Kaival Brands Innovations Group, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. Kaival Brands Innovations Group, Inc. CONSOLIDATED FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS Pages Report of Independent Registered Public Accounting Firms F2 Consolidated Balance Sheets F3 Consolidated Statements of Operations F4 Consolidated Statements of Changes in Stockholders’ Equity (Deficit) F5 Consolidated Statements of Cash Flows F6 Notes to Consolidated Financial Statements F7-F21 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders 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 Brands Innovations Group, Inc. (collectively, the “Company”) as of October 31, 2020 and 2019, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), 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, 2020 and 2019, 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 February 12, 2021 F- 2 Kaival Brands Innovations Group, Inc. Consolidated Balance Sheet October 31, 2020 October 31, 2019 ASSETS CURRENT ASSETS: Cash $ 7,421,701 $ — Accounts receivable 1,401,562 — Accounts receivable – related parties 15,360 — Inventories 6,383 — Total current assets 8,845,006 — Right of use asset- operating lease 70,133 — TOTAL ASSETS $ 8,915,139 $ — LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable- related party $ 1,409,561 $ — Accrued expenses 1,062,105 44,886 Income tax accrual 1,331,856 Deferred revenue 623,096 — Office lease liability – short term 11,709 — Total current liabilities 4,438,327 44,886 LONG TERM LIABILITIES Operating lease obligation, net of current portion 59,204 — TOTAL LIABILITIES $ 4,497,531 $ 44,886 STOCKHOLDERS’ EQUITY(DEFICIT): Preferred stock 5,000,000 shares authorized; Series A Convertible Preferred stock ($.001 par value, 3,000,000 shares authorized, 3,000,000 and none issued and outstanding as of October 31, 2020 and October 31, 2019, respectively) 3,000 — Common stock ($.001 par value, 1,000,000,000 shares authorized, 277,282,630 and 572,364,574 issued and outstanding as of October 31, 2020 and October 31, 2019, respectively) 277,283 572,365 Additional paid-in capital 364,728 (544,026 ) Retained earnings (accumulated deficit) 3,772,597 (73,225 ) Total Stockholders’ Equity (Deficit) 4,417,608 (44,886 ) TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY (DEFICIT) $ 8,915,139 $ — The accompanying notes are an integral part of these audited consolidated financial statements. F- 3 Kaival Brands Innovations Group, Inc. Consolidated Statements of Operations For the Year Ended October 31, 2020 2019 Revenues Revenues $ 64,742,721 $ — Revenues - related parties 233,955 — Excise tax on products (662,297 ) — Total revenues 64,314,379 — Cost of revenue Cost of revenue - related party 53,981,351 — Cost of revenue – other 273,885 Total cost of revenue 54,255,236 — Gross profit 10,059,143 — Operating expenses Advertising and Promotions 2,343,617 — General & Administrative expenses 2,355,971 68,849 Total operating expenses 4,699,588 68,849 Other Income Interest Income 1,048 — Total Other Income 1,048 — Income (loss) before income taxes provision 5,360,603 (68,849 ) Provision for income taxes (1,514,781 ) — Net income (loss) $ 3,845,822 $ (68,849 ) Net income (loss) per common share - basic and diluted $ 0.01 $ (0.00 ) Weighted average number of common shares outstanding - basic and diluted 516,212,943 572,364,574 The accompanying notes are an integral part of these audited consolidated financial statements. F- 4 Kaival Brands Innovations Group, Inc. Consolidated Statements of Changes in Stockholders’ Equity (Deficit) For the years ended October 31, 2020 and 2019 Convertible Preferred Shares (Series A) Par Value Convertible Preferred Shares (Series A) Common Shares Par Value Common Shares Additional Paid-in Capital Retained Earnings (Accumulated Deficit) Total Balances, October 31, 2018 — $ — $ 572,364,574 $ 572,365 $ (570,989 ) $ (4,376 ) $ (3,000 ) Expenses paid on behalf of the Company and contributed to capital — — — — 26,963 — 26,963 Net loss — — — — — (68,849 ) (68,849 ) Balances, October 31, 2019 — $ — $ 572,364,574 $ 572,365 $ (544,026 ) $ (73,225 ) $ (44,886 ) Issuance of common shares for employee compensation — — 1,320,000 1,320 156,940 — 158,260 Issuance of common shares for compensation — — 3,824,056 3,824 607,353 — 611,177 Common shares settled and cancelled — — (226,000 ) (226 ) (176,696 ) — (179,922 ) Return of common shares in exchange for Series A convertible preferred shares 3,000,000 3,000 (300,000,000 ) (300,000 ) 297,000 — — Expenses paid on behalf of the Company and contributed to capital — — — — 27,157 — 27,157 Net income — — — — — 3,845,822 3,845,822 Balances, October 31, 2020 3,000,000 $ 3,000 $ 277,282,630 $ 277,283 $ 364,728 $ 3,772,597 $ 4,417,608 The accompanying notes are an integral part of these audited consolidated financial statements. F- 5 Kaival Brands Innovations Group, Inc. Consolidated Statements of Cash Flows For the Year Ended October 31, 2020 For the Year Ended October 31, 2019 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 3,845,822 $ (68,849 ) Adjustment to reconcile net income (loss) to net cash provided by operating activities: Stock based compensation 769,437 — ROU operating lease expense 3,616 — Expenses contributed to capital 27,157 26,963 Changes in current assets and liabilities: Accounts receivable (1,401,562 ) — Accounts receivable – related parties (15,360 ) — Inventories (6,383 ) — Deferred revenue 623,096 — Payments on operating lease liability (2,836 ) Accounts payable – related party 1,409,561 Accrued taxes 1,331,856 Accrued expenses 1,017,219 41,886 Net cash provided by operating activities 7,601,623 — CASH FLOWS FROM FINANCING ACTIVITIES: Settled RSU shares with cash $ (179,922 ) $ — Cash flows used in financing activities (179,922 ) — Net change in cash $ 7,421,701 $ — Beginning cash balance — — Ending cash balance $ 7,421,701 $ — SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ — $ — Income taxes paid $ 182,925 $ — NON-CASH INVESTING AND FINANCING ACTIVITIES: Initial Recognition of ROU Asset and Liability $ 73,749 $ — Conversion of common shares into Series A Preferred 3,000 — The accompanying notes are an integral part of these audited consolidated financial statements. F- 6 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. USSE Corp. and USSE Delaware Merger USSE Corp., a Nevada Corporation (“USSE Nevada”), formerly known as Quick Start Holdings, Inc., was incorporated with the Nevada Secretary of State on July 8, 1998 under the original name C&A Restaurants, Inc. (“C&A Restaurants”). On June 15, 2009, C&A Restaurants changed its name to USSE Corp. Effective September 19, 2018, USSE Nevada re-domiciled from Nevada to Delaware pursuant to a merger of USSE Nevada 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 Nevada’s common 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; (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 at that date; and (b) 500,000 shares were designated as Convertible Series B, of which 71,700 Convertible Series B preferred shares were issued and outstanding at that date. Holding Company Reorganization On September 4, 2018, USSE Delaware acquired 1,000 shares of common stock of the Company, which represented 100% of the Company’s then-outstanding shares of common stock, for no consideration, resulting in the Company 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 the Company’s wholly-owned subsidiary. F- 7 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 the Company’s direct wholly-owned subsidiary merged with and into USSE Delaware, the Company’s then parent (the “Holding Company Reorganization”). USSE Delaware was the surviving corporation and the Company’s 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 the Company’s 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 the Company’s preferred stock, having the same designations, rights, powers, and preferences, and the qualifications, limitations, and restrictions thereof, as the corresponding share of USSE Delaware’s preferred stock. Each share of the Company’s common stock issued and outstanding and held by USSE Delaware immediately prior to the Effective Time was cancelled. This resulted in the Company 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, the Company 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 (“GRMZ”), for services rendered to the Company. Commensurate with the filing of the Company’s 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 shareholders’ 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, Convertible Series A and Series B preferred stock were removed from the status of authorized but unissued preferred stock. F- 8 On February 6, 2019, the Company entered into a non-binding Share Purchase Agreement (the “Agreement”), by and among the Company, GMRZ, and Kaival Holdings, LLC (formerly known as Kaival Brands Innovations Group, LLC) (“KH”), a Delaware limited liability company, 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 the Company’s 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 the Company, with KH becoming the Company’s largest controlling stockholder. The sole 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. On the effective date of the merger, our name was changed to “Kaival Brands Innovations Group, Inc.” and our Amended and Restated Certificate of Incorporation, as amended (the “Charter”), was further amended to reflect our new legal name. On August 19, 2020, upon approval by the Company’s Board of Directors, the Company filed a Certificate of Designation of Preferences, Rights, and Limitations of the Series A Preferred Stock (the “Certificate of Designation”) with the Secretary of State of the State of Delaware, which authorizes a total of 3,000,000 shares, par value $0.01 per share, of Series A Convertible Preferred Stock (the “Series A Preferred Stock”). On August 19, 2020, the Company entered into a Share Cancellation and Exchange Agreement (the “Agreement”) with KH. Prior to entering into the Agreement, KH owned 504,000,000 shares of the common stock, which constituted approximately 87.42% of the Company’s issued and outstanding shares of the common stock. Pursuant to the Agreement, on August 19, 2020, KH voluntarily returned to the Company 300,000,000 shares of the common stock (the “Cancellation Shares”), which Cancellation Shares were cancelled and retired by the Company. As a result of the cancellation and retirement of the Cancellation Shares, at October 31, 2020, the Company had 277,282,630 shares of the common stock issued and outstanding, of which 204,000,000 shares are held by the KH, constituting approximately 73.57% of the issued and outstanding shares of the common stock. In exchange for the Cancellation Shares the Company issued 3,000,000 shares (the “Preferred Shares”) of the 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 of 1933, as amended (the “Act”), in that the issuance is exempt from the registration requirements of the Act because the exchange of the Cancellation Shares for the Preferred Shares was an exchange between the Company, as issuer, with an existing stockholder, and no commission or other remuneration was paid or given directly for the exchange. The Series A Preferred Stock have no voting rights and each share of Series A Preferred Stock is convertible into 100 shares of common stock. The holders have the Series A Preferred Stock may convert their Series A Preferred Stock at any time on or after November 1, 2023. Notwithstanding the foregoing, the holders of the Series A Preferred Stock may convert their shares of Series A Preferred Stock prior to November 1, 2023 if a change of control (as provided for in the Certificate of Designation) or upon the occurrence of any other event as determined and agreed to by the Company and the holders holding a majority of the issued and outstanding shares of Series A Preferred Stock. The shares of common stock to be issued upon conversion will bear a restricted legend. F- 9 Description of Business The Company is focused on growing and incubating innovative and profitable products into mature, dominant brands. In March 2020, the Company commenced business operations as a result of becoming an exclusive distributor of certain electronic nicotine delivery systems and related components (the “Products”) manufactured by Bidi Vapor, LLC (“Bidi”), a Florida limited liability company, a related party company that is also owned by Nirajkumar Patel, the Chief Executive Officer and Chief Financial Officer of the Company. On March 9, 2020, the Company entered into an exclusive distribution agreement (the “Distribution Agreement”) with Bidi, a related party company, which Distribution Agreement was amended and restated on May 21, 2020 (the “A&R Distribution Agreement”) in order to clarify some of the provisions. Pursuant to the A&R Distribution Agreement, Bidi granted the Company an exclusive worldwide right to distribute the Products for sale and resale to both retail level customers and non-retail level customers. Currently, the Products consist primarily of the “Bidi Stick.” 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. Recent Developments 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. Our operations have not been significantly impacted. No impairments were recorded as of October 31, 2020 and no triggering events or changes in circumstances had occurred. However, the full impact of the COVID-19 pandemic continues to evolve subsequent to the fiscal year ended October 31, 2020 and as of the date these consolidated financial statements are issued. As such, the full magnitude of the COVID-19 pandemic, and the resulting impact, if any, on the Company’s financial condition, liquidity, and future results of operations is uncertain. Management is actively monitoring the global situation on our financial condition, liquidity, operations, suppliers, industry, and customers. Reduced demand for products or impaired ability to meet customer demand (including as a result of disruptions at the Company’s suppliers) could have a material adverse effect on its business operations and financial performance. Given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, the Company is not presently able to estimate the effects of the COVID-19 pandemic on its results of operations, financial condition, or liquidity for the current fiscal year. As of the date of this filing, the Company’s recently commenced business operations have not been impacted. F- 10 Note 2 – Basis of Presentation and Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the financial statements of the Company’s wholly-owned subsidiary, Kaival Labs. Intercompany transactions are eliminated. Basis of Presentation 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. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In the opinion of management, all adjustments necessary in order to make the financial statements not misleading have been included. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents at October 31, 2020 and October 31, 2019 were $7,421,701 and $0, respectively Significant Accounting Policies Advertising and Promotion All advertising, promotion and marketing expenses, including commissions, are expensed when incurred. Accounts Receivable and Allowance for Doubtful Accounts Receivables are stated at cost, net of an allowance for doubtful accounts. The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability of accounts receivables. 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. The Company has an allowance for doubtful accounts of $13,773, which is 1.0% of total accounts receivable customer balances as of October 31, 2020. F- 11 Inventories 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 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, 2020, the inventories only consisted of finished goods and were nominal. 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. Products Revenue The Company generates products revenue from the sale of the Products (as defined above) to retail and 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’s sales arrangements for retail sales usually require full prepayment before delivery of the Products. The advance payment is not considered a significant financing component because the period between the Company transfers a promised good to a customer and when the customer pays for that good is short. The Company offers credit sales arrangements to non-retail (or wholesale) customers and monitors the collectability of each credit sales periodically. 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 time of shipment to the customer. As of October 31, 2020, the Company has received $623,096 in deposits from customers, which is included with the Company’s current liabilities. F- 12 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. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740. Fair Value of Financial Instruments The Company’s balance sheet includes certain financial instruments. The carrying amounts of current assets and current liabilities approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization. ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below: · 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, 2020. 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 accrued expenses. Share-Based Compensation The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors and non-employees (effective January 1, 2019), the fair value of the award is measured on the grant date. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. The Company’s stock-based compensation for the periods ended October 31, 2020 and October 31, 2019 was $769,437 and $0, respectively. F- 13 Recently Adopted Accounting Pronouncements In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU 2014-09, “ Revenue from Contracts with Customers (ASC 606),” and issued subsequent amendments to the initial guidance or implementation guidance between August 2015 and November 2017 within ASU 2015-04, ASU 2016-08, ASU 2016-10, ASU 2016-12, ASU 2016-20, ASU 2017-13, and ASU 2017-14 (collectively, including ASU 2014-09, “ASC 606”). Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted the standard in the second quarter of fiscal year 2020. The adoption of ASC 606 did not have any impact on the Company’s previously reported consolidated financial statements in any prior period nor did it result in a cumulative effect adjustment to retained earnings. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 was amended by ASU 2018-01, ASU2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01, which FASB issued in January 2018, July 2018, July 2018, December 2018 and March 2019, respectively (collectively, the “amended ASU 2016-02”). The amended ASU 2016-02 requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from current GAAP. The amended ASU 2016-02 retains a distinction between finance leases (i.e. capital leases under current GAAP) and operating leases. The classification criteria for distinguishing between finance leases and operating leases will be substantially similar to the classification criteria for distinguishing between capital leases and operating leases under current GAAP. The amended ASU 2016-02 also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. A modified retrospective transition approach is permitted to be used when an entity adopts the amended ASU 2016-02, which includes a number of optional practical expedients that entities may elect to apply. The Company adopted the standard in the fourth quarter of fiscal year 2020. The adoption of the amended ASU 2016-02 did not have any impact on the Company’s previously reported financial statements in any prior period nor did it result in a cumulative effect adjustment to retained earnings. F- 14 Note 3 – Going Concern The Company’s financial statements are prepared in accordance with GAAP applicable to a going concern that contemplates the realization of assets and liquidation of liabilities in the normal course of business . The Company considered its going concern disclosure requirements in accordance with ASC 240-40-50. Prior to March 2020, the Company demonstrated adverse conditions that raised substantial doubt about the Company’s ability to continue as a going concern. These adverse conditions were negative financial trends, specifically operating loss, working capital deficiency, and other adverse key financial ratios. Also, the Company had not established any source of revenue to cover its operating costs. The Company’s management funded operating expenses with related party contributions to capital. However, on March 9, 2020, the Company commenced business operations upon entering into the A&R Distribution Agreement with Bidi, a related party company, whereby Bidi granted the Company an exclusive worldwide right to distribute the Products for sale and resale to both retail level customers and non-retail level customers. In April 2020, in connection with the A&R Distribution Agreement, the Company entered into the A&R Sub-Distribution Agreements with certain third-party counterparties, whereby the Company appointed such 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 Territory. With these agreements in effect, the Company has established sources of revenue to cover its operating costs and achieved net income for the year ended October 31, 2020. As of October 31, 2020, the Company had a positive working capital. Management plans to continue similar operations with increased marketing, which the Company believes will result in increased revenue and net income and will satisfy its estimated liquidity needs twelve months from the issuance of the financial statements. However, there is no assurance that management’s plan will be successful due to the current economic climate in the United States and globally. At the time of issuance of these consolidated financial statements, the previously reported going concern has been alleviated based on the reasons above, and management does not have substantial doubt of the Company’s ability to continue as a going concern. These financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that the Company cannot continue as a going concern. F- 15 Note 4 – Leases The Company capitalizes all leased assets pursuant to ASU 2016-02, "Leases (Topic 842)," which requires lessees to recognize right-of-use assets and lease liability, initially measured at present value of the lease payments, on its balance sheet for leases with terms longer than 12 months and classified as either financing or operating leases. The Company does not have financing leases, only one operating lease for office space. The operating lease is for a term of five years, beginning August 1, 2020, with rent of $1,000 payable monthly. As the operating lease does not provide implicit interest rate, we estimated a current borrowing rate of 4.5% in determining the present value of the lease. As of October 31, 2020, the right-to-use (“ROU”) lease asset, net of accumulated amortization, was $70,133. The initial recognition of the ROU operating lease was $73,749 for both the ROU asset and ROU liability. The amortization expense for the ROU asset for the twelve months ended October 31, 2020 was $3,616 and one payment on the ROU liability was $2,836. At October 31, 2020, short-term ROU lease liability was $$11,709 and long-term liability was $59,204, totaling $70,913. Operating lease expense totaling $3,000 for August-October 2020 was accrued at fiscal year-end. No rent payments had been made as of October 31, 2020. 2020 2021 2022 2023 2024 Total Lease payments $12,300 $13,500 $15,300 $18,000 $13,500 $72,600 Less discount (1,687) Present value of future payments 70,913 Less current obligations (11,709) Long term lease obligations $59,204 Note 5 – Stockholder Equity Additional Paid-In Capital The Company’s Chief Executive Officer and Chief Financial Officer, Mr. Nirajkumar Patel, paid expenses on behalf of the Company totaling $16,257 during the year ended October 31, 2020, which is considered a contribution to the Company with no expectation of repayment and is recorded as additional paid-in capital. The Company’s Chief Operating Officer, Mr. Eric Mosser, paid expenses on behalf of the Company totaling $10,900 during the year ended October 31, 2020, which is considered a contribution to the Company with no expectation of repayment and is recorded as additional paid-in capital. The Company’s Chief Executive Officer, Mr. Nirajkumar Patel, paid expenses on behalf of the Company totaling $6,000 during the year ended October 31, 2019, which is considered a contribution to the Company with no expectation of repayment and is recorded as additional paid-in capital. The Company’s Chief Operating Officer, Mr. Eric Mosser, paid expenses on behalf of the Company totaling $13,628 during the year ended October 31, 2019, which is considered a contribution to the Company with no expectation of repayment and is recorded as additional paid-in capital. The Company’s former officer and director, Paul Moody, paid expenses on behalf of the Company totaling $7,335 during the year ended October 31, 2019, which is considered a contribution to the Company with no expectation of repayment and is recorded as additional paid-in capital. F- 16 Preferred Shares Issued On August 19, 2020, upon approval by the Company’s Board of Directors, the Company filed the Certificate of Designation with the Secretary of State of the State of Delaware, which authorizes a total of 3,000,000 shares of Series A Preferred Stock. (See Note 1, Post-Holding Company Reorganization , for more detail of the designated terms.) On August 19, 2020, the Company issued 3,000,000 shares of its Series A Preferred Stock, to KH in exchange for its return of 300,000,000 shares of common stock to the Company. No cash consideration was paid during this exchange. At the time of issuance, the Company evaluated the nature of the Series A Preferred Stock, concluded that it was more akin to equity and recorded it as permanent equity. Common Shares Issued Restricted Stock Unit Awards On May 28, 2020, the Board of Directors approved the award of 8,500,000 restricted stock units (“RSUs”) under the Stock and Incentive Compensation Plan (the “Incentive Plan”) to six employees. 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. On June 1, 2020, the Board of Directors approved the award of 1,000,000 RSUs under the Incentive Plan to one newly-hired employee. The RSUs were awarded pursuant to a 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 Agreement. On July 26, 2020, the Company amended the RSU award agreements previously entered into with employees to include the option for employees of receiving a combination of cash and shares for their bonus, at the discretion of the Company. Any cash portion paid will be equal to the fair market value of the vested RSUs. The Company evaluated the amendments under ASC 718 and determined the amendment did not qualify as a modification. Any difference in the amount paid in cash and the fair market value of the shares purchased is recorded as additional compensation. As of June 1, 2020, the Board of Directors had approved a total of 9,500,000 granted RSUs for seven employees. These shares were valued at fair market value on the grant dates, using the closing share price for those dates, for a total of $1,359,600, which is to be vested over the vesting period. During the year ended October 31, 2020, 1,320,000 shares of common stock were issued to seven employees of the Company under the RSU agreements, resulting in $158,260 of share-based compensation. As of October 31, 2020, 8,430,000 RSUs remain to be vested. Of the shares issued to employees, 226,000 shares were withheld by the Company to satisfy tax withholding obligations equal to $223,763. The shares had a fair market value on the settlement date of $179,922. The difference in the amount paid and fair market value was $49,743 and was recorded as additional compensation. During the year ended October 31, 2020, 3,824,056 shares of common stock were issued to two non-employee vendors as compensation for professional services rendered to the Company. These shares were expensed to the Company using the closing share price on the share issue dates to compute a total of $611,177. F- 17 Note 6 – Related-Party Transactions Revenue and Accounts Receivable During the year ended October 31, 2020, the Company recognized revenue of $233,955 from seven companies owned by Nirajkumar Patel, the Chief Executive Officer and Chief Financial Officer of the Company, and/or his wife. As of October 31, 2020, the Company has accounts receivable from the related party in the amount of $15,360. Purchases and Accounts Payable During the year ended October 31, 2020, the Company purchased Products with a value of $53,981,351 from Bidi a related party company that is also owned by Nirajkumar Patel, our Chief Executive Officer and Chief Financial Officer. As of October 31, 2020, the Company had accounts payable to Bidi of $1,409,561. Contributed Capital During the year ended October 31, 2020, the Company’s Chief Executive Officer / Chief Financial Officer and Chief Operating Officer provided contributed capital of $16,257 and $10,900, respectively, to the Company. During the year ended October 31, 2019, the Company’s Chief Executive Officer/Chief Financial Officer, Chief Operating Office, and former officer and director paid expenses on behalf of the Company for $6,000, $13,628, and $7,335, respectively. For additional information, see Note 4, Additional Paid-in Capital . Office Space On August 1, 2020, the Company began leasing office space for its main corporate office in Grant, Florida. The five-year lease agreement is with a related party, Just Pick, LLC (“Just Pick”). The Company’s Chief Executive Officer is an officer of Just Pick. Prior to this, the Company utilized the home office space and warehouse of its management at no cost through July 31, 2020. Note 7 - Concentrations Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of purchases of inventories, accounts payable, accounts receivable, and revenue. Concentration of Purchases and Accounts Payable- Related Party For the year ended October 31, 2020, 100% of the inventories of products, primarily consisting of the “Bidi Stick,” were purchased from Bidi, a related party company that is also owned by Nirajkumar Patel, the Company’s Chief Executive Officer and Chief Financial Officer, in the amount of $53,981,351. It also accounted for 100% of the total accounts payable as of October 31, 2020. Concentration of Revenues and Accounts Receivable For the year ended October 31, 2020, approximately 41% of the revenue from the sale of the Products, primarily consisting of the “Bidi Stick,” was generated from Favs Business, LLC in the amount of $26,428,760 and approximately 6% of the revenue from the sale of products was generated from MMS Distro, Inc. in the amount of $3,905,704. Go Brands, Inc., with an outstanding balance of $319,175 and GPM Investment, LLC, with an outstanding balance of $551,212 , accounted for approximately 33% and 56% of the total accounts receivable from customers, respectively, as of October 31, 2020. F- 18 Note 8 – 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 of the Products from Florida and, thus, it is subject to the state corporate income tax of Florida with a tax rate of 4.458%. There is no difference from the income tax computed at the combined federal and state statutory rate to the income tax effective rate. During the year ended October 31, 2020, the Company generated taxable income of $5,950,117 and, thus, accrued $1,249,525 of federal income tax. Estimated state income tax of $182,925 was paid to the state of Florida based on taxable income for the nine months ended July 31, 2020. The accrued expense for state taxes was $82,331 at October 31, 2020. The income tax provision contains the following components: October 31, 2020 2019 Current tax expense: Federal $ 1,249,525 $ — State 265,256 — Total current tax expense 1,514,781 — Estimated tax payments: Federal — — State 182,925 — Total estimated tax payment 182,925 — Net income tax liability $ 1,331,856 $ — Significant components of the Company’s deferred tax assets and liabilities as of October 31, 2020 and October 31, 2019 after applying enacted corporate income tax rate, is net operating loss carryforward of $0 and $15,377, and a valuation allowance of $0 and $15,377, respectively, which is a total deferred tax asset of $0. The Company’s tax returns for 2018 and 2019 remain open to examination. Significant components of the Company's deferred tax assets and liabilities are as follows: October 31, 2020 2019 Deferred tax asset Net operating loss carry-forward $ — $ 15,377 Total deferred tax asset — 15,377 Less: Valuation allowance — (15,377 ) Net Deferred tax asset — — Note 9 – 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, 2020 and October 31, 2019 other than the below: On May 28, 2020, the Board of Directors approved cash bonus awards to each of the Chief Executive Officer and the Chief Operating Officer. With respect to the Chief Executive Officer, the Board of Directors approved a cash bonus award equal to $30,000 for every $25 million in gross revenues generated by the Company. With respect to the Chief Operating Officer, the Board approved a cash bonus award equal to $20,000 for every $25 million in gross revenues generated by the Company. On May 28, 2020, the Board of Directors also approved an equity bonus award for each of the Chief Executive Officer and the Chief Operating Officer. With respect to the Chief Executive Officer, the Board of Directors approved an award of 90,000 restricted shares of the Company’s 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 75,000 restricted shares of the Company’s common stock for every $50 million in accumulated gross revenues generated by the Company. The Company’s accumulated gross revenues will be evaluated on a quarterly basis, beginning with the second quarter of fiscal year 2020. At October 31, 2020, the Company determined that the fair value of the equity bonus shares, or $165,000, should be accrued as it was deemed likely that the $50 million revenue target would be met. F- 19 On March 31, 2020, the Company entered into a service agreement (the “Service Agreement”) with QuikfillRx LLC, a Florida limited liability company (“QuikfillRx”), whereby QuikfillRx provides the Company with certain services and support relating to sales management, website development and design, graphics, content, public communication, social media, management and analytics, and market and other research (collectively, the “Services”). The Services are provided by QuikfillRx as requested from time to time by the Company. On June 2, 2020, the Company entered into the First Amendment to the Service Agreement (the “First Amendment” and, collectively with the Service Agreement, the “Amended Service Agreement”) with QuikfillRx. Pursuant to the terms of the First Amendment, the parties modified the amount of General Compensation (as defined below) to be paid to QuikfillRx. “General Compensation” consists of the following: (i) for the Services provided in March 2020, the Company paid QuikfillRx an amount equal to $86,000; (ii) for the Services provided in April 2020, the Company paid QuikfillRx an amount equal to $100,000; (iii) each calendar month commencing May 2020 through October 2020, the Company paid QuikfillRx an amount equal to $125,000 per month for the Services to be performed during such calendar month; (iv) if the parties agree to extend the term of the Amended Service Agreement beyond the original expiration date of October 31, 2020, then for the period between November 1, 2020 and October 31, 2021, the Company will pay QuikfillRx $125,000 per month for the Services to be performed during such calendar month; and (iv) if the parties agree to extend the term of the Amended Service Agreement beyond October 31, 2021, then for the period between November 1, 2021 and October 31, 2022, the Company will pay QuikfillRx $150,000 per month for the Services to be performed during such calendar month. In October 2020, the parties agreed to extend the term of the Amended Service Agreement. 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 has accrued $79,592 for a quarterly bonus payable to QuikfillRx, based on the Applicable Gross Quarterly Sales results of the three months ended October 31, 2020. On September 28, 2020, the Company, entered into a patent contribution agreement (the “Patent Contribution Agreement”) with Kaival Labs, the Company’s 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 the Company. Pursuant to the Patent Contribution Agreement, the Company has agreed to pay Next Generation a purchase price of $3 million for the Patents (the “Purchase Price”), which is expected to be paid over-time upon two events. First, the Company expects 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, the Company 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, the Company has 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 issuance of these consolidated financial statements, none of the Patents have been transferred, no payments have been made to Next Generation, and none of the triggering events listed in the Patent Contribution Agreement have occurred. F- 20 Note 10 – Subsequent Events On December 31, 2020, the Company issued 188,391 shares of common stock to Quickfillrx as a bonus for the fourth quarter of the fiscal year, which was accrued at fiscal year end. On December 31, 2020, the Company issued 90,000 and 75,000 shares of common stock to the CEO and COO, respectively, as bonus for reaching the revenue benchmark at fiscal year end. These amounts were accrued as of the fiscal year end. On December 31, 2020, the Company issued 57,625 shares of common stock to Jared M. Witt as compensation for legal services to the Company. On December 31, 2020, the Company issued 4,532 shares of common stock to Jared T. Walsh as compensation for legal services to the Company. On January 6, 2021, 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, and an incentive compensation of 1,000,000 shares of common stock or warrants to purchase 1,500,000 shares of common stock . As of the issuance date of these consolidated financial statements, 1,000,000 shares of common stock have been issued to Inflection Partners as compensation for services provided to the Company. Effective on January 11, 2021, the Company entered into a Services Agreement (the “TE Services Agreement”), for a period of one month, with Trending Equities Corp. (“Trending Equities”), pursuant to which the Company engaged Trending Equities to provide certain social media awareness and consulting and investor relations services (the “TE Services”). In connection therewith, the Company issued 500,000 shares of the Company’s restricted common stock to Trending Equities as partial consideration for the TE Services to be rendered to the Company. In addition, the Company must pay Trending Equities $7,500 as a monthly fee for the term of the TE Services Agreement and an advertising fee of $275,000, due on the effective date of the TE Services Agreement. The initial term of the TE Services Agreement was extended in February 2021. F- 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.