** |
| Current Tax Expense: |  |  |
| Federal | $— | $(1301008) |
| State | (18317) | (134190) |
| Total Current Tax Expense | (18317) | (1435198) |
| Deferred Tax Expense: |  |  |
| Federal |  |  |
| State |  |  |
| Total Deferred Tax Expense |  |  |
| Estimated Tax Payments: |  |  |
| Federal |  |  |
| State |  |  |
| Total Estimated Tax Payment |  |  |
| Net Income Tax Liability/(Benefit) | $(18317) | $(1435198) |

---

Total net deferred taxes are comprised of the following on October 31, 2021, and October 31, 2022:

---

| | | |
|:---|:---|:---|
| &nbsp;&nbsp;&nbsp;Schedule of Deferred Tax Assets and Liabilities |  |  |
|  | **October 31,** | **October 31,** |
|  | **2022** | **2021** |
| Deferred Tax Assets: |  |  |
| &nbsp;&nbsp;&nbsp;Stock Compensation Expense – NQSO | $1694324 | $384540 |
| &nbsp;&nbsp;&nbsp;Other | 362170 | 30099 |
| &nbsp;&nbsp;&nbsp;Net Operating Loss Carryforwards | 2582061 | 910685 |
| Total Deferred Tax Asset | 4638555 | 1325324 |
| Deferred Tax Liabilities: |  |  |
| &nbsp;&nbsp;&nbsp;Prepaid Expenses | (92420) | (69265) |
| &nbsp;&nbsp;&nbsp;Right of Use Asset | (259866) |  |
| Total Deferred Tax Liabilities | (352286) | (69265) |
| &nbsp;&nbsp;&nbsp;Less: Valuation Allowance | (4286269) | (1256059) |
| Net Deferred Tax Asset |  |  |

---

The Company has Federal NOL carryforwards of approximately $12,295,530 and state NOL carryforwards of approximately $85,429. 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 2019 and 2020 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 the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, management has determined that a valuation allowance of $4,286,269 for the year ended on October 31, 2022, it is necessary to reduce the deferred tax asset to the amount that will more likely than not be realized.

During the year ended October 31, 2021, the Company paid $1,637,102 in combined Federal/State income taxes for taxable income generated in fiscal year 2020. As of October 31, 2021, the Company had a total income tax receivable in the amount of $1,753,594, which was the result of the NOL generated in fiscal year 2021 to be applied against taxable income in fiscal year 2020. As of October 31, 2022, the Company had a total income tax receivable in the amount of $1,607,302 of which $1,127,683 was received on December 22, 2022. On January 17, 2023 the Company received a payment from the U.S. Treasury in the amount of approximately $491,000, which the eliminated the remaining receivable balance as of October 31, 2022.

During the year ended October 31, 2022, the Company generated a pre-tax loss of $(14,388,652), creating a $0 federal tax current provision and a state tax benefit of $(18,317).

**Note 8 – Commitments and Contingencies**

The Company follows ASC 450-20, *Los*s *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 October 31, 2022, and October 31, 2021 other than the below:

*Consulting Agreements*

 

On March 17, 2021, the Company entered into a consulting agreement with Russell Quick, pursuant to which the Company granted stock options exercisable for up to 41,667 shares of Common Stock in exchange for consulting services. The shares underlying the stock options fully vested on December 1, 2021. The exercise price per share was $28.68. The Company recognized approximately $190,000 in expense to account for the stock options during the fiscal year ended October 31, 2022. The Company recognized approximately $1,140,000 in expense to account for the stock options during the fiscal year ended October 31, 2021. Russell Quick is the Chief Executive Officer of QuikfillRx.

On December 1, 2021, the Company and Russell Quick agreed to renew his consulting agreement for one year, pursuant to which on May 18, 2022, the Company granted non-qualified stock options exercisable for up to 500,000 shares of the Common Stock in exchange for on-going consulting services. The shares underlying the stock options fully vest on December 1, 2022. They have a 10-year expiration. The exercise price per share is $1.03. The Company recognized approximately $434,000 in expense to account for the stock options in the fiscal year ended October 31, 2022. The Company accrued approximately $33,871 for a quarterly bonus payable to QuikfillRx, based on the Applicable Gross Quarterly Sales results of the three months ended October 31, 2022. As of the date of these financial statements, Mr. Quick has not exercised any of his fully vested stock options.

On 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 April 24, 2022, the Company approved amending the Consulting Agreement for Oakhill Europe, in order to modify the previously granted stock option award from "an incentive compensation bonus value of $75,000 paid in fully-vested non-qualified stock options, upon the achievement of certain events" to the following amended terms; "Non-Qualified Stock Options exercisable for up to 75,000 shares of common stock of the Client with an exercise price equal to the market closing price upon the Effective Date of the Amendment, with a vesting schedule as follows: (a) 37,500 shares of the common stock underlying the granted stock options will vest upon the earlier of either: (i) June 30, 2022 or (ii) the occurrence of the achievement of certain events; and b. 37,500 shares of common stock underlying the granted stock options will vest upon the earlier of either: (i) October 31, 2022 or (ii) the achievement of certain events." The option shares are exercisable at a price of $1.42 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. The option has a ten-year term. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.

On August 1, 2022, the Company approved the grant of a stock option award to an employee, to acquire up to 25,000 shares of Common Stock under the Company's Amended 2020 Stock and Incentive Compensation Plan. The option shares vest on August 1, 2023 and are exercisable at a price of $1.16 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. The option has a ten-year term. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.

On August 24, 2022, Company approved amending the Consulting Agreement for Mark Thoenes, the Company's Interim Chief Financial Officer, in order to extend its term, modify the vesting terms of the previously granted stock option award, and approved the grant of a stock option award to acquire up to 50,000 shares of Common Stock under the Company's Amended 2020 Stock and Incentive Compensation Plan. The option shares vest on August 24, 2022 and are exercisable at a price of $1.32 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. The option has a ten-year term. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.

On October 28, 2022, The Company entered into a settlement agreement with a customer in the amount of $150,000. The full settlement released and discharged both parties from future claims and damages, neither party has any further obligations to the other party arising out of or relating to the customer agreement.

*Executive Compensation*

 

On May 28, 2020, the Board approved cash bonus awards to each of Nirajkumar Patel, the Company's then Chief Executive Officer, and Eric Mosser, the Company's 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. On 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 April 30, 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 were accrued at April 30, 2021.

During the quarter ended April 30, 2022, the $125 million accumulated revenue targets were achieved, and the Company determined that cash bonuses totaling $50,000 were accrued on April 30, 2022.

On March 4, 2022, the Board terminated all future cash and equity bonus awards for the Company's Chief Executive Officer and its Chief Operating Officer.

On March 5, 2022, the Company granted a stock option award to Nirajkumar Patel, then the Company's Chief Executive Officer, to acquire up to 600,000 shares of Common Stock under the Company's 2020 Stock and Incentive Compensation Plan, as partial compensation for Mr. Patel's services as Chief Executive Officer. 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. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.

On March 5, 2022, the Company granted 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, as partial compensation for Mr. Mosser's services as Chief Operating Officer. 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. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.

On June 24, 2022, the Company granted a stock option award to Nirajkumar Patel, Chief Science and Regulatory Officer, to acquire up to 250,000 shares of Common Stock under the Company's 2020 Stock and Incentive Compensation Plan, as partial compensation for Mr. Patel's services as Chief Science and Regulatory Officer. The option shares are exercisable at a price of $1.72 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.

On June 24, 2022, the Company granted stock option awards to Eric Mosser, President and Chief Operating Officer, to acquire up to 250,000 shares of Common Stock under the Company's 2020 Stock and Incentive Compensation Plan, as partial compensation for Mr. Mosser's services as President and Chief Operating Officer. The option shares are exercisable at a price of $1.72 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.

*QuikfillRx 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") with QuikfillRx. Effective as of March 16, 2021, the Company entered into the Second Amendment to Service Agreement (the "Second Amendment") with QuikfillRx. Effective as of September 17, 2021, the Company entered into the Third Amendment to the Service Agreement (the "Third Agreement") with QuikfillRx. Effective as of June 24, 2022, the Company entered into the Fourth Amendment to the Service Agreement (the "Fourth Agreement" and, collectively with the First Amendment, Second Amendment, Third Amendment, and the Service Agreement, the "Amended Service Agreement") with QuikfillRx. Pursuant to the terms of the Amended Service Agreement, the parties agreed to the following "General Compensation" payments: (i) for the Services provided in March 2020, the Company paid QuikfillRx an amount equal to $86,000; (ii) for the Services provided in April 2020, the Company paid QuikfillRx an amount equal to $100,000; (iii) each calendar month commencing May 2020 through October 2020, the Company paid QuikfillRx an amount equal to $100,000 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 paid QuikfillRx $125,000 per month for the Services to be performed during such calendar month; (iv) for the period between November 1, 2021 and June 30, 2022, the Company paid QuikfillRx $150,000 per month for the Services to be performed during such calendar month; (v) for the period between July 1, 2022 and October 31, 2024, the Company will pay QuikfillRx $125,000 per month for the Services to be performed during such calendar month; and (vi) parties acknowledged that as a result of extensions to the term of the Service Agreement , such term of the Original Agreement will end on October 31, 2023. The parties have agreed to extend such term for an additional one year until October 31, 2024. In addition, the Company will pay the following quarterly bonuses:

● An amount equal to 0.9% of the Applicable Gross Quarterly Sales (as defined in the Amended Service Agreement), which amount shall, at the Company's option be paid in (a) cash or (b) shares of the Company's common stock, or (c) a combination of cash and common stock.

● An amount equal to 0.27% of the Applicable Gross Quarterly Sales, which amount must be paid in cash.

The Company accrued $33,871 for a quarterly bonus payable to QuikfillRx, based on the Applicable Gross Quarterly Sales results of the three months ended October 31, 2022. The Company accrued $3,775 for a quarterly bonus payable to QuikfillRx, based on the Applicable Gross Quarterly Sales results for the three months ended October 31, 2021.

**Note 9 – Subsequent Events**

*QuikfillRx Service Agreement Amendment*

Effective as of November 9, 2022, the Company entered into its latest amendment to the Service Agreement with QuikfillRx, (collectively with prior amendments, the "Amended Service Agreement"). The November 9, 2022 amendment to the Service Agreement was captioned as the "Fourth Amendment" although it was the fifth amendment to the Service Agreement. Pursuant to the Amended Service Agreement:

(a) &nbsp;&nbsp;&nbsp;&nbsp; the term of the Amended Service Agreement was extended (unless earlier terminated pursuant to the terms of the Amended Service Agreement) from November 1, 2022 (the "Effective Date") until October 31, 2025., following which the term shall automatically on renew for successive one (1) year periods beginning November 1, 2025;

(b) &nbsp;&nbsp;&nbsp;&nbsp; QuikfillRx agreed to change its "doing business as" name to "Kaival Marketing Services" within thirty (30) days following the Effective Date;

(c) &nbsp;&nbsp;&nbsp;&nbsp; it was provided that either party may terminate the Amended Service Agreement without cause upon not less than ninety (90) days prior written notice to the other party;

(d) &nbsp;&nbsp;&nbsp;&nbsp; QuikfillRx was granted a one-time, fully vested, ten-year non-qualified option award to purchase up to 250,000 shares of Company common stock with an exercise price of $0.9869 per share (the closing price of the Company's common stock on November 9, 2022)")., which option grant was memorialized pursuant to a Nonqualified Option Agreement, dated November 9, 2022, between the Company and QuikfillRx; and

(e)&nbsp;&nbsp;&nbsp;&nbsp; the parties agreed to revise the compensation for services as follows: (i) payment of $125,000 per month; (ii) bonus equivalent to 0.27% of the applicable gross quarterly sales and (iii) a grant of 3,000,000 nonqualified stock options to purchase shares of Company common stock which shall vest based on achievement of certain net revenue and profit margin targets up to $180,000,000 in total net revenues over a period of 3 years.

&nbsp;&nbsp;&nbsp;&nbsp;

**Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.**

None.

 **

**Item 9A Controls and Procedures.**

 

***Evaluation of Disclosure Controls and Procedures***

We maintain "disclosure controls and procedures," as such term is defined in Rule 13a-15e and Rule 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our President & Chief Operating Officer and our Interim Chief Financial Officer to allow for timely decisions regarding required disclosure.

As of October 31, 2022, the end of the year covered by this Report, we carried out an evaluation under the supervision and with the participation of members of our management, including our President & Chief Operating Officer and our Interim Chief Financial Officer, of the effectiveness of the design and the operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Exchange Act. Our management has concluded, based on their evaluation, that the disclosure controls and procedures were not effective as of the end of the year covered by this Report due to material weaknesses identified below.

***Management's Annual Report on Internal Control Over Financial Reporting***

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Internal control over financial reporting is a process, including policies and procedures, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. Our management assessed our internal control over financial reporting using the criteria in Internal Control – Integrated Framework (2013 Framework), issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). A system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Based on our evaluation under the framework in COSO, our management concluded that our internal control over financial reporting was ineffective, taken as a whole, as of October 31, 2022, based on such criteria. Material weaknesses existed in the design or operation of certain of our internal controls over financial reporting that adversely affect our internal controls. A material weakness is a significant deficiency, or combination of deficiencies, in internal control over financial reporting that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements may not be prevented or detected. Management determined that there was a lack of resources to provide segregation of duties consistent with control objectives, the lack of sufficient and consistent real time remote communications, and the lack of a fully developed formal review process that includes multiple levels of review over financial disclosure and reporting processes. However, management has been in the process of implementing new controls that should mitigate, if not fully eliminate certain identified risks in our control over financial reporting.

The weaknesses and the related risks are not uncommon in a company of our size because of the limitations in the location, size and number of our staff. To address these material weaknesses, and subject to the receipt of additional financing or cash flows, we have undertaken certain remediation measures to date to address the material weaknesses described in this Report, including implementing procedures pursuant to which we can ensure proper segregation of duties and hire additional resources to ensure appropriate review and oversight, as well as more timely formal communications processes, more diligent review and approval of all disbursements and more timely review of all banking transactions sales orders and inventory management.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met under all potential conditions, regardless of how remote, and may not prevent or detect all errors and all fraud. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

***Auditor's Report on Internal Control Over Financial Reporting***

This Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the SEC that permit us to provide only management's report in this Report.

***Changes in Internal Control Over Financial Reporting***

There have been no changes in our internal control over financial reporting (as that term is defined in Rules 13(a)-15(f) and 15(d)-15(f) of the Exchange Act) that have occurred during the fourth quarter ended October 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

**Item 9B. Other Information.**

None.

**Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections** 

Not Applicable.

**Item 10. Directors, Executive Officers and Corporate Governance.**

Each of our directors holds office until the next annual meeting of our stockholders or until his successor has been elected and qualified, or until his death, resignation, or removal. Our executive officers are appointed by our Board of Directors (our "Board") and hold office until their death, resignation, or removal from office.

Our current executive officers and directors and additional information concerning them are as follows:

---

| | | | |
|:---|:---|:---|:---|
| **Name** | **Age** | **Position(s)** | **Dates in Position or Office** |
| Nirajkumar Patel (1) | 40 | Chief Science & Regulatory Officer, Treasurer, and Director | June 24, 2022 – Current |
| Eric Mosser (2) | 44 | President & Chief Operating Officer, Secretary, and Director | June 24, 2022 - Current |
| Mark Thoenes | 69 | Interim Chief Financial Officer | June 30, 2021 - Current |
| Paul Reuter (3) | 75 | Director | March 17, 2021 - Current |
| Roger Brooks (4) | 78 | Director | March 17, 2021 - Current |
| George Chuang (5) | 55 | Director | June 30, 2021 - Current |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) Mr. Patel served as Chief Executive Officer and Chief Financial Officer
from February 20, 2019, until June 24, 2022.

(2) Mr. Mosser serves on the Finance Committee.

(3) Mr. Reuter serves as Chair of the Board of Directors, the Chair of the Governance and Nominating Committee, and on the Audit, Compensation, and Finance Committees.

(4) Mr. Brooks serves as Chair of the Audit Committee and a member of the Governance and Nominating, Compensation, and Finance Committees.

(5) Mr. Chuang serves as Chair of the Compensation Committee and a member of the Finance, Audit, and the Governance and Nominating Committees.

**Business Experience**

The following is a brief account of the education and business experience of our executive officers and directors during at least the past five years, indicating their principal occupation during the period, the name and principal business of the organization by which they were employed, and certain of their other directorships:

**Nirajkumar Patel, Chief Science & Regulatory Officer, and Director**

Mr. Nirajkumar Patel attended AISSMS College of Pharmacy in Pune, India and received a Bachelor of Science Degree in Pharmacy in 2004. After moving to the United States in 2005, Mr. Patel became a United States citizen in 2008 and obtained a Master Degree in Chemistry from the Florida Institute of Technology in 2009. Mr. Patel is a prominent local businessman in Brevard County, Florida. In 2017 and 2018, Mr. Patel served as Vice President for the Board of the Indian Association of the Space Coast, located in Brevard County, Florida. Mr. Patel founded, and has served as a Board member of, the Florida Independent Liquor Stores Owners Association since 2017. In 2013, Mr. Patel launched Just Chill Products LLC, a highly successful developer/manufacturer of high-end CBD products and has served as its Chief Executive Officer and Chief Science Officer since 2017. In 2017, Mr. Patel created Relax Lab Inc., a producer/manufacturer of a CBD relaxation beverage, and currently serves as its Chief Executive Officer and Chief Science Officer. In 2017, Mr. Patel also created RLX Lab LLC, a producer/manufacturer of a non-CBD relaxation beverage, and currently serves as its Chief Executive Officer and Chief Science Officer. In 2017, Mr. Patel also founded KC Innovations Lab Inc., a CBD white-label manufacturing service and developer/producer of best-selling white-label CBD products including cosmetics, edibles, beverages, topicals, and vape oils, and currently serves as its Chief Executive Officer and Chief Science Officer. Additional companies that are owned by Nirajkumar Patel, the Chief Science & Regulatory Officer and director of the Company, and/or his wife include Beach Food Store created in 2004, Diya Food Store created in 2010, Cloud Nine 2012 created in 2012, JC Products of USA, LLC created in 2013 and Just Pick, LLC. We believe that Mr. Patel is qualified to serve on our Board because of his prior and current management experience, as well as his business experience within our business industry.

**Eric Mosser, President & Chief Operating Officer, Secretary, and Director**

Mr. Eric Mosser attended Arizona State University and studied Business Management and then graduated from Rio Salado College with an Associate Degree in Applied Science in Computer Technology in 2004. With extensive previous corporate work history in Information Technology, Mr. Mosser worked from 2012 to 2014 as Director of Information Technology at Timbercon Inc., a fiber-optic design company and ITAR manufacturing facility in Oregon. In 2014, Mr. Mosser created Lasermycig LLC, a specialized custom laser-engraving service for electronic cigarettes and vaporizers and served as its Chief Executive Officer until 2020. Upon meeting Mr. Nirajkumar Patel in 2015, Mr. Mosser immediately founded Chillcorp Ltd., a full-service corporation dedicated solely to the complete internal and external operations of Just Chill Products LLC, Relax Lab Inc., RLX Lab LLC, and KC Innovations Lab Inc., and served as its Chief Executive Officer until 2020. We believe that Mr. Mosser is qualified to serve on our Board because of his current management and business experience.

**Mark Thoenes, Interim Chief Financial Officer**

Mr. Mark Thoenes, has more than 35 years of diverse financial and operational leadership. He has been a licensed Certified Public Accountant since 1984 and began his career with Ernst & Young Global Limited. From 2000 to 2010, Mr. Thoenes served as the Executive Vice President/Chief Financial Officer of Rentrak Corporation ("Rentrak"), a publicly traded company listed on Nasdaq and headquartered in Portland, Oregon. Founded in 1977, Rentrak went public in 1986, and remained a public company until it was acquired by comScore, Inc. in 2016, after Mr. Thoenes left Rentrak. For the past eleven years, Mr. Thoenes has been the President of MLT Consulting Services, LLC, a full-service business/financial consulting firm.

**Paul Reuter, Director**

Mr. Paul Reuter has nearly five decades of industry experience in small box retail as a journalist, editorial director, entrepreneur, and speaker. From April 2013 through June 2019, he served as the Chairman and Founding Partner of the Midwest Retail Group LLC, which was the largest 7-Eleven franchise group. Beginning in January 2018, Mr. Reuter founded and serves as a consultant for Kreative Collaborations, LLC, an industry consultancy. Prior to that, Mr. Reuter purchased CSP Information Group Inc. ("CSP Information Group") in 1992 and served as the Chief Executive Officer until July 2012, at which time CSP Information Group was sold to CSP Business Media, now Winsight LLC, based in Chicago, Illinois. Under his leadership, CSP Information Group became the industry leader in market share and a well-respected industry journalism entity. Mr. Reuter also serves as a director of Abierto Networks LLC ("Abierto Networks"), a digital communications and engagement solutions provider that primarily focuses on the convenience and food service industries. Mr. Reuter graduated from St. John's University in 1968. Mr. Reuter's previous experience in the convenience store industry provides invaluable knowledge to our Board, as well as his business experience gained as a founder and Chief Executive Officer of numerous companies, qualifies him to serve as a director.

**Roger Brooks, Director**

Mr. Roger Brooks has served as the Chairman, Treasurer, and Co-founder of Abierto Networks, a digital media and engagement technology company focused on the convenience store, retail, and other similar consumer market segments, since 2005. At Abierto Networks, Mr. Brooks has also served on the Compensation Committee since 2005. Prior to his roles at Abierto Networks, from 1998 to 2008, Mr. Brooks was the lead independent director and member of the compensation and audit committees for Moldflow Corporation, a Nasdaq-listed software company that was sold to Autodesk, Inc. in 2008. From February 2016 to June 2019, Mr. Brooks served as an independent director of Lytron, Incorporated, a closely held international industrial solutions company. From 1998 to 2002, Mr. Brooks served as President, Chief Executive Officer, and member of the board for Intelligent Controls, Inc., a publicly traded software and instrumentation company, which was sold to Franklin Electric Co. Inc. Mr. Brooks was President, Chief Executive Officer, and a board member of Dynisco, Inc. from 1987 to 1996 where he grew the company from $10 million of sales to an international company with over $100 million of sales. Mr. Brooks holds a Bachelor of Arts degree from the University of Connecticut and a Master of Business Administration degree from New York University, Stern Graduate Business School. He is also a graduate of the Stanford University Executive Management Program. Mr. Brooks extensive experience gained from his roles as an executive officer and director of numerous public companies, as well as experience in the convenience store, retail, and other consumer markets will be invaluable to the Board and qualifies him for service as a director.

**George Chuang, Director**

Mr. George Chuang has served as the Chief Executive Officer of Lucy Labs, Inc. since July 2017 and as the Chair of the Board of Directors of Lucy Labs, Inc. since November 2021. Prior to that, he served as the co-managing principal of Hillside Advisors LLC from June 2015 to July 2017. Mr. Chuang was also the principal owner of USB Media, Inc., a technology B2B company he founded in 2007. During his career, Mr. Chuang spent time at Chase Manhattan Bank as an assistant Treasurer for their Credit Risk Department, as a management consultant at Price Waterhouse Management Consulting, and served as the Chief Administrative Officer for several equity product sales groups at Lehman Brothers. In addition, Mr. Chuang spent eight years as a Principal at Pacific Partnership Advisors LLC, a consulting firm with offices in New York and Beijing, which facilitated cross-border transactions. Mr. Chuang graduated from the University of Chicago and obtained a Master of Business Administration degree at Yale University. Mr. Chuang's experience in capital markets and global supply chain knowledge, as well as his business experience in start-up companies, qualifies him for service as a director.

**Family Relationships**

There are no family relationships among any of our directors or executive officers.

**Arrangements**

There are no arrangements or understandings between an executive officer or director and any other person pursuant to which he was selected as an executive officer or director.

**Involvement in Certain Legal Proceedings**

None of our executive officers and directors have been involved in any legal or regulatory proceedings, as set forth in Item 401 of Regulation S-K, during the past ten years.

**Delinquent Section 16(a) Reports**

Section 16(a) of the Exchange Act requires our officers, directors, and persons who own more than ten percent of a class of our equity securities that is registered pursuant to Section 12 of the Exchange Act within specified time periods to file certain reports of ownership and changes in ownership with the SEC. Officers, directors, and ten-percent stockholders are required by regulation to furnish us with copies of all Section 16(a) forms they file. Based solely on a review of copies of the reports furnished to us and written representations from persons concerning the necessity to file these reports, we believe that all reports required to be filed pursuant to Section 16(a) of the Exchange Act during fiscal 2022 were filed with the SEC on a timely basis.

**Code of Ethics**

On March 17, 2021, our Board adopted a Code of Ethics and Business Conduct, which applies to all directors, senior officers, and employees of the Company (the "Code of Ethics"). The Code of Ethics was adopted to enhance and clarify our personnel's understanding of our standards of ethical business practices, promote awareness of ethical issues that may be encountered in carrying out an employee's or director's responsibilities, and sets forth how to address ethical issues that may arise. A copy of the Code of Ethics is available on our website at www.kaivalbrands.com or may be obtained free of charge by writing to Corporate Secretary, Kaival Brands Innovations Group, Inc., 4460 Old Dixie Highway, Grant, Florida 32949.

**Audit Committee**

The purpose of the Audit Committee of the Board is to represent and assist the Board in its general oversight of our accounting and financial reporting processes, audits of the financial statements, and internal control and audit functions. The responsibilities of the Audit Committee are set forth in a written charter which is available on our website at https://ir.kaivalbrands.com/governance/governance-documents/default.aspx. The Audit Committee currently consists of Roger Brooks, who serves as its Chairman, Paul Reuter, and George Chuang. Our Board has determined that Mr. Brooks, the Chairman of the Audit Committee, is an "audit committee financial expert" as defined under SEC rules.

**Compensation Committee**

The purpose of the Compensation Committee of the Board is to discharge the responsibilities of the Board relating to compensation of our executives, to produce an annual report on executive compensation for inclusion in our annual proxy statement, and to oversee and advise the Board on the adoption of policies that govern our compensation programs, including stock and benefit plans. The responsibilities of the Compensation Committee are set forth in a written charter which is available on our website at https://ir.kaivalbrands.com/governance/governance-documents/default.aspx. The Compensation Committee currently consists of George Chuang, who serves as its Chairman, Paul Reuter, and Roger Brooks.

**Governance and Nominating Committee**

The purpose of the Governance and Nominating Committee of the Board is to determine the slate of director nominees for election to our Board, to identify and recommend candidates to fill vacancies occurring between annual stockholder meetings, to review our policies and programs that relate to matters of corporate responsibility, including public issues of significance to our company and its stockholders, and any other related matters required by the federal securities laws. The responsibilities of the Governance and Nominating Committee are set forth in a written charter which is available on our website at https://ir.kaivalbrands.com/governance/governance-documents/default.aspx. The Governance and Nominating Committee currently consists of Paul Reuter, who serves as its Chairman, Roger Brooks, and George Chuang. We have not adopted any material changes to the procedures by which security holders may recommend nominees to our Board.

**Item 11. Executive Compensation.**

***Summary Compensation Table***

 ****

The table below summarizes all compensation awarded to, earned by, or paid to our named executive officers, which is defined herein as (i) all individuals serving or having served as our principal executive officer or officers during the year ended October 31, 2022, (ii) each of our two other most highly compensated executive officers who were serving as executive officers at the end of the year ended October 31, 2022, and (iii) any individuals for whom disclosure would have been required but for the fact that the individual was not serving as an executive officer as of the fiscal year ended October 31, 2022.

---

| | | | | | | | | | |
|:---|:---|:---|:---|:---|:---|:---|:---|:---|:---|
| **Name and principal position** | **Fiscal Year Ended October 31,** | **Salary ($)** | **Salary ($)** | **Bonus ($)** | **Stock Awards ($) (1) (2)** | **Option Awards ($) (1)** | **Non-Equity Incentive Plan Compensation ($) (3)** | **Nonqualified Deferred Compensation Earnings ($)** | **Total ($)** |
| Nirajkumar Patel, Chief Science & Regulatory Officer, and Director | 2021 | 171000 |  | 60000 | 157102 | 0 | 40156 | 0 | 428258 |
|  | 2022 | 244000 |  | 30000 | 42584 | 2139989 | 57709 | 0 | 2514282 |
| Eric Mosser, President & COO, Secretary, and Director | 2021 | 138000 |  | 40000 | 150652 | 0 | 135147 | 0 | 463799 |
|  | 2022 | 226577 |  | 20000 | 37707 | 1854991 | 57709 | 0 | 2196984 |
| Mark Thoenes, Interim CFO | 2021 | 80340 |  | 0 | 0 | 0 | 0 | 0 | 80340 |
|  | 2022 | 347201 | (4) | 0 | 0 | 310998 | 0 | 0 | 658189 |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) Reflects the fair value of stock awards during the years in accordance with FASB ASC 718, Compensation – Stock Compensation, using actual forfeitures that were immaterial. For valuation assumptions, refer to Note 2, "*Share-based Compensation*," to the audited consolidated financial statements for the year ended October 31, 2022.

(2) Includes fair value of shares withheld by us to pay for taxes.

(3) Consisted of cash paid in lieu of vested RSUs.

(4) Consulting fees pursuant to the Consulting Agreement (as defined below). See "Narrative Discussion" for additional information.

***Narrative Discussion***

 ****

The following is a narrative discussion of the material information that we believe is necessary to understand disclosed in the foregoing Summary Compensation Table. The following narrative disclosure is separated into sections, with a separate section for each of our named executive officers.

On January 21, 2021, our Board approved an increase in annual base salaries equal to $180,000 for our then Chief Executive Officer (Nirajkumar Patel) and $144,000 for our then Chief Operating Officer (Eric Mosser). On June 24, 2022, following the realignment of the persons holding officer titles, our Board approved an increase in annual base salaries equal to $300,000 for our President & Chief Operating Officer (Eric Mosser) and $276,000 for our Chief Science and Regulatory Officer (Nirajkumar Patel). The annual base salaries will be reviewed by our Board on an annual basis.

On March 5, 2022, the Company granted a stock option award to Nirajkumar Patel, our then Chief Executive Officer, to acquire up to 600,000 shares of Common Stock under the Company's 2020 Stock and Incentive Compensation Plan, as partial compensation for Mr. Patel's services as Chief Executive Officer. 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. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.

On March 5, 2022, the Company granted 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, as partial compensation for Mr. Mosser's services as Chief Operating Officer. 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. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.

On June 24, 2022, the Company granted a stock option award to Nirajkumar Patel, Chief Science and Regulatory Officer, to acquire up to 250,000 shares of Common Stock under the Company's 2020 Stock and Incentive Compensation Plan, as partial compensation for Mr. Patel's services as Chief Science and Regulatory Officer. The option shares are exercisable at a price of $1.72 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.

On June 24, 2022, the Company granted stock option awards to Eric Mosser, President and Chief Operating Officer, to acquire up to 250,000 shares of Common Stock under the Company's 2020 Stock and Incentive Compensation Plan, as partial compensation for Mr. Mosser's services as President and Chief Operating Officer. The option shares are exercisable at a price of $1.72 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.

***Nirajkumar Patel***

During the fiscal year ended October 31, 2022, we paid a base salary of approximately $244,000 to Nirajkumar Patel, our then Chief Executive Officer (now Chief Science & Regulatory Officer), compared to a base salary of approximately $171,000 for the fiscal year ended October 31, 2021. In May 2020, our Board approved a cash bonus award to Mr. Patel equal to $30,000 for every $25 million in gross revenues generated by us. On the same date, our Board also approved an equity bonus award to Mr. Patel of 75,000 restricted shares of our common stock for every $50 million in accumulated gross revenues generated by us. Based on the cash bonus award, we paid Mr. Patel a cash bonus of $60,000 in fiscal year 2021 and $30,000 in fiscal year 2022 based on our meeting the gross revenue benchmarks in each respective fiscal year.

We issued the following stock-based compensation to Mr. Patel during fiscal years 2022 and 2021:

---

| | | | |
|:---|:---|:---|:---|
| **Vesting and/or Issuance Date** | **Number of Shares of our Common Stock** | **Price Per Share** | **Aggregate Value** |
| 11/5/2020 | 10833 | $3.79 (1) | $41082 |
| 12/31/2020 | 7500 | $5.16 (2) | $38702 |
| 2/5/2021 | 12444 | $16.08 (1) | $196881 |
| 5/5/2021 | 12608 | $14.52 (1) | $183073 |
| 8/5/2021 | 12608 | $6.26 (1) | $78926 |
| 11/5/2021 | 15760 | $1.80 | $28368 |
| 2/5/2022 | 14656 | $0.97 | $14216 |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) Shares issued are pursuant to a restricted
 stock unit award granted in fiscal 2020, with vesting to occur over a period of three years. The price per share is based
 on the average of the close price reported for the three trading days prior to the vesting and issuance date.

(2) Shares issued are as a result of the
 Company achieving $50 million in accumulated gross revenues. The price per share is based on the close price reported on the
 issuance date.

During fiscal year 2021, we also paid approximately $40,156 in non-equity incentive plan compensation, which consisted of cash paid in lieu of a vested RSU issuance. During fiscal year 2022, we paid approximately $57,709 in non-equity incentive plan compensation, which consisted of cash paid in lieu of a vested RSU issuance. The aggregate values are based on the value of the vesting date for the shares that would have been issued.

***Eric Mosser***

During the fiscal year ended October 31, 2022, we paid a base salary of approximately $226,577 to Eric Mosser, our President & Chief Operating Officer, compared to $138,000 for the fiscal year ended October 31, 2021. In May 2020, our Board approved a cash bonus award to Mr. Mosser equal to $20,000 for every $25 million in gross revenues generated by us. On the same date, our Board also approved an equity bonus award to Mr. Mosser of 6,250 restricted shares of our common stock for every $50 million in accumulated gross revenues generated by us. Based on the cash bonus award, we paid Mr. Mosser a cash bonus of $40,000 in fiscal year 2021 and $20,000 in fiscal year 2022 based on our gross revenue benchmarks in each respective fiscal year.

We issued the following stock-based compensation to Mr. Mosser during fiscal years 2022 and 2021:

---

| | | | |
|:---|:---|:---|:---|
| **Vesting and/or Issuance Date** | **Number of Shares of our Common Stock** | **Price Per Share** | **Aggregate Value** |
| 11/5/2020 | 2083 | $3.79 | $7900 |
| 12/31/2020 | 6250 | $5.16 | $32251 |
| 2/5/2021 | 10879 | $16.08 | $174934 |
| 5/5/2021 | 8333 | $14.52 | $121000 |
| 11/5/2021 | 14072 | $1.80 | $25330 |
| 2/5/2022 | 12760 | $0.97 | $12377 |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) Shares issued are pursuant to a restricted
 stock unit award granted in fiscal 2020, with vesting to occur over a period of three years. The price per share is based
 on the average of the close price reported for the three trading days prior to the vesting and issuance date.

(2) Shares issued are as a result of the
 Company achieving $50 million in accumulated gross revenues. The price per share is based on the close price reported on the
 issuance date.

During fiscal year 2021 we also paid approximately $135,147 in non-equity incentive plan compensation, which consisted of cash paid in lieu of a vested RSU issuance. During fiscal year 2022 we paid approximately $57,709 in non-equity incentive plan compensation, which consisted of cash paid in lieu of a vested RSU issuance. The aggregate value is based on the value on the vesting date for the shares that would have been issued.

***Mark Thoenes***

 ****

Effective June 30, 2021, we entered into a Consulting Agreement, dated June 14, 2021, with Mr. Thoenes (the "Consulting Agreement"), Pursuant to the Consulting Agreement, we agreed to pay Mr. Thoenes a rate of $130 per hour and will reimburse him for usual and customary business expenses. We paid approximately $80,340 and $347,671 to Mr. Thoenes pursuant to the Consulting Agreement during the fiscal years 2021 and 2022 respectively. In the fiscal year 2022 Mr. Thoenes was granted 150,000 non-qualified stock options of the Company's common stock, pursuant to the Consulting Agreement. The total fair market value of these stock options on October 31, 2022, was $310,998. The Consulting Agreement is for a term of approximately 6 months, or until December 31, 2021, and may be extended by the parties. The parties then further extended the term to June 30, 2023, Mr. Thoenes is assisting us as Interim Chief Financial Officer until such time as we have identified an individual to serve as a full-time Chief Financial Officer.

**Outstanding Equity Awards at Fiscal Year-End**

---

| | | |
|:---|:---|:---|
| | **Stock Option Awards** | **Stock Option Awards** |
| <br>**Name** | **Number of Stock Options that Have Not Vested (#)** | **Market Value of Stock Options that Have Not Vested ($)** |
| Nirajkumar Patel | 550000 | 1285000 |
| Eric Mosser | 500000 | 1142500 |

---

On March 5, 2022, the Company granted a stock option award to Nirajkumar Patel, at the time our Chief Executive Officer, to acquire up to 600,000 shares of Common Stock under the Company's 2020 Stock and Incentive Compensation Plan, as partial compensation for Mr. Patel's services as Chief Executive Officer. 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. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.

On March 5, 2022, the Company granted 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, as partial compensation for Mr. Mosser's services as Chief Operating Officer. 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. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.

On June 24, 2022, the Company granted a stock option award to Nirajkumar Patel, Chief Science and Regulatory Officer, to acquire up to 250,000 shares of Common Stock under the Company's 2020 Stock and Incentive Compensation Plan, as partial compensation for Mr. Patel's services as Chief Science and Regulatory Officer. The option shares are exercisable at a price of $1.72 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.

On June 24, 2022, the Company granted stock option awards to Eric Mosser, President and Chief Operating Officer, to acquire up to 250,000 shares of Common Stock under the Company's 2020 Stock and Incentive Compensation Plan, as partial compensation for Mr. Mosser's services as President and Chief Operating Officer. The option shares are exercisable at a price of $1.72 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.

**Potential Payments Upon Termination or Change-of-Control**

Other than the RSUs mentioned above in "Outstanding Equity Awards at Fiscal Year-End", none of our named executive officers are entitled to any payments upon termination or change-of-control.

**Retirement or Similar Benefit Plans**

There are no arrangements or plans in which we provide retirement or similar benefits for our named executive officers.

**Employment Agreements**

We do not have formal written employment agreements with Mr. Patel or Mr. Mosser. We are party to the Consulting Agreement between us and Mr. Thoenes.

**Director Compensation**

In fiscal year 2022, we compensated our independent directors.

---

| | | | |
|:---|:---|:---|:---|
| **(a)** <br> **Name of Director <sup>(1)</sup>** | **(b) <br> Fees Earned<br> or Paid in<br> Cash** | **(d) <br> Option<br> Awards** | **(h) <br> Total** |
| Paul Reuter | $100000 | $214999 | $314999 |
| Roger Brooks | 100000 | 214999 | 314999 |
| George Chuang | 100000 | 214999 | 314999 |

---

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) Mr. Patel and Mr.
 Mosser are each named executive officers and, accordingly, their compensation is included in the "Summary Compensation
 Table" above. Neither Mr. Patel nor Mr. Mosser received any compensation for their service as a director for the fiscal
 year ended October 31, 2022.

**Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.**

**Securities Authorized for Issuance Under Equity Compensation Plans**

The following table sets forth information with respect to compensation plans under which our equity securities are authorized for issuance as of the end of fiscal year 2022:

---

| | | | |
|:---|:---|:---|:---|
| **Plan category** | **Number of securities to be issued upon exercise of outstanding options, warrants and rights** | **Weighted average exercise and grant price of outstanding options, warrants and rights** | **Number of securities remaining available for future issuance** |
| Equity compensation plans approved by security holders | 0 | 0 | 0 |
| Equity compensation plans not approved by security holders | 42916 | $17.98 | 6713749 |

---

*Plans Not Approved by Stockholders*

On May 28, 2020, our Board adopted the Incentive Plan. The following is a summary of the principal features of the Incentive Plan. The summary of the Incentive Plan does not purport to be complete and is qualified in its entirety by reference to the full text of the Incentive Plan.

*Background*. The purpose of the Incentive Plan is to enhance stockholder value by linking the compensation of our employees, officers, directors, and consultants to increases in the price of our common stock and the achievement of other performance objectives and to encourage ownership in the Company by key personnel whose long-term employment is considered essential to our continued progress and success. The Incentive Plan is also intended to assist us in recruiting new employees and to motivate, retain, and encourage such employees and directors to act in stockholders' interest and share in our success. The various types of incentive awards that may be provided under the Incentive Plan are intended to enable us to respond to changes in compensation practices, tax laws, accounting regulations, and the size and diversity of its business. We will not offer incentive stock options under the Incentive Plan. All our employees, officers, directors, and consultants will be eligible to be granted awards under the Incentive Plan.

The Incentive Plan will be administered by our Board. All awards made under the Incentive Plan will be subject to the recommendations and approvals of our Board.

*Stock Subject to the Incentive Plan*. Subject to the terms of the Incentive Plan, the maximum aggregate number of shares of our common stock that may be subject to or delivered under awards granted pursuant to the Incentive Plan is 100,000,000 shares. Shares subject to awards that have been canceled, expired, settled in cash, or not issued or forfeited for any reason (in whole or in part) will not reduce the aggregate number of shares that may be subject to or delivered under awards granted under the Incentive Plan and be available for future awards granted under the Incentive Plan.

*Eligibility*. We may grant awards under the Incentive Plan to employees, officers, directors, and consultants.

*Types of Awards*. The Incentive Plan provides for options not qualifying as "incentive" stock options, as defined in Section 422 of the Internal Revenue Code of 1986, as amended, stock appreciation rights, shares of restricted stock, and other stock-based awards.

*Award Limitation*. Non-employee directors may not be granted awards in excess of the 200,000 shares of our common stock in any calendar year.

*Term and Amendments*. Unless terminated by our Board, the Incentive Plan will continue to remain effective until no further awards may be granted, and all awards granted under the Incentive Plan are no longer outstanding. Our Board may at any time, and from time to time, amend the Incentive Plan; provided that no amendment will be made that would impair the rights of a holder under any agreement entered into pursuant to the Incentive Plan without the holder's consent.

**Security Ownership of Certain Beneficial Owners and Management**

***Common Stock***

The following table sets forth, as of January 27, 2023, the number of shares of common stock owned of record and beneficially by (i) each of our current directors, (ii) each of our named executive officers, (iii) our directors and executive officers as a group, and (iv) each stockholder known by us to be the beneficial owner of more than 5% of our outstanding common stock. Beneficial ownership has been determined in accordance with the rules and regulations of the SEC and includes voting or investment power with respect to shares. Unless otherwise indicated, the persons named in the table have sole voting and investment power with respect to the number of shares indicated as beneficial owned by them.

---

| | | |
|:---|:---|:---|
| **Name and Address (1)** | **Amount and Nature of Beneficial Ownership (Common Stock) (2)** | **Percentage of Class (2)** |
| Nirajkumar Patel (3) | 42735801 | 76.08% |
| Eric Mosser (4) | 42579164 | 75.81% |
| Mark Thoenes (5) | 151667 | \* |
| Paul Reuter (6) | 141666 | \* |
| Roger Brooks (7) | 141666 | \* |
| George Chuang (8) | 141666 | \* |
| **Current Executive Officers and Directors as a Group (6 Persons)** | **43891630** | **78.14%** |
| Kaival Holdings, LLC (9) 401 N. Wickham Road, Suite 130 Melbourne, FL 32935 | 42000000 | 74.77% |

---

\* Less than 1.0%

(1) The address for each person listed above is 4460 Old Dixie Highway, Grant-Valkaria, Florida 32949, unless otherwise indicated.

(2) Applicable percentage of ownership is based on 56,169,090 shares of common stock outstanding as of January.27, 2023. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock that are currently exercisable within 60 days of January 27, 2023, are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person but are not treated as outstanding for the purpose of computing the percentage ownership of any person.

(3) Nirajkumar Patel serves as our Chief Science & Regulatory Officer, and director. Consists of 42,000,000 shares of our common stock held by KH, an entity over which Mr. Patel has shared dispositive and voting authority, and approximately 600,000 shares of our common stock issuable upon the exercise of vested options.

(4) Eric Mosser serves as our President & Chief Operating Officer, Secretary, and director. Consists of 42,000,000 shares of our common stock held by KH, an entity over which Mr. Mosser has shared dispositive and voting authority, and approximately 500,000 shares of our common stock issuable upon the exercise of vested options.

(5) Consists of approximately 150,000 shares of our common stock issuable upon the exercise of vested options.

(6) Consists of approximately 141,666 shares of our common stock issuable upon the exercise of vested options.

(7) Consists of approximately 141,666 shares of our common stock issuable upon the exercise of vested options.

(8) Consists of approximately 141,666 shares of our common stock issuable upon the exercise of vested options.

(9) Nirajkumar Patel and Eric Mosser are the sole voting members of KH.

***Preferred Stock***

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 Stock. On June 24, 2022, all 3,000,000 shares of Series A Preferred Stock were converted into shares of Common Stock by Kaival Holdings, LLC, a related party. 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 or outstanding as of October 31, 2022.

**Item 13. Certain Relationships and Related Transactions.**

***Revenue***

During the fiscal year ended October 31, 2022, the Company recognized revenue of $68,139 from five companies owned by Nirajkumar Patel, the Chief Science & Regulatory Officer of the Company, and/or his wife.

***Purchases and Accounts Payable***

For the year ended October 31, 2022, 100% of the inventories of the products, consisting solely of the BIDI® Stick, were purchased from Bidi Vapor, LLC ("Bidi"), a related party company that is owned by Nirajkumar Patel, our Chief Science and Regulatory Officer, in the amount of approximately $1.5 million. There was no related party accounts payable balance as of October 31, 2022.

***Review, Approval, and Ratification of Transactions with Related Persons***

We follow ASC 850, *Related Party Disclosures*, for the identification of related parties and disclosure of related party transactions. When and if we contemplate entering into a transaction in which any executive officer, director, nominee, or any family member of the foregoing would have a direct or indirect interest, regardless of the amount involved, the terms of such transaction are presented to our board of directors (other than any interested director, if possible) for approval, and documented in the board minutes.

**Director Independence**

As of October 31, 2022, our Board was composed of five persons – Nirajkumar Patel, Eric Mosser, Paul Reuter, Roger Brooks, and George Chuang. In accordance with the rules of the SEC and Rule 5605 of The Nasdaq Stock Market Listing Rules, our Board affirmatively determines the independence of each director. Based on these standards, the Board has determined that as of the end of fiscal 2022, each of the following non-employee directors was independent and has no relationship with us except as one of our directors and stockholders: Paul Reuter, Roger Brooks, and George Chuang.

All the members of the Audit, Governance and Nominating, and Compensation Committees are also independent.

**Item 14. Principal Accounting Fees and Services.**

Below is the aggregate amount of fees billed for professional services rendered by MaloneBailey, LLP, our principal accountants with respect to our fiscal year ended October 31, 2022, and October 31, 2021.

---

| | | |
|:---|:---|:---|
|  | 2022 | 2021 |
| Audit and review fees | $195000 | $252500 |
| Audit-related fees | 10000 | 3820 |
| Tax fees |  |  |
| All other fees |  | 55000 |
| Total | $205000 | $311320 |

---

**Pre-Approval Policies and Procedures**

All audit fees are approved by the Audit Committee of our Board. The Audit Committee reviews, and in its sole discretion, pre-approves, our independent auditors' annual engagement letter, including proposed fess and all audit and non-audit services provided by the independent auditors. Accordingly, all services described under "Audit Fees," "Audit-related Fees," "All Other Fees," and "Tax Fees," as applicable, were pre-approved by our Audit Committee. The Audit Committee may not engage independent auditors to perform the non-audit services prohibited by law or regulations.

**PART IV**

**Item 15. Exhibits, Financial Statement Schedules.**

a) Financial Statements

&nbsp;&nbsp;&nbsp;&nbsp;1. Our financial statements are listed in the index under Item 8 of this document; and

&nbsp;&nbsp;&nbsp;&nbsp;2. All financial statement schedules are omitted because they are not applicable, not material or the required information is shown in the financial statements or notes thereto.

(b) Exhibits required by Item 601 of Regulation S-K.

---

| | |
|:---|:---|
| **Exhibit Number** | **Description** |
| 3.1 | [Restated Certificate of Incorporation, which was filed as Exhibit 3.1 to our Registration Statement on Form 10-12G filed with the Securities and Exchange Commission on March 25, 2019 and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000159991619000052/articlesofinc.htm) |
| 3.2 | [Bylaws, which were filed as Exhibit 3.2 to our Registration Statement on Form 10-12G filed with the Securities and Exchange Commission on February 19, 2019 and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000159991619000028/articlesofinc.htm) |
| 3.3 | [Certificate of Ownership and Merger, as filed with the Secretary of State of the State of Delaware on June 20, 2019, which was filed as Exhibit 3.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on July 15, 2019 and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000173112219000386/e1427_3-1.htm) |
| 3.4 | [Certificate of Correction, as filed with the Secretary of State of the State of Delaware on July 15, 2019, which was filed as Exhibit 3.2 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on July 15, 2019 and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000173112219000386/e1427_3-2.htm) |
| 3.5 | [Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Kaival Brands Innovations Group, Inc., effective July 20, 2021, which was filed as Exhibit 3.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on July 20, 2021, and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000173112221001188/e2932_ex3-1.htm) |
| 4.1 | [Description of Securities.\*](e4364_ex4-1.htm) |
| 4.2 | [Form of senior indenture, filed as Exhibit 4.4 to our Registration Statement on Form S-3 filed with the Securities and Exchange Commission on July 30, 2021, and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000173112221001281/e2966_ex4-4.htm) |
| 4.3 | [Form of Warrant, filed as Exhibit 4.1 to our Current Report on Form 8-K filed with Securities and Exchange Commission on October 4, 2021, and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000173112221001636/e3140_ex4-1.htm) |
| 4.4 | [Warrant Agency Agreement, dated as of September 29, 2021, by and between Kaival Brands Innovations Group, Inc. and Vstock Transfer, LLC, as warrant agent, filed as Exhibit 4.2 to our Current Report on Form 8-K filed with Securities and Exchange Commission on October 4, 2021, and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000173112221001636/e3140_ex4-2.htm) |
| 10.1 | [Exclusive Distribution Agreement by and between Kaival Brands Innovations Group, Inc. and Bidi Vapor LLC, dated March 9, 2020, which was filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on March 9, 2020, and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000159991620000036/ex10_1.htm) |
| 10.2 | [Service Agreement by and between Kaival Brands Innovations Group, Inc. and QuikfillRx LLC, dated March 31, 2020, which was filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 1, 2020, and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000159991620000047/serviceagreement.htm) |
| 10.3 | [First Amendment to Service Agreement by and between Kaival Brands Innovations Group, Inc. and QuikfillRx LLC, dated June 2, 2020, which was filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 3, 2020, and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000173112220000618/e1968_10-1.htm) |

---

10.4 [Non-Exclusive Sub-Distribution Agreement by and between Kaival Brands Innovations Group, Inc. and Favs Business, LLC, dated April 3, 2020, which was filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 6, 2020, and is incorporated herein by reference thereto. <u>(1)</u>](http://www.sec.gov/Archives/edgar/data/1762239/000173112220000344/e1848_10-1.htm)

10.5 [Non-Exclusive Sub-Distribution Agreement by and between Kaival Brands Innovations Group, Inc. and Colonial Wholesale Distributing Inc., dated April 11, 2020, which was filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 13, 2020, and is incorporated herein by reference thereto. <u>(1)</u>](http://www.sec.gov/Archives/edgar/data/1762239/000173112220000374/e1864_10-1.htm)

10.6 [Amended and Restated Exclusive Distribution Agreement by and between Kaival Brands Innovations Group, Inc. and Bidi Vapor LLC, dated May 21, 2020, which was filed as Exhibit 10.5 to our Form 10-Q filed with the Securities and Exchange Commission on May 27, 2020, and is incorporated herein by reference thereto. <u>(1)</u>](http://www.sec.gov/Archives/edgar/data/1762239/000173112220000584/e1956_ex10-5.htm)

10.7 [Amended and Restated Non-Exclusive Sub-Distribution Agreement by and between Kaival Brands Innovations Group, Inc. and Favs Business, LLC, dated May 21, 2020, which was filed as Exhibit 10.6 to our Form 10-Q filed with the Securities and Exchange Commission on May 27, 2020, and is incorporated herein by reference thereto. <u>(1)</u>](http://www.sec.gov/Archives/edgar/data/1762239/000173112220000584/e1956_ex10-6.htm)

10.8 [Amended and Restated Non-Exclusive Sub-Distribution Agreement by and between Kaival Brands Innovations Group, Inc. and Colonial Wholesale Distributing Inc., dated May 25, 2020, which was filed as Exhibit 10.7 to our Form 10-Q filed with the Securities and Exchange Commission on May 27, 2020, and is incorporated herein by reference thereto. <u>(1)</u>](http://www.sec.gov/Archives/edgar/data/1762239/000173112220000584/e1956_ex10-7.htm)

10.9 [Share Cancellation and Exchange Agreement, by and between the Company and Kaival Holdings, LLC, dated August 19, 2020, which was filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on August 21, 2020, and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000159991620000101/shareagreement101_82120.htm)

10.10 [2020 Stock and Incentive Compensation Plan, which was filed as Exhibit 10.2 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 3, 2020 and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000173112220000618/e1968_10-2.htm)

10.11 [Form of Restricted Stock Unit Agreement by and between Kaival Brands Innovations Group, Inc. and Nirajkumar Patel, which was filed as Exhibit 10.3 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 3, 2020, and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000173112220000618/e1968_10-3.htm)

10.12 [Form of Restricted Stock Unit Agreement by and between Kaival Brands Innovations Group, Inc. and Eric Mosser, which was filed as Exhibit 10.4 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 3, 2020, and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000173112220000618/e1968_10-4.htm)

10.13 [Form of Restricted Stock Unit Agreement by and between Kaival Brands Innovations Group, Inc. and Nirajkumar Patel, which was filed as Exhibit 10.5 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 3, 2020 and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000173112220000618/e1968_10-5.htm)

10.14 [Form of Restricted Stock Unit Agreement by and between Kaival Brands Innovations Group, Inc. and Eric Mosser, which was filed as Exhibit 10.6 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 3, 2020 and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000173112220000618/e1968_10-6.htm)

10.15 [Lease Agreement by and between Kaival Brands Innovations Group, Inc., and Just Pick, LLC, dated July 15, 2020, which was filed as Exhibit 10.14 to our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on September 14, 2020, and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000173112220000946/e2108_10-14.htm)

10.16 [Second Amended and Restated Exclusive Distribution Agreement, by and between Kaival Brands Innovations Group, Inc. and Bidi Vapor, LLC, dated April 2021, which was filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 21, 2021, and is incorporated herein by reference thereto. (1)](http://www.sec.gov/Archives/edgar/data/1762239/000173112221000625/e2658_10-1.htm)

10.17 [Consulting Agreement, by and between Kaival Brands Innovations Group, Inc. and Russell Quick, dated March 16, 2021, which was filed as Exhibit 10.18 to our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on June 21, 2021, and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000173112221001071/e2861_ex10-18.htm)

10.18 [Second Amendment to Service Agreement, by and between Kaival Brands Innovations Group, Inc. and QuikfillRx LLC, effective as of March 16, 2021, which was filed as Exhibit 10.19 to our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on June 21, 2021 and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000173112221001071/e2861_ex10-19.htm)

10.19 [Independent Director Agreement, dated June 30, 2021, by and between the Company and George Chuang, which was filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on July 1, 2021, and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000173112221001119/e2888_ex10-1.htm)

10.20 [Consulting Agreement, dated June 14, 2021, by and between the Company and Mark Thoenes, which was filed as Exhibit 10.2 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on July 1, 2021, and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000173112221001119/e2888_ex10-2.htm)

---

| | |
|:---|:---|
| 10.21 | [Amended and Restated Independent Director Agreement, dated March 29, 2021, by and between the Company and Roger Brooks, which was filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on July 23, 2021, and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000173112221001232/e2943_ex10-1.htm) |
| 10.22 | [Amended and Restated Independent Direct Agreement, dated March 29, 2021, by and between the Company and Paul Reuter, which was filed as Exhibit 10.2 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on July 23, 2021, and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000173112221001232/e2943_ex10-2.htm) |
| 10.23 | [Amendment to Amended and Restated Independent Director Agreement, dated July 19, 2021, by and between the Company and Roger Brooks, which was filed as Exhibit 10.3 to our Current Report on Form 8-K filed with Securities and Exchange Commission on July 23, 2021, and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000173112221001232/e2943_ex10-3.htm) |
| 10.24 | [Amendment to Amended and Restated Independent Director Agreement, dated July 19, 2021, by and between the Company and Paul Reuter, which was filed as Exhibit 10.4 to our Current Report on Form 8-K filed with Securities and Exchange Commission on July 23, 2021, and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/1762239/000173112221001232/e2943_ex10-4.htm) |
| 10.25 | [Third Amended and Restated Exclusive Distribution Agreement, by and between Kaival Brands Innovations Group, Inc. and Bidi Vapor, LLC, dated June 10, 2022, which was filed as Exhibit 10.23 to our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on June 21, 2022, and is incorporated herein by reference thereto. (1) +](http://www.sec.gov/Archives/edgar/data/0001762239/000173112222001099/e3829_ex10-23.htm) |
| 10.26 | [Lease Agreement by and between the Company and Just Pick, LLC, dated June 10, 2022, which was filed as Exhibit 10.24 to our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on June 21, 2022, and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/0001762239/000173112222001099/e3829_ex10-24.htm) |
| 10.27 | [License Agreement by and between the Company and Bidi Vapor, LLC, dated June 10, 2022, which was filed as Exhibit 10.25 to our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on June 21, 2022, and is incorporated herein by reference thereto. (1)](http://www.sec.gov/Archives/edgar/data/1762239/000173112222001099/e3829_ex10-25.htm) |
| 10.28 | [Deed of Licensing Agreement by and between Kaival Brands International, LLC and Philip Morris Products S.A., dated as of June 13, 2022, which was filed as Exhibit 10.26 to our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on June 21, 2022, and is incorporated herein by reference thereto. (1) +](http://www.sec.gov/Archives/edgar/data/0001762239/000173112222001099/e3829_ex10-26.htm) |
| 10.29 | [Fourth Amendment to Service Agreement, dated November 9, 2022 between the Company and QuikfillRx, which was filed as Exhibit 10.1 to our Current Report on Form 8-K filed with Securities and Exchange Commission on November 15, 2022, and is incorporated herein by reference thereto. +](http://www.sec.gov/Archives/edgar/data/0001762239/000173112222001986/e4234_ex10-1.htm) |
| 10.30 | [Nonqualified Stock Option Grant Agreement, dated November 9, 2022, between the Company and QuikfillRx, which was filed as Exhibit 10.2 to our Current Report on Form 8-K filed with Securities and Exchange Commission on November 15, 2022, and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/0001762239/000173112222001986/e4234_ex10-2.htm) |
| 10.31 | [Nonqualified Stock Option Grant Agreement, dated November 9, 2022, between the Company and QuikfillRx, which was filed as Exhibit 10.3 to our Current Report on Form 8-K filed with Securities and Exchange Commission on November 15, 2022, and is incorporated herein by reference thereto.](http://www.sec.gov/Archives/edgar/data/0001762239/000173112222001986/e4234_ex10-3.htm) |
| 21.1 | [List of Subsidiaries\*](e4364_ex21-1.htm) |
| 23.1 | [Consent of Independent Registered Public Accounting Firm\*](e4364_ex23-1.htm) |
| 31.1 | [Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934\*](e4364_ex31-1.htm) |
| 31.2 | [Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934\*](e4364_ex31-2.htm) |
| 32.1 | [Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 of Chapter 63 of Title 18 of the United States Code\*](e4364_ex32-1.htm) |
| 32.2 | [Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 of Chapter 63 of Title 18 of the United States Code\*](e4364_ex32-2.htm) |
| 101.INS | XBRL Instance Document\* |
| 101.SCH | XBRL Taxonomy Extension Schema Document\* |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document\* |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document\* |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document\* |
| 101.PRE | XBRL Taxonomy Presentation Linkbase Document\* |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)\* |

---

\*Filed herewith.

+ + Certain portions of this exhibit (indicated by "[\*\*\*]") have been omitted pursuant to Regulation S-K, Item 601(b)(10).as the Company has determined they are both not material and are of the type that the Company treats as private or confidential.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) Schedules and Exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request; provided, however, that the Company may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any Schedule or Exhibit so furnished.

**Item 16. Form 10-K Summary.**

None.

**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

---

| | |
|:---|:---|
| **Kaival Brands Innovations Group, Inc.** | **Kaival Brands Innovations Group, Inc.** |
| By: | */s/ Eric Mosser* |
|  | Eric Mosser |
|  | President and Chief Operating Officer |
|  | (Principal Executive Officer) |
|  | Dated: January 30, 2023 |

---

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

---

| | |
|:---|:---|
| By: | */s/ Eric Mosser* |
| Eric Mosser | Eric Mosser |
| President and Chief Operating Officer, Secretary and Director | President and Chief Operating Officer, Secretary and Director |
| (Principal Executive Officer) | (Principal Executive Officer) |
| Dated: January 30, 2023 | Dated: January 30, 2023 |
| By: | */s/ Mark Thoenes* |
| Mark Thoenes | Mark Thoenes |
| Interim Chief Financial Officer | Interim Chief Financial Officer |
| Dated: January 30, 2023 | Dated: January 30, 2023 |
| By: | */s/ Nirajkumar Patel* |
| Nirajkumar Patel | Nirajkumar Patel |
| Chief Science and Regulatory Officer and Director | Chief Science and Regulatory Officer and Director |
| Dated: January 30, 2023 | Dated: January 30, 2023 |
| By: | */s/ Roger Brooks* |
| Roger Brooks | Roger Brooks |
| Director | Director |
| Dated: January 30, 2023 | Dated: January 30, 2023 |
| By: | */s/ George Chuang* |
| George Chuang | George Chuang |
| Director | Director |
| Dated: January 30, 2023 | Dated: January 30, 2023 |
| By: | */s/ Paul Reuter* |
| Paul Reuter | Paul Reuter |
| Director | Director |
| Dated: January 30, 2023 | Dated: January 30, 2023 |

---

## Exhibit 4.1

**Exhibit 4.1**

**DESCRIPTION OF THE REGISTRANT'S SECURITIES REGISTERED PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED**

*The following is a summary of all material characteristics of the capital stock of Kaival Brands Innovations Group, Inc., a Delaware corporation ("Kaival Brands," the "Company," "we," "us," or "our"), as set forth in our Amended and Restated Certificate of Incorporation, as amended (the "Certificate of Incorporation") and our Bylaws (the "Bylaws"), and as registered under Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The summary does not purport to be complete and is qualified in its entirety by reference to our Certificate of Incorporation and our Bylaws, each of which are incorporated by reference as exhibits to the Annual Report on Form 10-K of which this Exhibit 4.1 is a part and to the provisions of the Delaware General Corporate Law (the "DGCL"). We encourage you to review complete copies of our Certificate of Incorporation and our Bylaws, and the applicable provisions of the DGCL for additional information.*

**General**

Our authorized capital stock consists of 1,005,000,000 shares, divided into 1,000,000,000 shares of common stock, par value $0.001 per share (the "Common Stock"), and 5,000,000 shares of preferred stock, par value $0.001 per share ("Preferred Stock"). Under our Certificate of Incorporation, our board of directors (our "Board") has the authority to issue such shares of Common Stock and Preferred Stock in one or more classes or series, with such voting powers, designations, preferences and relative, participating, optional or other special rights, if any, and such qualifications, limitations or restrictions thereof, if any, as shall be provided for in a resolution or resolutions adopted by our Board and filed as designations.

**Common Stock**

As of January 16, 2023, 56,169,090 shares of our Common Stock were outstanding.

Holders of our Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders, including the election of directors, and are entitled to receive dividends when and as declared by our Board out of funds legally available therefore for distribution to stockholders and to share ratably in the assets legally available for distribution to stockholders in the event of the liquidation or dissolution, whether voluntary or involuntary, of the Company. We have not paid any dividends and do not anticipate paying any dividends on our Common Stock in the foreseeable future. It is our present policy to retain earnings, if any, for use in the development of our business. Our Common Stockholders do not have cumulative voting rights in the election of directors and have no preemptive, subscription, or conversion rights. Our Common Stock is not subject to redemption by us.

The transfer agent and registrar for our Common Stock is VStock Transfer, LLC

**Preferred Stock**

Of the 5,000,000 shares of Preferred Stock authorized, none are presently outstanding.

Our Preferred Stock remains available for designation by our Board. Accordingly, our Board is empowered, without stockholder approval, to issue Preferred Stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of Common Stock. The issuance of Preferred Stock could have the effect of restricting dividends on the Common Stock, diluting the voting power of the Common Stock, impairing the liquidation rights of the Common Stock, or delaying or preventing a change in control of us, all without further action by our stockholders.

**Certain Provisions of our Certificate of Incorporation, our Bylaws, and the DGCL**

Certain provisions in our Certificate of Incorporation and Bylaws, as well as certain provisions of the DGCL, may be deemed to have an anti-takeover effect and may delay, deter, or prevent a tender offer or takeover attempt that a stockholder might consider to be in its best interests, including attempts that might result in a premium being paid over the market price of the shares held by stockholders. These provisions contained in our Certificate of Incorporation and Bylaws include the items described below.

● *Special Meetings of Stockholders.* Our Bylaws provide that special meetings of our stockholders may be called only by a majority of our Board, the President, Chief Executive Officer, or the Secretary.

● *No Cumulative Voting.* Our Certificate of Incorporation does not include a provision for cumulative voting for directors. Under cumulative voting, a minority stockholder holding a sufficient percentage of a class of shares could be able to ensure the election of one or more directors.

● *Undesignated Preferred Stock.* Because our Board has the power to establish the preferences and rights of the shares of any additional series of Preferred Stock, it may afford holders of any Preferred Stock preferences, powers, and rights, including voting and dividend rights, senior to the rights of holders of our Common Stock, which could adversely affect the holders of Common Stock and could discourage a takeover of us even if a change of control of the Company would be beneficial to the interests of our stockholders.

● *Our Officers Beneficially Own a Majority of Our Capital Stock.* Our executive officers and sole directors beneficially own more than a majority of our Common Stock and own all of the issued and outstanding shares of Series A Preferred Stock. Accordingly, they are able to control all matters related to the Company.

These and other provisions contained in our Certificate of Incorporation and Bylaws are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our Board. However, these provisions could delay or discourage transactions involving an actual or potential change in control of us, including transactions in which stockholders might otherwise receive a premium for their shares over then current prices. Such provisions could also limit the ability of stockholders to remove current management or approve transactions that stockholders may deem to be in their best interests.

In addition, we are subject to the provisions of Section 203 of the DGCL. Section 203 of the DGCL prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the person became an interested stockholder, unless:

● The board of directors of the corporation approved the business combination or other transaction in which the person became an interested stockholder prior to the date of the business combination or other transaction;

● Upon consummation of the transaction that resulted in the person becoming an interested stockholder, the person owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding, shares owned by persons who are directors and also officers of the corporation and shares issued under which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or

● on or subsequent to the date the person became an interested stockholder, the board of directors of the corporation approved the business combination and the stockholders of the corporation authorized the business combination at an annual or special meeting of stockholders by the affirmative vote of at least 66-2/3% of the outstanding voting stock of the corporation that is not owned by the interested stockholder.

A "business combination" includes mergers, asset sales, and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within the prior three years did own, 15% or more of a corporation's voting stock.

Section 203 of the DGCL could depress our stock price and delay, discourage, or prohibit transactions not approved in advance by our Board, such as takeover attempts that might otherwise involve the payment to our stockholders of a premium over the market price of our Common Stock.

## Exhibit 21.1

<u>Exhibit 21.1</u>

<u>Subsidiaries</u>

<u> </u>

---

| | |
|:---|:---|
| &nbsp;&nbsp;**Name** | &nbsp;&nbsp;**Jurisdiction of Formation** |
| &nbsp;&nbsp;Kaival Labs, Inc | &nbsp;&nbsp;Delaware |
| &nbsp;&nbsp;Kaival Brands International, LLC | &nbsp;&nbsp;Delaware |

---

## Exhibit 23.1

**EXHIBIT 23.1**

**CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

We consent to the incorporation by reference in the Registration Statements on Form S-3 (File No. 333-258339) and Form S-8 (File No. 333-265897) of our report dated January 27, 2023 with respect to the audited consolidated financial statements of Kaival Brands Innovations Group, Inc. and its subsidiaries (collectively, the "Company") appearing in this Annual Report on Form 10-K of the Company for the year ended October 31, 2022.

*/s/ MaloneBailey, LLP*

www.malonebailey.com

Houston, Texas

January 27, 2023

## Exhibit 31.1

**Exhibit 31.1**

**Certification of Chief Executive Officer**

**Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934**

I, Eric Mosser, certify that:

1. I have reviewed this Annual Report on Form 10-K of Kaival Brands Innovations Group, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b) Any fraud, whether or not material, which involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

---

| | | |
|:---|:---|:---|
| Date: January 30, 2023 | By: | */s/ Eric Mosser* |
|  |  | Eric Mosser |
|  |  | President and Chief Operating Officer |

---

## Exhibit 31.2

**Exhibit 31.2**

**Certification of Chief Financial Officer**

**Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934**

I, Mark Thoenes, certify that:

1. I have reviewed this Annual Report on Form 10-K of Kaival Brands Innovations Group, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

---

| | | |
|:---|:---|:---|
| Date: January 30, 2023 | By: | */s/ Mark Thoenes* |
|  |  | Mark Thoenes |
|  |  | Interim Chief Financial Officer |

---

## Exhibit 32.1

**Exhibit 32.1**

**Certification of Chief Executive Officer**

**Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1. The Annual Report on Form 10-K of the Company for the Annual period ended October 31, 2021 (the "Report") fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

---

| | | |
|:---|:---|:---|
| Date: January 30, 2023 | By: | */s/ Eric Mosser* |
|  |  | Eric Mosser |
|  |  | President and Chief Operating Officer |

---

The certifications set forth above are being furnished as an exhibit solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall they be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended.

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Kaival Brands Innovations Group, Inc. and will be retained by Kaival Brands Innovations Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

## Exhibit 32.2

**Exhibit 32.2**

**Certification of Chief Financial Officer**

**Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code**

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1. The Annual Report on Form 10-K of the Company for the Annual period ended October 31, 2021 (the "Report") fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

---

| | | |
|:---|:---|:---|
| Date: January 30, 2023 | By: | */s/ Mark Thoenes* |
|  |  | Mark Thoenes |
|  |  | Interim Chief Financial Officer |

---

The certifications set forth above are being furnished as an exhibit solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall they be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended.

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Kaival Brands Innovations Group, Inc. and will be retained by Kaival Brands Innovations Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.