Kaival Brands Innovations Group, Inc. 10-K

Item 1. Business. Corporate History We were incorporated on September 4, 2018 in the State of Delaware. USSE Corp. and USSE Delaware Merger USSE Corp., a Nevada corporation (“USSE Corp.”), was incorporated with the Nevada Secretary of State on July 8, 1998 under the original name C&A Restaurants, Inc. (“C&A Restaurants”). On June 15, 2009, C&A Restaurants changed its name to USSE Corp. Effective September 19, 2018, USSE Corp. re-domiciled from Nevada to Delaware pursuant to a merger of USSE Corp. with and into USSE Delaware, Inc., a Delaware corporation (“USSE Delaware”), with USSE Delaware as the surviving entity (the “Re-domestication Merger”). Each share of USSE Corp.’s capital stock issued and outstanding immediately prior to the effective date of the Re-domestication Merger was automatically converted into one fully paid and nonassessable share of USSE Delaware. Immediately following the Re-domestication Merger, USSE Delaware was authorized to issue up to 1,005,000,000 shares, which consisted of: (i) 1,000,000,000 shares of common stock, par value $0.001 per share, of which 66,397,574 shares were issued and outstanding at such date; and (ii) 5,000,000 shares of preferred stock, par value $.001 per share, of which (a) 1,000,000 shares were designated as Convertible Series A, all of which were issued and outstanding at that date; and (b) 500,000 shares were designated as Convertible Series B, of which 71,700 shares of Convertible Series B preferred stock were issued and outstanding at that date. Holding Company Reorganization On September 4, 2018, USSE Delaware acquired 1,000 shares of our common stock, which represented 100% of our then-outstanding shares of common stock, for no consideration, resulting in us becoming a wholly-owned subsidiary of USSE Delaware. Also, immediately prior to the Holding Company Reorganization (as defined below), USSE Merger Sub, Inc., a Delaware corporation (“USSE Merger Sub”), was our wholly-owned subsidiary. On September 19, 2018 (the “Effective Time”), and in accordance with the provisions set forth in Section 251(g) of the Delaware General Corporation Law (“DGCL”), USSE Merger Sub, an indirect wholly-owned subsidiary of USSE Delaware and our direct wholly-owned subsidiary, merged with and into USSE Delaware, our then parent (the “Holding Company Reorganization”). 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 cancelled. 5 This resulted in us being authorized to issue up to 1,005,000,000 shares, which consisted of: (i) 1,000,000,000 shares of common stock, par value $0.001 per share of which 66,397,574 shares were issued and outstanding; (ii) 5,000,000 shares of preferred stock, par value $0.001 per share, of which (a) 1,000,000 shares were designated as Convertible Series A, all of which were issued and outstanding; and (b) 500,000 shares were designated as Convertible Series B, of which 71,700 shares of Convertible Series B preferred stock were issued and outstanding. Post-Holding Company Reorganization On October 19, 2018, 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. Commensurate with the filing of our Amended and Restated Certificate of Incorporation with the Delaware Secretary of State on October 22, 2018, every issued and outstanding share of Convertible Series A preferred stock was converted into 1.25 shares of common stock with stockholders’ economic rights preserved. Additionally, at the same time, every share of Convertible Series B preferred stock issued and outstanding was converted into ten shares of common stock with stockholders’ economic rights adversely affected in the conversion. Immediately following the conversion of the aforementioned shares, and upon filing of the Amended and Restated Certificate of Incorporation, the authorized and unissued shares of Convertible Series A and Convertible Series B preferred stock were cancelled. As of October 22, 2018, the Convertible Series A and Series B preferred stock were removed from the status of authorized but unissued preferred stock. 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 the Company’s 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. Effective July 12, 2019, we changed our corporate name from Quick Start Holdings, Inc. to Kaival Brands Innovations Group, Inc. The name change was effected through a parent/subsidiary short-form merger of Kaival Brands Innovations Group, Inc., our wholly-owned Delaware subsidiary formed solely for the purpose of the name change, with and into us. We were the surviving entity. 6 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 cancelled 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 ”). All series of preferred stock, whether now or hereafter designated, may by their respective terms have a preference over the Series A Preferred Stock in respect of distribution upon liquidation, dividends, or any other right or matter. The number of shares so designated is three million (3,000,000) shares, par value $0.001 per share, and such amount cannot be increased except by the favorable vote or the written consent of the holders of at least a majority of the issued and outstanding shares of Series A Preferred Stock or by a resolution of our Board of Directors (our “Board”). Such number of shares of Series A Preferred Stock may be decreased by the written consent of the holders of at least a majority of the issued and outstanding shares of Series A Preferred Stock or by a resolution of our Board; provided, however, that no decrease will reduce the number of shares of Series A Preferred Stock to a number less than the number of the shares then outstanding plus the number of shares issuable upon exercise of outstanding rights, options, or warrants or upon conversion of outstanding securities issued by us. The holders of the Series A Preferred Stock do not have any preferential dividend rights and will be entitled to receive dividends, if any, only if, when, and as declared by our Board in its sole and absolute discretion. The holders of the Series A Preferred Stock have no voting rights. At any time on or after November 1, 2023, each share of Series A Preferred Stock is convertible, at the option of the holder thereof. Notwithstanding the foregoing, the holders of Series A Preferred Stock will be entitled to convert their shares of Series A Preferred Stock prior to November 1, 2023 if any of the following events occur: (i) a Change of Control (as defined in the Certificate of Designation) or (ii) any other event as determined and agreed to by us and by the holders holding a majority of the issued and outstanding shares of Series A Preferred Stock. Each share of the Series A Preferred Stock is convertible into one hundred shares of common stock, par value $0.001 per share. 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. Subsidiaries On August 31, 2020, we formed Kaival Labs, Inc., a Delaware corporation (“Kaival Labs”), as our wholly owned subsidiary. Business Information Description of Business We are focused on growing and incubating innovative and profitable products into mature, dominant brands. In March 2020, we commenced business operations as a result of becoming the exclusive distributor of certain electronic nicotine delivery systems and related components (the “Products”) manufactured by Bidi Vapor, LLC (“Bidi”), a Florida limited liability company, and a related party company that is also owned by Nirajkumar Patel, our Chief Executive Officer and Chief Financial Officer. On March 9, 2020, we entered into an exclusive distribution agreement (the “Distribution Agreement”) with Bidi, a related party company, which Distribution Agreement was amended and restated on May 21, 2020 (the “A&R Distribution Agreement”). Pursuant to the A&R Distribution Agreement, Bidi granted to us an exclusive worldwide right to distribute the Products for sale and resale to both retail level customers and non-retail level customers. 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”). 7 On September 28, 2020, we entered into a patent contribution agreement (the “Patent Contribution Agreement”) with Kaival Labs, our wholly owned subsidiary, and Next Generation Labs, LLC, a California limited liability company (“Next Generation”), whereby Next Generation will contribute certain patents, patent applications, and patent data (collectively, the “Patents”) to us, which we plan to then subsequently transfer to Kaival Labs. Pursuant to the Patent Contribution Agreement, we agreed to pay Next Generation a purchase price of $3 million for the Patents (the “Purchase Price”), which is expected to be paid overtime upon two events. First, we expect to pay part of the Purchase Price from proceeds generated from a future securities offering (the “Offering Payment”). Additionally, on the first date that Kaival Labs sells a product that was developed using any portion of the Patents or based on the Patents, we will pay Next Generation the difference between the Purchase Price and the Offering Payment. Kaival Labs has also agreed to pay Next Generation a quarterly royalty equal to fifteen percent (15%) of the profits from sales of a product that was developed using any portion of the Patents or based on the Patents , on an accrued basis. Finally, we agreed to pay all of the applicable costs associated with obtaining product approval(s) from the United States Food and Drug Administration. As of the date of this Report, none of the Patents have been transferred, no payments have been made to Next Generation, and none of the triggering events under the Patent Contribution Agreement have occurred. Current Product Offerings Pursuant to the A&R Distribution Agreement, we sell and resell electronic nicotine delivery systems, which we may refer to herein as “ENDS Products”, or “e-cigarettes”, to both retail level customers and non-retail level customers. Our primary Product we resell is the “Bidi Stick,” a disposable, tamper-resistant ENDS Product that comes in a variety of flavor options. In addition to the Bidi Stick, we also recently launched distribution of the “Bidi Pouch” in February 2021. The Bidi Pouch provides a tobacco-free nicotine formulation, which contains natural fibers and a chew-base filler in six different flavors. We do not manufacture any of the products we resell. The Bidi Stick and Bidi Pouch are manufactured by Bidi, a related party company. Pursuant to the terms of the A&R Distribution Agreement, Bidi provides us with all branding, logos, and marketing materials to be utilized by us in connection with our marketing and promotion of the Products. We process all sales made to retail customers and non-retail customers, with all sales to retail customers to be made through the website, www.bidivapor.com. We provide all customer service and support at our own expense. Bidi sets the minimum prices for all sales made by us. With respect to sales to non-retail customers, we submit purchase orders to Bidi, Bidi delivers the Products to us, and we ship the Products directly to these non-retail customers. In the case of retail customers, we maintain adequate inventory levels of the Products in order to meet these customers’ demand, and deliver the Products sold to these retail customers. In addition to our current product offerings, Bidi launched its recycling program, Bidi Cares, in the spring of 2020 that provides an opportunity for its adult (21+) customers to recycle their Bidi Sticks and be rewarded with a free Bidi Stick after recycling ten used Bidi Sticks. Each Bidi 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. 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. We process all sales made to retail customers and non-retail customers, with all sales to retail customers made through the website, www.bidivapor.com. 8 Our long-term marketing strategy remains based on 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+) 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 Stick and the Bidi Pouch 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 vaping, and stand against the illicit market of vapor products, we believe that together with Bidi, we are taking the necessary steps to ensure that our partners are aligned with our community goals. Bidi also attends trade shows at established expos throughout the United States, such as the National Association for Convenience Stores (NACS) Show held in the fourth quarter of calendar year 2020. Bidi anticipates attending additional trade shows in calendar year 2021. Further, Bidi has a dedicated marketing team that focuses on these marketing efforts and more. Resellers Throughout fiscal 2020, we significantly increased the distribution of the Bidi Stick through national retailers, which we believe will continue to grow significantly in fiscal 2021. In March 2020, we entered into an agreement with Lakshmi Distributer Inc., doing business as C Store Master (“C Store Master”), which currently distributes to Circle K convenience stores. With this relationship, we expanded our distribution footprint to more than 5,000 Circle K locations during fiscal 2020. Currently, our distribution footprint includes more than 30,000 retail stores, including Circle K and 7 ELEVEN locations across the country. Our Products are also accessible through the digital delivery service mobile applicable, GoPuff, in more than 50 cities across the U.S. We expect that in the third or fourth quarter of fiscal 2021, we will launch distribution of the Products in Europe, which will further expand our distribution footprint. Employees As of the date of this Report we have eight employees, all of whom are full time, including our officers and directors. In addition to our officers and directors, we have employees who fulfill the roles of sales staff, information technology, web development, warehouse staff and account management. All of our employees are eligible to enroll, or have already enrolled, in our medical plan. Environment and Government Regulation Related to our Operations We are a retail and wholesale distributor of pre-packaged products, namely the Bidi Stick, an e-cigarette that comes in a variety of flavors, designed and manufactured by Bidi. Bidi is a related third party that sells us the Products that we resell to other retailers and wholesalers, which include, but are not limited to, C Store Master, who distributes to Circle K convenience stores, and 7-Eleven convenience stores. Given that we are only a retailer and wholesale distributor of the Bidi Stick and Bidi Pouch, 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 manufacture, 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. 9 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: U.S. Food and Drug Administration (the “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 (the “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. These “deeming regulations” apply to all products made or derived from tobacco intended for human consumption, but excluding accessories of tobacco products (such as lighters). The deeming regulations require (i) products be registered with the FDA and that products include ingredient listings; (ii) newly deemed products be marketed only after FDA review and approval; (iii) products only make direct and implied claims of reduced risk if the FDA approves 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; (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 our 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. 10 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. State and Local Regulations As a retail seller and/or wholesale distributor of e-cigarette 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 on the subject of 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. 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 any 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 28 states, plus various jurisdictions, impose a tax on vapor products. During 2020, approximately 11 states passed or implemented legislation to begin taxing vapor or related 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 vapor 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. 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 in an effort 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. 11 If the U.S. becomes a signatory to the FCTC and/or national laws are enacted in the U.S. 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. Future Plans Our primary goals during the next 12 months are twofold: (i) continue to significantly grow revenues and (ii) add the necessary infrastructure and partners appropriate for a multi-hundred-million-dollar revenue company. We believe that distribution growth through availability of the Products in retail stores, new product offerings, and continued branding efforts will lead to further significant market share gains resulting in accelerated revenue growth. We have also added four new service providers to further support our anticipated growth, improve our operations, and increase stockholder awareness. We engaged a global leader in executive recruitment to bolster our Corporate Suite Management Team. We also expanded our legal team to assist us in our corporate governance efforts and goal to up-list to Nasdaq in the near-term. Additionally, we migrated vendor relationships upstream. We engaged Fiserv, a global provider of financial services technology. By integrating Fiserv and its services, we believe that we are not only providing the most secure and efficient transaction possible for our customers, but also reducing processing fees and, in turn, provides cost-savings to both the company and its valued customers. We also engaged Insperity, a global leader in human resources and benefits management, to assist with the development and ongoing management of HR Compliance, employee benefits, employer liability management, co-development and implementation of employee training and development programs, and employee administration and payroll. We are committed to recognizing excellence throughout the organization. As such, throughout fiscal 2021, we anticipate continuing to execute on our strategy of developing our brand, securing future growth and creating optimal value to stockholders. 12 Competition Because we solely distribute Bidi’s Products, which comprises all of our business operations, Bidi’s competitors in the e-cigarette and vaping industry are indirect competitors of ours. Many of these competitors in the e-cigarette and vaping 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. “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 e-cigarette and vaping 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 at this point in time, but it is our belief that we have the capability to compete successfully. Based on Goldman Sachs' Equity Research Report through November 28, 2020 on the Nielsen data for total nicotine volumes (the "Goldman Report"), the Bidi Stick was the second largest disposable ENDS Product based on retail sales for the 52-week period ending on November 28, 2020. The Bidi Stick has increased its absolute-dollar market share of the disposable ENDS market share from 7.4% during the 52-week period ending on October 27, 2020 to 24.2% of retail sales during the 52-week period ending on November 28, 2020. According to the Goldman Report, total dollar sales growth has surged to 1,845% to lead the category for the 12-week period ended November 28, 2020. We believe our growth underscores the unique customer experience the Bidi Stick provides. Intellectual Property Currently, as of the date of this Report, we have no intellectual property rights. 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. On September 28, 2020, we entered into the Patent Contribution Agreement with Kaival Labs, our wholly owned subsidiary, and Next Generation Labs, LLC, whereby Next Generation will contribute the Patents to us, which we plan to subsequently transfer to Kaival Labs. As of the date of this Report, none of the Patents have been transferred, no payments have been made and none of the triggering events under the Patent Contribution Agreement have occurred. Emerging Growth Company 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, that allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. 13 Item 1A. Risk Factors. 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 1B. Unresolved Staff Comments. None.