Quarterly Report for Quarter Ending July 31, 2025 (Form 10-Q)

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 unaudited financial statements and notes thereto for the nine months ended July 31, 2025, included under Item 1 - Financial Statements in this Report and our audited financial statements and notes thereto for the year ended October 31, 2024, contained in the 2024 Annual 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 flavors. 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").

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 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 our results of 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 is December 29, 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 significant revenue from the sale of Bidi Sticks in the foreseeable future. Our primary source of revenue is from KBI from royalties from PMI under the PMI License Agreement.

PMI Licensing Agreement and International Distribution

On June 13, 2022, we, through our wholly owned subsidiary, KBI, entered into the PMI License Agreement with PMPSA, a wholly owned affiliate of PMI, for the development and distribution of ENDS products in certain markets outside of the United States, subject to market (or regulatory assessment). The PMI License Agreement grants to PMPSA a license of certain intellectual property rights relating to Bidi's ENDS device, known as the BIDI® Stick in the United States, as well as potentially newly developed devices, to permit PMPSA to manufacture, promote, sell, and distribute such ENDS device and newly developed devices, in international markets, outside of the United States.

On July 25, 2022, we announced the launch of PMPSA's custom-branded self-contained e-vapor product, pursuant to the licensing agreement. The product, a self-contained e-vapor device initially called VEEBA and more recently rebranded as VEEV NOW, has been custom developed and was initially distributed in Canada. VEEV NOW was then commercially launched by PMPSA in Europe in February 2023, with additional market launches planned this year. On August 12, 2023, we executed and entered into a Deed of Amendment No. 1 (the "PMI License Amendment") with PMPSA, Bidi and KBI. Pursuant to the PMI License Amendment (which was effective on June 30, 2023), resulting in a Net Reconciliation Payment to KBI and ongoing quarterly royalty payments.

The ability of PMPSA to generate sales of its licensed products is important to our results of operations since we derive royalty revenue from PMPSA sales. Should our relationship with PMPSA deteriorate or terminate, or if PMPSA is unable to generate meaningful sales of its licensed products, our business and results of operations would be materially harmed.

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 Vapor. 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 seeking to 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.

Corporate History

We were incorporated on September 4, 2018, in the State of Delaware. Effective July 12, 2019, we changed our corporate name from Quick Start Holdings, Inc. to Kaival Brands Innovations Group, Inc. The name change was effected through a parent/subsidiary short-form merger of Kaival Brands Innovations Group, Inc., our wholly-owned Delaware subsidiary formed solely for the purpose of the name change, with and into us. We were the surviving entity.

Change of Control

On February 6, 2019, we entered into a Share Purchase Agreement (the "Share Purchase Agreement"), by and among us, GMRZ Holdings LLC, a Nevada limited liability company ("GMRZ"), our then-controlling stockholder, and Kaival Holdings, LLC, a Delaware limited liability company ("KH"), pursuant to which, on February 20, 2019, GMRZ sold 24,000,000 shares of our restricted common stock, representing approximately 88.06% of our then issued and outstanding shares of common stock, to KH, and KH paid GMRZ consideration in the amount set forth in the Share Purchase Agreement. The consummation of the transactions contemplated by the Share Purchase Agreement resulted in a change in control, with KH becoming our largest controlling stockholder. KDMM Trust I, the trustee of which is the widow of Kaival's former Chief Executive Officer and director, Nirajkumar Patel, is the sole voting member of KH.

Other Potential Product Offerings & Opportunities

In May 2023, we acquired 19 existing and 47 pending patents with novel technologies related to vaporization and inhalation technologies from GoFire. The GoFire patent portfolio includes novel technologies across extrusion dose control, product preservation, tracking and tracing usage, multiple modalities (i.e., different methods of vaporizing) and child safety. The patents and patent applications cover territories including the United States, Australia, Canada, China, the EPO (European Patent Organization), Israel, Japan, Mexico, New Zealand and South Korea. The portfolio also includes a proprietary mobile device software application that is used in conjunction with certain patents in the portfolio.

We expect to continue seeking third-party licensing opportunities in the cannabis, hemp/CBD, nicotine, nutraceutical and pharmaceutical markets, as a means of monetizing our patents. However, there can be no assurance that we will be able to implement this strategy.

Going Concern

The accompanying unaudited interim consolidated financial statements of the Company 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 ("FASB"), Accounting Standards Update ("ASU") No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40), the Company's management evaluates whether there are conditions or events, considered in aggregate, that raise substantial doubt about the Company's ability to continue as a going concern within one year after the date that the accompanying financial statements are issued.

The Company has incurred recurring losses and negative cash flows from operations for nine months ended July 31, 2025. The Company will need significant additional funds to satisfy its outstanding payables, fund its working capital, and fully implement its business plan. In addition, the Company's ability to continue as a going concern is adversely affected by the uncertainty surrounding Bidi's PMTA process with the FDA for its non-tobacco flavored Bidi® Stick as well as the uncertainty in the Company's ability to continue to sell the Bidi Stick given the patent infringements claim filed by RJ Reynolds. Likewise, in April 2025 the 11^th Circuit upheld FDA's MDO for the Classic BIDI® Stick. All of these factors raise substantial doubt regarding the Company's ability to continue as a going concern.

Management plans to continue developing strategies for similar or expanded operations for the Company's business to help the Company's ability to determine where its business will be viable going forward. Until such time, if ever, the Company can generate substantial product revenues, management plans to finance its cash needs through public or private equity offerings or debt financing.

However, there is no assurance that the Company 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 faced by the Company. The accompanying unaudited interim consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these or other risks or uncertainties.

Liquidity and Capital Resources

We believe we will not have sufficient cash on hand to support our operations for at least twelve months. As of July 31, 2025, we had working capital of $546,419 and total cash of $1,268,926. As discussed above, this condition and other factors raise substantial doubt regarding our ability to continue as a going concern.

We intend to generally rely on cash from operations and equity and debt offerings to the extent necessary and available, to satisfy our liquidity needs. There are several factors that could result in the need to raise additional funds, including a decline in revenue, a lack of anticipated sales growth, and increased costs. Our efforts are directed toward generating positive cash flow and, ultimately, profitability. As our efforts during our fiscal 2024 and since have not generated positive cash flows, we will need to raise additional capital. Should capital not be available to us at reasonable terms, other actions will become necessary, including implementing cost control measures and additional efforts to generate sales. We may also be required to take more strategic actions such as exploring strategic options for the sale of our company, the creation of joint ventures or strategic alliances under which we will pursue business opportunities, or other alternatives.

Cash Flows:

Net cash flows used in operations was approximately $2.0 million for the first nine months of fiscal year 2025, compared to $0.12 million cash flows provided by operations for the first nine months of fiscal year 2024. The decrease in cash flows provided by operations for the first nine months of fiscal year 2025 compared to the first nine months of fiscal year 2024 was primarily due to the lower sales revenue.

Net cash flows used in financing activities was approximately $0.6 million for the first nine months of fiscal year 2025, compared to cash flows provided by financing activities of approximately $3.9 million for the first nine months of fiscal year 2024. The cash used in financing activities for the first nine months of fiscal year 2025 consisted primarily of payments on preferred dividends and payments on loans payables.

Results of Operations

Three months ended July 31, 2025, compared to three months ended July 31, 2024

Revenues:

Revenues for the third quarter of fiscal year 2025 were approximately $142 thousand, compared to approximately $714 thousand in the same period of the prior fiscal year. Revenues decreased in the third quarter of 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 the third quarter of fiscal year 2025 was approximately $142 thousand, or approximately 100.0% of revenues, net, compared to approximately $369 thousand gross profit or approximately 51.7%, of revenues, net, for the third quarter of fiscal year 2024. Total cost of revenue, net was zero for the third quarter of fiscal year 2025, compared to approximately $345 thousand, or approximately 48.3% of revenue, net for the third quarter of fiscal year 2024. The decrease is due to the reduction of product sales to customers during the three months ended July 31, 2025.

Operating Expenses:

Total operating expenses were approximately $701 thousand for the third quarter of fiscal year 2025, compared to approximately $1.8 million for the third quarter of fiscal year 2024. The decrease is primarily a decrease in professional fees, payroll and general and administrative expenses. For the third quarter of fiscal year 2025, operating expenses consisted primarily of professional fees of approximately $0.2 million, and all other general and administrative expenses of approximately $0.4 million. General and administrative expenses in the third quarter of fiscal year 2025 consisted primarily of salaries and wages, insurance, lease expense, project expenses, banking fees, business fees and state and franchise taxes.

For the third quarter of fiscal year 2024, operating expenses consisted primarily of advertising and promotion fees of approximately $0.03 million, stock option expense of approximately $56 thousand, professional fees of approximately $0.6 million, and all other general and administrative expenses of approximately $1.1 million. General and administrative expenses in the third quarter of fiscal year 2024 consisted primarily of salaries and wages, insurance, lease expense, project expenses, banking fees, business fees and state and franchise taxes.

Income Taxes:

During the third quarter of fiscal year 2025, we did not accrue a provision for income taxes, due to the pre-tax loss of approximately $0.6 million. Similarly, we did not accrue a provision for income taxes, due to the pre-tax loss of approximately $1.6 million for the third quarter of fiscal year 2024.

Net Loss:

As a result of the items noted above, the net loss for the third quarter of fiscal year 2025 was approximately $0.6 million, or $0.05 basic and diluted net loss per share, compared to a net loss of approximately $1.8 million, or $0.39 basic and diluted net loss per share, for the third quarter of fiscal year 2024. The decrease in the net loss for the third quarter of fiscal year 2025, as compared to the third quarter of fiscal year 2024, is primarily attributable to the lower sales and royalty revenue and decrease in operating expenses as noted above.

Nine months ended July 31, 2025, compared to nine months ended July 31, 2024

Revenues:

Revenues for the nine months ended July 31, 2025, were approximately $0.4 million, compared to $6.2 million for the nine months ended July 31, 2024. Revenues decreased during the nine months ended July 31, 2025, compared to the nine months ended July 31, 2024, primarily due to a decrease in product sales to customers.

Cost of Revenue and Gross Profit:

Gross profit for the nine months ended July 31, 2025, was approximately $0.4 million, compared to gross profit of approximately $2.1 million for the nine months ended July 31, 2024. Total cost of revenue was zero for the nine months ended July 31, 2025, compared to $4.1 million for the nine months ended July 31, 2024. The decrease in gross profit for the nine months ended July 31, 2025 compared to the nine months ended July 31, 2024 is due to the reduction of product sales to customers during the nine months July 31, 2025.

Operating Expenses:

Total operating expenses were approximately $7.0 million for the nine months ended July 31, 2025, compared to approximately $6.5 million for the nine months ended July 31, 2024. For the nine months ended July 31, 2025, operating expenses consisted primarily of stock option expense of $36 thousand, professional fees totaling approximately $4.3 million, loss on ROU asset of $0.7 million, and all other general and administrative expenses of approximately $2.0 million. General and administrative expenses during the nine months ended July 31, 2025, consisted primarily of salaries and wages, insurance, lease expense, project expenses, banking fees, business fees and state and franchise taxes.

For the nine months ended July 31, 2024, operating expenses were approximately $6.5 million, consisting primarily of advertising and promotion fees of approximately $0.7 million, stock option expense of $77 thousand, professional fees totaling approximately $1.9 million, and all other general and administrative expenses of approximately $3.8 million. General and administrative expenses during the nine months ended July 31, 2024, consisted primarily of salaries and wages, insurance, banking fees, business fees, and other service fees.

Income Taxes:

During the nine months ended July 31, 2025, we did not accrue a tax provision for income taxes, due to the pre-tax loss of approximately $6.6 million for the nine months ended July 31, 2025. Similarly, we did not accrue a tax provision for income taxes during the nine months ended July 31, 2024, due to the pre-tax loss of approximately $5.2 million for the nine months ended July 31, 2024.

Net Loss:

The net loss for the first nine months ended July 31, 2025, was approximately $6.6 million, or $0.61 basic and diluted net loss per share, compared to net loss for the nine months ended July 31, 2024, which was approximately $5.2 million, or $1.62 basic and diluted net loss per share. The increase in the net loss for the nine months ended July 31, 2025, as compared to the nine months ended July 31, 2024, is primarily attributable to the increase of stock based compensation, loss on ROU asset and lower sales revenue.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information available as of the date of the financial statements; therefore actual results could differ from those estimates. There have been no material changes to our critical accounting policies and estimates during the nine months ended July 31, 2025 from those disclosed in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of our 2024 Annual Report for the year ended October 31, 2024.

Recent Accounting Pronouncements

Refer to Item 1, Financial Statements, Note 2, Basis of Presentation and Significant Accounting Policies.

Emerging Growth Company

We are an "emerging growth company," that is exempt from certain financial disclosure and governance requirements for up to five years as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). The JOBS Act eases restrictions on the sale of securities and increases the number of stockholders a company must have before becoming subject to the SEC's reporting and disclosure rules. We have not elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the JOBS Act, that allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies.