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 Firm F2 Consolidated Balance Sheets F3 Consolidated Statements of Operations F4 Consolidated Statements of Changes in Stockholders’ Equity F5 Consolidated Statements of Cash Flows F6 Notes to Consolidated Financial Statements F7-F18 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Kaival Brands Innovations Group, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Kaival Innovations Group, Inc. (collectively, the “Company”) as of October 31, 2021 and 2020, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 2021 and 2020, 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. Going Concern Matter The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has negative operating cash flows. Additionally, the Company operates in a rapidly changing legal and regulatory environment; new laws and regulations or changes to existing laws and regulations could significantly limit the Company’s ability to sell its products, and/or result in additional costs. Additionally, the Company’s exclusive supplier was required to apply for FDA approval to continue selling and marketing its products in the United States. There can be no assurance the FDA will approve the applications. These matters raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 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 15, 2022 F- 2 Kaival Brands Innovations Group, Inc. Consolidated Balance Sheets October 31, 2021 October 31, 2020 ASSETS CURRENT ASSETS: Cash $ 7,760,228 $ 7,421,701 Restricted cash 65,007 Accounts receivable 1,985,186 1,401,562 Accounts receivable – related parties — 15,360 Inventory deposit – related party 2,925,000 — Inventories 15,326,370 6,383 Prepaid expenses 319,531 — Income tax receivable 1,753,594 — Total current assets 30,134,916 8,845,006 Right of use asset- operating lease 55,604 70,133 TOTAL ASSETS $ 30,190,520 $ 8,915,139 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 242,829 $ — Accounts payable- related party 12,667,769 1,409,561 Accrued expenses 579,604 1,062,105 Income tax accrual — 1,331,856 Deferred revenue — 623,096 Operating lease obligation, short term 13,020 11,709 Customer refund due 316,800 — Total current liabilities 13,820,022 4,438,327 LONG TERM LIABILITIES Operating lease obligation, net of current portion 46,185 59,204 TOTAL LIABILITIES $ 13,866,207 $ 4,497,531 STOCKHOLDERS’ EQUITY: Preferred stock 5,000,000 shares authorized; Series A Convertible Preferred stock ($ 0.001 par value, 3,000,000 shares authorized , 3,000,000 shares issued and outstanding as of October 31, 2021 and October 31, 2020, respectively) 3,000 3,000 Common stock ($ 0.001 par value, 1,000,000,000 shares authorized, 30,195,312 and 23,106,886 issued and outstanding as of October 31, 2021 and October 31, 2020, respectively) 30,195 23,107 Additional paid-in capital 21,551,959 618,904 Retained earnings (accumulated deficit) ( 5,260,841 ) 3,772,597 Total Stockholders’ Equity 16,324,313 4,417,608 TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY $ 30,190,520 $ 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, 2021 2020 Revenues Revenues, net $ 59,378,208 $ 64,742,721 Revenues - related parties 154,560 233,955 Excise tax on products ( 756,338 ) ( 662,297 ) Total revenues, net 58,776,430 64,314,379 Cost of revenue Cost of revenue - related party 46,528,501 53,981,351 Cost of revenue – other 314,049 273,885 Total cost of revenue 46,842,550 54,255,236 Gross profit 11,933,880 10,059,143 Operating expenses Advertising and promotions 3,195,883 2,343,617 General & Administrative expenses 19,207,028 2,355,971 Total operating expenses 22,402,911 4,699,588 Other income Interest income 395 1,048 Total other income 395 1,048 Income (loss) before income taxes provision ( 10,468,636 ) 5,360,603 Provision (benefit) for income taxes ( 1,435,198 ) 1,514,781 Net income (loss) $ ( 9,033,438 ) $ 3,845,822 Net income (loss) per common share - basic and diluted $ ( 0.38 ) $ 0.09 Weighted average number of common shares outstanding - basic and diluted 24,000,246 43,017,745 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 For the years ended October 31, 2021 and 2020 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, 2019 — $ — 47,697,048 $ 47,697 $ ( 19,358 ) $ ( 73,225 ) $ ( 44,886 ) Common stock issued for employee compensation — — 110,000 110 158,150 — 158,260 Common stock issued for compensation — — 318,671 319 610,858 — 611,177 Common stock settled and canceled — — ( 18,833 ) ( 19 ) ( 179,903 ) — ( 179,922 ) Return of common stock in exchange for Series A convertible preferred stock 3,000,000 3,000 ( 25,000,000 ) ( 25,000 ) 22,000 — — 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 23,106,886 $ 23,107 $ 618,904 $ 3,772,597 $ 4,417,608 Common stock issued for employee compensation — — 221,666 221 505,100 — 505,321 Common stock settled and canceled — — ( 92,871 ) ( 93 ) ( 254,017 ) — ( 254,110 ) Common stock issued for compensation — — 674,803 675 8,943,425 — 8,944,100 Stock option expense — — — — 1,773,947 — 1,773,947 Common stock issued for cash, net of financing cost — — 5,405,000 5,405 8,300,367 — 8,305,772 Common stock issued for warrant exercise — — 879,828 880 1,664,233 — 1,665,113 Net loss — — — — — ( 9,033,438 ) ( 9,033,438 ) Balances, October 31, 2021 3,000,000 3,000 30,195,312 30,195 21,551,959 ( 5,260,841 ) 16,324,313 The accompanying notes are an integral part of these audited consolidated financial statements. F- 5 For the Year Ended October 31, 2021 For the Year Ended October 31, 2020 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ ( 9,033,438 ) $ 3,845,822 Adjustment to reconcile net income (loss) to net cash (used in) provided by operating activities: Stock based compensation 9,449,421 769,437 Stock option expense 1,773,947 — ROU operating lease expense 14,529 3,616 Expenses contributed to capital — 27,157 (Changes in current assets and liabilities: Accounts receivable ( 583,624 ) ( 1,401,562 ) Accounts receivable – related parties 15,360 ( 15,360 ) Prepaid expenses ( 319,531 ) — Inventory ( 15,319,987 ) ( 6,383 ) Inventory deposit – related party ( 2,925,000 ) — Income tax receivable ( 1,753,594 ) — Accounts payable 242,829 — Accounts payable – related party 11,258,208 1,409,561 Accrued expenses ( 482,501 ) 1,017,219 Deferred revenue ( 623,096 ) 623,096 Income tax accrual ( 1,331,856 ) 1,331,856 Customer refund due 316,800 — Payments on operating lease obligation ( 11,708 ) ( 2,836 ) Net cash (used in) provided by operating activities ( 9,313,241 ) 7,601,623 CASH FLOWS FROM FINANCING ACTIVITIES: Common stock issued for cash, net of financing cost 8,305,772 — Proceeds from the exercise of warrants 1,665,113 — Settled RSU shares with cash ( 254,110 ) ( 179,922 ) Net cash provided by (used in) financing activities 9,716,775 ( 179,922 ) Net change in cash and restricted cash $ 403,534 $ 7,421,701 Beginning cash and restricted cash balance 7,421,701 — Ending cash and restricted cash balance $ 7,825,235 $ 7,421,701 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ — $ — Income taxes paid $ 1,637,102 $ 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. Current Description of Business The Company is focused on growing and incubating innovative and profitable products into mature, dominant brands. On March 9, 2020, the Company entered into an exclusive distribution agreement (the “Distribution Agreement”) of certain electronic nicotine delivery systems (“ENDS”) and related components (the “Products”) with Bidi Vapor, LLC, a Florida limited liability company (“Bidi”), a related party company that is also owned by Nirajkumar Patel, the Chief Executive Officer of the Company. The Distribution Agreement was amended and restated on May 21, 2020, and again on April 20, 2021, (collectively the “A&R Distribution Agreement”), in order to clarify some of the provisions. Pursuant to the A&R Distribution Agreement, Bidi granted the Company an exclusive worldwide right to distribute the Products for sale and resale to non-retail level customers. Currently, the Products consist primarily of the “Bidi Stick.” The Company ceased all retail/direct-to-consumer sales in February 2021. In connection with the A&R Distribution Agreement, the Company entered into non-exclusive sub-distribution agreements, some of which were subsequently amended and restated by the parties in order to clarify certain provisions (all such agreements, as amended and restated, are collectively referred to as the “A&R Sub-Distribution Agreements”), whereby the Company appointed the counterparties as non-exclusive sub-distributors. Pursuant to the A&R Sub-Distribution Agreements, the sub-distributors agreed to purchase for resale the Products in such quantities as they should need to properly service non-retail customers within the continental United States (the “Territory”). On August 31, 2020 the Company formed Kaival Labs, Inc., a Delaware corporation (herein referred to as “Kaival Labs”) as a wholly owned subsidiary of the Company. On July 16, 2021, the Company filed a Certificate of Amendment to the Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a 1-for-12 reverse stock split (the “Reverse Stock Split”) of the shares of the Company’s common stock, par value $ 0.001 per share (the “Common Stock”). The Reverse Stock Split was effective as of 12:01 a.m. Eastern time on July 20, 2021. No fractional shares were issued in connection with the Reverse Stock Split. Any fractional shares of Common Stock that would have otherwise resulted from the Reverse Stock Split will be rounded up to the nearest whole number. In connection with the Reverse Stock Split, the Board of Directors (the “Board”) approved appropriate and proportional adjustments to all outstanding securities or other rights convertible or exercisable into shares of Common Stock, including, without limitation, all preferred stock, warrants, options, and other equity compensation rights. All historical share and per-share amounts reflected throughout our consolidated financial statements and other financial information herein have been adjusted to reflect the Reverse Stock Split as if the split occurred as of the earliest period presented. The par value per share of the Common Stock was not affected by the Reverse Stock Split. Current Product Offerings Pursuant to the A&R Distribution Agreement, The Company sells and resells electronic nicotine delivery systems, which it may refer to herein as “ENDS Products”, or “e-cigarettes”, to non-retail level customers. The sole Product the Company resells is the “BIDI ® Stick,” a disposable, tamper-resistant ENDS product that comes in a variety of flavor options for adult cigarette smokers. The Company does not manufacture any of the Products it resells. The BIDI ® Stick is manufactured by Bidi. Pursuant to the terms of the A&R Distribution Agreement, Bidi provides the Company with all branding, logos, and marketing materials to be utilized by the Company in connection with its marketing and promotion of the Products. On July 14, 2021, the Company announced plans to launch its first Kaival-branded product, a Hemp CBD product. In addition to its Kaival-branded formulation, the Company anticipates that it will also provide white label, wholesale solutions for other product manufacturers through its subsidiary, Kaival Labs. The Company has not yet launched any Kaival-branded product, nor has it begun to provide white label wholesale solutions for other product manufacturers. COVID-19 In January 2020, the World Health Organization (the “WHO”) announced a global health emergency because of a new strain of coronavirus (“COVID-19”) originating in Wuhan, China and the risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in global exposure. The Company’s operations have not been significantly impacted by COVID-19. No impairments were recorded as of October 31, 2021 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, 2021 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. However, the Company was indirectly impacted by supply chain issues and regulatory oversight. 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 Premarket Tobacco Product Application (“PMTA”) process, the Food and Drug Administration (“FDA”) reiterated their enhanced scrutiny over ENDS products and raised the bar. F- 7 Impact of FDA PMTA Decision As of September 10, 2021, the FDA announced that it has taken action on over 93% of applications and issued Marketing Denial Orders (“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. The Company anticipates 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 U.S. Court of Appeals for the Eleventh Circuit to review the FDA’s denial of the PMTAs for its non-tobacco flavored BIDI® Stick ENDS, arguing that it was arbitrary and capricious under the Administrative Procedure Act (“APA”), as well as ultra vires , for the FDA not to conduct any scientific review of 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, U.S. Court of Appeals for the Eleventh Circuit 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 U.S. Court of Appeals for the Eleventh Circuit, which was granted on February 1, 2022. In the event that the U.S. Court of Appeals issues for the Eleventh Circuit 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 the Company being unable to distribute such products, the Company’s business and financial condition would be materially adversely affected. The Company cannot provide any assurances as to the timing or outcome of the merits-based case. Risks and Uncertainties Historically, substantially all of the Company’s 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 its total sales of BIDI® Sticks for the fiscal years ended October 31, 2021 and 2020, respectively. The uncertainty of any potential decisions by the FDA leading up to the MDO negatively impacted the Company’s overall revenues for the last two quarters of fiscal 2021. Generally, substantially all of the ENDS industry’s revenue is derived from the sales of flavored products. In addition, 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 the Company in these international markets. The Company is also exploring potential partnerships with international distribution companies in order to possibly expand BIDI® Stick distribution more rapidly in these international markets. 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 Restricted Cash The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents at October 31, 2021and October 31,2020. Cash and restricted cash at October 31, 2021 and October 31, 2020 were $ 7,825,235 and $ 7,421,701 , respectively. Cash and restricted consist of cash and cash held short-term in escrow as required. As of October 31, 2021, and October 31, 2020, the Company had $ 65,007 and $0 in restricted cash, respectively, for amounts held in escrow. F- 8 The following table sets forth a reconciliation of cash, and restricted cash reported in the consolidated balance sheet and the consolidated statements of cash flows that agrees to the total of those amounts presented in the consolidated statements of cash flows. Restrictions on Cash and Cash Equivalents October 31, October 31, 2021 2020 Cash $ 7,760,228 $ 7,421,701 Restricted cash 65,007 — Total cash and restricted cash shown in statement of cash flows $ 7,825,235 $ 7,421,701 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. As of October 31, 2021, based upon management’s assessment of the accounts receivable aging and the customers’ payment history, the Company has determined that no allowance for doubtful accounts is required. The Company had an allowance for doubtful accounts of $13,773, which was 1.0% of total accounts receivable customer balances, as of October 31, 2020. Inventories All product inventory is purchased from a related party, Bidi. Inventories are stated at the lower of cost and net realizable value. Cost includes all costs of purchase and other costs incurred in bringing the inventories to their present location and condition. The Company determines cost based on the FIFO method. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. All inventories are purchased from a related party of October 31, 2021, the inventories only consisted of finished goods, were significant and located in four storage locations, one of which is a related party, Bidi and one of which is a customer/sub distributor, Favs Business LLC (“Favs Business”). Based upon fiscal year 2021 inventory management procedures and their results, the Company has determined that no allowance for the inventory valuation is required at October 31, 2021. No inventory allowance was required as of October 31, 2020 either. Inventory deposit – related party The Company paid $2.9 million from its capital financing raise to Bidi, a related party, to have BIDI ® Sticks manufactured with regulatory product requirements, different from the United States, as stipulated by the United Kingdom. Once complete the European Bidi Sticks will be maintained in appropriate warehousing for distribution and sale there. As of the date these audited consolidated financial statements were issued, this has not been completed and no inventory has been transferred to the Company and this remains a deposit. Revenue Recognition The Company adopted ASC 606, Revenue from Contracts with Customers (Topic 606) (“ASC 606”), in the second quarter of fiscal year 2020, as this was the first quarter that the Company generated revenues. Under ASC 606, the Company recognizes revenue when a customer obtains control of promised goods, in an amount that reflects the consideration that the Company expects to receive in exchange for the goods. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods it transfers to the customer. Under ASC 606, disaggregated revenue from contracts with customers depicts the nature, amount, timing, and uncertainty of revenue and cash flows affected by economic factors. The Company has evaluated revenues recognized and substantially all 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. OnOctober 31, 2021, the Company and one of its customers, Favs Business, entered into a Consignment Agreement. As of October 31, 2021, the value of the Products stored at Favs Business under the Consignment Agreement was $2,556,930. 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, 2021 and October 31, 2020 the Company has received $ 0 and $ 623,096 in deposits from customers, respectively, which is included with the Company’s current liabilities. Customer Refunds The Company infrequently has a need to adjust the size of an order after it has been shipped, received and paid for, due to the customer oversizing the order for more product that it can realistically sell at that time. If and when this occurs, the Company will ask the customer to return the over allotted product. Once received and inspected, the Company will issue a refund for the product return. As of October 31, 2021, the Company had one customer refund due for $316,800, which was the result of one of the Company’s sub distributor customers returning Product that had become defective in storage. The $316,800 amount at October 31, 2021 represents the amount of refund the Company will make to this customer. F- 9 Products Revenue The Company generates products revenue from the sale of the Products (as defined above) to non-retail customers. The Company recognizes revenue at a point in time based on management’s evaluation of when performance obligations under the terms of a contract with the customer are satisfied and control of the Products has been transferred to the customer. In most situations, transfer of control is considered complete when the products have been shipped to the customer. The Company determined that a customer obtains control of the Product upon shipment when title of such product and risk of loss transfer to the customer. The Company’s shipping and handling costs are fulfillment costs and such amounts are classified as part of cost of sales. The Company’s sales arrangements for retail sales usually require full prepayment before delivery of the Products. The advance payment is not considered a significant financing component because the period between when the Company transfers a promised good to a customer and when the customer pays for that good is short. The Company offers credit sales arrangements to non-retail (or wholesale) customers and monitors the collectability of each credit sale routinely. Revenue is measured by the transaction price, which is defined as the amount of consideration expected to be received in exchange for providing goods to customers. The transaction price is adjusted for estimates of known or expected variable consideration, which includes refunds and returns as well as incentive offers and promotional discounts on current orders. Estimates for sales returns are based on, among other things, an assessment of historical trends, information from customers, and anticipated returns related to current sales activity. These estimates are established in the period of sale and reduce revenue in the period of the sale. Variable consideration related to incentive offers and promotional programs are recorded as a reduction to revenue based on amounts the Company expects to collect. Estimates are regularly updated and the impact of any adjustments are recognized in the period the adjustments are identified. In many cases, key sales terms such as pricing and quantities ordered are established at the time an order is placed and incentives have very short-term durations. Amounts billed and due from customers are short term in nature and are classified as receivables since payments are unconditional and only the passage of time related to credit terms is required before payments are due. The Company does not grant payment financing terms greater than one year. Payments received in advance of revenue recognition are recorded as deferred revenue. Concentration of Revenues and Accounts Receivable For the fiscal year ended October 31, 2021, approximately 23%, or $13.9 million, of the revenue from the sale of Products, primarily consisting of the “BIDI ® Stick,” was generated from Favs Business LLC (“Favs Business”), approximately 16%, or $9.6 million, of the revenue from the sale of Products was generated from MMS Distributing, LLC (“MMS Distro”), and approximately 14%, or $8.2 million, of the revenue from the sale of Products was generated from C Store Master. Favs Business and C Store Master had outstanding balances of $1 million and, $0.3 million respectively, and accounted for approximately 50%, and 16%, respectively, of the total accounts receivable from customers as of October 31, 2021. For the year ended October 31, 2020, approximately 41% of the revenue from the sale of products, primarily 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 products was generated from MMS Distro in the amount of approximately $3.9 million. Go Brands, Inc., with an outstanding balance of approximately $0.3 million and GPM Investment, LLC, with an outstanding balance of approximately $0.6 million, accounted for approximately 33% and 56% of the total accounts receivable from customers, respectively, as of October 31, 2020. Share-Based Compensation The Company measures the cost of services received in exchange for an award of equity instruments (share-based payments, or SBP) based on the grant-date fair value of the award. That cost is recognized over the period during which a recipient is required to provide service in exchange for the SBP award—the requisite service period (vesting period). For SBP awards subject to conditions, compensation is not recognized until the performance condition is probable of occurrence. The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock-based awards on the date of grant and on each modification date. .Compensation expense for SBP awards granted to nonemployees is re-measured each period as the underlying options vest. The fair value of each option granted during the year ended October 31, 2021 and 2020 was estimated on the date of grant using the Black-Scholes option-pricing model with the weighted average assumptions in the following table: Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions 2021 2020 Expected dividend yield 0 % — Expected option term (years) 10 — Expected volatility 294.55 %- 301.53 % — Risk-free interest rate 1.19 %- 1.63 % — The expected term of options granted represents the period of time that options granted are expected to be outstanding. The expected volatility was based on the volatility in the trading of the Common Stock. The assumed discount rate was the default risk-free ten-year interest rate for US Treasury bills. The Company stock option expense for the year ended October 31, 2021 and October 31, 2020 was $ 1,773,947 and $ 0 , respectively. The Company’s stock-based compensation for the fiscal years ended October 31, 2021 and October 31, 2020 was $ 9,449,421 and $ 769,437 , respectively. Income Tax Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the recorded book basis and the tax basis of assets and liabilities for financial and income tax reporting. Deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income and tax credits that are available to offset future federal income taxes. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on the Company’s financial condition, results of operations, or cash flow. The Company has Federal net operating loss (“NOL”) carryforwards of approximately $ 4,000,000 and state NOL carryforwards of approximately $ 1,800,000 . With the changes instituted by the CARES Act, the Federal NOLs have an indefinite life and will not expire. The Company’s federal and state tax returns for the 2018 and 2019 tax years generally remain subject to examination by U.S. and various state authorities. A valuation allowance is recorded to reduce the deferred tax asset if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. After consideration of all the evidence, both positive and negative, management has determined that a valuation allowance of $ 1,256,059 for the year ended on October 31, 2021 is necessary to reduce the deferred tax asset to the amount that will more likely than not be realized 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. F- 10 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, 2021. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash, restricted cash, accounts receivable, inventory, accounts payable and accrued expenses. Recent Accounting Pronouncements The Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements. F- 11 Note 3 – Going Concern A recent court ruling on behalf of Bidi in the U.S. Court of Appeals for the Eleventh Circuit, granted a judicial stay of the MDO previously issued by the FDA to Bidi in September 2021. The ruling, issued on February 1, 2022, means that all BIDI® Stick flavors remain marketable by the Company in the United States, subject to the FDA’s enforcement discretion, while Bidi continues with its merits case challenging the legality of the MDO. As the FDA has indicated that it is prioritizing enforcement against companies that have not submitted PMTAs or who have MDOs in place, the Company views the risk of FDA enforcement against Bidi as low. Oral arguments in the merits case are currently scheduled in May 2022. If the U.S. Court of Appeals for the Eleventh Circuit agrees with Bidi in the merits case, the Company anticipates that 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, the Company will be able to fully market and sell 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 U.S. Court of Appeals for the Eleventh Circuit disagrees with Bidi on the merits case, or if FDA otherwise chooses to enforce against Bidi, the Company will be forced to cease sales on the flavored ENDS in the United States market, leaving only the Tobacco and Menthol (Arctic) ENDS products for sale in the United States (pending 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 the negative cash flows from operations raises substantial doubt on the Company’s ability to continue as a going concern. Management plans to continue similar operations with increased marketing, which the Company believes 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. These audited consolidated 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 we cannot continue as a going concern. 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 excludes short-term leases having initial terms of 12 months or less from Topic 842 as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term. The Company adopted the standard in the fourth quarter of fiscal year 2020. The adoption of 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 T he Company does not have financing leases and only one operating lease for office space, with a related party. The operating lease is for a term of 5 five years, beginning August 1, 2020, with rent of $ 1,000 payable monthly. Certain of the Company’s leases include renewal options and have not been included in the calculation of the lease liabilities and right of use assets as the Company is not reasonably certain to exercise the option. As the operating lease does not provide for an implicit interest rate, we estimated a current borrowing rate of 4.5 % in determining the present value of the lease. As of October 31, 2021, the right-to-use (“ROU”) lease asset, net of accumulated amortization, was $ 55,604 . The initial recognition of the ROU operating lease was $ 73,749 for both the ROU asset and ROU liability. The amortization expense for ROU asset for the twelve months ended October 31, 2021 was $ 14,529 and no payments were made on the ROU liability. The amortization for the expense ROU asset for the twelve months ended October 31, 2020 was $ 3,616 and three payments on the ROU liability were $ 2,836 . At October 31, 2021, short-term ROU lease liability was $ 13,020 and long-term liability was $ 46,185 , totaling $ 59,205 . Schedule of Future Minimum Rental Payments for Operating Leases 2021 2022 2023 2024 Total Lease payments $ 13,500 $ 15,300 $ 18,000 $ 13,500 $ 60,300 Less discount imputed interest ( 1,095 ) Present value of future payments 59,205 Less current obligations ( 13,020 ) Long term lease obligations $ 46,185 On November 1, 2021 the Company entered into a month-to-month lease agreement with Ranger Enterprises, LLC, located in Seymour, Indiana, to store product inventory at this satellite location. The Company made one payment on this lease in the amount of $ 2,143 on October 31, 2021. On November 11, 2021 the Company entered into a month- to-month lease agreement with FFE Solutions Group, located in Salt Lake City Utah, to store additional product inventory at this satellite location. The Company made one payment on this lease in the amount of $ 10,713 on December 15, 2021. F- 12 Note 5 – Stockholder Equity Additional Paid-In Capital The Company’s Chief Executive 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. Preferred Shares Issued On August 19, 2020, the Company issued 3,000,000 shares of its Series A Preferred Stock, to Kaival Holdings, LLC (“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 Convertible Preferred Stock (the “Series A Preferred Stock”), concluded that it was more akin to equity and recorded it as permanent equity. The authorized preferred stock of the Company consists of 5,000,000 shares with a par value of $ 0.001 per share, of which 3,000,000 shares were designated as Series A Preferred Stock . Each share of the Series A Preferred Stock is initially convertible into 100 shares of Common Stock. As a result of the Reverse Stock Split, the conversion rate was adjusted such that each share of the Series A Preferred Stock is convertible into approximately 8.33 shares of Common Stock. All 3,000,000 shares of Series A Preferred Stock were issued and outstanding as of October 31, 2021 and October 31, 2020. Common Shares Issued On November 1, 2020, the Company entered into a Consulting Agreement with Inflection Partners LLC (“Inflection Partners”), pursuant to which the Company engaged Inflection Partners to provide investor relations, corporate communication, marketing, strategic advising, and operational activities (collectively, the “Inflection Services”), in exchange for a $ 45,000 deposit, a $ 60,000 monthly retainer, 83,333 shares of restricted Common Stock due upon the execution of the agreement, and an incentive compensation of 83,333 shares of restricted Common Stock or warrants to purchase 125,000 shares of restricted Common Stock. On January 6, 2021, the Company entered into a new Consulting Agreement with Inflection Partners which replaced the original Consulting Agreement, pursuant to which the Company engaged Inflection Partners to provide “the Inflection Services”, in exchange for a $ 45,000 deposit, a $ 60,000 monthly retainer, 83,333 shares of restricted Common Stock due upon the execution of the agreement, and an incentive compensation of an aggregate of 166,667 shares of restricted Common Stock On October 15, 2021, the Company paid $100,000 and 225,000 shares of restricted Common Stock. The Consulting Agreement was terminated on October 31, 2021 and no further compensation is due. During the year ended October 31, 2021, 308,333 shares of restricted Common Stock were issued to Inflection Partners as compensation for services provided to the Company The fair value of the shares of Common Stock issued was $1,597,667. The Company implemented the Reverse Stock Split, effective prior to the opening of the market on Tuesday, July 20, 2021. The Reverse Stock Split was implemented by the Company in support of its application to list on the Nasdaq Capital Market (“Nasdaq”). As a result of the Reverse Stock Split at the 1-for-12 ratio, every 12 shares of the Common Stock was exchanged for one share of the Common Stock. The Company has retroactively adjusted all share amounts and per share data herein to give effect to the Reverse Stock Split. The authorized Common Stock of the Company consists of 1,000,000,000 shares with a par value of $ 0.001 . There were 30,195,312 and 23,106,886 shares of Common Stock issued and outstanding October 31, 2021 and October 31, 2020, respectively. In September 2021, the Company completed a firm commitment underwritten offering, which offering was made pursuant to its Registration Statement on Form S-3 (File No. 333-258339) (the “Registration Statement”). The Securities and Exchange Commission (the “SEC”) declared the Registration Statement effective on August 10, 2021. The Company sold 4,700,000 million shares of our Common Stock and warrants, with an exercise price of $1.90 per share and an expiration of five years, to purchase an additional 3,525,000 shares of its Common Stock. The Company sold each share of its Common Stock and warrants to purchase 0.75 shares of its Common Stock at a combined public offering price of $1.70. The Company also granted the underwriter the option to purchase an additional 705,000 shares of its Common Stock and warrants to purchase an additional 528,750 shares of its Common Stock. As of October 31, 2021, the Company had received net proceeds from the offering of approximately $ 8,305,772 , net of offering cost. The Company had also received approximately $1,665,113 from the exercise of 879,828 warrants. During the year ended October 31, 2020, 318,671 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 During the year ended October 31, 2021, 674,803 shares of Common Stock were issued to 8 non-employee vendors as compensation for professional services rendered to the Company and two officers as additional compensation. These shares were expensed to the Company using the closing share price on the grant dates to compute an aggregate fair market value total of $ 8,944,100 , of which 308,333 shares and $1,597,667 compensation is related to shares issued to Inflection Partners disclosed above. F- 13 Warrants Shares Issued The weighted average remaining term of the outstanding Common Stock warrants is 4.92 years as of October 31, 2021 . As part of the underwritten offering, the Company issued warrants to purchase a total of 4,053,750 shares of Common Stock at an exercise price of $ 1.90 per share. These warrants expire in the year 2026. During the year ended October 31, 2021, warrants for 879,828 shares were exercised for $ 1,665,113 . The aggregate intrinsic value of the outstanding Common Stock warrants as of October 31, 2021 was $ 0 . The following is a summary of the stock warrant plan activity during the years ended October 31, 2021 and 2020. Share-based Payment Arrangement, Option, Activity 2021 2020 Number of Warrants Weighted Average Exercise Price Number of Warrants Weighted Average Exercise Price Warrants Outstanding at Beginning of the year — $ — — $ — Granted 4,053,750 1.90 — — Exercised ( 879,828 ) 1.90 — — Canceled, forfeited, expired — 1.90 - — — Warrants Outstanding and Exercisable at End of Year 3,173,922 $ 1.90 — $ — Restricted Stock Unit Awards During the fiscal year October 31, 2021: During the twelve months ended October 31, 2021, 221,666 shares of Common Stock were issued to eight employees of the Company pursuant to restricted stock unit (“RSU”) agreements, resulting in $ 505,321 of share-based compensation. Of the shares issued to employees, 92,871 shares were withheld by the Company to satisfy tax withholding obligations equal to $ 254,110 as of October 31, 2021. Additionally, one employee resigned her employment from the Company and forfeited 23,333 RSUs Accordingly, there remains 499,167 unvested employee RSUs corresponding to $ 1,011,019 of unamortized stock expenses as of October 31, 2021. On January 1, 2021, the Board of Directors approved the award of 41,667 “RSUs” under the 2020 Stock and Incentive Compensation Plan (the “Incentive Plan”) and made a grant to one employee. The RSUs had a fair value of $ 315,000 at the time of grant. The RSUs were awarded pursuant to restricted stock unit agreements (“RSU Agreement”), which provide for vesting over the course of three years, with a portion of the RSUs vesting every three months. The vesting schedules are set forth in the applicable RSU Agreements. During the fiscal year October 31, 2020: On May 28, 2020, the Board of Directors approved the award of 729,167 RSUs under the Incentive Plan to six employees. The RSUs were awarded pursuant to RSU Agreements, 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 83,333 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. 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, 110,000 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, 702,500 RSUs remain unvested, corresponding to $1,201,340 of unamortized stock expenses as of October 31,2020. . F- 14 Of the shares issued to employees, 18,833 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 . Stock Option Awards During fiscal year 2021, the Company granted options exercisable for up to 150,000 shares of Common Stock of which 41,667 fully vested on December 1, 2021, 15,000 fully vested on March 17, 2021, 7,500 fully vested on June 30, 2021, 68,333 vest over the next 2 years on March 17, 2022, and 2023, and 17,500 vest over the next 2 years on June 30, 2022 and 2023. The options have exercise prices ranging from $9.12 to $28.68 per share. These options have a weighted average remaining life of 9.43 years as of October 31, 2021 and expire in the year 2031. On July 19, 2021, two of the stock option agreements, exercisable for an aggregate of 50,000 shares of Common Stock, were modified to accelerate the full vesting period from 3 years to 2 years. The aggregate intrinsic value of these outstanding options as of October 31, 2021 was $0. The Company fair valued the options on the grant date at $ 3,088,002 using a Black-Scholes option pricing model with the following assumptions: stock price range of $ 9.12 to $ 27.36 per share (based on the quoted trading price on the date of grant), volatility range of 294.55 % to 301.53 %, expected term of 10 years, and a risk-free interest rate range of 1.19 % to 1.63 %. The Company is amortizing the expense over the vesting terms of each. The total stock option expense for the twelve months ended October 31, 2021 was $ 1,773,947 . The total unamortized stock option expense at October 31, 2021 was $ 1,314,055 . Note 6 – Related-Party Transactions Revenue and Accounts Receivable During the fiscal year ended October 31, 2021, the Company recognized revenue of $ 154,560 from seven companies owned by Nirajkumar Patel, the Chief Executive Officer of the Company, and/or his wife. During the fiscal 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 had accounts receivable from the related party in the amount of $ 15,360 . Purchases and Accounts Payable During the fiscal year ended October 31, 2021, the Company purchased Products equal to $91,149,783 from Bidi, a related party company that is also owned by Nirajkumar Patel, the Company’s Chief Executive Officer, and after returns of $29,283,452 , resulted in the net amount of $61,866,332 in product purchases. As of October 31, 2021, the Company had accounts payable to Bidi of $12,667,769. During the fiscal year ended October 31, 2021, Lakshmi Distributors Inc., doing business as C Store Master (“C Store Master”), a large customer of the Company, elected to return the inventory associated with the consignment order placed on April 1, 2021, which was located at the staging warehouse in California, to the Company at no cost. The Company then returned this same inventory to Bidi’s warehouse in Florida at no cost. This reduced the Company’s inventory and reduced the related-party amount due to Bidi by $ 13,846,950 . 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 Office Space and Other Leases 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. During fiscal year 2021 the Company was not being charged for the leased space under the terms and conditions of the lease between the Company and Just Pic k , was not being charged for the separate warehouse space provided by Just Pick, and accordingly no payments were made on the lease. Concentration of Purchases and Accounts Payable- Related Party For the years ended October 31, 2021 and 2020, 100% of the inventories of Products, primarily consisting 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 and $ 54.0 million , respectively.. It also accounted for 100% of the total accounts payable - related party as of October 31, 2021 and 2020 . Concentration of Revenues and Accounts Receivable For the fiscal year ended October 31, 2021, approximately 23%, or $ 13.9 million, of the revenue from the sale of Products, primarily consisting of the “BIDI ® Stick,” was generated from Favs Business LLC (“Favs Business”), approximately 16%, or $ 9.6 million, of the revenue from the sale of Products was generated from MMS Distributing, LLC (“MMS Distro”), and approximately 14%, or $ 8.2 million, of the revenue from the sale of Products was generated from C Store Master. Favs Business and C Store Master had outstanding balances of $ 1 million and, $ 0.3 million respectively, and accounted for approximately 50 %, and 16 %, respectively, of the total accounts receivable from customers as of October 31, 2021. F- 15 For the year ended October 31, 2020, approximately 41% of the revenue from the sale of products, primarily 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 products was generated from MMS Distro in the amount of approximately $3.9 million. Go Brands, Inc., with an outstanding balance of approximately $0.3 million and GPM Investment, LLC, with an outstanding balance of approximately $0.6 million, accounted for approximately 33% and 56% of the total accounts receivable from customers, respectively, as of October 31, 2020. 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. Significant components of the tax expense (benefit) recognized in the accompanying statements of operations for the years ended October 31, 2021 and October 31, 2020 are as follows: Schedule of Components of Income Tax Expense (Benefit) October 31, 2021 2020 Current Tax Expense: Federal $ ( 1,301,008 ) $ 1,249,525 State ( 134,190 ) 265,256 Total Current Tax Expense ( 1,435,198 ) 1,514,781 Deferred Tax Expense: Federal — — State — — Total Deferred Tax Expense — — Estimated Tax Payments: Federal — — State — 182,925 Total Estimated Tax Payment — 182,925 Net Income Tax Liability/(Benefit) $ ( 1,435,198 ) $ 1,331,856 Total net deferred taxes are comprised of the following at October 31, 2021 and October 31, 2020: Schedule of Deferred Tax Assets and Liabilities October 31, 2021 2020 Deferred Tax Assets: Stock Compensation Expense – NQSO $ 384,540 $ — Other 30,099 — Net Operating Loss Carryforwards 910,685 — Total Deferred Tax Asset 1,325,324 — Deferred Tax Liabilities: Prepaid Expenses ( 69,265 ) — Total Deferred Tax Liabilities ( 69,265 ) — Less: Valuation Allowance ( 1,256,059 ) — Net Deferred Tax Asset — — The Company has Federal NOL carryforwards of approximately $ 4,000,000 and state NOL carryforwards of approximately $ 1,800,000 . With the changes instituted by the CARES Act, the Federal NOLs have an indefinite life and will not expire. The Company’s federal and state tax returns for the 2018 and 2019 tax years generally remain subject to examination by U.S. and various state authorities. A valuation allowance is recorded to reduce the deferred tax asset if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. After consideration of all the evidence, both positive and negative, management has determined that a valuation allowance of $ 1,256,059 for the year ended on October 31, 2021 is necessary to reduce the deferred tax asset to the amount that will more likely than not be realized. F- 16 During the year ended October 31, 2021, the Company paid $1,637,102 in combined Federal/State income taxes for taxable income generated in fiscal year 2020. As of October 31, 2021, the Company had a total income tax receivable in the amount of $ 1,753,594 , which was the result of the NOL generated in fiscal year 2021 to be applied against taxable income in fiscal year 2020. 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. During the year ended October 31, 2020 the Company paid $ 182,925 in income taxes and reported an income tax accrual of $ 1,331,856 . 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, 2021 and October 31, 2020 other than the below: Patent Contribution Agreement On May 4, 2021, Next Generation Labs, LLC (“Next Generation”) notified the Company that a “reversion event” had occurred under that certain Patent Contribution Agreement, dated September 28, 2020 (the “Patent Contribution Agreement”). Pursuant to the Patent Contribution Agreement, Next Generation agreed to contribute certain patents, patent applications, and patent data, described on Exhibit “A” of the Patent Contribution Agreement (the “Patents”), to the Company and the Company would subsequently transfer the Patents to Kaival Labs. Pursuant to the Patent Contribution Agreement, the Company agreed to pay Next Generation a purchase price of $3 million for the Patents (the “Purchase Price”), which was expected to be paid over-time upon two events. First, the Company expected 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 sold a product that was developed using any portion of the Patents or based on the Patents, the Company agreed to pay Next Generation the difference between the Purchase Price and the Offering Payment. Pursuant to the terms of the Patent Contribution Agreement, the parties agreed that the Company would file a Form 1-A offering statement no later than January 31, 2021, unless extended in writing by the Company in good faith to no later than March 15, 2021 (the “Filing Date”). The Patent Contribution Agreement further provided that in the event the Company or Kaival Labs materially breached the terms of the Patent Contribution Agreement and the material breach is not cured within fifteen (15) business days after Next Generation provides written notice of such material breach, then a reversion event would occur, and the Patents would revert from Kaival Labs to Next Generation. The Company did not undertake a securities offering by filing a Form 1-A offering statement by the Filing Date. The Company attempted to negotiate an amendment to the Patent Contribution Agreement, which would allow the Company additional time to undertake a securities offering. However, on April 8, 2021, Next Generation notified the Company that it was in material breach of the Patent Contribution Agreement and that the Company would have fifteen (15) business days, or April 30, 2021, to cure such breach. Ultimately, the Company decided not to cure such breach within the requisite time and, on May 4, 2021, Next Generation notified the Company that a reversion event occurred. The Company has completed the process of completing the necessary documentation to transfer the Patents from Kaival Labs to Next Generation. Neither the Company, nor Kaival Labs, had developed or otherwise relied on the Patents to date and does not expect the reversion of the Patents to materially affect the Company’s business. Consulting Agreement On March 17, 2021, the Company entered into a consulting agreement with Russell Quick, which granted stock options to purchase 41,667 shares of the Company’s Common Stock in exchange for consulting services. Mr. Quick may exercise the option on or after December 1, 2021 when the shares are fully vested. The exercise price per share is $ 28.68 . The Company recognized $ 1,139,998 in expense to account for the stock options from date of grant until date of full vestment. Russell Quick is the Chief Executive Officer of QuikfillRx. As of February 14, 2022, Mr. Quick has not exercised any of his fully vested stock options. Executive Compensation 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 of Directors 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 of Directors 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. On October 31, 2020, the Company determined that the fair value of the equity bonus shares, or $ 165,000 , should be accrued as it was deemed likely that the $50 million revenue target would be met. The Company issued these shares to the Chief Executive Officer and Chief Operating Office on January 1, 2021. During the quarter ended October 31, 2021, the $150 million next accumulated revenue target was not achieved and the Company determined that no equity bonuses or cash bonuses should be accrued as of October 31, 2021. F- 17 QuikfillRx Service Agreement On June 2, 2020, the Company entered into the First Amendment to the Service Agreement with QuikfillRx (collectively with the “Amended Service Agreement”) with 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. . Pursuant to the terms of the 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 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. The Company accrued $ 3,775 for a quarterly bonus payable to QuikfillRx, based on the Applicable Gross Quarterly Sales results of the three months ended October 31, 2021. Note 10 – Subsequent Events On February 4, 2022, the Company entered into a Consulting Agreement with Oakhill Europe Ltd (“Oakhill Europe”), pursuant to which the Company engaged Oakhill Europe to provide strategic advising and negotiation assistance for potential international distribution agreements (collectively, the “Oakhill Services”), in exchange for a $15,000 monthly retainer, incentive compensation bonuses of up to $175,000, and an incentive compensation bonus value of $75,000 paid in fully-vested non-qualified stock options, upon the achievement of certain events . Share-based Compensation On November 11, 2021, the Company issued 61,250 shares of Common Stock to eight employees in accordance with the vesting schedules set forth in RSU agreements previously entered into with such employees. Of the shares issued to employees, 23,243 shares were withheld by the Company to satisfy tax withholding obligations and/or satisfy cash settlement options to employees, equaling $ 124,612 . F- 18 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.