Kaival Brands Innovations Group, Inc. Annual Report - A Pivotal Year of Transition (Fiscal Year Ended October 31, 2025)

Kaival Brands Innovations Group (KAVL) navigated a year of profound transformation during its fiscal year ended October 31, 2025. Once primarily a distributor of electronic nicotine delivery systems (ENDS), the company underwent a complete overhaul of its business model, driven by significant regulatory and legal pressures.

Business Overview

Kaival Brands Innovations Group, Inc. distributes and licenses electronic nicotine delivery systems (ENDS) and related intellectual property. Historically, the company's core business focused on the exclusive U.S. distribution of Bidi Stick e-cigarettes. However, significant regulatory and legal challenges led Kaival to entirely discontinue this business segment. The company has since pivoted its strategy to focus on two main areas:

• An international licensing agreement for its technology and intellectual property with Philip Morris Products S.A. (PMPSA), a subsidiary of Philip Morris International (PMI).
• The development and commercialization of new vaporization and inhalation technologies through its Kaival Labs initiatives, which followed the acquisition of assets from GoFire, Inc.

Financial Performance

Fiscal Year 2025 saw a significant financial downturn for Kaival, primarily as its core business ceased operations.

• Revenue Plummet: Total revenue for Fiscal Year 2025 plummeted to $5 million from $50 million in Fiscal Year 2024. This massive drop is directly due to the loss of Bidi Stick sales.
• Significant Net Loss: The company incurred a substantial net loss of $25 million for FY2025, up from a net loss of $10 million in the prior year. This reflects the loss of high-margin Bidi Stick sales and continued operational costs.
• Operating Cash Flow: Kaival continued to burn cash, reporting negative operating cash flow of -$15 million for the year. This highlights the urgent need for external funding or a rapid increase in new revenue streams.

Management Discussion and Analysis (MD&A) Highlights

Management emphasized the profound impact of regulatory and legal actions on Kaival's operations and financial results. The complete discontinuation of Bidi Stick sales primarily drove the severe revenue decline and increased net loss. This resulted directly from a patent infringement lawsuit and, more critically, the Marketing Denial Orders (MDOs) the FDA issued for the Classic BIDI® Stick and non-tobacco flavored BIDI® Sticks in January 2024 and November 2025, respectively.

These MDOs effectively banned the legal marketing and sale of Bidi Sticks in the U.S. As a result, Kaival ceased imports in June 2024, eliminating all revenue from this segment, which previously generated over 95% of total revenue.

In response to this existential threat, Kaival strategically pivoted, making the company's revenue almost entirely dependent on royalty payments from an international licensing agreement with PMPSA. This agreement grants PMPSA exclusive international rights to Kaival's disposable nicotine e-cigarette technology. It generated $4.5 million in royalty revenue in FY2025. Management highlighted upfront guaranteed minimum royalty payments received in prior periods as a critical bridge during this transition.

Kaival also began diversification efforts through Kaival Labs, building on the May 2023 acquisition of GoFire, Inc.'s vaporization technology. While the company invested an estimated $2 million in research and development (R&D) for these initiatives in FY2025, they have not yet generated any revenue. Management sees this as a long-term growth opportunity but recognizes the significant investment and time needed for commercialization.

Corporate actions during the year included mutually terminating a merger agreement with Delta Corp Holdings Limited in September 2025, originally signed in September 2024. Both parties dropped related claims. Additionally, Kaival executed a 1-for-21 reverse stock split in January 2024 to maintain stock exchange listing compliance. These actions reflect management's efforts to navigate a challenging financial and market environment.

Financial Health

Kaival's financial health shows limited liquidity and significant cash burn.

• Cash Position: As of October 31, 2025, Kaival reported $3 million in cash and cash equivalents.
• Debt: As of October 31, 2025, the company had $0.5 million in long-term debt and $1.2 million in current liabilities (excluding operating payables). Its debt-to-equity ratio remains a concern due to an accumulated deficit.
• Liquidity and Going Concern: Given its significant net loss and negative operating cash flow, Kaival's ability to continue operating (its "going concern" status) depends heavily on generating new revenue, controlling expenses, or raising additional capital. Current cash reserves cannot fund operations for the next 12 months without further action.

Future Outlook

The road ahead for Kaival Brands Innovations Group involves a high-stakes transition and considerable uncertainty. The complete loss of its primary revenue stream from Bidi Stick sales forced a radical pivot towards international licensing royalties from Philip Morris International. While this offers a lifeline, it also creates significant dependence on a single partner.

• Strategy: Kaival's primary strategic focus remains on maximizing royalty revenues from the PMPSA agreement and advancing Kaival Labs initiatives towards commercialization. The company plans to leverage its intellectual property through licensing and potentially direct product launches in new vaporization markets.
• Guidance: Management has not provided specific financial guidance for Fiscal Year 2026. They cite the business's highly transitional nature and uncertainties surrounding the new revenue model and diversification efforts. The success of unproven diversification efforts through Kaival Labs, combined with the company's precarious financial position and ongoing regulatory risks, makes Kaival's future highly uncertain and speculative.

Competitive Position

Kaival Brands' competitive position evolved significantly. With the cessation of Bidi Stick sales, the company no longer directly competes as a distributor in the U.S. electronic nicotine delivery systems (ENDS) market. Its competitive landscape now involves two distinct areas:

• Licensing Model: The success of Kaival's royalty agreement with PMPSA is indirectly tied to PMPSA's competitive performance in international ENDS markets. PMPSA faces intense competition from established global tobacco companies, local players, and evolving regulatory hurdles in various jurisdictions. Kaival's licensed intellectual property must remain competitive and relevant to ensure PMPSA's continued success and, consequently, Kaival's royalty stream.
• Kaival Labs Initiatives: For its future Kaival Labs products, the company expects to enter highly competitive markets, such as cannabis, hemp/CBD, nicotine, and health supplements. These markets feature numerous established players, rapid technological innovation, and evolving regulatory landscapes. Kaival's ability to differentiate its technology and products, secure intellectual property protection, and establish distribution channels will be crucial for competitive success in these new ventures.

Critical Risks for Investors

Investing in Kaival Brands involves substantial risks, especially given its current financial state and operational shifts:

• Liquidity and Going Concern: Given its significant net loss and negative operating cash flow, Kaival's ability to continue operating (its "going concern" status) depends heavily on generating new revenue, controlling expenses, or raising additional capital. Current cash reserves cannot fund operations for the next 12 months without further action.
• Heavy Reliance on PMI: Kaival's financial survival now hinges almost entirely on the success and continuation of its licensing agreement with PMPSA. Any failure by PMPSA to meet performance targets, or a decision by PMI to terminate or not renew the agreement, would devastate Kaival's revenue.
• Regulatory Environment: The electronic nicotine delivery systems (ENDS) industry remains under intense scrutiny from the FDA and international regulatory bodies. Future regulatory actions, even those not directly targeting Kaival's licensed products, could negatively impact the broader market and PMPSA's ability to generate sales.
• Uncertainty of Diversification: The GoFire acquisition and Kaival Labs initiatives are speculative. There is no guarantee they will successfully develop marketable products, secure licensing deals, or generate meaningful revenue to offset the loss of Bidi Stick sales.
• Competition: The electronic cigarette and vaporization markets are highly competitive, with established players and new entrants constantly vying for market share. Kaival's future success depends on its ability to compete effectively in these dynamic environments, both through its licensing partner and its own new product ventures.

Corporate Actions & Market Context

• Merger Terminated: Kaival mutually terminated a previously announced merger agreement with Delta Corp Holdings Limited in September 2025, originally signed in September 2024. Both parties dropped related claims.
• Reverse Stock Split: To address its low stock price and maintain market viability, Kaival executed a 1-for-21 reverse stock split in January 2024. While this theoretically increased the per-share price, it did not fundamentally alter the company's overall market capitalization or financial health.
• Market Value & Trading: As of April 30, 2025, Kaival's public float (shares available for public trading) had a market value of approximately $5.54 million, with shares trading around $0.48. With approximately 13.5 million shares outstanding as of January 28, 2026, the company remains relatively small. KAVL stock trades on the OTC Pink Limited Market, an over-the-counter market with less stringent reporting requirements compared to major exchanges, which typically means lower liquidity and higher investment risk.

Investors should carefully consider these factors and the company's limited financial resources before making any investment decisions.