Overview

Kaival Brands Innovations Group, Inc. (the “Company”) is engaged in the sale, marketing, and distribution of electronic nicotine delivery system (“ENDS”) products, also known as “e-cigarettes”, in a variety of flavors. Until October 2024, the Company’s primary source of revenue was the Bidi Stick. 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 the Company and others, alleging that the Bidi Stick infringes on a patent owned by one of the RJ Reynolds Entities. As a result, the Company has not imported any Bidi Sticks and currently does not generate any revenue from the sale of Bidi Sticks.

The Company’s 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”). The Company has also entered into a Merger and Share Exchange Agreement with Delta Corp Holdings Limited, a company incorporated in England and Wales, which, if consummated, would result in Pubco becoming the Company’s parent and the appointment of new officers and directors, except that the Company has the right to appoint one director to the Pubco board of directors.

Material Items, Trends and Risks Impacting Our Business

1. The ITC Complaint filed by the RJ Reynolds Entities: The ITC Complaint requests the ITC to grant temporary and permanent limited exclusion orders, which would prohibit the importation of the Bidi Stick in the United States, and temporary and permanent cease and desist orders, which would prohibit the sale and distribution of the Bidi Stick in the United States. If the Company or Bidi is prohibited from importing the Bidi Stick, the Company’s business, operations, financial results, and reputation would be significantly adversely impacted.

PMI Licensing Agreement and International Distribution

On June 13, 2022, the Company, through its wholly owned subsidiary, KBI, entered into a licensing agreement with PMPSA for the development and distribution of ENDS products in certain markets outside of the United States. The ability of PMPSA to generate sales of its licensed products is important to the Company’s results of operations, as the Company derives royalty revenue from PMPSA sales.

Ability to Develop and Monetize the GoFire Intellectual Property

In May 2023, the Company acquired certain vaporizer and inhalation-related technology from GoFire with the goal of diversifying its business and lessening its dependence on the Bidi Stick. The Company expects to continue seeking third-party licensing opportunities in various markets to monetize the acquired patents.

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. The current environment of material inflation in the U.S. may impact discretionary consumer purchases, such as the Bidi Stick.

Going Concern

The Company has incurred recurring losses and negative cash flows from operations, and its ability to continue as a going concern is adversely affected by the uncertainty surrounding Bidi’s PMTA process with the FDA, the outcome of Bidi’s petition with the 11th Circuit Court of Appeals, and the uncertainty in the Company’s ability to continue to sell the Bidi Stick due to the patent infringement claim filed by RJ Reynolds. The Company will need significant additional funds to satisfy its outstanding payables, fund its working capital, and fully implement its business plan.

Liquidity and Capital Resources

The Company believes it will not have sufficient cash on hand to support its operations for at least twelve months. As of January 31, 2025, the Company had working capital of $1,998,945 and total cash of $2,427,612. The Company intends to generally rely on cash from operations and equity and debt offerings to the extent necessary and available, to satisfy its liquidity needs.

Results of Operations

For the three months ended January 31, 2025, the Company’s revenues were approximately $0.2 million, compared to approximately $3.2 million in the same period of the prior fiscal year. The decrease in revenues was primarily due to a decrease in product sales to customers. Gross profit in the first quarter of fiscal year 2025 was approximately $0.2 million, or 100.0% of revenues, net, compared to approximately $1.2 million, or 37.3% of revenues, net, for the first quarter of fiscal year 2024. Total operating expenses were approximately $4.3 million for the first quarter of fiscal year 2025, compared to approximately $2.9 million for the first quarter of fiscal year 2024, primarily due to an increase in stock compensation expense. The net loss for the first quarter of fiscal year 2025 was approximately $4.0 million, or $0.43 basic and diluted net loss per share, compared to a net loss of approximately $2.2 million, or $0.76 basic and diluted net loss per share, for the first quarter of fiscal year 2024.