Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations is designed to provide a reader of the financial statements with a narrative report
on our financial condition, results of operations, and liquidity. This discussion and analysis should be read in conjunction with
the audited Financial Statements and notes thereto for the year ended October 31, 2021 included under Item 8 – Financial
Statements and Supplementary Data in this Report. The following discussion contains forward-looking statements that involve risks
and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Our actual results could differ materially
from those discussed in the forward-looking statements. Please also see the cautionary language at the beginning of this Report
regarding forward-looking statements.
Potential Impact of COVID-19
In January
2020, the World Health Organization (the “WHO”) announced a global health emergency because of COVID-19, a new coronavirus
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 declared the outbreak of COVID-19 as a pandemic based on the rapid increase in global exposure. COVID-19
continues to spread throughout the world, including the United States. Our business operations, which commenced during this pandemic,
continue to be operational and, to date, we have not seen any significant direct negative impact of COVID-19 to our business. No
impairments have been recorded and no triggering events or changes in circumstances have occurred. However, the COVID-19 pandemic
continues to impact economic conditions, which could impact the short-term and long-term demand from our customers and, therefore,
has the potential to negatively impact our results of operations, cash flows, and financial position in the future. Management
is actively monitoring this situation and any impact on our financial condition, liquidity, and results of operations. However,
given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, we are not presently able to estimate
the effects of the COVID-19 pandemic on our future results of operations, financial condition, or liquidity for fiscal year 2022
and, possibly, beyond.
Despite not
being directly impacted by COVID-19, we were indirectly impacted by supply chain issues and regulatory oversight as a result of
Bidi’s direct impact. First, COVID-19 impacted Bidi’s ability to quality test and develop its new product, the BIDI ®
Pouch, in line with its targeted release date, which negatively impacted our ability to begin distribution of the BIDI ®
Pouch. Throughout the year and during the PMTA process, the FDA reiterated their enhanced scrutiny over ENDS products and raised
the bar. We have not only invested significant financial resources into developing state of the art procedures, policies and technology
around compliance but have also refused to relax our own internal standards when we observed some distributors and retailers relaxing
their standards. We believe that retailers and distributors relaxed their standards for two reasons: (i) due to COVID-19, government
enforcement of regulations were very limited due to imposed social restrictions, resulting in less in-person monitor enforcement
by government officials and (ii) retail stores experienced light foot traffic from customers due to COVID-19 restrictions and fears,
which resulted in relaxed compliance in an effort to generate revenue. The relaxation of standards by certain retailers significantly
impacted our revenues.
Impact of the FDA PMTA Decision
During fiscal 2021, we were
impacted by the FDA’s PMTA process. In September 2021, in connection with the PMTA process, the FDA effectively
“banned” flavored ENDS by denying nearly all then-pending PMTAs for such products. Following the issuance of an
MDO, manufacturers are required to stop selling non-tobacco flavored ENDS products. As of September 10, 2021, the FDA
announced that it has taken action on over 93% of applications and issued MDOs for more than 1,167,000 flavored ENDS
products, while issuing zero marketing authorizations.
Bidi,
along with nearly every other company in the ENDS industry, received a MDO for its non-tobacco flavored ENDS products. With respect
to Bidi, the MDO covered all non-tobacco flavored BIDI® Sticks, including its Arctic (menthol) BIDI® Stick, which Bidi
believes the FDA mischaracterized as “flavored.” BIDI believes that because its Arctic BIDI® Stick is menthol,
it should not be subject to the MDO. Bidi and the Company believe this position is aligned with the FDA’s public statements
and press releases stating that tobacco and menthol ENDS are not deemed flavored products subject to the MDOs.
As
a result, beginning in September 2021, Bidi pursued three avenues to challenge the MDO. First, on September 21, 2021, separate
from the judicial appeal of the MDO in its entirety, Bidi filed a 21 C.F.R. § 10.75 internal FDA review request specifically
of the decision to include the Arctic (menthol) BIDI® Stick in the MDO. We anticipate a decision from the FDA on the internal
review in the second or third quarter of 2022, although we cannot provide any assurances as to the timing or outcome.
Separately, on September 29, 2021, Bidi petitioned
the Eleventh Circuit Court of Appeals to review the FDA’s denial of the PMTAs for its non-tobacco flavored BIDI® Stick
ENDS, arguing that it was arbitrary and capricious under the Administrative Procedure Act (“APA”), as well as ultra
vires , for the FDA not to conduct any scientific review of the company’s comprehensive applications, as required by the
Tobacco Control Act, to determine whether the BIDI® Sticks are “appropriate for the protection of the public health”
(APPH). Bidi further argued that the FDA violated due process and the APA by failing to provide fair notice of the FDA’s
new requirement for ENDS companies to conduct long-term comparative smoking cessation studies for their flavored products. On February
1, 2022, the Eleventh Circuit Court of Appeals granted Bidi’s motion to stay (put on hold) the MDO, pending the litigation
on the merits. The court-ordered stay means that the MDO is not legally in force. Accordingly, we anticipate being able to continue
marketing and selling the Products, subject to the FDA’s enforcement discretion, while Bidi continues with its merits case
challenging the legality of the MDO. FDA has indicated that it is prioritizing enforcement against companies that have either not
submitted PMTAs, or whose PMTAs have been refused acceptance or filing by FDA, or whose PMTAs remain subject to MDOs. Oral arguments
in the merits-based proceeding are currently scheduled for May 2022.
Finally, on
October 14, 2021, Bidi requested FDA re-review the MDO and reconsider its position that Bidi did not include certain scientific
data in its applications sufficient to allow the PMTAs to proceed to scientific review. In light of this request, on October 22,
2021 pursuant to 21 C.F.R. § 10.35(a), FDA issued an administrative stay of Bidi’s MDO pending its re-review. Subsequently,
FDA lifted its administrative stay on December 17, 2021. Following the lifting of the FDA’s administrative stay, Bidi filed
a renewed motion to stay the MDO with the Eleventh Circuit Court of Appeals, which was granted on February 1, 2022.
In the event that the Eleventh Circuit Court of Appeals issues a
ruling adverse to Bidi, or if FDA otherwise chooses to enforce against Bidi, Bidi will be forced to cease the continued sale of
its non-tobacco flavored BIDI® Stick products in the United States, thereby resulting in our being unable to distribute such
products, our business and financial condition would be materially adversely affected. We cannot provide any assurances as to the
timing or outcome of the merits-based case.
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Historically,
substantially all of our revenues were derived from sales of flavored BIDI ® Sticks, including the Arctic (menthol)
BIDI ® Stick, sales of which constituted approximately 18.4% and 12.9%
of our total sales of BIDI® Sticks for the fiscal years ended October 31, 2021 and 2020, respectively. Generally, substantially
all of the ENDS industry’s revenue is derived from the sales of flavored products.
For additional information, please refer
to the section entitled “Item. 1 – Business” in this Report.
Future Strategic Opportunities
In addition to the continued domestic
opportunity, we believe that international markets provide an exciting growth opportunity for us. The estimated total addressable
global market for ENDS products is approximately $36.7 billion. Bidi has received approval to market and distribute products within
11 international markets, including the United Kingdom, France, Russia, and the Czech Republic. Bidi has also secured significant
intellectual property protections similar to those received in the United States from the European Union, China, and several other
regions and countries. It is also important to note that the nicotine formulation in the Bidi ® Stick has been modified
and approved at the 2% level to meet the criteria for distribution in the United Kingdom and Europe.
These international market approvals Bidi has
previously secured are for the full formulation lineup, including all flavors. Because the FDA’s PMTA restrictions and guidelines
do not pertain to international markets, Bidi intends to continue manufacturing its full product lineup, for distribution by us
in these international markets. Accordingly, in light of the pending MDO appeal and uncertainty regarding FDA’s review of
the PMTA, as well as the ongoing threat of FDA enforcement, Bidi intends to expedite the planned product launches into foreign
markets starting with the United Kingdom. The Company is also actively exploring potential partnerships with international distribution
companies in order to possibly expand Product distribution more rapidly in these international markets.
Reverse Stock Split
We effected the 1-for-12 Reverse Stock
Split of our Common Stock on July 20, 2021. As a result of the Reverse Stock Split, every twelve (12) shares of our pre-Reverse
Stock Split Common Stock were combined and reclassed into one share of our Common Stock. No fractional shares were issued in connection
with the Reverse Stock Split. Any fractional shares of Common Stock that would have otherwise resulted from the Reverse Stock Split
were rounded up to the nearest whole number. In connection with the Reverse Stock Split, the Board approved appropriate and proportional
adjustments to all outstanding securities or other rights convertible or exercisable into shares of Common Stock, including, without
limitation, all preferred stock, warrants, options, and other equity compensation rights. All historical share and per-share amounts
reflected throughout our consolidated financial statements and other financial information in this Report have been adjusted to
reflect the Reverse Stock Split as if the split occurred as of the earliest period presented. The par value per share of the Common
Stock was not affected by the Reverse Stock Split.
Going Concern
A recent court ruling on behalf of Bidi in
the Eleventh Circuit Court of Appeals, granted a judicial stay of the MDO previously issued by the FDA to Bidi in September 2021.
The ruling, which was issued on February 1, 2022, means that the MDO is not legally in force. Accordingly, we anticipate being
able to continue marketing and selling the Products, subject to the FDA’s enforcement discretion, while Bidi continues with
its merits case challenging the legality of the MDO. FDA has indicated that it is prioritizing enforcement against companies that
have either not submitted PMTAs, or whose PMTAs have been refused acceptance or filing by FDA, or whose PMTAs remain subject to
MDOs.
Oral arguments in the merits case are currently
scheduled in May 2022.
20
If the Eleventh Circuit Court of Appeals
agrees with Bidi in the merits case, we anticipate that the FDA will be compelled to place the flavored ENDS back into the
PMTA scientific review process. If this is the outcome of the merits case, we anticipate being able to continue marketing and
selling the Products, subject to the FDA’s enforcement discretion, until the scientific review process is complete on
each of Bidi’s PMTA for flavored ENDS and the FDA issues its decision on each.
If the Eleventh Circuit Court of appeals disagrees
with Bidi on the merits case, or if the FDA re-issues the MDO after completing its scientific review process for each of Bidi’s
PMTAs for its flavored ENDS, or if The DA otherwise chooses to enforce against Bidi, we will be forced to cease sales on the flavored
BIDI ® Sticks in the United States market, leaving only the Tobacco (Classic) and Menthol (Arctic) BIDI ®
Sticks products for sale in the United States (which, with respect to the Menthol (Arctic) BIDI ® Stick, depends
on the outcome of the specific PMTA filings and the administrative review request for the classification of “Arctic”
as a standard menthol ENDS). If this is the outcome of the merits case, this combined with a negative cash flow from
operations would raise substantial doubt on our ability to continue as a going concern.
Management plans to continue similar
operations with increased marketing, which we believe will result in increased revenue and net income. However, there is no assurance
that management’s plan will be successful due to the current economic climate in the United States and globally.
The audited consolidated financial statements
filed as part of this Report do not include any adjustments relating to the recoverability and classification of recorded assets,
or the amounts and classification of liabilities that might be necessary in the event that we cannot continue as a going concern.
Liquidity and Capital Resources
We believe we have sufficient cash on hand as of February 14, 2022. However, we are awaiting the outcome of
Bidi’s merit-based case pending in the Eleventh Circuit Court of Appeals with respect to the MDO issued by the FDA in September
2021. If the Eleventh Circuit Court of Appeals rules against Bidi, our business and financial condition will be materially adversely
affected, including our ability to generate revenues and our liquidity. Other than the ongoing MDO matters, we have no known current
demands or commitments and are not aware of any events or uncertainties as of October 31, 2021 that will result in or that are
reasonably likely to materially increase or decrease our current requirements for cash and resulting improved liquidity.
On October 31, 2021, we had working
capital of approximately $16.3 million and total cash of approximately $7.8 million.
We intend to generally rely on cash
from operations and equity and debt offerings, to the extent necessary and available, to satisfy our liquidity needs. There are
a number of factors that could result in the need to raise additional funds, including a decline in revenue or a lack of anticipated
sales growth and increased costs. Our efforts are directed toward generating positive cash flow and profitability. If these efforts
are not successful, we may need to raise additional capital. Should capital not be available to us at reasonable terms, other actions
may become necessary in addition to cost control measures and continued efforts to increase sales. These actions may include exploring
strategic options for the sale of the Company, the creation of joint ventures or strategic alliances under which we will pursue
business opportunities, or other alternatives. We believe we have the financial resources to weather any short-term impacts of
COVID-19; however, we are unable to presently estimate any potential future impacts from COVID-19 and an extended impact could
have a material and adverse effect on our sales, earnings, and liquidity. We have also been impacted by Bidi’s receipt of
a MDO from the FDA. For additional information regarding the impact to our revenues during the last two quarters of fiscal 2021,
please see the section entitled “Revenues” below. At this time, we do not foresee the need for further strategic financing
for the next twelve months, given the financing we completed in September 2021, as indicated below, and our continual sales efforts
and results.
In September 2021, we completed a firm commitment
underwritten offering, which offering was made pursuant to our Registration Statement on Form S-3 (File No. 333-258339) (the “Registration
Statement”). The SEC declared the Registration Statement effective on August 10, 2021. We sold 4,700,000 million shares
of our Common Stock and warrants to purchase an additional 3,525,000 shares of our Common Stock. We sold each share of our Common
Stock and warrants to purchase 0.75 shares of our Common Stock at a combined public offering price of $1.70. We also granted the
underwriter the option to purchase an additional 705,000 shares of our Common Stock and warrants to purchase an additional 528,750
shares of our Common Stock. We received net proceeds from the offering of approximately $8.3 million. We have also received approximately
$1.7 million from the exercise of the warrants. We used the proceeds for general corporate
purposes.
Cash Flows:
Cash
flow used in operations was approximately ($9.3) million for fiscal year 2021, compared to cash flow provided by operations of
approximately $7.6 million for fiscal year 2020. The decrease in cash flow from operations for the fiscal year 2021 was primarily
due to the decrease in net income, year-over-year. We anticipate that our cash flows provided by operations in fiscal year 2022
will improve based on the minimum purchase obligations set forth in the Sub-Distribution Agreements, partially offset by increases
in costs as we ramp up our sales and marketing efforts. Additionally,
we conducted a public financing in September 2021 to raise capital for short term sales opportunities with major sub-distributors,
expand our sales territories, and invest cash in enlarging our corporate infrastructure to adequately support the intended growth.
Cash flow provided from financing activities
was approximately $9.7 million for fiscal year 2021, compared to cash flow used in financing activities of approximately ($180,000)
for fiscal year 2020. The increase in cash flow from financing activities for the fiscal year 2021 was primarily due to the $8.3
million in net proceeds from the firm commitment underwritten offering in September 2021, which consisted of shares of Common Stock
and warrants to purchase shares of Common Stock, and the approximately $1.7 million in cash received from the exercise of warrants,
offset by approximately $254,000, which was the cash amount that was paid in connection with the withholding of 92,871 shares to
satisfy tax obligations due upon such issuances to certain employees.
21
Results of Operations
Year ended October 31, 2021, compared
to year ended October 31, 2020
Revenues:
Revenues for
fiscal year 2021 were approximately $58.7 million ,
compared to approximately $64.3 million in the prior fiscal year. Revenues decreased in fiscal year 2021, primarily in the last
two fiscal quarters, generally due to (i) increased competition, which we believe was the result of the lack of enforcement by
federal and state authorities against sub-par and low-priced vaping products that continued to enter the market illegally without
FDA authorization and (ii) Bidi’s receipt of the MDO ,
which limited our ability towards the end of fiscal year 2021 to sell flavored BIDI ® Sticks in the United States.
A recent court ruling in favor of Bidi granted a judicial stay on the MDO previously issued by the FDA banning the marketing and
sale of flavored BIDI ® Sticks, amongst banning these flavored sticks with other industry competitors. As a result
of the judicial stay of Bidi’s MDO, we expect an upturn in sales of all of the BIDI ® Sticks ,
which sales remain subject to FDA’s enforcement discretion, anticipated to begin in the second quarter of fiscal year 2022
(and assuming that Bidi is successful in its currently pending merits-based case). We also anticipate that if the FDA begins enforcement
against illegally-marketed or synthetic-nicotine vaping products, there may be an increased demand for compliant and legal vaping
products, such as the BIDI ® Stick.
Cost
of Revenue and Gross Profit:
Gross profit in fiscal year 2021 was approximately
$11.9 million, compared to approximately $10.0 million for fiscal year 2020. Total cost of revenue was approximately $46.8 million
for fiscal year 2021, compared to approximately $54.3 million for fiscal year 2020. The decrease in gross profit volume is primarily
driven by the downturn in sales of the Products, beginning in the third quarter and continuing through the end of fiscal year
2021, primarily the result of the negative impact the PMTA and the impact the regulatory landscape had on our business. Additionally,
the cost of the discounts, coupons and promotions programs, that we implemented in the third quarter of fiscal year 2021 to assist
in growing and retaining the customer base and store shelf space, contributed a lower gross profit margin per unit of Products
sales for that period of time, as these discounts, coupons and promotions decreased our revenues.
Operating Expenses:
Total operating expenses were approximately $22.4 million for fiscal year 2021, compared to approximately $4.7 million for fiscal year 2020.
For the fiscal year 2021, operating expenses consisted of advertising and promotional expenses of approximately $3.2 million, which included
commissions paid to QuikfillRx pursuant to the Service Agreement dated March 31, 2020, as amended on June 2, 2020 (the “Amended
Service Agreement”), and general and administrative expenses of approximately $19.2 million. General and administrative expenses
in the fiscal year 2021 consisted primarily of legal fees, salaries, professional fees, merchant fees, and other service fees, and were
necessary for our Reverse Stock Split process, the process for the uplisting to Nasdaq, and to a lesser degree some of the indirect costs
incurred relating to our Common Stock and warrants offering in September 2021. Additionally, we incurred legal and other costs related
to the FDA’s PMTA/MDO process for limiting the sales of flavored BIDI sticks. In fiscal 2020, we paid commissions to QuikfillRx
in the amount of approximately $2.3 million and our general and administrative expenses were approximately $2.4 million. Total General
and administrative expenses in the fiscal year 2020 consisted primarily of legal fees, salaries, professional fees, merchant fees, and
other service fees. We expect future operating expenses to continue to increase while we generate increased sales growth and invest in
the Company infrastructure to support the planned business growth.
Income Taxes:
We have Federal net operating loss (“NOL”)
carryforwards of approximately $4.0 million and state NOL carryforwards of approximately $1.8 million. With the changes instituted
by the CARES Act, the Federal NOLs have an indefinite life and will not expire. Our federal and state tax returns for the 2018
and 2019 tax years generally remain subject to examination by U.S. and various state authorities. A valuation allowance is recorded
to reduce the deferred tax asset if, based on the weight of the evidence, it is more likely than not that some portion or all of
the deferred tax asset will not be realized. Management determined that a valuation allowance of approximately $1.3 million for
the year ended on October 31, 2021 was necessary to reduce the deferred tax asset to the amount that will more likely than not
be realized.
During the year ended October 31, 2020, we generated taxable income of
approximately $6.0 million. During the year ended October 31, 2020, the Company paid approximately $183,000 in income taxes and reported
an income tax accrual of approximately $1.3 million.
Please refer to Note 8, Income Tax,
in the Notes to the Consolidated Financial Statements in this Report for additional information related to our income taxes.
Net Income (Loss):
Net loss for fiscal year 2021 was approximately ($9.0) million, or $(0.38)
basic and diluted net loss per share, compared to net income of approximately $3.8 million, or $0.9 basic and diluted net income
per share, for fiscal year 2020. The increase in net loss for the fiscal year 2021, as compared to net income in fiscal year 2020, is
attributable to the factors noted above with respect to the decline of revenues from Product sales and increase in marketing and sales
expenses to grow our revenue, as well as other expenses for our growth, the Reverse Stock Split and a capital raise for funds to invest
in our continued structural growth.
Weighted-average
common stock shares outstanding were 24,000,246 at October 31, 2021 as compared to 43,017,745 at October 31, 2020. The
decrease in the weighted-average shares in fiscal year 2021 was primarily attributable to the shares issued in connection
with the public underwritten offering, shares issued upon the exercise of outstanding warrants, and equity compensation
granted to third-party service providers in exchange for providing services to us.
Accrued Expenses:
During fiscal year 2021, we accrued approximately
$3,800 for a quarterly bonus and approximately $180,000 for a monthly retainer plus approved expenses payable to QuikfillRx based on our
applicable gross quarterly sales for the three months ended October 31, 2021. During fiscal year 2020, we accrued approximately $80,000
for a quarterly bonus and $132,000 for a monthly retainer plus approved expenses payable to QuikfillRx based on our applicable gross quarterly
sales for the three months ended October 31, 2020.
Because certain revenues benchmarks were not achieved
during the three months ended October, 31, 2021, we did not accrue any bonuses payable to our executive officers during the three months
ended October 31, 2021. During fiscal year 2020, we accrued approximately $165,000 for bonuses payable to our executive officers based
on the revenues benchmark achieved during the three months ended October 31, 2020.
Excise taxes totaling approximately $2,200 were accrued based on
taxable sales during the fourth quarter of fiscal year 2021, compared to excise taxes of approximately $502,000 that were accrued in fiscal
year 2020 based on taxable sales during the fourth quarter of fiscal year 2020.
Concentrations:
Financial instruments, which potentially
subject us to concentrations of credit risk, consist primarily of purchases of inventories, accounts payable, accounts receivable,
and revenue.
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Concentration of Purchases and Accounts
Payable- Related Party:
For the fiscal year 2021, 100% of the inventories
of Products, consisting solely of the BIDI ® Stick, were purchased from Bidi, a related party company that is owned by Nirajkumar
Patel, our Chief Executive Officer, in the amount of approximately $61.9 million, as compared to approximately $54.0 million for
fiscal year 2020. In fiscal year 2021, such inventories accounted for 100% of the total accounts payable, compared to 100% of the total
accounts payable for fiscal year 2020.
Concentration of Revenues and Accounts Receivable:
For the fiscal year
2020, (i) approximately 23% of the revenue from the sale of Products, solely consisting of the BIDI ® Stick, was generated
from Favs Business in the amount of approximately $13.9 million, (ii) approximately 16% of the revenue from the sale of the Products
was generated from MMS Distro in the amount of approximately $9.6 million, and (iii) approximately 14 %
of the revenue from the sale of Products, solely consisting of the BIDI Stick, was generated from C Store Master, in the amount of approximately
$8.2 million. In fiscal 2020, approximately 41% of the revenue from the sale of Products, solely consisting of the BIDI ®
Stick, was generated from Favs Business in the amount of approximately $26.4 million and approximately 6% of the revenue from the sale
of the Products was generated from MMS Distro in the amount of approximately $3.9 million.
Favs Business with an outstanding balance of approximately $1.0 million
and C Store Master, with an outstanding balance of approximately $322,000, accounted for approximately 50% and 16% of the total accounts
receivable from customers, respectively, as of October 31, 2021. Go Brands, with an outstanding balance of approximately $319,000, and
GPM, with an outstanding balance of approximately $551,200, accounted for approximately 33% and 56% of the total accounts receivable from
customers, respectively, as of October 31, 2020.
Cash and Restricted Cash
We consider all highly liquid investments
with an original maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents at October
31, 2021 or October 31, 2020. Cash and restricted cash at October 31, 2021 and October 31, 2020 were $7.8 million and $7.4 million,
respectively.
Restricted consists of cash held short-term
in escrow as required. As of October 31, 2021, and October 31, 2020, we had $65,007 and $0 in restricted cash, respectively, for
amounts held in escrow.
Critical Accounting Policies and
Estimates
Our financial statements are prepared in accordance
with generally accepted accounting principles in the United States, or GAAP. The preparation of the consolidated financial statements
in conformity with accounting principles, generally accepted in the United States of America (“GAAP”) requires our management
to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure or inclusion
of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses
during the period. We evaluate our significant estimates on an ongoing basis, including, but not limited to, estimates related to allowance
for doubtful accounts, and income tax provisions. We base our estimates on historical experience and on various other assumptions that
we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying value of
assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
We believe that
the assumptions associated with our revenue recognition have the greatest potential impact on our financial statements. Therefore,
we consider this to be our only critical accounting policy and we do not consider any of our estimates to be critical accounting
estimates.
However, we consider Revenue Recognition the most
critical accounting policy for the Company that could create a material misevaluation of Product Revenue if not adhered to and implemented
successfully. We adopted ASC 606, Revenue from Contracts with Customers (Topic 606) (“ASC 606”), in the second quarter of
fiscal year 2020, as this was the first quarter that we generated revenues. Under ASC 606, we recognize revenue when a customer obtains
control of promised goods, in an amount that reflects the consideration that we expect to receive in exchange for the goods. To determine
revenue recognition for arrangements within the scope of ASC 606, we perform the following five steps: (1) identify the contracts with
a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction
price to the performance obligations in the contract; and (5) recognize revenue when or as the entity satisfies a performance obligation.
We only apply the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in
exchange for the goods it transfers to the customer.
Background and Revenue Recognition Policy:
Products
Revenue
We generate product revenue from the sale of the Products (as defined above)
to non-retail customers. We recognize revenue at a point in time based on management’s evaluation of when performance
obligations under the terms of a contract with the customer are satisfied and control of the Products has been transferred to
the customer. In most situations, transfer of control is considered complete when the products have been shipped to the customer.
We determined that a customer obtains control of the Product upon shipment when title of such product and risk of loss transfer
to the customer. Our shipping and handling costs are fulfillment costs and such amounts are classified as part of cost of sales. The advance payment is
not considered a significant financing component because the period between when we transfer a promised good to a customer and
when the customer pays for that good is short. We offer credit sales arrangements to non-retail (or wholesale) customers and monitor
the collectability of each credit sale routinely.
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Item 7A. Quantitative and Qualitative
Disclosures about Market Risk.
We qualify as a smaller reporting company,
as defined by Item 10 of Regulation S-K and, thus, are not required to provide the information required by this Item.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.