Kaival Brands Innovations Group Inc

Results of Operations

Three months ended April 30, 2024, compared to three months ended April 30, 2023

Revenues*:*

Revenues for the three months ended April 30, 2024, were approximately $2.2 million, compared to approximately $3.0 million for the three months ended April 30, 2023. Revenues decreased during the three months ended April 30, 2024, primarily due to a decrease in the number of sticks sold to customers.

Cost of Revenue, Net and Gross Profit (Loss):

Gross profit for the three months ended April 30, 2024 was approximately $0.5 million, or approximately 22.4% of revenues, net, compared to approximately $(0.1) million gross loss or approximately (4.2%) of revenues, net, for the three months ended April 30, 2023. Total cost of revenue, net was approximately $1.7 million, or approximately 77.6% of revenue, net for the three months ended April 30, 2024, compared to approximately $3.1 million, or approximately 104.2% of revenue, net for the three months ended April 30, 2023. The increase in gross profit is due to fewer credits issued to customers and a decreased in cost of revenue during the three months ended April 30, 2024.

Operating Expenses:

Total operating expenses were approximately $1.8 million for the three months ended April 30, 2024, compared to approximately $3.8 million for the three months ended April 30, 2023. For the three months ended April 30, 2024, operating expenses consisted primarily of advertising and promotion fees of approximately $0.3 million, stock option expense of approximately ($0.3) million, professional fees of approximately $0.5 million, and all other general and administrative expenses of approximately $1.3 million. General and administrative expenses for the three months ended April 30, 2024 consisted primarily of salaries and wages, insurance, lease expense, project expenses, banking fees, business fees and state and franchise taxes.

For the three months ended April 30, 2023, operating expenses consisted primarily of advertising and promotion fees of approximately $0.7 million, stock option expense of approximately $1.4 million, professional fees of approximately $0.8 million, and all other general and administrative expenses of approximately $1.0 million. General and administrative expenses for the three months ended April 30, 2023, consisted primarily of salaries and wages, insurance, lease expense, project expenses, banking fees, business fees and state and franchise taxes. We expect future operating expenses to increase while we increase the footprint of our business and generate increased sales growth.

Income Taxes:

During the three months ended April 30, 2024, we did not accrue a tax provision for income taxes, due to the pre-tax loss of approximately $1.5 million for the three months ended April 30, 2024. Similarly, we did not accrue a tax provision for income taxes during the three months ended April 30, 2023, due to the pre-tax loss of approximately $4.0 million for the three months ended April 30, 2023.

Net Loss:

As a result of the items noted above, the net loss for the three months ended April 30, 2024 was approximately $1.5 million, compared to a net loss of approximately $4.0 million, for the three months ended April 30, 2023. The decrease in the net loss for the three months ended April 30, 2024, as compared to the three months ended April 30, 2023, is primarily attributable to the increase in gross profit and decrease in operating expenses as noted above.

Six months ended April 30, 2024, compared to six months ended April 30, 2023

Revenues:

Revenues for the six months ended April 30, 2024, were approximately $5.4 million, compared to $5.5 million for the six months ended April 30, 2023. Revenues increased during the six months ended April 30, 2024, compared to the six months ended April 30, 2023, generally due to an increase in royalty revenues offset by a decrease in the number of sticks sold to customers

Cost of Revenue and Gross Profit:

Gross profit for the six months ended April 30, 2024, was approximately $1.7 million, compared to gross profit of approximately $0.4 million for the six months ended April 30, 2023. Total cost of revenue was approximately $3.7 million for the six months ended April 30, 2024, compared to $5.1 million for the six months ended April 30, 2023. Therefore, the increase in gross profit of approximately $1.3 million for the six months ended April 30, 2024 compared to the six months ended April 30, 2023 is primarily driven by the decrease in the cost of revenue, totaling approximately $1.4 million, partially offset by a decrease in overall sales of approximately $0.1 million.

Operating Expenses:

Total operating expenses were approximately $4.7 million for the six months ended April 30, 2024, compared to approximately $7.4 million for the six months ended April 30, 2023. For the six months ended April 30, 2024, operating expenses consisted of advertising and promotion fees of approximately $0.7 million, stock option expense of approximately $21 thousand, professional fees of approximately $1.3 million, and all other general and administrative expenses of approximately $2.7 million. General and administrative expenses during the six months ended April 30, 2024, consisted primarily of salaries and wages, insurance, lease expense, project expenses, banking fees, business fees and state and franchise taxes.

For the six months ended April 30, 2023, operating expenses were approximately $7.4 million, consisting primarily of advertising and promotion fees of approximately $1.2 million, stock option expense of $2.8 million, professional fees totaling approximately $1.4 million, and all other general and administrative expenses of approximately $2.0 million. General and administrative expenses during the six months ended April 30, 2023, consisted primarily of salaries and wages, insurance, banking fees, business fees, and other service fees. We expect future operating expenses to increase while we increase the footprint of our business and generate increased sales growth.

Income Taxes:

During the six months ended April 30, 2024, we did not accrue a tax provision for income taxes, due to the pre-tax loss of approximately $3.6 million for the three months ended April 30, 2024. Similarly, we did not accrue a tax provision for income taxes during the six months ended April 30, 2023, due to the pre-tax loss of approximately $7.0 million for the six months ended April 30, 2023.

Net Loss:

The net loss for the first six months ended April 30, 2024, was approximately $3.6 million, compared to net loss for the six months ended April 30, 2023, which was approximately $7.0 million. The decrease in the net loss for the six months ended April 30, 2024, as compared to the six months ended April 30, 2023, is primarily attributable to the increase in gross profit and decrease in operating expenses as noted above.

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. Other than the policy changes disclosed in Note 2,*Basis of Presentation and Significant Accounting Policies,*to the unaudited interim consolidated financial statements in Item 1 of Part I of this Quarterly Report, there have been no material changes to our critical accounting policies and estimates during the six months ended April 30, 2024 from those disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our 2023 Annual Report for the year ended October 31, 2023.

Recent Accounting Pronouncements

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