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, 2025, 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”
23
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”).
On September 11, 2025, Kaival
Brands Innovations Group, Inc., (the “Company”) and Delta Corp Holdings Limited, a company incorporated in England and Wales
(together with its successors and assigns, “Delta”) entered into a Business Combination Termination and Release Agreement
(the “Termination Agreement”) pursuant to Section 10.1(a) of the Merger Agreement (the “Merger Agreement’) among
the Company, Delta, Delta Corp Holdings Limited, a Cayman Islands exempted company, KAVL Merger Sub Inc. and Delta Corp Cayman Limited.
Pursuant to the Termination
Agreement, the Company and Delta mutually terminated the Merger Agreement and all agreements between the parties that are ancillary thereto
and Delta waived any and all claims against the other party that in any way directly and/or indirectly arise out of, are based upon, or
are in connection with the Merger Agreement and any agreements ancillary thereto.
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.
Although Bidi disputes the patent infringement claims set forth in the ITC Complaint by the RJ Reynolds Entities, in December 2024 Bidi
entered into a consent order 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
As a result of the ITC Complaint and other
factors, we do not expect any 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.
24
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.
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.
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.
Going Concern
Our accompanying consolidated 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 accompanying financial statements are issued.
As
shown in the accompanying consolidated financial statements, we have incurred recurring losses and negative cash flows from operations
for the year ended October 31, 2025. 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
FDA’s denial of Bidi’s PMTA process for its non-tobacco flavored Bidi ® Stick as well as our ability to continue
to sell the Bidi Stick given the patent infringements claim filed by RJ Reynolds. Likewise, in April 2025, the 11th Circuit upheld FDA’s
MDO for the Classic BIDI® Stick. Finally, on November 4, 2025, FDA issued a MDO for the PMTA for the non-tobacco flavored Bidi Sticks.
All of these factors raise substantial doubt regarding our ability to continue as a going concern.
Our management plans to continue developing strategies
for 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.
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.
25
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, 2025, we had working capital of approximately
$100 thousand and total cash of approximately $0.5 million. As discussed above, these conditions 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 2025 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, 2024 and 2025.
Cash Flows:
Net cash flows used in operations was approximately
$2.8 million for fiscal year ended 2025, compared to net cash flows used in operations of approximately $0.7 million for fiscal year ended
2024. The increase in cash flows used in operations for the fiscal year ended 2025 compared to the fiscal year ended 2024 was primarily
due to lower revenue.
Net cash flows used in financing activities was approximately
$0.6 million for the fiscal year ended 2025, compared to approximately $4.0 million provided by financing activities for the fiscal year
ended 2024. The cash used in financing activities for the fiscal year 2025 consisted primarily of payments on preferred dividends and
payments on loans payables. 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, 2025, compared
to fiscal year ended October 31, 2024
Revenues:
Revenues for fiscal year ended 2025 were approximately
$0.5 million, compared to approximately $6.9 million in fiscal year ended 2024. Revenues decreased in fiscal year ended 2025, primarily
due to a decrease in product sales to customers and also due to the decrease in royalty revenue.
Cost of Revenue, Net and Gross Profit:
Gross profit in fiscal year ended 2025 was approximately
$0.5 million, compared to approximately $2.6 million for fiscal year ended 2024. Total cost of revenue, net was zero for the fiscal year
ended 2025, compared to approximately $4.3 million for fiscal year ended 2024. The decrease in gross profit is due to the reduction of
product sales to customers during the fiscal year ended 2025.
Operating Expenses:
Total operating expenses were approximately $17.1 million for fiscal
year ended 2025, compared to approximately $8.3 million for fiscal year ended 2024. For the fiscal year ended 2025, operating expenses
consisted primarily of professional fees of approximately $4.6 million, gain on termination of operating lease of $0.06 million , salaries and
wages of $0.6 million, loss on impairment of intangible assets of $9.9 million, and all other general and administrative expenses of approximately
$2.0 million. 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.
26
Income Taxes:
We have Federal net operating loss (“NOL”)
carryforwards of approximately $34.2 million and state NOL carryforwards of approximately $0.4 million. With the changes instituted by
the CAREES Act, the Federal NOLs have an indefinite life and will not expire. Our federal and state tax returns for the 2023 and 2024
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 $10.1 million for the year ended on
October 31, 2025, was necessary to reduce the deferred tax asset to the amount that will more likely than not be realized.
Please refer to Note 9, 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 2025 was approximately
$(16.7) million, or $(1.51) basic and diluted net loss per share, compared to a net loss of approximately $(6.7)
million, or $(1.62) basic and diluted net loss per share, for fiscal year 2024. The increase in net loss for the fiscal year 2025,
as compared to net loss in fiscal year 2024, is attributable to the revenues and expenses factors noted above. Weighted-average Common
Stock outstanding were 11,032,569 on October 31, 2025, as compared to 4,313,900 on October 31, 2024. The increase in the weighted-average
shares in fiscal year 2025 was primarily attributable to the issuance of 3,076,100 shares of Common Stock.
Concentrations:
Financial instruments, which potentially subject us
to concentrations of credit risk, consist primarily of accounts payable, accounts receivable, and revenue.
Concentration of Purchases and Accounts Payable-
Related Party:
For the year ended October 31, 2025, the Company had
no inventory on hand. As of 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 of October 31, 2025, we had no related party receivable
balance. As of October 31, 2025, there was $50,000 of related party accounts payable.
As of October 31, 2024, there was $131,683 of
related party accounts payable.
Concentration of Revenues and Accounts Receivable:
No revenue concentration from the sale of Products
existed for the fiscal year ended 2025.
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.
No accounts receivable concentration from the sale
of Products existed as of October 31, 2025.
QuikTrip Corporation with an outstanding balance of
approximately $205 accounted for 100% of the total accounts receivable from customers, as of October 31, 2024.
27
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 as of October 31, 2025,
or October 31, 2024. Cash as of October 31, 2025, and October 31, 2024, were approximately $0.5 million and $3.9 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.
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 its 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.
28