Kaival Brands(KAVL) - 2025 Q3 - Quarterly Report

Filing Information This document is a Quarterly Report on Form 10-Q for the period ended July 31, 2025, filed by KAIVAL BRANDS INNOVATIONS GROUP, INC - The document is a Quarterly Report on Form 10-Q for the period ended July 31, 2025, filed by KAIVAL BRANDS INNOVATIONS GROUP, INC.[2] Company Filing Details | Metric | Value | | :--- | :--- | | Trading Symbol | KAVL | | Exchange | The Nasdaq Stock Market, LLC | | Filer Status | Non-accelerated filer, Smaller reporting company, Emerging growth company | | Common Stock Outstanding (as of Sep 16, 2025) | 11,542,302 shares | Cautionary Note Concerning Forward-Looking Statements This report contains forward-looking statements subject to risks and uncertainties that may cause actual results to differ materially - The report contains forward-looking statements reflecting current expectations about future events and results, identified by words such as 'may,' 'should,' 'believe,' 'expect,' and 'intend'[9] - These statements involve significant risks, uncertainties, and other factors, some beyond the company's control, which may cause actual results to differ materially from those anticipated[10] - Key risks include substantial reliance on Bidi Vapor, inability to import/sell Bidi Stick due to patent infringement claims, challenges in raising funding, integration of acquired intellectual property from GoFire, impact of FDA marketing denial orders (MDOs), reliance on royalty payments from Philip Morris International, and the effects of government regulation[11] PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements for Kaival Brands Innovations Group, Inc., including balance sheets, statements of operations, changes in stockholders' equity, and cash flows, along with detailed notes Unaudited Consolidated Balance Sheets Consolidated Balance Sheet Summary | Metric | July 31, 2025 | October 31, 2024 | Change | | :-------------------------- | :-------------- | :--------------- | :----- | | Total Current Assets | $1,411,009 | $4,510,183 | -68.7% | | Total Assets | $11,503,114 | $16,004,276 | -28.1% | | Total Current Liabilities | $864,590 | $1,526,333 | -43.3% | | Total Liabilities | $1,418,088 | $2,188,604 | -35.2% | | Total Stockholders' Equity | $10,085,026 | $13,815,672 | -27.0% | Unaudited Consolidated Statements of Operations Statements of Operations (Three Months Ended July 31) | Metric (3 Months Ended July 31) | 2025 | 2024 | Change | | :------------------------------ | :--- | :--- | :----- | | Total revenues, net | $142,425 | $713,814 | -80.0% | | Gross profit | $142,425 | $368,816 | -61.4% | | Total operating expenses | $700,944 | $1,786,594 | -60.8% | | Net loss | $(559,355) | $(1,571,861) | -64.4% | | Net loss per common share - basic and diluted | $(0.05) | $(0.39) | -87.2% | Statements of Operations (Nine Months Ended July 31) | Metric (9 Months Ended July 31) | 2025 | 2024 | Change | | :------------------------------ | :--- | :--- | :----- | | Total revenues, net | $392,073 | $6,151,701 | -93.6% | | Gross profit | $392,073 | $2,066,610 | -81.0% | | Total operating expenses | $7,018,286 | $6,454,722 | +8.7% | | Net loss | $(6,618,088) | $(5,212,725) | +26.9% | | Net loss per common share - basic and diluted | $(0.61) | $(1.62) | -62.4% | Unaudited Consolidated Statements of Changes in Stockholders' Equity Changes in Stockholders' Equity | Metric | October 31, 2024 | July 31, 2025 | Change | | :-------------------------------- | :--------------- | :-------------- | :----- | | Common Shares Outstanding | 8,517,302 | 11,542,302 | +35.5% | | Additional Paid-in Capital | $51,269,485 | $54,153,902 | +5.6% | | Accumulated Deficit | $(37,463,230) | $(44,081,318) | +17.7% | | Total Stockholders' Equity | $13,815,672 | $10,085,026 | -27.0% | - Common shares issued for services totaled 3,025,000 shares, contributing $2,870,725 to additional paid-in capital during the nine months ended July 31, 2025[24][110] Unaudited Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (Nine Months Ended July 31) | Cash Flow Activity (9 Months Ended July 31) | 2025 | 2024 | Change | | :------------------------------------------ | :--- | :--- | :----- | | Net cash (used in) provided by operating activities | $(2,020,758) | $120,821 | -1772.0% | | Net cash used in investing activities | $0 | $0 | 0% | | Net cash (used in) provided by financing activities | $(612,616) | $3,870,509 | -115.8% | | Net change in cash | $(2,633,374) | $3,991,330 | -166.0% | | Ending cash balance | $1,268,926 | $4,524,989 | -71.9% | - The significant decrease in cash flows from operating activities in 2025 was primarily due to lower sales revenue[148] - Cash used in financing activities for the first nine months of fiscal year 2025 primarily consisted of payments on preferred dividends ($405,000) and payments on loans payable ($207,616)[30][149] Notes to Unaudited Consolidated Financial Statements Note 1 – Organization and Description of Business This note details the company's incorporation, primary business activities, and significant events impacting its operations - Kaival Brands Innovations Group, Inc. was incorporated on September 4, 2018, and primarily distributes electronic nicotine delivery systems (ENDS) and related components, specifically the 'Bidi Stick,' from Bidi Vapor, LLC[33][34] - The company's wholly-owned subsidiary, KBI, entered into an international licensing agreement with Philip Morris Products S.A. (PMPSA) for the development and distribution of ENDS products in certain markets outside the United States[34][35] - The company's primary revenue source is now royalties from PMI under the PMI License Agreement, as significant revenue from Bidi Stick sales is not expected due to an ITC patent infringement complaint and FDA Marketing Denial Orders (MDOs)[37][131] - The ITC Complaint filed by RJ Reynolds Entities on June 11, 2024, seeks to prohibit the importation, sale, and distribution of the Bidi Stick in the U.S. due to alleged patent infringement[36][129] - The FDA issued an MDO for the Classic BIDI® Stick in January 2024, which was upheld by the 11th Circuit Court of Appeals in April 2025, prohibiting its continued marketing and distribution[44] - The MDO for non-tobacco flavored BIDI® Sticks was rescinded by the FDA on July 29, 2024, allowing the company to market and sell these products subject to FDA's enforcement discretion during PMTA scientific review[43] - The previously announced merger agreement with Delta Corp Holdings Limited was mutually terminated on September 11, 2025[48][49][121][122] Note 2 – Basis of Presentation and Significant Accounting Policies This note outlines the basis for financial statement preparation and key accounting policies, including revenue recognition and inventory valuation - The consolidated financial statements include the company's wholly-owned subsidiaries, Kaival Labs and Kaival Brands International, and are prepared in accordance with GAAP and SEC rules[50][51] - The company had uninsured cash of $1,018,926 as of July 31, 2025, and $3,652,300 as of October 31, 2024[54] - No reserve for credit losses was required as of July 31, 2025, or October 31, 2024, based on management's assessment of accounts receivable aging and customer payment history[57] - A full reserve of $313,654 was recognized for all remaining 'Classic' BIDI® Stick products on hand as of October 31, 2024, due to the FDA MDO, resulting in zero inventory as of July 31, 2025[61] - Revenue from product sales is recognized when control is transferred to the customer (typically upon shipment), while royalty revenue from the PMI License Agreement is recognized in the period the sales of the manufactured product occur[68][74] - The PMI License Agreement was amended on August 12, 2023, to change the royalty rate to be volume-based ($0.08 to $0.16 per sale, increasing to $0.10 to $0.20 upon milestones), eliminate certain potential royalty adjustments, and cancel guaranteed royalty payments in favor of quarterly payments based on actual sales[77][78] Note 3 – Going Concern This note addresses the company's ability to continue as a going concern, citing recurring losses and regulatory uncertainties - The company has incurred recurring losses and negative cash flows from operations for the nine months ended July 31, 2025, raising substantial doubt about its ability to continue as a going concern[95][143] - Factors contributing to going concern doubt include uncertainty surrounding Bidi's PMTA process with the FDA, the inability to sell the Bidi Stick due to patent infringement claims, and the upheld FDA MDO for the Classic BIDI® Stick[95][143] - Management plans to finance cash needs through public or private equity offerings or debt financing, but there is no assurance that the company will be able to raise additional capital, generate revenues, or achieve profitability[96][97][144][145] Note 4 – Intangible Assets This note provides details on the company's intangible assets, primarily patents and technology, and their amortization - Intangible assets, primarily patents and technology acquired pursuant to the GoFire Asset Purchase Agreement, had a net carrying value of $10,092,105 as of July 31, 2025, down from $10,681,911 as of October 31, 2024[19][98] - Amortization expense for intangible assets was $589,806 for the nine months ended July 31, 2025[99] Future Amortization Expense for Intangible Assets | Period | Amortization Expense | | :-------------------------- | :------------------- | | Remaining period in 2025 | $196,592 | | Year ending October 31, 2026 | $786,398 | | Year ending October 31, 2027 | $786,398 | | Year ending October 31, 2028 | $786,398 | | Year ending October 31, 2029 | $786,398 | | Thereafter | $6,749,921 | | Total | $10,092,105 | Note 5 – Loans Payable This note details the status of the company's loans payable, including repayments and outstanding balances - The outstanding balance of insurance loans was zero as of July 31, 2025, down from $207,616 as of October 31, 2024[101] - All loan agreements entered into on November 29, 2023, were fully repaid on June 13, 2024[102] - A promissory note in the principal amount of $650,000, issued to AJB Capital Investments, LLC, was fully repaid in advance of its maturity date on December 1, 2023, resulting in a $98,432 loss on extinguishment of debt recognized in the nine months ended July 31, 2024[103][104] Note 6 – Leases This note describes the company's operating lease for office and storage space, including its termination and future lease liabilities - The company has one operating lease for office space and inventory storage space with Just Pick, LLC, a related party[105] - On April 30, 2025, the company terminated its office lease with Just Pick, LLC, due to breach of lease terms and recorded a loss on the Right-of-Use (ROU) assets of $707,626[107] Lease Liabilities Maturity | Lease Liabilities Maturity (July 31, 2025) | Amount | | :----------------------------------------- | :----- | | Remaining period in 2025 | $121,474 | | Year ending October 31, 2026 | $253,614 | | Year ending October 31, 2027 | $274,946 | | Year ending October 31, 2028 | $175,989 | | Total future undiscounted lease payments | $826,023 | | Less: Interest | $(58,573) | | Present value of lease liabilities | $767,450 | Note 7 – Stockholders' Equity This note provides information on the company's stockholders' equity, including preferred stock, common shares, stock options, and warrants - The company issued 900,000 shares of Series B Preferred Stock on May 30, 2023, as consideration for the GoFire asset purchase, with a liquidation preference of $15 per share and a 2% cumulative dividend[108] - Accrued dividends of $405,000 were paid to Series B shareholders on December 3, 2024, with no further dividends to be accrued or paid as of July 31, 2025[108] - During the nine months ended July 31, 2025, 3,025,000 fully vested common shares were issued to directors, officers, and an employee, resulting in $2,873,750 in stock compensation cost[110] Stock Options Summary | Stock Options | October 31, 2024 | July 31, 2025 | | :-------------------------- | :--------------- | :-------------- | | Outstanding Number | 189,590 | 119,953 | | Aggregate Exercise Price | $6,847,736 | $3,353,019 | | Weighted Average Exercise Price | $36.12 | $27.95 | - Stock option expense for the nine months ended July 31, 2025, was $36,192, with $18,744 of unrecognized expense remaining to be recognized over approximately 1.94 years[111][112] Warrants Summary | Warrants | October 31, 2024 | July 31, 2025 | | :-------------------------- | :--------------- | :-------------- | | Outstanding Number | 5,754,686 | 5,754,686 | | Aggregate Exercise Price | $19,826,116 | $19,826,116 | | Weighted Average Exercise Price | $3.45 | $3.45 | Note 8 – Related-Party Transactions This note details transactions with related parties, including revenue, inventory purchases, and lease agreements - The company's business operations commenced as the exclusive distributor of ENDS products manufactured by Bidi, a related party[114] - Revenue from related parties decreased from $5,950 for the nine months ended July 31, 2024, to zero for the same period in 2025[115] - No inventory purchases were made from Bidi for the nine months ended July 31, 2025, compared to $273,060 in the prior year[116] - License fees paid to Bidi were $228,215 for the nine months ended July 31, 2025, and $130,000 for the same period in 2024[117][118] - The company terminated its operating lease for office and storage space with Just Pick, LLC, a related party, on April 30, 2025, due to breach of lease terms[120] Note 9 – Subsequent Events This note reports on significant events occurring after the balance sheet date, specifically the termination of a merger agreement - On September 11, 2025, Kaival Brands Innovations Group, Inc. and Delta Corp Holdings Limited mutually terminated their Merger and Share Exchange Agreement[121][122] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a narrative report on the company's financial condition, results of operations, and liquidity for the nine months ended July 31, 2025, highlighting key business developments, financial performance, and future outlook Overview This section provides a high-level summary of the company's business, revenue sources, and recent strategic developments - The company is engaged in the sale, marketing, and distribution of electronic nicotine delivery system (ENDS) products[124] - The primary source of revenue has shifted from Bidi Stick sales to royalties from an international licensing agreement with Philip Morris Products S.A. (PMPSA) due to an ITC patent infringement complaint and FDA MDOs[124][131] - The previously announced merger agreement with Delta Corp Holdings Limited was mutually terminated on September 11, 2025[126][127] Material Items, Trends and Risks Impacting Our Business This section discusses significant factors, trends, and risks affecting the company's business, including regulatory actions and litigation - The ITC Complaint filed by RJ Reynolds Entities on June 11, 2024, alleges patent infringement by the Bidi Stick, leading Bidi to agree to cease importation and distribution until October 2026[129] - An initial determination from the ITC Administrative Law Judge (ALJ) on August 29, 2025, found a violation of Section 337 based on patent infringement by respondents[129] - The company's primary revenue source is now royalties from PMI under the PMI License Agreement, and the ability of PMPSA to generate sales of its licensed products is crucial to the company's results of operations[131][134] - The company acquired vaporizer and inhalation technology from GoFire in May 2023 to diversify its business, but there is no assurance of successful monetization or patent issuance from these assets[135][139][140] - Inflation and economic conditions may impact discretionary consumer purchases of ENDS products, potentially leading to a decline in demand[136] - The company faces substantial doubt about its ability to continue as a going concern due to recurring losses, negative cash flows, and regulatory uncertainties surrounding Bidi's products[143] Liquidity and Capital Resources This section analyzes the company's ability to meet its short-term and long-term financial obligations and its capital-raising strategies - As of July 31, 2025, the company had working capital of $546,419 and total cash of $1,268,926, which is believed to be insufficient to support operations for at least twelve months, raising substantial doubt about its ability to continue as a going concern[146] - The company intends to rely on cash from operations and equity/debt offerings to meet liquidity needs, but there is no assurance of raising additional capital[147] - Net cash used in operations was approximately $2.0 million for the first nine months of fiscal year 2025, a significant decrease from $0.12 million provided by operations in the prior year, primarily due to lower sales revenue[148] - Net cash used in financing activities was approximately $0.6 million for the first nine months of fiscal year 2025, compared to $3.9 million provided in the prior year, mainly due to preferred dividend and loan payments[149] Results of Operations This section provides a detailed analysis of the company's financial performance, comparing current and prior period results Three months ended July 31, 2025, compared to three months ended July 31, 2024 This section compares the company's financial performance for the three-month periods ended July 31, 2025, and 2024 Statements of Operations (Three Months Ended July 31) | Metric (3 Months Ended July 31) | 2025 | 2024 | Change | | :------------------------------ | :--- | :--- | :----- | | Total revenues, net | $142,425 | $713,814 | -80.0% | | Gross profit | $142,425 | $368,816 | -61.4% | | Total operating expenses | $700,944 | $1,786,594 | -60.8% | | Net loss | $(559,355) | $(1,571,861) | -64.4% | | Net loss per common share - basic and diluted | $(0.05) | $(0.39) | -87.2% | - The decrease in revenue was primarily due to lower product sales to customers and a decrease in royalty revenue[150] - Gross profit decreased significantly due to the reduction of product sales, with total cost of revenue being zero in the third quarter of fiscal year 2025[151] - Operating expenses decreased primarily due to a reduction in professional fees, payroll, and general and administrative expenses[152] Nine months ended July 31, 2025, compared to nine months ended July 31, 2024 This section compares the company's financial performance for the nine-month periods ended July 31, 2025, and 2024 Statements of Operations (Nine Months Ended July 31) | Metric (9 Months Ended July 31) | 2025 | 2024 | Change | | :------------------------------ | :--- | :--- | :----- | | Total revenues, net | $392,073 | $6,151,701 | -93.6% | | Gross profit | $392,073 | $2,066,610 | -81.0% | | Total operating expenses | $7,018,286 | $6,454,722 | +8.7% | | Net loss | $(6,618,088) | $(5,212,725) | +26.9% | | Net loss per common share - basic and diluted | $(0.61) | $(1.62) | -62.4% | - The substantial decrease in revenue was primarily due to a significant reduction in product sales to customers[156] - Gross profit decreased significantly due to the reduction of product sales, with total cost of revenue being zero for the nine months ended July 31, 2025[157] - Operating expenses increased due to higher stock-based compensation and a loss on ROU assets, despite reductions in other general and administrative expenses[158][161] Critical Accounting Policies and Estimates This section discusses the accounting policies and estimates that require significant judgment and can materially impact financial results - No material changes to critical accounting policies and estimates were reported during the nine months ended July 31, 2025, from those disclosed in the 2024 Annual Report[162] Recent Accounting Pronouncements This section outlines the impact of recently issued accounting standards on the company's financial statements - The company is currently evaluating the impact of adopting ASU 2023-09, 'Income Taxes (Topic 740) - Improvements to Income Tax Disclosures,' effective for fiscal years beginning after December 15, 2024[91][163] - The company does not expect that the adoption of ASU 2023-07, 'Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,' will have a material impact on its financial statements[92][163] Emerging Growth Company This section clarifies the company's status as an emerging growth company under the JOBS Act and its election regarding accounting standards - The company is an 'emerging growth company' under the JOBS Act but has not elected to use the extended transition period for complying with new or revised accounting standards[164] Item 3. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, Kaival Brands Innovations Group, Inc. is not required to provide quantitative and qualitative disclosures about market risk - The company is a 'smaller reporting company' as defined by Item 10 of Regulation S-K and is therefore not required to provide the information on market risk[165] Item 4. Controls and Procedures This section addresses the effectiveness of the company's disclosure controls and procedures and reports on any changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures This section reports on management's assessment of the effectiveness of the company's disclosure controls and procedures - Management concluded that the disclosure controls and procedures were not effective as of July 31, 2025, due to material weaknesses in internal control over financial reporting[168] Changes in Internal Control over Financial Reporting This section discloses any material changes in the company's internal control over financial reporting during the quarter - There have been no changes in internal control over financial reporting during the quarter ended July 31, 2025, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[169] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not currently involved in legal proceedings expected to have a material adverse effect on its business, but acknowledges that the outcome of legal or regulatory proceedings involving Bidi could significantly impact its operations due to reliance on Bidi - The company is not currently involved in legal proceedings that could reasonably be expected to have a material adverse effect on its business, prospects, financial condition, or results of operations[170] - The outcome of legal or regulatory proceedings involving Bidi, a related party, could have a material adverse or positive impact on the company's ability to operate its business given its reliance on Bidi[171] Item 1A. Risk Factors As a smaller reporting company, Kaival Brands Innovations Group, Inc. is not required to provide specific risk factors in this quarterly report - As a smaller reporting company, the company is not required to provide the information required by this item[172] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - None[173] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report for the period - None[174] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[175] Item 5. Other Information There is no other information to report for the period - None[176] Item 6. Exhibits This section lists the exhibits filed as part of this Quarterly Report on Form 10-Q, including certifications and XBRL documents - The report includes certifications from the Chief Executive Officer and Chief Financial Officer (Exhibits 31.1, 31.2, 32.1, 32.2) and Inline XBRL documents (Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[178] Signatures This section contains the required signatures from the company's Chief Executive Officer and Interim Chief Financial Officer, certifying the report's accuracy - The report was signed on September 16, 2025, by Mark Thoenes, Chief Executive Officer, and Eric Morris, Interim Chief Financial Officer[183]