KAVL

Kaival Brands Innovations Group, Inc. (NASDAQ: KAVL) ("Kaival Brands," the "Company" or "we,” “our” or similar terms), the exclusive U.S. distributor of all products manufactured by Bidi Vapor, LLC ("Bidi Vapor"), including the BIDI® Stick electronic nicotine delivery system, which are intended for adults 21 and over, today announced its financial results for the fiscal 2022 fourth quarter and full year ended October 31, 2022.

Eric Mosser, President & Chief Operating Officer of Kaival Brands, stated, “Fiscal 2022 was an exceptionally challenging year for us, primarily due to regulatory action by the FDA that was ultimately overturned in August. For a portion of fiscal 2022, we were prohibited from selling our flavored BIDI Sticks, and our 2022 revenues reflect the significant extended impact of this. The good news is that this impediment is behind us. Moreover, despite the challenges, we accomplished several important milestones during the year which we believe has laid the foundation for renewed growth and progress in 2023, including expanding existing sales channel relationships and initiating significant new ones. We expect and hope that the FDA will continue to pull bad actors from the marketplace, paving the way for companies like ours to provide our products to adult smokers deserving of premium e-cigarette product and experience.”

Fourth Quarter and Full-Year 2022 Highlights

• On or about May 13, 2022, the U.S. Food and Drug Administration (“FDA”) placed the tobacco-flavored Classic BIDI® Stick into the final Phase III scientific review.

• In June, the Company’s wholly owned subsidiary, Kaival Brands International, LLC ("KBI"), entered into an international licensing agreement with Philip Morris Products S.A. (“PMPSA”), a wholly owned affiliate of Philip Morris International Inc., for the development and distribution of electronic nicotine delivery system ("ENDS") products in markets outside the U.S., subject to market (or regulatory) assessment.

• In July, the Company announced the launch of PMPSA's custom-branded self-contained e-vapor product, VEEBA, being sold in Canada, with royalties due to KBI pursuant to the international licensing agreement.

• In August, the U.S. Court of Appeals for the Eleventh (11th) Circuit ruled in favor of Bidi Vapor in its appeal of the FDA’s Marketing Denial Order (“MDO”) issued to the non-tobacco flavored BIDI® Sticks. The court set aside or vacated the MDO and remanded the PMTAs back to FDA for further review.

• In December, KMS, Kaival’s marketing & sales vendor, hired Dean Simmons, a former Vice President of Sales of Swisher International, in preparation for an expected resurgence of revenue growth following a pivotal legal victory for Bidi Vapor this past summer.

Summary of Fourth Quarter and Full Year Fiscal Results

Revenues: Revenues for the fourth fiscal quarter ended October 31, 2022 were approximately $3.0 million, compared to approximately $0.1 million for the prior fourth fiscal quarter. Revenues for the full fiscal year ended October 31, 2022 were approximately $12.8 million, compared to approximately $58.8 million for fiscal year 2021. Revenues decreased in fiscal year 2022, primarily in the first two fiscal quarters, due to Bidi Vapor’s receipt of the MDO, our resulting inability to sell our products and also generally due to increased competition, which we believe was the result of the lack of enforcement by federal and state authorities against sub-par and low-priced vaping products, including illegal synthetic nicotine disposable ENDS, that continued to enter the market illegally without FDA authorization.

Following the 11th Circuit Court decision vacating the FDA’s MDO in August, we began to aggressively reignite sales efforts and expect an upturn in sales of all BIDI® Sticks, anticipated to begin to show results in the second quarter of fiscal year 2023 (which sales remain subject to FDA’s enforcement discretion). We also anticipate that if the FDA begins enforcement against illegally marketed or synthetic-nicotine vaping products, there may be an increased demand for compliant and legal vaping products, such as the BIDI® Stick.

Cost of Revenue, Net, and Gross Profit (Loss): Gross profit for the fourth fiscal quarter ended October 31, 2022 was approximately $1.1 million, compared to approximately $(1.0) million gross loss for the prior fourth fiscal quarter. Gross profit for the full fiscal year ended October 31, 2022 was approximately $1.2 million, compared to approximately $11.9 million for fiscal year 2021. Total cost of revenue for the fourth fiscal quarter ended October 31, 2022 was approximately $1.9 million, compared to approximately $0.9 million for the prior fourth fiscal quarter, and approximately $11.5 million for fiscal year 2022, compared to approximately $46.8 million for fiscal year 2021. The decrease in gross profit volume is primarily driven by the downturn in sales of our products, beginning in the third quarter and continuing through the end of fiscal year 2022, which was primarily the result of the negative impact the MDO and the overall impact the regulatory landscape had on our business. Additionally, the cost of the discounts, coupons and promotions programs, that we implemented in the third quarter of fiscal year 2021 to assist in growing and retaining the customer base and store shelf space, contributed a lower gross profit margin per unit of products sales for that period of time, as these discounts, coupons and promotions decreased our revenues.

Operating Expenses: Total operating expenses for the fourth fiscal quarter ended October 31, 2022 were approximately $3.8 million, compared to approximately $4.3 million for the prior fourth fiscal quarter, and were approximately $15.6 million for fiscal year 2022, compared to approximately $22.4 million for fiscal year 2021. For the fiscal year 2022, operating expenses consisted primarily of advertising and promotion fees of approximately $2.7 million, stock option compensation expense of approximately $6.0 million, professional fees of approximately $3.2 million, salaries and wages of $1.7 million, and all other general and administrative expenses of approximately $2.0 million. In fiscal year 2021, operating expenses consisted of advertising and promotional expenses of approximately $3.2 million, which included commissions paid to our third-party marketing consultant QuikfillRx, and general and administrative expenses of approximately $10.2 million. We expect future operating expenses to increase while we generate increased sales growth and invest in our infrastructure to support the planned revenue and business growth.

Net Loss: Net loss for the fourth fiscal quarter ended October 31, 2022 was approximately $(2.7) million, compared to approximately $(1.6) million for the prior fourth fiscal quarter, and approximately $(14.4) million for the full fiscal year 2022, or $(0.36) basic and diluted net loss per share, compared to a net loss of approximately $(9.0) million, or $(0.38) basic and diluted net loss per share, for fiscal year 2021. The increase in net loss for the fiscal year 2022, as compared to net loss in fiscal year 2021, is attributable to the revenue and expense factors noted above.

Cash Position: 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 on October 31, 2022, or October 31, 2021. Cash and restricted cash on October 31, 2022, and October 31, 2021, were $3.7 million and $7.8 million, respectively.

Restricted cash consists of cash held short-term in escrow as required. As of October 31, 2022, and October 31, 2021, we had $0 and $65,007 in restricted cash, respectively, for amounts held in escrow.

Additional information regarding the Company’s results of operations for the fiscal year ended October 31, 2022 will be available in the Company’s Annual Report on Form 10-K for such reporting period, which report will be filed with the Securities and Exchange Commission. Readers are encouraged to review such Annual Report in its entirety, including the risk factors related to the Company’s business described therein.

ABOUT BIDI VAPOR

Based in Melbourne, Florida, Bidi Vapor maintains a commitment to responsible, adult-focused marketing, supporting age-verification standards and sustainability through its BIDI® Cares recycling program. Bidi Vapor's premier device, the BIDI® Stick, is a premium product made with high-quality components, a UL-certified battery and technology designed to deliver a consistent vaping experience for adult smokers 21 and over. Bidi Vapor is also adamant about strict compliance with all federal, state and local guidelines and regulations. At Bidi Vapor, innovation is key to its mission, with the BIDI® Stick promoting environmental sustainability, while providing a unique vaping experience to adult smokers.

Nirajkumar Patel, the Company’s Chief Science and Regulatory Officer and director, owns and controls Bidi Vapor. As a result, Bidi Vapor is considered a related party of the Company.

For more information, visit www.bidivapor.com.

ABOUT KAIVAL BRANDS

Based in Grant, Florida, Kaival Brands is a company focused on incubating innovative and profitable products into mature and dominant brands, with a current focus on the distribution of electronic nicotine delivery systems (ENDS) also known as “e-cigarettes”. Our business plan is to seek to diversify into distributing other nicotine and non-nicotine delivery system products (including those related to hemp-derived cannabidiol (known as CBD) products. Kaival Brands and Philip Morris Products S.A. (via sublicense from Kaival Brands) are the exclusive global distributors of all products manufactured by Bidi Vapor.

Learn more about Kaival Brands at https://ir.kaivalbrands.com/overview/default.aspx.

Cautionary Note Regarding Forward-Looking Statements

This press release and the statements of the Company’s management and partners included herein and related to the subject matter herein includes statements that constitute “forward-looking statements” (as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended), which are statements other than historical facts. You can identify forward-looking statements by words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “position,” “should,” “strategy,” “target,” “will,” and similar words. All forward-looking statements speak only as of the date of this press release. Although we believe that the plans, intentions, and expectations reflected in or suggested by the forward-looking statements are reasonable, there is no assurance that these plans, intentions, or expectations will be achieved. Therefore, actual outcomes and results (including, without limitation, the results of the Company sales and marketing efforts and the impact of the August 2022 11th Circuit Court of Appeals decision as described herein) could materially and adversely differ from what is expressed, implied, or forecasted in such statements. Our business may be influenced by many factors that are difficult to predict, involve uncertainties that may materially affect results, and are often beyond our control. Factors that could cause or contribute to such differences include, but are not limited to: (i) future actions by the FDA in response to the 11th Circuit Court’s decision that could impact our business and prospects, (ii) the outcome of FDA’s scientific review of Bidi Vapor’s pending PMTAs, (iii) the success of our agreement with Philip Morris International, (iv) how quickly domestic and international markets adopt our products, (v) the scope of future FDA enforcement of regulations in the ENDS industry, (vi) the FDA’s approach to the regulation of synthetic nicotine and its impact on our business, (vii) potential federal and state flavor bans and other restrictions on ENDS products, (viii) the duration and scope of the COVID-19 pandemic and impact on the demand for the products we distribute, (ix) general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth, (x) the effects of steps that we could take to reduce operating costs, (xi) our inability to generate and sustain profitable sales growth, including sales growth in the international markets, (xii) circumstances or developments that may make us unable to implement or realize anticipated benefits, or that may increase the costs, of our current and planned business initiatives, (xiii) significant changes in our relationships with our distributors or sub-distributors and (xiv) other factors detailed by us in our public filings with the Securities and Exchange Commission, including the disclosures under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 31, 2022, filed with the Securities and Exchange Commission on January 27, 2023 and accessible at www.sec.gov. All forward-looking statements included in this press release are expressly qualified in their entirety by such cautionary statements. Except as required under the federal securities laws and the Securities and Exchange Commission’s rules and regulations, we do not have any intention or obligation to update any forward-looking statements publicly, whether as a result of new information, future events, or otherwise.

Investor Relations:Stephen Sheriff, Director of Communications and AdministrationIr.kaivalbrands.cominvestors@kaivalbrands.com

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Kaival Brands Innovations Group, Inc.Consolidated Balance Sheets  

	October 31,2022				October 31,2021
ASSETS
CURRENT ASSETS:
Cash	$	3,685,893			$	7,760,228
Restricted cash		—				65,007
Accounts receivable		574,606				1,985,186
Other receivable – related parties – short term		1,539,486				—
Inventory deposit – related party		—				2,925,000
Inventories		1,239,725				15,326,370
Prepaid expenses		426,407				319,531
Income tax receivable		1,607,302				1,753,594
Total current assets		9,073,419				30,134,916
Other receivable – related party – net of current portion		2,164,646				—
Right of use asset- operating lease		1,198,969				55,604
TOTAL ASSETS	$	12,437,034			$	30,190,520
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	40,023			$	242,829
Accounts payable- related party		—				12,667,769
Accrued expenses		1,099,157				579,604
Customer deposits		44,973				—
Deferred revenue		235,274				—
Operating lease obligation, short term		166,051				13,020
Customer refund due		—				316,800
Total current liabilities		1,585,478				13,820,022
LONG TERM LIABILITIES
Operating lease obligation, net of current portion		1,050,776				46,185
TOTAL LIABILITIES	$	2,636,254			$	13,866,207
STOCKHOLDERS’ EQUITY:
Preferred stock 5,000,000 shares authorized; Series A Convertible Preferred stock ($0.001 par value, 3,000,000 shares authorized, 0 and 3,000,000 shares issued and outstanding as of October 31, 2022, and October 31, 2021, respectively)		—				3,000
Common stock ($0.001 par value, 1,000,000,000 shares authorized, 56,169,090 and 30,195,312 issued and outstanding as of October 31, 2022, and October 31, 2021, respectively)		56,169				30,195
Additional paid-in capital		29,375,787				21,551,959
Accumulated deficit		(19,631,176	)			(5,260,841	)
Total Stockholders’ Equity		9,800,780				16,324,313
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY	$	12,437,034			$	30,190,520

 The accompanying notes are an integral part of these consolidated financial statements.

Kaival Brands Innovations Group, Inc.Consolidated Statements of Operations  

	For the YearsEnded October 31,
	2022				2021
Revenues
Revenues, net	$	12,701,539			$	59,378,208
Revenues – related parties		68,139				154,560
Royalty revenue		117,292				—
Excise tax on products		(125,513	)			(756,338	)
Total revenues, net		12,761,457				58,776,430
Cost of revenue
Cost of revenue – related party		11,345,912				46,528,501
Cost of revenue – other		174,520				314,049
Total cost of revenue		11,520,432				46,842,550
Gross profit		1,241,025				11,933,880
Operating expenses
Advertising and promotions		2,679,308				3,195,883
General and administrative expenses		12,950,373				19,207,028
Total operating expenses		15,629,681				22,402,911
Other income
Interest income		4				395
Total other income		4				395
Loss before income taxes		(14,388,652	)			(10,468,636	)
Provision (benefit) for income taxes		(18,317	)			(1,435,198	)
Net loss	$	(14,370,335	)		$	(9,033,438	)
Net loss per common share – basic and diluted	$	(0.36	)		$	(0.38	)
Weighted average number of common shares outstanding – basic and diluted		39,710,389				24,000,246

The accompanying notes are an integral part of these consolidated financial statements.

Kaival Brands Innovations Group, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

For the years ended October 31, 2022 and 2021

	Convertible Preferred Shares			Par Value Convertible Preferred Shares				Common Shares			Par Value Common Shares				Additional Paid-in Capital				Accumulated Deficit				Total
	(Series A)			(Series A)
Balances, October 31, 2020	3,000,000			$	3,000			23,106,886			$	23,107			$	618,904			$	3,772,597			$	4,417,608
Stock issued for services – RSUs	—				—			221,666				221				505,100				—				505,321
Common stock settled and canceled	—				—			(92,871	)			(93	)			(254,017	)			—				(254,110	)
Common stock issued for compensation	—				—			674,803				675				8,943,425				—				8,944,100
Stock option expense	—				—			—				—				1,773,947				—				1,773,947
Common stock issued for cash, net of financing cost	—				—			5,405,000				5,405				8,300,367				—				8,305,772
Common stock issued for warrant exercise	—				—			879,828				880				1,664,233				—				1,665,113
Net loss	—				—			—				—				—				(9,033,438	)			(9,033,438	)
Balances, October 31, 2021	3,000,000			$	3,000			30,195,312			$	30,195			$	21,551,959			$	(5,260,841	)		$	16,324,313
Stock issued for services – RSUs	—				—			123,256				123				172,256				—				172,379
Common shares settled and cancelled	—				—			(44,720	)			(45	)			(59,817	)			—				(59,862	)
Common stock issued for compensation	—				—			39,637				40				65,283				—				65,323
Exercise of common stock warrants	—				—			855,605				856				1,624,794				—				1,625,650
Converted Series A Convertible Preferred Stock	(3,000,000	)			(3,000	)		25,000,000				25,000				(22,000	)			—				—
Stock option expense	—				—			—				—				6,043,312				—				6,043,312
Net loss	—				—			—				—				—				(14,370,335	)			(14,370,335	)
Balances, October 31, 2022	—			$	—			56,169,090			$	56,169			$	29,375,787			$	(19,631,176	)		$	9,800,780

The accompanying notes are an integral part of these consolidated financial statements.

Kaival Brands Innovations Group, Inc.Consolidated Statements of Cash Flows  

	For the Year Ended				For the Year Ended
	October 31, 2022				October 31, 2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(14,370,335	)		$	(9,033,438	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Stock based compensation		237,702				9,449,421
Stock options expense		6,043,312				1,773,947
ROU operating lease expense		132,890				14,529
Write off of inventory		259,563				—
Changes in current assets and liabilities:
Accounts receivable		1,410,580				(583,624	)
Other receivable – related party		(3,704,132	)			15,360
Prepaid expenses		(106,876	)			(319,531	)
Inventory		13,827,082				(15,319,987	)
Inventory deposit – related party		2,925,000				(2,925,000	)
Income tax receivable		146,292				(1,753,594	)
Accounts payable		(202,806	)			242,829
Accounts payable – related party		(12,667,769	)			11,258,208
Accrued expenses		519,553				(482,501	)
Deferred revenue		235,274				(623,096	)
Income tax accrual		—				(1,331,856	)
Customer deposits		44,973				—
Customer refund due		(316,800	)			316,800
Payments on operating lease liability		(118,633	)			(11,708	)
Net cash used in operating activities		(5,705,130	)			(9,313,241	)
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock issued for cash, net of financing cost		—				8,305,772
Proceeds from the exercise of warrants		1,625,650				1,665,113
Settled RSU shares with cash		(59,862	)			(254,110	)
Net cash provided by financing activities		1,565,788				9,716,775
Net change in cash and restricted cash	$	(4,139,342	)		$	403,534
Beginning cash and restricted cash balance		7,825,235				7,421,701
Ending cash and restricted cash balance	$	3,685,893			$	7,825,235
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	—			$	—
Income taxes paid	$	—			$	1,637,102
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of Series A Preferred Stock Shares to Common Stock Shares	$	25,000			$	—
ROU asset and operating lease obligation recognized under Topic 842	$	1,276,255			$	—

  The accompanying notes are an integral part of these consolidated financial statements.