Item 1A. Risk Factors
Item 1A. Risk Factors.
Our business and an investment
in our company is speculative and subject to significant risks. We caution you that the following important factors, among others, could
cause our actual results to differ materially from those expressed in forward-looking statements made by us or on our behalf in filings
with the SEC, press releases, communications with investors and oral statements. Any or all of our forward-looking statements contained
in this Report and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we
might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below will be important in determining
future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may differ materially from those anticipated
in forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information,
future events or otherwise. You are advised, however, to consult any further disclosure we make in our reports filed with the SEC.
Risks Related to Our Business and Industry
If the claims against the Company and Bidi that
have been filed with the International Trade Commission are successful, the Company and Bidi could be prohibited from importing and selling
the Bidi Stick into the United States.
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. On July 17, 2024, the Company was dismissed from the ITC proceeding
and is no longer a defendant in the ITC proceeding. No damages are recoverable in the proceedings before the ITC. On November 1,
2024, Bidi stipulated to a consent order prohibiting Bidi from selling for import, importing, or selling after importation the Bidi Stick.
The ITC entered the consent order on December 6, 2024,
agreeing to cease all importation and distribution
of the Bidi Stick until the RJ Reynolds Entities’ patent expires in October 2026. In November 2024, the ITC Administrative Law Judge
(ALJ) denied temporary relief to the Reynolds Entities and the case proceeded on the merits. A trial was held in April 2025. The initial
determination (ID) from the ALJ was issued on August 29, 2025. The ALJ found that violation of §337 based on infringement of U.S.
Patent No. 11,925,202 by the respondents, and that both the technical and economic prongs of domestic industry were satisfied. The ID
will now be reviewed by the Commission for final approval, with respondents and complainants expected to file additional briefs. The Commission
target deadline was November 24, 2025 , subject to potential extensions. The asserted patent expires in October 2026 as
would any exclusion order that the ITC enters as a result of the ITC Complaint, as well as the Bidi consent order.
Our Business may permanently
suffer as a result of the ITC Complaint
As a result of the ITC Complaint,
Bidi no longer imports the Bidi Stick and we do not expect that we will have access to the Bidi Stick in the foreseeable future. Since
we have been unable to sell the Bidi Stick our revenues have declined. We may not ever be able to increase our revenues to the levels
they were at when we were able to sell Bidi Sticks, as a result our business may not financially recover in the near term.
We have a present need
for additional funding, which raises questions about our ability to continue as a going concern. We may be unable to raise capital when
needed, which would force us to delay, reduce or eliminate aspects of our business or cause our business to fail.
As of October 31, 2025, we
had cash and cash equivalents of approximately $0.5 million. We believe that based on our current operating plan, our existing cash and
cash equivalents will only be sufficient to enable us to fund our operations and other obligations for a very limited period. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
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Moreover, we will need significant
additional funds to satisfy our outstanding payables, fund our working capital, and fully implement our business plan as we seek to grow
our revenues and ultimately achieve positive cash flow and profitability. In addition, our ability to continue as a going concern is adversely
affected by the denial of Bidi’s PMTA for its flavored Bidi Sticks and the 11 th Circuit’s denial of Bidi’s
petition challenging the FDA’s January 2024 MDO relating to Classic Bidi ® Stick, as well as our negative cash flows
from operations, significant recurring losses and present need for additional funding. All of these factors raise substantial doubt regarding
our ability to continue as a going concern.
There is therefore a material
risk that we will be unable to generate sufficient revenues to pay our expenses, and if our existing sources of cash and cash flows are
insufficient to fund our activities, we will need to raise additional funds. Additional equity or debt financing may not be available
on acceptable terms, if at all, particularly in the current economic environment.
Until such time, if ever,
we can generate substantial product revenues, we will be required to finance our cash needs through public or private equity offerings,
debt financings and corporate collaboration and licensing arrangements. If we elect to raise additional funds by issuing equity securities,
our stockholders may experience dilution. Debt financing, if available, may involve agreements that include covenants limiting or restricting
our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any debt
financing or additional equity that we may raise may contain terms, such as liquidation and other preferences, that are not favorable
to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be
necessary to relinquish valuable rights to our technologies, research programs or product candidates or grant licenses on terms that may
not be favorable to us.
If we are unable to generate cash flow positive operations
or achieve profitability, and if we are unable to raise additional funds on commercially reasonable terms or at all, we may be required
to significantly reduce or cease our operations, declare bankruptcy or our business could fail, which could result in the loss to investors
of their investment in our securities.
We rely primarily on Bidi for access to our
key intellectual property rights, and any change in our relationship could adversely alter such rights or our access to them.
We currently have no intellectual property
rights other than the intellectual property assets we acquired in May 2023 from GoFire and our trademarks KAIVAL BRANDS and KAIVAL
LABS. We also indirectly rely on Bidi’s intellectual property rights related to the Bidi products, such as patents. We have
from time to time considered, and discussed with Bidi, potential alterations to this arrangement, including a potential acquisition
by us of all or a portion of the intellectual property owned by Bidi and related to Bidi products. Should we pursue such a
transaction, it would be a “related party transaction,” as defined by the listing rules of Nasdaq and, thus, subject to
the review of the Audit Committee of our Board (or, if deemed appropriate, a special Board committee comprised of disinterested
directors). Further, should we undertake such a transaction, then we would become responsible to respond if a third-party challenged
Bidi’s patents, or infringed upon such rights, in which case our business could be materially adversely affected.
We have a limited operating history, and our
historical operating and financial results may not be indicative of future performance, which, along with the relative early stage of
the ENDS industry, makes it difficult to predict our future business prospects and financial performance.
Our current business model is relatively new,
and so business and prospects may be difficult to evaluate. Our limited operating history makes it difficult to evaluate both our
operating history and our future potential. We have yet to demonstrate a consistent ability to generate revenue, and are still
subject to many of the risks common to early-stage companies operating in the nicotine and non-nicotine delivery system products
sector, including the uncertainty as to our ability to implement our business plan, market acceptance of business plan,
under-capitalization, cash shortages, limitations with respect to personnel, financing and other resources and uncertainty of our
ability to generate revenues. There is therefore a significant risk that our activities will not result in any material revenues or
profit, and the likelihood of our business viability and long-term prospects must be considered in light of the stage of our
development. There can be no assurance that we will be able to fulfill our stated business strategy and plans, or that financial,
technological, market, or other limitations may force us to modify, alter, significantly delay, or significantly impede the
implementation of such plans. We have insufficient results of operations in our current business model for investors to use to
identify historical trends. Investors should consider our prospects considering the risk, expenses and difficulties we will
encounter as an early-stage company. Our revenue and income potential is unproven and our business model is continually evolving. We
are therefore subject to the risk that we will be unable to address these risks, and our inability to address these risks could lead
to the failure of our business.
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Our business is rapidly evolving and is particularly
at risk given the FDA’s January 2024 MDO for Classic BIDI® Stick and FDA’s November 2025 denial of Bidi’s PMTA
for the non-tobacco flavored BIDI® Sticks.
The ENDS industry is relatively new and is rapidly
evolving, and the FDA has been aggressive in its oversight of the ENDS industry. Changes in existing laws, regulations and policies and
the issuance of new laws, regulations, policies, as well as the FDA’s actions on ENDS-related PMTAs (including Bidi’s) and
any other entry barriers in relation to the ENDS industry may materially and adversely affect our ability to conduct business and our
results of operations.
Bidi was among the many companies that received a
MDO for its non-tobacco flavored BIDI ® Sticks. On August 23, 2022, the U.S. Court of Appeals for the Eleventh Circuit
set aside (i.e., vacated) the MDO issued to the non-tobacco flavored BIDI® Sticks and remanded Bidi’s PMTA back to FDA for
further review.
Separately, on or about May 13, 2022, FDA placed the
tobacco-flavored Classic BIDI® Stick into the final Phase III scientific review. In March 2023, FDA issued a deficiency letter regarding
the Classic BIDI® Stick PMTA, to which Bidi submitted a timely response in June 2023. Subsequently, on January 22, 2024, FDA issued
a MDO for the Classic BIDI® Stick. On January 26, 2024, Bidi filed a petition for review of the MDO with the 11 th Circuit
Court of Appeals, followed by a motion to stay the MDO. Bidi is arguing, among other things, that the MDO was arbitrary and capricious
in violation of the Administrative Procedure Act. On February 2, 2024, Bidi filed a Time Sensitive Motion for a Stay Pending Review, which
the court denied on February 18, 2024. The case is now proceeding on the merits, with Bidi’s opening merits brief filed on April
15, 2024. FDA filed its response brief on June 7, 2024, and Bidi filed its reply brief on July 29, 2024. Oral arguments were held before
a three-judge panel on the 11 th Circuit on April 2, 2025. The Court issued a decision on April 24, 2025 upholding FDA’s
denial order. Accordingly, at this time, the Classic BIDI® Stick is considered an adulterated tobacco product, the continued marketing
and distribution of which is prohibited.
On November 4, 2025, FDA issued a MDO for the PMTA
for the non-tobacco flavored Bidi Sticks. FDA’s basis for this MDO is that Bidi Vapor’s PMTAs for non-tobacco flavored BIDI
Stick did not include sufficient, robust evidence showing that marketing the flavored products would be “appropriate for the protection
of the public health” (APPH)—i.e., that adult-smoker benefits (complete switching or significant cigarette reduction) would
be large enough to outweigh the well-established youth-appeal and youth-initiation risks of flavored ENDS. In particular, FDA said the
submission lacked the kind of comparative evidence (e.g., RCT/longitudinal cohort comparing flavored vs tobacco-flavored ENDS) needed
to demonstrate an added adult benefit. FDA therefore concluded the applications were insufficient and stopped further scientific review
of other sections.
If it is determined or perceived that the usage
of ENDS products poses long-term health risks, the use of ENDS products may decline significantly, which may materially and adversely
affect our business, financial condition, and results of operations.
Negative publicity on the health consequences of
ENDS products or other similar devices may also adversely affect the usage of ENDS products. For example, the FDA and the United
States Centers for Disease Control and Prevention (“CDC”) issued a joint statement on August 30, 2019, linking a number
of cases of respiratory illnesses to ENDS product use. On November 8, 2019, the CDC announced that it had preliminarily linked cases
of severe respiratory illness to the presence of Vitamin E acetate, which was found in certain Tetrahydrocannabinol (THC)-containing
ENDS cartridges for non-electronic nicotine delivery systems (non-ENDS) products that may have been obtained illegally. However,
evidence is not sufficient to rule out the contribution of other chemicals of concern, including chemicals in either THC or non-THC
products (THC is the principal psychoactive constituent of cannabis) .
In January 2020, after further research, the FDA and CDC recommended against the use of THC-containing ENDS products, especially
those from unofficial sources, and that the underage, pregnant women and adults who do not currently use tobacco products should not
start using ENDS products. On February 25, 2020, the CDC issued a final update, stating that the number of cases of severe
respiratory illnesses had declined to single digits as of February 9, 2020. The CDC also reconfirmed that (i) Vitamin E acetate,
which was found in some THC-containing ENDS cartridges for non-ENDS ENDS products that were mostly obtained illegally, was strongly
linked to and indicated to be the primary cause of the severe respiratory illnesses, and (ii) THC-containing ENDS products from
informal sources were linked to most cases of severe respiratory illnesses. Furthermore, there have been recent claims that users of
ENDS products may suffer a greater risk of more serious COVID-19 complications. However, it remains unclear whether the exposure to
toxic chemicals through ENDS product usage will increase the risk of COVID-19.
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Research regarding the actual causes of these illnesses
is still ongoing. If ENDS product usage is determined or perceived to pose long-term health risks or to be linked to illnesses, the usage
of ENDS products may significantly decline, which would have a material adverse effect on our business, financial condition, and results
of operations. Although we currently do not offer products containing THC, any perceived correlation between THC and Vitamin E acetate
may adversely affect the public’s perception of ENDS products in general, regardless of whether such products contain THC and/or
Vitamin E.
We do not expect the assets acquired from GoFire
will generate immediate revenue for us, and we may never be able to develop these assets into revenue generating products.
We purchased a certain vaporizer and inhalation-related
patent portfolio 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. While we will seek to monetize the acquired intellectual property, including
through third-party licensing opportunities, we can give no assurances at this time that either (i) the patent applications we acquired
will result in issued patents or (ii) we will be able to successfully monetize these assets. Our failure to capitalize on our GoFire assets
would materially impair our strategy of diversifying our product offerings, leaving us even more reliant on the products we distribute
for Bidi.
Our business may be damaged by events outside
of our own or Bidi’s control, such as the impact of epidemics, political changes, or natural disasters.
Our business could be adversely affected by the effects
of epidemics, political changes, wars or natural disasters. World economies and capital markets have been adversely impacted by COVID-19
and its variants, the Ukraine-Russia conflict, the recent eruption of hostilities in Israel and Gaza and political instability in the
United States and elsewhere. The lasting impacts of these matters on the United States and broader global economy, including supply chain
disruption, may have a significant continuing negative effect on our company and may continue to materially impact our company, our ability
to conduct business, our financial condition and results of operations.
Reliance on information technology means a significant
disruption could affect our communications and operations.
We increasingly rely on information technology systems
for our internal communications, controls, reporting and relations with customers and suppliers, and information technology is becoming
a significantly important tool for our sales staff. In addition, our reliance on information technology exposes us to cyber-security risks,
which could have a material adverse effect on our ability to compete. Security and privacy breaches may expose us to liability and cause
us to lose customers or may disrupt our relationships and ongoing transactions with other entities with whom we contract throughout our
network. The failure of our information systems to function as intended, or the penetration by outside parties’ intent on disrupting
business processes, could result in significant costs, loss of revenue, assets or personal or other sensitive data and reputational harm.
Security and privacy breaches may expose us
to liability and cause us to lose customers.
Federal and state laws require us to safeguard our
wholesalers’, retailers’, and consumers’ financial information, including credit information. Although we have established
security procedures to protect against identity theft and the theft of our customers’ financial information, our security and testing
measures may not prevent security breaches. We cannot guarantee that a future breach will not result in material liability or otherwise
harm to our business. In the event of any such breach, we may be required to notify governmental authorities or consumers under breach
disclosure laws, indemnify consumers, or other third parties for losses resulting from the breach, and expend resources investigating
and remediating any vulnerabilities that contributed to the occurrence of the breach. We rely on third-party technology to safeguard the
security of sensitive information in our possession. Advances in computer capabilities, new discoveries in the field of cryptography and
quantum computing, inadequate facility security or other developments may result in a compromise or breach of the technology used by us
to protect customer data. Any compromise of our security, even a security breach that does not result in a material liability could harm
our reputation and, therefore, our business and financial condition. In addition, a party who can circumvent our security measures or
exploit inadequacies in our security measures, could, among other effects, misappropriate proprietary information, cause interruptions
in our operations or expose customers and other entities with which we interact to computer viruses or other disruptions. Actual or perceived
vulnerabilities may lead to claims against us. Any insurance coverage that we obtain to cover such risks may be insufficient to cover
all claims or losses. To the extent the measures we have taken prove to be insufficient or inadequate, we may become subject to litigation
or administrative sanctions, which could result in significant fines, penalties or damages and harm to our reputation.
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We may fail to manage our growth.
In our early years we had opportunities to grow significantly
in a short amount of time and we intended to continue that growth in the future. However, our future growth has been placed on hold with
additional constraints and demand for our resources, and we cannot be sure we will be able to manage an acceptable growth effectively
as we did in our early years. If we are unable to manage our growth while expanding the distribution of our products and increasing profit
margins, or if new systems that we implement to assist in managing our growth do not produce the expected benefits, our business, financial
position, results of operations and cash flows could be adversely affected. We may not be able to support, financially or otherwise, future
growth, or hire, train, motivate and manage the required personnel. Our failure to manage growth effectively could also limit our ability
to achieve our goals as they relate to streamlined sales, marketing and distribution operations and the ability to achieve certain financial
metrics.
Adverse U.S. and global economic conditions
could negatively impact our business, prospects, results of operations, financial condition or cash flows.
Our business and operations are sensitive to global
economic conditions. These conditions include interest rates, energy costs, inflation, recession, fluctuations in debt and equity capital
markets, and the general condition of the United States and world economies, including as a result of the effect of the COVID-19 pandemic.
A material decline in the economic conditions affecting consumers, which cause a reduction in disposable income for the average consumer,
may change consumption patterns, and may result in a reduction in spending on our product offerings or a switch to cheaper products or
products obtained through illicit channels. As such, demand for our products may be particularly sensitive to economic conditions such
as inflation, recession, high energy costs, unemployment, changes in interest rates and money supply, changes in the political environment,
the ultimate effect on the economy of the COVID-19 pandemic and other factors beyond our control, any combination of which could result
in a material adverse effect on our business, results of operations, and financial condition.
The departure of key management personnel and
the failure to attract and retain talent could adversely affect our operations.
Our success depends upon the continued contributions
of our senior executive management, especially our Interim Chief Executive Officer, Mark Thoenes, our Interim Chief Financial Officer,
Eric Morris If one or more of our executive officers are unable or unwilling to continue in their current positions, we may not be able
to replace them readily, if at all. Additionally, we may incur additional expenses to recruit and retain new executive officers. If any
of our executive officers join a competitor or forms a competing company, we may lose some or all of our customers. Finally, we do not
maintain “key person” life insurance on any of our executive officers. Because of these factors, the loss of the services
of any of these key persons could adversely affect our business, financial condition, and results of operations.
Our insurance may be insufficient to cover losses that may occur
as a result of our operations.
We currently maintain directors’ and officers’
liability insurance and property and general liability insurance. This insurance or other insurance we may elect to obtain may not be
or remain available to us or be obtainable by us at commercially reasonable rates, and the amount of our coverage may not be adequate
to cover any liability we incur. Future increases in insurance costs, coupled with the increase in deductibles, will result in higher
operating costs and increased risk. If we were to incur substantial liability and such damages were not covered by insurance or were in
excess of policy limits, or if we were to incur such liability at a time when we were not able to obtain liability insurance, our business,
results of operations and financial condition could be materially adversely affected.
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Risks Related to Our Securities
Our Restated Certificate of Incorporation, as
amended (our “Certificate of Incorporation”), and our Bylaws (our “Bylaws”), as well as the DGCL and certain regulations,
could discourage or prohibit acquisition bids or merger proposals, which may adversely affect the market price of our Common Stock.
Provisions of our Certificate of Incorporation and
Bylaws and the DGCL may discourage, delay or prevent a merger, acquisition, or other change in control that stockholders may consider
favorable, including transactions in which our stockholders might otherwise receive a premium for their shares of our Common Stock. These
provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management.
In addition, Section 203 of the DGCL prohibits a publicly-held
Delaware corporation from engaging in a business combination with an interested stockholder, which generally refers to a person which
together with its affiliates owns, or within the last three years has owned, 15 percent or more of our voting stock, for a period of three
years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved
in a prescribed manner.
The existence of the foregoing provisions and anti-takeover
measures could limit the price that investors might be willing to pay in the future for shares of Common Stock. They could also deter
potential acquirers of our company, thereby reducing the likelihood that our stockholders could receive a premium for their Common Stock
in an acquisition.
For so long as any shares of Series B Preferred
Stock remain outstanding, the majority holders of the Series B Preferred Stock are entitled to designate one individual to be nominated
to serve as a director on our board of directors.
For so long as any shares of Series B Preferred Stock
remain outstanding, the majority holders of the Series B Preferred Stock (or the Majority Holders) will be entitled to designate one (1)
individual to be nominated to serve as a director (who we refer to as the Series B Preferred Director) on our board of directors (or the
Board). At each annual meeting of the stockholders of our company, or at any special meeting called for the purpose of electing directors,
the Board shall nominate such designee for election. Unless the Board shall have received from the Majority Holders a written designation
by March 1 of each calendar year of an individual other than the then-sitting Series B Preferred Director, the Board shall nominate the
then-sitting Series B Preferred Director for re-election to the Board. The Series B Preferred Director is subject to any board of directors-related
provisions that may be contained in our Certificate of Incorporation or Bylaws. The Majority Holders, voting as a single class at a meeting
called for such purpose (or by written consent signed by the Majority Holders in lieu of such a meeting), have the sole right to remove
the Series B Preferred Director from the Board. Any vacancy created by the removal, resignation or death of a Series B Preferred Director
may solely be filled by the Majority Holders, voting as a single class, at a meeting called for such purpose (or by written consent signed
by the Majority Holders in lieu of such a meeting). The Series B Preferred Director shall be entitled to receive similar compensation,
benefits, reimbursement (including of reasonable travel expenses), indemnification and insurance coverage for his or her service as a
director of our company as the other non-employee directors of on the Board. As of the date of this Report, the seat on our Board designated
for the Series B Preferred Director is vacant due to Mr. Cassidy’s resignation from the Board on January 25, 2024. As a result of
their Board appointment right, the Majority Holders could have a disproportionate impact on our governance and operations, which could
have an adverse effect on our company.
The Series B Preferred Stock ranks senior to
our Common Stock.
The Series B Preferred Stock ranks, with respect to
dividend rights, rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs
of our company, and redemption rights, senior to the Common Stock and each other class or series of securities now existing or hereafter
authorized classified or reclassified, the terms of which do not expressly provide that such class or series ranks on a parity basis with
or senior to the Series B Preferred Stock as to dividend rights, rights on the distribution of assets on any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of our company, and redemption rights.
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Future offerings of debt or equity securities
may rank senior to our Common Stock.
We have a present need for additional capital, and
we will likely continue to seek to raise new funding from time to time through the issuance of debt or equity securities. Our Board of
Directors has the ability, without further approval of our stockholders, to issue debt or equity securities in the future, in addition
to the Series B Preferred Stock, ranking senior to our Common Stock or otherwise incur additional indebtedness, it is possible that these
securities or indebtedness will be governed by an indenture or other instrument containing covenants restricting our operating flexibility
and limiting our ability to pay dividends to stockholders. Additionally, any convertible or exchangeable securities that we issue in the
future may have rights, preferences, and privileges, including with respect to dividends, more favorable than those of our Common Stock
and may result in dilution (perhaps significant) to our stockholders. Because our decision to issue debt or equity securities in any future
offering or otherwise incur indebtedness will depend on market conditions and other factors beyond our control, we cannot predict or estimate
the amount, timing, or nature of our future offerings or financings, any of which could reduce the market price of our Common Stock and
dilute its value.
We may issue additional classes or series of
preferred stock whose terms could adversely affect the voting power or value of our commons stock.
Our Certificate of Incorporation authorizes us to
issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designations, preferences,
limitations, and relative rights, including preferences over our Common Stock respecting dividends and distributions, as our Board may
determine. The terms of one or more additional classes or series of preferred stock could adversely impact the voting power or value of
our Common Stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events
or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or
dividend or liquidation preferences we might assign to holders of preferred stock could affect the residual value of our Common Stock.
The market price for our Common Stock is volatile
and has and will fluctuate.
The market price for shares of our Common Stock may
be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond our control, including the following:
(i) action by the FDA with respect to Bidi’s PMTAs or regulatory action by FDA generally against Bidi, our company or our industry,
(ii) actual or anticipated fluctuations in our quarterly financial results; (iii) recommendations by securities research analysts; (iv)
changes in the economic performance or market valuations of other issuers that investors deem comparable to ours; (v) addition or departure
of our executive officers or members of our Board and other key personnel; (vi) release or expiration of lock-up or other transfer restrictions
on outstanding shares of Common Stock; (vii) sales or perceived sales of additional shares of our Common Stock; (viii) the liquidity of
our Common Stock or lack thereof; (ix) significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital
commitments by or involving us or our competitors; and (x) news reports relating to trends, concerns, technological or competitive developments,
regulatory changes, and other related issues in our industry or target markets. Financial markets often experience significant price and
volume fluctuations that affect the market prices of equity securities of public entities and that are, in many cases, unrelated to the
operating performance, underlying asset values or prospects of such entities. Accordingly, the market price of our shares of Common Stock
may decline even if our operating results, underlying asset values or prospects have not changed.
A limited trading market currently exists for
our securities, and we cannot assure you that an active market will ever develop, or if developed, will be sustained.
There is currently a limited trading market for our Common Stock on the
OTC Pink Market and an active trading market for our Common Stock may not develop. Consequently, we cannot assure you when and if an active-trading
market in our shares will be established, or whether any such market will be sustained or sufficiently liquid to enable holders of shares
of our Common Stock to liquidate their investment in our Company. If an active public market should develop in the future, the sale of
unregistered and restricted securities by current stockholders may have a substantial impact on any such market.
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Future sales of shares of our Common Stock by
our controlling shareholders or by our officers and directors may negatively impact the market price for our Common Stock.
Subject to compliance with applicable securities laws,
our controlling shareholders Kaival Holdings and Bidi Vapor as well as our directors and officers and their affiliates may sell some or
all of their shares of our Common Stock in the future. No prediction can be made as to the effect, if any, such future sales of shares
of our Common Stock may have on the market price of the shares of our Common Stock prevailing from time to time. However, the future sale
of a substantial number of shares of our Common Stock by our directors and officers and their affiliates, or the perception that such
sales could occur, could adversely affect prevailing market prices for our shares of our Common Stock.
The concentration of ownership by Kaival Holdings
and Bidi Vapor and our officers and directors may result in conflicts of interest and may prevent other stockholders from influencing
significant corporate decisions and depress our stock price.
Based on the number of shares outstanding as of the
date of this Report, Kaival Holdings and Bidi Vapor, our affiliated majority stockholder, together with our officers and directors, beneficially
own a combined total of approximately 21.9% percent of our outstanding Common Stock, including shares of our Common
Stock subject to stock options that are currently exercisable or are exercisable and that vest within 60 days as of the date of this prospects.
If our controlling stockholders, together with these officers and directors act together, they will be able to exert a significant degree
of influence over our management and affairs and control matters requiring stockholder approval,
including the election of directors and
approval of mergers, business combinations, or other significant transactions. For example, Kaival Holdings, together with our officers
and directors, could cause us to enter into transactions or agreements that we would not otherwise consider or might not be in the best
interests of our minority stockholders. Similarly, this concentration of ownership may have the effect of delaying or preventing a change
in control of our company otherwise favored by our other stockholders. This, in turn, could have a negative effect on the market price
of our Common Stock. It could also prevent our stockholders from realizing a premium over the market price for their shares of our Common
Stock. The concentration of ownership also may contribute to the low trading volume and volatility of our Common Stock. Moreover, any
such conflicts of interest may not be easy to resolve and could impair our ability to operate our business.
Our Common Stock may become the target of a “short squeeze.”
Beginning in 2021, the securities of several companies
have increasingly experienced significant and extreme volatility in stock price due to short sellers of shares of Common Stock and buy-and-hold
decisions of longer investors, resulting in what is sometimes described as a “short squeeze.” Short squeezes have caused extreme
volatility in those companies and in the market and have led to the price per share of those companies trading at a significantly inflated
rate that is disconnected from the underlying value of the company. Sharp rises in a company’s stock price may force traders in
a short position to buy stock to avoid even greater losses. Many investors who have purchased shares in those companies at an inflated
rate face the risk of losing a significant portion of their original investment as the price per share has declined steadily as interest
in those stocks has abated. We may be a target of a short squeeze, and investors may lose a significant portion or all their investment
if they purchase our shares at a rate that is significantly disconnected from our underlying value.
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We do not currently pay dividends on our shares
of Common Stock and have no intention of paying dividends on shares of our Common Stock for the foreseeable future.
No dividends on the shares of our Common Stock have
been paid by us to date. We do not intend to declare or pay any cash dividends in the foreseeable future. Payment of any future dividends
will be at the discretion of our Board, after considering a multitude of factors appropriate in the circumstances, including our operating
results, financial condition, and current and anticipated cash needs. In addition, the terms of any future debt or credit facility may
preclude us from paying any dividends unless certain consents are obtained, and certain conditions are met. There is no assurance that
future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend. Unless
our Board decides to pay dividends, our stockholders will be required to look at appreciation of our Common Stock to realize a gain on
their investment. There can be no assurance that this appreciation will occur.
For as long as we are an “emerging growth
company” we intend to take advantage of reduced disclosure and governance requirements applicable to emerging growth companies,
which could result in our Common Stock being less attractive to investors and could make it more difficult for us to raise capital as
and when we need it.
We are an “emerging growth company,” as
defined in the JOBS Act, and we have taken advantage, and intend to continue to take advantage, of certain exemptions from various reporting
requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being
required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”),
reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the
requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments
not previously approved.
Investors may find our Common Stock less attractive
because we rely on these exemptions, which could contribute to a less active trading market for our Common Stock or volatility in our
share price. In addition, we may be less attractive to investors, and it may be difficult for us to raise additional capital when we need
it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting
is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial
condition and results of operations may be materially and adversely affected.
We may take advantage of these reporting exemptions
until we are no longer an emerging growth company.
We have identified material weaknesses in our
system of internal controls over financial reporting and, if we cannot remediate these material weaknesses, we may not be able to accurately
report our financial condition, results of operations, or cash flows, which may adversely affect investor confidence in us and, as a result,
the value of our Common Stock.
A material weakness is a deficiency, or combination
of deficiencies, in internal control over financial reporting that results in more than a reasonable possibility that a material misstatement
of annual or interim financial statements will not be prevented or detected on a timely basis. Section 404 of Sarbanes-Oxley also generally
requires an attestation from our independent registered public accounting firm on the effectiveness of our system of internal controls
over financial reporting. However, if we remain an emerging growth company as defined in the JOBS Act, we intend to take advantage of
the exemption permitting us not to comply with the independent registered public accounting firm attestation requirement.
Our management has identified, and we have disclosed,
certain material weaknesses in our system of internal controls over financial reporting as of our fiscal year ended October 31, 2025.
Specifically, our management has found that our internal control system over financial reporting was ineffective as of October 31, 2025,
based on a determination that there was a lack of sufficient resources to provide adequate segregation of duties consistent with control
objectives, the lack of sufficient and consistent real time remote communications, and the lack of a fully developed formal review process
that includes multiple levels of review over financial disclosure and reporting processes.
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To address these material weaknesses, and subject
to the receipt of additional financing or cash flows, we have undertaken, and intend to continue to undertake, remediation measures to
address such material weaknesses, including implementing prevent and detect internal control procedures pursuant to which we can ensure
segregation of duties and hire additional resources to ensure appropriate review and oversight.
Our compliance with Section 404 of Sarbanes-Oxley
will require that we incur substantial accounting expenses and spend significant management efforts. We may not be able to complete our
evaluation, testing, and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or
more material weaknesses in our internal control over financial reporting, we will be unable to assert that our system of internal control
over financial reporting is effective. We cannot assure you that there will not be material weaknesses or significant deficiencies in
our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely
inhibit our ability to accurately report our financial condition, results of operations, or cash flows. This may expose us, including
individual executives, to potential liability which could significantly affect our business.
We cannot assure you that we will, in the future,
identify areas requiring improvement in our system of internal controls over financial reporting. We cannot assure you that the measures
we will take to remediate any areas in need of improvement will be successful or that we will implement and maintain adequate controls
over our financial process and reporting in the future as we continue to grow. If we are unable to establish appropriate internal financial
reporting controls and procedures, if we are unable to conclude that our system of internal controls over financial reporting is effective,
or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our system
of internal controls over financial reporting once that firm begins its audits of our systems of internal controls over financial reporting,
it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating
results, cause investors to lose confidence in the accuracy and completeness of our financial reports, the market price of our common
shares could decline, and we could be subject to sanctions or investigations by Nasdaq, the SEC, or other regulatory authorities. Failure
to remedy any material weakness in our system of internal controls over financial reporting, or to implement or maintain other effective
internal control systems required of public companies, could also restrict our future access to the capital markets.
Our disclosure controls and procedures may not
prevent or detect all errors or acts of fraud.
Our disclosure controls and procedures are designed
to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated
and communicated to management, recorded, processed, summarized, and reported within the time periods specified in the rules and forms
of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. As of October 31, 2025,
our Interim Chief Executive Officer and our Interim Chief Financial Officer concluded that the disclosure controls and procedures were
not effective as of such date due to material weaknesses in internal controls identified above.
These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls.
Accordingly, because of the inherent limitations in our internal controls system, misstatements, or insufficient disclosures due to error
or fraud may occur and not be detected.
We have incurred, and will continue to
incur, increased costs as a result of operating as a public company, and our management has been required, and will continue to be required,
to devote substantial time to new compliance initiatives.
As a public company, we have incurred and are continuing
to incur significant legal, accounting, and other expenses and these expenses may increase even more after we are no longer an “emerging
growth company” and “smaller reporting company.” We are subject to the reporting requirements of the Exchange Act and
the rules adopted, and to be adopted, by the SEC. Our management and other personnel devote a substantial amount of time to these compliance
initiatives.
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Moreover, these rules and regulations have substantially
increased our legal and financial compliance costs and made some activities more time-consuming and costly. The increased costs can result
in our reporting a net loss. These rules and regulations may make it more difficult and more expensive for us to maintain sufficient directors’
and officers’ liability insurance coverage. We cannot predict or estimate the amount or timing of additional costs we may continue
to incur to respond to these requirements. The ongoing impact of these requirements could also make it more difficult for us to attract
and retain qualified people to serve on our Board, our Board committees, or as executive officers.