Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
This management’s Discussion and Analysis
of Financial Condition and Results of Operations is designed to provide a reader of the financial statements with a narrative report on
our financial condition, results of operations, and liquidity. This discussion and analysis should be read in conjunction with the audited
Financial Statements and notes thereto for the year ended October 31, 2024, 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.
Overview
We
are engaged in the sale, marketing and distribution of electronic nicotine delivery system (“ENDS”) products, also known
as “e-cigarettes”, in a variety of favors. Until October of 2024, our primary source of revenue has been the Bidi Stick as
we sold our inventory on hand. However, on June 11, 2024, RAI Strategic Holdings, Inc., R.J. Reynolds Vapor Company, R.J. Reynolds Tobacco
Company, and RAI Services Company (collectively, the “RJ Reynolds Entities”) filed a patent infringement complaint with the
International Trade Commission (the “ITC”) against Bidi, us, and forty (40) other respondents (the “ITC Complaint”)
pursuant to Section 337 of the Tariff Act of 1930, as amended. Specifically, the ITC Complaint alleges that one or more components or
elements of the Bidi Stick infringe U.S. Patent No. 11,925,202, which is owned by one of the RJ Reynolds Entities. The ITC Complaint
requests the ITC grant: (a) temporary and permanent limited exclusion orders pursuant to Section 337(e) of the Tariff Act of 1930, as
amended, which would prohibit the importation of the Bidi Stick in the United States; and (b) issue temporary and permanent cease and
desist orders pursuant to 337(f) of the Tariff Act of 1930, as amended, which would prohibit the sale and distribution of the Bidi Stick
in the United States. No damages are recoverable in the proceedings before the ITC. Since the initiation of the ITC Complaint,
we have not imported any Bidi Sticks and currently do not generate any revenue from the sale of Bidi Sticks. Our
current primary source of revenue is through an international licensing agreement with Philip Morris Products S.A. (“PMPSA”),
a wholly owned affiliate of Philip Morris International Inc. (“PMI”). See “Item 1 Business--Philip Morris Deed of
Licensing Agreement”
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We
have also entered into a Merger and Share Exchange Agreement (the “Merger Agreement”) with Delta Corp Holdings Limited, a
company incorporated in England and Wales (together with its successors and assigns, “Delta”), Delta Corp Holdings Limited,
a Cayman Islands exempted company (“Pubco”), KAVL Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of
Pubco (“Merger Sub”) and Delta Corp Cayman Limited (the “Sellers”). If the Merger Agreement is consummated, Pubco
will become our parent and all new officers and directors will be appointed by Pubco, except that pursuant to the Merger Agreement we
have the right to appoint one director to the Pubco board of directors and we have agreed to appoint any family member of Ankitaben Patel
(the widow of our former CEO, Nirajkumar Patel) and/or Nirajkumar Patel who is qualified and identified by Bidi for this role prior to
the closing of the Merger Agreement. While we expect the transactions contemplated by the Merger Agreement to close (the “Closing”)
in March or April of this year, no assurances can be made that such transactions will close by then or ever. The transactions contemplated
by the Merger Agreement are described in further detail below under “ Item 1 Business--The Merger and Share Exchange Agreement .”
Material Items, Trends
and Risks Impacting Our Business
We believe that the following items and trends may
be useful in better understanding the results of our operations.
On June 11, 2024, the RJ Reynolds Entities filed the
ITC Complaint. The ITC Complaint requests the ITC grant: (a) temporary and permanent limited exclusion orders pursuant to Section 337(e)
of the Tariff Act of 1930, as amended, which would prohibit the importation of the Bidi Stick in the United States; and (b) issue temporary
and permanent cease and desist orders pursuant to 337(f) of the Tariff Act of 1930, as amended, which would prohibit the sale and distribution
of the Bidi Stick in the United States. No damages are recoverable in the proceedings before the ITC. If the Company or Bidi is prohibited
from importing the Bidi Stick, then our business, operations, financial results, and reputation would be significantly adversely impacted.
Bidi disputes the patent infringement claims set forth in the ITC Complaint by the RJ Reynolds Entities and plans to vigorously defend
the ITC Investigation. A Commission determination regarding temporary relief is expected in October or December 2024. A final Commission
determination on permanent relief is not expected until late 2025 or early 2026. The asserted patent expires in October 2026 as would
any exclusion order that the ITC enters as a result of the ITC Complaint.
As a result of the ITC Complaint and other factors
we do not expect any significant revenue from the sale of Bidi Sticks in the foreseeable future. Our primary source of revenue is from
KBI from royalties from PMI under the PMI License Agreement.
PMI Licensing Agreement and International Distribution
On June 13, 2022, we, through our wholly owned subsidiary,
KBI, entered into the PMI License Agreement with PMPSA, a wholly owned affiliate of PMI, for the development and distribution of ENDS
products in certain markets outside of the United States, subject to market (or regulatory assessment). The PMI License Agreement grants
to PMPSA a license of certain intellectual property rights relating to Bidi’s ENDS device, known as the BIDI® Stick in the United
States, as well as potentially newly developed devices, to permit PMPSA to manufacture, promote, sell, and distribute such ENDS device
and newly developed devices, in international markets, outside of the United States.
On July 25, 2022, we announced the launch of PMPSA’s
custom-branded self-contained e-vapor product, pursuant to the licensing agreement. The product, a self-contained e-vapor device initially
called VEEBA and more recently rebranded as VEEV NOW, has been custom developed and was initially distributed in Canada. VEEV NOW was
then commercially launched by PMPSA in Europe in February 2023, with additional market launches planned this year. On August 12, 2023,
we executed and entered into a Deed of Amendment No. 1 (the “PMI License Amendment”) with PMPSA, Bidi and KBI. Pursuant to
the PMI License Amendment (which was effective on June 30, 2023), resulting in a Net Reconciliation Payment to KBI and ongoing quarterly
royalty payments.
The ability of PMPSA to generate sales of its licensed
products is important to our results of operations since we derive royalty revenue from PMPSA sales. Should our relationship with PMPSA
deteriorate or terminate, or if PMPSA is unable to generate meaningful sales of its licensed products, our business and results of operations
would be materially harmed.
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Ability to Develop and Monetize the GoFire Intellectual Property
We purchased certain vaporizer
and inhalation-related technology from GoFire in May 2023 with the goal of diversifying our business and lessening our dependence on BIDI.
We do not expect that the acquired assets will generate immediate revenue for us, and while we believe this to be a transformative acquisition
for us and we are already seeking to develop and monetize the acquired assets, we can give no assurances at this time that either (i)
the patent applications we acquired will eventuate in issued patents or (ii) we will be able to enter into successful monetizing arrangements
with respect to these assets.
Nature of our Products
and Regulation
Competition in the market for e-cigarettes from illicit
sources may have an adverse effect on our overall sales volume, restricting our ability to increase selling prices and damaging our brand
equity and reputation. Illicit trade and tobacco trafficking in the form of counterfeit products, smuggled genuine products, and locally
manufactured products on which applicable taxes or regulatory requirements are evaded, represent a significant and growing threat to the
legitimate tobacco industry, including the products we sell. Although we combat counterfeiting of our Products by engaging in certain
tactics, such as requiring all sales force personnel to randomly collect our Products from retailers in order to be tested by our quality
control team, maintaining a quality control group that is responsible for identifying counterfeit products and surveillance of retailers
we suspect are selling counterfeit Products through our own secret shopper force, no assurance can be given that we will be able to detect
or stop sales of all counterfeit products. In addition, while we may bring suits against retailers and distributors that sell certain
counterfeit products, no assurance can be given that we will be successful in any such suits or that such suits will be successful in
stopping other retailers or distributors from selling.
Counterfeit Products
Our Products (included in
this context any products that we may develop from the GoFire Purchased Assets) are and will be heavily regulated by the FDA, which has
broad regulatory powers. The market for ENDS products is subject to a great deal of uncertainty and is still evolving. ENDS products,
having recently been introduced to market over the past 10 to 15 years, are at a relatively early stage of development, and represent
core components of a market that is evolving rapidly, highly regulated, and characterized by a number of market participants. Rapid growth
in the use of, and interest in, ENDS products is recent, and may not continue on a lasting basis. With respect to the GoFire Purchase
Assets, the underlying technology touches on hemp/cannabis, nutraceutical and healthcare applications in addition to nicotine, all of
which are heavily regulated by the FDA and other federal and state agencies. The demand and market acceptance for all of these products
is subject to a high level of uncertainty. Therefore, we are subject to all the business risks associated with a new enterprise in an
evolving market.
Some of our Product offerings
through Bidi are subject to developing and unpredictable regulation. Our Products are sold through our distribution network and may be
subject to uncertain and evolving federal, state, and local regulations, including hemp, non-THC cannabidiol (CBD) and other non-tobacco
consumable products. Enforcement initiatives by those authorities are therefore unpredictable and impossible to anticipate. We anticipate
that all levels of government, which have not already done so, are likely to seek in some way to regulate these products, but the type,
timing, and impact of such regulations remains uncertain. With respect to CBD in particular, on January 26, 2023, the FDA announced that
it would not initiate rulemaking to regulate CBD as a dietary food ingredient. Rather, after careful review, the FDA has concluded that
a new regulatory pathway for CBD is needed and has further indicated that it is prepared to work with Congress to create a new regulatory
pathway for CBD through legislation.
In addition to the de facto
FDA flavor ban that has resulted from the denial of nearly all PMTAs for flavored ENDS, ENDS products that are non-tobacco flavored continue
to face the threat of prohibition at the local level, as many state and local authorities and attorneys general push for bans or request
the FDA to deny PMTAs for flavored ENDS. In addition, a number of states and localities have banned the sale of non-tobacco flavored tobacco
products. Recently, for example, California passed Proposition 31, which prohibits the sale of non-tobacco flavored tobacco products,
including e-cigarettes, in retail locations. Thus, the non-tobacco flavored BIDI® Sticks are not permitted to be sold in California
retail locations. We anticipate more states and localities will take this approach. Several other states and localities have banned flavored
ENDS, including Washington, D.C., New York (and New York City), New Jersey, Rhode Island, Illinois (and Chicago), Utah and Massachusetts,
with several more considering similar bans (e.g., Maryland and Connecticut).
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Ability
to Meet Demand for our Products
We believe that the
matters described under “FDA PMTA Determinations, 11 th Circuit Decision and Impact on Our Business” could have
decreased demand for our Products and would likely have negative opportunities to distribution channels for us through which we could
sell our Products. However, an unlikely increase in demand for the Products would require us to raise cash and/or obtain financing in
order to purchase Products from Bidi for resale in the marketplace. As a result, we are faced with the risk that such cash or financing
will not be available in sufficient amounts or on terms acceptable to us (or at all) to meet the market demand for the Products. Our
inability to fulfill this demand will damage our reputation and could materially impact our ability to increase sales of the Products
which, in turn, would adversely impact our results of operations.
Inflation
Consumer purchases of tobacco
products are historically affected by economic conditions, such as changes in employment, salary and wage levels, the availability of
consumer credit, inflation, interest rates, fuel prices, sales taxes, and the level of consumer confidence in prevailing and future economic
conditions. The U.S. has been experiencing an environment of material inflation in recent quarters, and this condition may impact discretionary
consumer purchases, such as the BIDI® Stick. Demand for our products may also decline during recessionary periods or at other times
when disposable income is lower, and taxes may be higher.
Supply
Chain
The spread of COVID-19 throughout
the world as well as increasing tensions with China over the past several years has created global economic uncertainty, which may cause
partners, suppliers, and potential customers to closely monitor their costs and reduce activities. Any of the foregoing could materially
adversely affect the supply chain for Bidi and our Products, and any supply chain distribution for the Products could have a material
adverse effect on our results of operations.
Going Concern
Our financial statements are prepared in accordance
with U.S. GAAP applicable to a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal
course of business within one year after the date the consolidated financial statements are issued.
In accordance with Financial Accounting Standards
Board (or FASB), Accounting Standards Update (or ASU) No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic
205-40), our management evaluates whether there are conditions or events, considered in aggregate, that raise substantial doubt about
our ability to continue as a going concern within one year after the date that the financial statements are issued.
As shown in the accompanying consolidated
financial statements, we have incurred recurring
losses and negative cash flows from operations. We will need significant additional funds to satisfy our outstanding payables, fund our
working capital, and fully implement our business plan . In addition,
our ability to continue as a going concern is adversely affected by the uncertainty surrounding Bidi’s PMTA process with FDA and
outcome of Bidi’s petition with the 11th Circuit Court of Appeals regarding the FDA’s January 2024 MDO relating to Classic
Bidi ® Stick as well as the uncertainty in the Company’s ability to continue to sell the Bidi Stick given the patent
infringements claim filed by RJ Reynolds. All of these factors raise substantial doubt regarding our ability to continue as a going
concern.
Our management plans
to continue developing strategies on similar or expanded operations of our business to help our ability to determine where our business
will be viable going forward. Until such time, if ever,
we can generate substantial product revenues, management plans to finance our cash needs through public or private equity offerings or
debt financing.
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However, there is no assurance that we will be able
to raise additional capital, generate revenues or achieve profitability due to the factors listed above as well as the regulation and
public perception of ENDS products and the various other risks we face. The accompanying consolidated financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification
of liabilities that may result from the outcome of these or other risks or uncertainties.
Liquidity and Capital Resources
We believe we will not generate sufficient revenue
to support our operations for at least twelve months. As of October 31, 2024, we had working capital of approximately $3.0 million and
total cash of approximately $3.9 million. As discussed above, this condition and other factors raise substantial doubt regarding our ability
to continue as a going concern.
We intend to generally
rely on cash from operations and equity and debt offerings to the extent necessary and available, to satisfy our liquidity needs. There
are several factors that could result in the need to raise additional funds, including a decline in revenue, a lack of anticipated sales
growth, and increased costs. Our efforts are directed
toward generating positive cash flow and, ultimately, profitability. As our efforts during our fiscal 2024 and since have not generated
positive cash flows, we will need to raise additional capital. Should capital not be available to us at reasonable terms, other actions
will become necessary, including implementing cost control measures and additional efforts to generate sales.
We may also be required to take more strategic actions such as exploring strategic options for the sale of our company, the creation
of joint ventures or strategic alliances under which we will pursue business opportunities, or other alternatives. We believe we have,
or have access to, the financial resources to weather the impacts of the FDA’s PMTA process and Bidi’s receipt of MDOs from
the FDA in 2021 and 2024, which are subject to additional FDA action and ongoing court proceedings, respectively. However, we will require
further financing for the next twelve months, given our operating results.
Cash Flows:
Net cash flows used in operations was approximately
$0.7 million for fiscal year ended 2024, compared to cash flow used in operations of approximately $3.0 million for fiscal year ended
2023. The decrease in cash flows used in operations for the fiscal year ended 2024 compared to the fiscal year ended 2023 was primarily
due to changes in Other receivable – related party, Accounts receivable, Income tax receivable, and Accounts
payable – related party (such related party being our affiliate, Bidi, as described further below under Results of Operations).
Net cash flows used in investing activities was zero
for the fiscal year ended 2024, compared to approximately $0.3 million cash flow used in investing activities for the fiscal year ended
2023. The cash used in investing activities for the fiscal year ended 2023 consisted of cash used for the purchase of warehouse equipment
and used for the transaction acquisition costs associated with the purchase of the GoFire, intellectual property.
Net cash flows provided by financing activities was
approximately $4.1 million for the fiscal year ended 2024, compared to approximately $0.1 million provided by financing activities for
the fiscal year ended 2023. The cash provided by financing activities for the fiscal year ended 2024 consisted primarily from the issuance
of common shares, warrants, pre-funded warrants, and proceeds from short-term financing.
Results of Operations
Fiscal year ended October 31, 2024, compared
to fiscal year ended October 31, 2023
Revenues:
Revenues for fiscal
year ended 2024 were approximately $6.9 million, compared to approximately $13.1 million in fiscal year ended 2023. Revenues decreased
in fiscal year ended 2024, primarily due to sales pressure related to the MDO received in January 2024, which resulted in the decrease
in the number of sticks sold to customers.
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Cost of Revenue, Net and Gross Profit (Loss):
Gross profit in fiscal year ended 2024 was approximately
$2.6 million, compared to approximately $2.6 million for fiscal year ended 2023. Total cost of revenue was approximately $4.3 million
for fiscal year ended 2024, compared to approximately $10.5 million for fiscal year ended 2023. The slight increase in gross profit volume
is primarily driven by the decrease in cost of revenue.
Operating Expenses:
Total operating expenses were approximately $8.3 million
for fiscal year ended 2024, compared to approximately $13.2 million for fiscal year ended 2023. For the fiscal year ended 2024, operating
expenses consisted primarily of advertising and promotion fees of approximately $0.7 million, stock option compensation expense of approximately
$0.1 million, professional fees of approximately $2.9 million, salaries and wages of $1.8 million, and all other general and administrative
expenses of approximately $2.8 million. In fiscal year ended 2023, operating expenses consisted primarily of advertising and
promotion fees of approximately $2.5 million, stock option compensation expense of approximately $3.2 million, professional fees of approximately
$2.7 million, salaries and wages of $2.0 million, and all other general and administrative expenses of approximately $2.8 million.
Income Taxes:
We have Federal net operating loss (“NOL”)
carryforwards of approximately $29.8 million and state NOL carryforwards of approximately $0.4 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 2022 and 2023 tax
years generally remain subject to examination by U.S. and various state authorities. A valuation allowance is recorded to reduce the deferred
tax asset if, based on the weight of the evidence, it is more likely than not that some portion or all the deferred tax assets will not
be realized. Management determined that a valuation allowance of approximately $8.7 million for the year ended on October 31, 2024, was
necessary to reduce the deferred tax asset to the amount that will more likely than not be realized.
Please refer to Note 10, Income Tax, in the Notes
to the Consolidated Financial Statements in this Report for additional information related to our income taxes.
Net Loss:
Net loss for fiscal year ended 2024 was approximately
$(6.7) million, or $(1.62) basic and diluted net loss per share, compared to a net loss of approximately $(11.1) million, or $(4.13) basic
and diluted net loss per share, for fiscal year 2023. The decrease in net loss for the fiscal year 2024, as compared to net loss in fiscal
year 2023, is attributable to the revenues and expenses factors noted above. Weighted-average Common Stock outstanding were 4,313,900
on October 31, 2024, as compared to 2,721,080 on October 31, 2023. The increase in the weighted-average shares in fiscal year 2024 was
primarily attributable to the issuance of 5,723,916 shares of Common Stock.
Concentrations:
Financial instruments, which potentially subject
us to concentrations of credit risk, consist primarily of purchases of inventories, accounts payable, accounts receivable, and revenue.
Concentration of Purchases and Accounts Payable-
Related Party:
For
the year ended October 31, 2024, 100% of the inventories of products, consisting solely of
the BIDI ® Stick, were purchased from Bidi, a related party, in the amount
of $0.3 million, as compared to $12.8 million for the year ended October 31, 2023.
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As of October 31, 2024, we had no related party receivable
balance. As of October 31, 2024, there was $131,683 of related party accounts payable. On October 31, 2023, a credit of $3.0 million
was applied from the related-party receivable balance to the related party accounts payable balance. After this was applied, we had no
related party receivable balance as of October 31, 2023. As of October 31, 2023, the related party accounts payable balance related to
purchases of inventories was $1.5 million.
Concentration of Revenues and Accounts Receivable:
For the fiscal year 2024, (i) approximately 21% of the revenue from the sale
of Products, solely consisting of the BIDI ® Stick, was generated from QuikTrip Corporation in the amount of approximately
$1.2 million, (ii) approximately 12% from GPM Investments in the amount of $0.7 million, and (iii) approximately 11% from FAVS Business,
LLC in the amount of $0.7 million. For the fiscal year 2023, (i) approximately 16% of the revenue from the sale of Products, solely consisting
of the BIDI ® Stick, was generated from GPM Investments, LLC in the amount of approximately $2.0 million, (ii) approximately
15% from H.T. Hackney Co in the amount of $1.8 million, (iii) approximately 15% from FAVS Business, LLC in the amount of $1.8 million,
(iv) approximately 14% from C Store Master in the amount of $1.8 million, and (v) approximately 12% from QuikTrip Corporation in the amount
of $1.5 million.
QuikTrip
Corporation with an outstanding balance of approximately $205 accounted for 100% of the
total accounts receivable from customers, as of October 31, 2024. FAVS Business
LLC with an outstanding balance of approximately $302,000, C Store Master with an outstanding
balance of approximately $301,000, and QuikTrip Corporation with an outstanding balance of
approximately $165,000 accounted for approximately 35%, 35%, and 19% of the total accounts
receivable from customers, respectively, as of October 31, 2023.
Cash and cash equivalents
We consider all highly liquid investments with an
original maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents on October 31, 2024, or
October 31, 2023. Cash as of October 31, 2024, and October 31, 2023, was $3.9 million and $0.5 million, respectively.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance
with generally accepted accounting principles in the United States, (“GAAP”). The preparation of the consolidated financial
statements in conformity with GAAP requires our management to make a number of estimates and assumptions relating to the reported amounts
of assets and liabilities, the disclosure or inclusion of contingent assets and liabilities at the date of the consolidated financial
statements, and the reported amounts of revenue and expenses during the period. We evaluate our significant estimates on an ongoing basis,
including, but not limited to, estimates related to allowance for doubtful accounts, and income tax provisions. We base our estimates
on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about carrying value of assets and liabilities that are not readily apparent from other sources. Actual
results could differ from those estimates.
We believe that the assumptions associated with our
revenue recognition have the greatest potential impact on our financial statements. Therefore, we consider this to be our only critical
accounting policy and we do not consider any of our estimates to be critical accounting estimates.
However, we consider Revenue Recognition the most
critical accounting policy for the Company that could create a material misevaluation of Product Revenue if not adhered to and implemented
successfully. Under ASC 606, Revenue from Contracts with Customers (Topic 606) (“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.
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Revenue Recognition Policy
Products Revenue
We generate product revenue from the sale
of our products to non-retail customers. We recognize revenue at a point in time based on management’s evaluation of when performance
obligations under the terms of a contract with the customer are satisfied and control of the products has been transferred to the customer.
In most situations, transfer of control is considered complete when the products have been shipped to the customer. However, when we enter
a consignment agreement with a new customer, once we ship and deliver the requested amount of the products the customer ordered to it s
distribution center for its retail sales location, we retain ownership of the delivered products until they
are delivered to their retail stores. When the products are sold in the stores and the funds, as stated in the consignment agreement,
are remitted to us, then we record the revenues in our financial records. We determined that a customer obtains control of the product
upon shipment when title of such product and risk of loss transfer to the customer. Our shipping and handling costs are fulfillment costs,
and such amounts are classified as part of cost of sales. The advance payment is not considered a significant financing component
because the period between when we transfer a promised good to a customer and when the customer pays for that good is short. We offer
credit sales arrangements to non-retail (or wholesale) customers and monitor the collectability of each credit sale routinely .
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk.
We qualify as a smaller reporting company, as defined
by Item 10 of Regulation S-K and, thus, are not required to provide the information required by this Item.
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