What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2023-04-17 compared with 2022-04-12 · 218 added, 212 removed, 140 unchanged (75% of the section changed)

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Prior to August 3, 2021, our common stock was traded on the OTC Pink Marketplace under the symbol "CHUC", and prior to July 3, 2019, our common stock was traded on the OTC Pink Marketplace under the symbol “TRUU”.

The following table sets forth high and low sales prices for our common stock for the calendar quarters indicated as reported by the OTCQB Venture Marketplace.

These prices represent quotations between dealers without adjustment for retail markup, markdown, or commission and may not represent actual transactions.

First Quarter ended March 31, 2021

Second Quarter ended June 30, 2021

Third Quarter ended September 30, 2021

Fourth Quarter ended December 31, 2021

First Quarter ended March 31, 2020

Second Quarter ended June 30, 2020

Third Quarter ended September 30, 2020

Fourth Quarter ended December 31, 2020

First Quarter ended March 31, 2019

Second Quarter ended June 30, 2019

Third Quarter ended September 30, 2019

Fourth Quarter ended December 31, 2019

As of April 12, 2022, there were 216,840,987 shares of our common stock outstanding, and approximately 4,200 stockholders of record.

The prices of our common stock on the OTCQB Venture Marketplace represent quotations between dealers without adjustment for retail markup, markdown, or commission and may not represent actual transactions.

As of April 17, 2023, there were 224,112,168 shares of our common stock outstanding, and 199 stockholders of record.

As of April 17, 2023, there were 130,106 shares of our Series A Preferred outstanding held by 94 stockholders of record.

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Our Transfer Agent and Registrar for our common stock is Continental Stock Transfer and Trust located in New York, New York.

Dividend Policy

We have not previously and do not plan to declare or pay any dividends on our common stock.

Our current policy is to retain all funds and any earnings for use in the operation and expansion of our business.

Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including current financial condition, operating results and current and anticipated cash needs.

Recent Sales of Unregistered Securities

Issuer Purchases of Equity Securities

Shares authorized for issuance under equity compensation plans

The stockholders previously approved the Charlie’s Holdings Inc.

2019 Omnibus Incentive Plan, as amended (the “Plan”).

The Plan allows for the granting of equity awards to eligible individuals over the life of the Plan, including the issuance of up to 26,072,542 shares of the Company’s common stock.

As of December 31, 2022, we had available 11,953,605 shares remaining for future awards under the Plan.

The following table summarizes the number of shares of common stock to be issued upon exercise of outstanding options and vesting of restricted stock units under the Plan, the weighted-average exercise price of such stock options, and the number of securities available to be issued under the Plan as of December 31, 2022:

Number of securities

Number of securities to

remaining available for

be issued upon exercise

issuance under equity

of outstanding options,

Weighted average

compensation plans

and restricted stock

exercise price of

(excluding securities

outstanding options

reflected in column (a))

Equity compensation plans approved by security holders

Equity compensation plans not approved by security holders

The number of outstanding options is 6,002,937 and the number of outstanding restricted stock units is 8,116,000.

Consists of shares available for award under the Plan.

SELECTED FINANCIAL DATA

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and elsewhere in this Annual Report.

Our objective is to become a significant leader in the rapidly growing, global e-cigarette and e-liquid segments of the broader nicotine related products industry.

Through Charlie’s, we formulate, market and distribute premium, nicotine-based vapor products.

Charlie’s products are produced through contract manufacturers for sale through select distributors, specialty retailers and third-party online resellers throughout the United States, and in more than 80 countries worldwide.

The Company’s objective is to become a leader in three broad product categories:

(i) non-combustible nicotine-related products, (ii) alternative alkaloid vapor products, and (iii) hemp-derived vapor and edible products.

Through our Charlie’s subsidiary, we formulate, market, and distribute premium, nicotine-based and alternative alkaloid vapor products.

Charlie’s products are produced through contract manufacturers for sale through select distributors, specialty retailers, and third-party online resellers throughout the United States, as well as in more than 80 countries worldwide.

Charlie’s primary international markets include the United Kingdom, Italy, Spain, New Zealand, Australia, and Canada.

In June 2019, we launched distribution, through Don Polly, of certain premium vapor, tincture and topical wellness products containing hemp-derived cannabidiol (“

CBD ”) and we currently intend to develop and launch additional products containing other compounds derived from hemp in the future.

Through Don Polly, we develop, market and distribute products containing compounds derived from hemp.

Operational Plan

Considering industry-specific hurdles, as well as the potential for future regulatory changes, management has targeted opportunities for growth and has adopted the following operational plan.

First, we plan to increase the sales of our hemp-derived products, including topicals, ingestibles and disposable vapor devices.

We feel there is a significant upside in the hemp-derived products space, and we have begun to shift our focus in this business to the burgeoning market for products containing compounds synthetically derived from hemp, including Delta-8-Tetrahydrocannabinol ( "Delta-8-THC" ) and other synthetic tetrahydrocannabinol ( "Synthetic THC" ) compounds.

In 2022, we initiated a plan and began to invest substantial time and resources to develop various proprietary products and new technologies in order to achieve competitive advantages in the vapor and alternative products marketplace.

In conjunction with internal and external research and development resources, we have endeavored to identify a nicotine substitute (“

Metatine ™”) to be used in lieu of tobacco-based and synthetically derived nicotine.

We believe adult consumers will enjoy Metatine vapor products in much the same way that they enjoy traditional vapor products.

However, because Metatine is not made or derived from tobacco, and because Metatine does not consist of or contain nicotine from any source, the FDA's Center for Tobacco Products does not have jurisdiction to regulate Metatine.

Accordingly, if the Company is successful utilizing Metatine in the development of a viable commercial product, such a product would allow us additional flexibility in offering both flavored and non-flavored vapor products to adult consumers looking to transition away from traditional combustible and smokeless tobacco products.

The Company has also begun to develop intellectual property around technologies designed to prevent youth access to nicotine vapor products.

Edward Carmines, Ph.D., a member of Charlie’s Board of Directors and an accomplished scientist and regulatory affairs expert, is spearheading Charlie's development of patented "age-gating technology" for both Charlie's and potential licensees of the Company.

Currently, there is a need for age-gated product technologies that can satisfy or accommodate concerns the FDA has related to under-age youth access in the ENDS market.

If our age-gated e-cigarettes-in-development are recognized as "products of merit" by the FDA, Charlie's e-cigarettes could emerge among the select minority of flavored nicotine disposables able to be sold legally in the $7 billion U.S.

vapor products market.

Rounding out the Company’s research and development initiatives are Charlie’s efforts to expand and enhance the PINWEEL product line.

PINWEEL is Charlie’s alternative cannabis brand that contains only cannabinoids derived from the hemp plant.

Since our PINWEEL product line contains only cannabinoids made from 100% hemp extract, we are able to legally manufacture, distribute and sell to consumers in the United States.

As a result of the Agriculture Improvement Act (the “

Farm Bill ”), ratified and signed into law in December 2018, cannabis containing less than 0.3% Delta 9-THC is legally classified as hemp and is thus legal under federal law.

Accordingly, with the objective of developing an array of new purpose-driven alternative cannabis products that offer adult consumers an enjoyable alternative to alcohol and traditional cannabis products, the Company continues to develop new PINWEEL vapor products, edibles, and other novel products.

In November 2022, we successfully launched our PINWEEL brand of alternative cannabis products.

In 2023, we plan to increase sales and marketing efforts of our PINWEEL product line, including ingestibles and disposable vapor devices.

We feel there is a significant upside in the hemp-derived products space, and we have begun to shift our focus in this business to the burgeoning “alternative cannabis”

market for products containing live resin blends of hemp-derived cannabinoids.

These product categories have grown rapidly, as they offer consumers a range of benefits across varying potencies and product formats.

We have also recently allocated additional financial resources to increase e-commerce sales of certain of our hemp-derived products.

Secondly, we continue to see a significant opportunity for sales growth in international markets for our e-liquid and other vapor products.

Alternative cannabis products contain only cannabinoids that are derived from the hemp plant, are not subject to the Controlled Substances Act and are legal throughout most of the United States.

Further, alternative cannabis products are not currently subject to FDA review.

We will expand and refocus our sales team.

Currently, we are increasing the number of independent contractor account executives, as well as refining the skill set of our existing sales team.

An expanded sales team will more effectively manage key customer relationships across a larger number of reps, mitigating concentration risks and assuring adequate coverage.

The sales team is organized into two groups, each with a specific mandate for targeting customers.

One group will focus on direct-to-retail (smoke shops, chain stores, adult beverage/liquor stores, gas stations, and grocery stores) with the goal of acquiring 1,000 new customer accounts in 2023.

The second group will focus on satisfying the requirements of mega-distributors (McLane, Coremark, HT Hackney, Eby-Brown) in order to sell into the nation’s largest chain store accounts.

Additionally, to broaden our footprint with customers and to minimize order size variability, sales reps will rebalance their product sales mix, placing enhanced focus on alternative cannabis and legacy e-liquid products.

In order to mitigate FDA regulatory risk in the domestic market and to capture what management believes is a significant commercial opportunity, we have dedicated additional resources to efforts focused on growing our market share internationally.

Presently, approximately 17% of our vapor product sales come from the international market and we are well positioned to increase sales in countries where we already have presence and, in additional overseas markets, as we have already built an international distribution platform.

We have recently hired an Account Executive who will be dedicated to driving our efforts in international expansion.

More specifically, the Company intends to launch proprietary new disposables, containing synthetically derived nicotine, that have been specially formulated for the European and Middle East markets.

In partnership with our international distributors, Charlie’s will sell award winning products in markets where more than 20% of the population currently consumes nicotine in some format.

Most importantly, we feel that tobacco and synthetically derived nicotine vapor products will continue to provide a significant growth opportunity domestically.

During the quarter ended March 31, 2021, we launched our synthetic nicotine (not derived from tobacco) Pacha Syn (formerly Pachamama Disposable) product line, which will provide access to additional sales channels and broaden our customer base.

These innovative product formats currently represent Charlie’s most important, fastest-growing product category.

We are continuing with our plan to obtain marketing authorization for certain of our nicotine vapor products through the completion of a Premarket Tobacco Application (“

PMTA ”), which we submitted in September 2020.

Obtaining a marketing order from the FDA would, we believe, help to remediate perceived health issues related to vaping, and further position the Company as a trusted, industry leader.

We feel that a significant number of our competitors will not have the necessary resources and/or expertise to complete the extensive and costly PMTA process and that, once authorized by the FDA, we will benefit significantly by emerging as one of a select group of companies able to continue operating in the flavored vapor products space.

To facilitate this plan, we recently hired an Account Executive who will be dedicated to driving our efforts in international expansion.

More specifically, we plan to build-out a dedicated international team, including country managers and marketing coordinators, to market and sell a suite of custom-made products to new and existing international customers.

Impact of COVID-19

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COVID-19 ”, or, “

Coronavirus ”) has had, and continues to have, a negative impact on the global economy and the markets in which we operate.

Beginning in March 2020, the Company transitioned nearly all employees to a remote working environment for their safety and to protect the integrity of Company operations.

We have updated certain sales, accounting and administrative processes, and corresponding information technology platforms, in an effort to help facilitate the virtual work environment which still persists for some employees.

During the year ended December 31, 2021, we engaged in periodic, informal testing of our business operations, and we do not believe that our financial position, work efficiency and overall operational integrity have been materially affected.

However, we recognize that a certain degree of employee enthusiasm, teamwork, creativity, and support is normally generated by being present at a physical location, and we believe that prolonged remote working may have a negative impact over time on our business, and on employee productivity.

Our Denver, CO office and Huntington Beach, CA warehouse locations have returned fully to on “premise status”, while our corporate headquarters in Costa Mesa, CA remains remote for some employees.

Coronavirus ”) has had a negative impact on the global economy and the markets in which we operate.

Beginning in March 2020, the Company transitioned nearly all employees to a remote working environment for their safety and to protect the integrity of Company operations, which have largely returned to the office.

We will continue to monitor the COVID-19 situation in all regions in which we operate and will maintain strict adherence to local health guidelines and mandates.

We may need to take further actions that we determine are in the best interests of our employees or are required by federal, state, or local authorities.

Our ability to manufacture products is dependent on the availability of certain raw materials and components that our contract manufacturers purchase from Europe and China.

In February 2020, we started to experience disruptions across several key areas of our global supply chain.

Our domestic and international contract manufacturers source many of our high-quality flavorings from suppliers located in Italy, a region that was severely affected by COVID-19-related restrictions throughout most of 2020.

Mandated stay-at-home orders in this region ultimately caused increased manufacturing lead times and delayed customer order deliveries for certain of our products, resulting in revenue declines.

We have been successful in mitigating some of the supply chain risks through bulk purchases of certain flavorings and components and adjusting the production allocation amongst our contract manufacturers.

Shifting production to contract manufacturers in regions with fewer restrictions and/or an enhanced ability to procure larger supplies of raw materials has helped alleviate disruptions in our supply chain.

Certain of our products are sourced from China and require delivery to our warehouse locations in the United States prior to shipment to customers.

Although we currently use air freight for Chinese shipments, ongoing disruptions in the global supply chain could continue to affect the costs associated with such shipments and could put additional pressure on our sales and margins.

If a resurgence of COVID-19 and associated shutdowns were to occur in Europe or China, this would likely have an adverse effect on our ability to manufacture and sell our products due to related shortages of materials and components.

Depending on the severity of any such future shutdowns, we could experience a materially diminished ability to produce products and be exposed to significantly longer lead times.

This would result in delayed or reduced revenue from the affected products in production and potentially higher operating costs.

Sales and Marketing

Our sales and marketing efforts have also been directly and indirectly affected by COVID-19.

Most of our sales through Charlie’s and Don Polly are to resellers of our products, typically distributors or brick and mortar retail locations.

Stay-at-home mandates across the U.S.

and internationally created a challenge for these customers to maintain continuity in their businesses, and therefore we experienced lower sales volumes in some regions.

Periodic labor shortages, indirectly related to COVID-19, have also influenced our customers’

ability to operate their businesses effectively.

We’ve since seen activity approach pre-pandemic levels, however a resurgence of COVID-19, causing subsequent shutdowns and labor shortages, could have a significant effect on our business.

Historically, most of our business-to-business sales and marketing efforts have been generated through industry events in both the vapor products and hemp-derived products spaces.

During 2019, we also initiated a program of in-store marketing events to help facilitate relationship building and sell-through for our retail partners.

Beginning in 2020, the suspension of certain trade shows and disruption of business travel weakened our new customer pipeline, which negatively affected our sales during the years ended December 31, 2021 and 2020.

Though trade show activity has since rebounded, it remains uncertain how the effects of COVID-19 will persist and what effect they will have on our sales and marketing efforts.

In response, we have shifted some of our focus to digital marketing campaigns aimed at customer engagement and education.

We also continue to allocate additional resources towards certain key distributors and retail partners that are better positioned to interact directly with our consumers and to continue growing our brands.

Risks and Uncertainties

Risks and Uncertainties and Ability to Continue as a Going Concern

The Company operates in an environment that is subject to rapid changes and developments in laws and regulations that could have a significant impact on the Company’s ability to sell its products.

Federal, state, and local governmental bodies across the United States have indicated that flavored e-cigarette liquid, vaporization products and certain other consumption accessories may become subject to new laws and regulations at the federal, state and local levels.

Beginning in September 2019, certain states temporarily banned the sale of flavored e-cigarettes, and on January 2, 2020, the FDA issued an enforcement policy effectively banning the sale of flavored cartridge-based e-cigarettes marketed primarily by large manufacturers without prior authorization from the FDA.

The application of any new laws or regulations that may be adopted in the future, at a federal, state, or local level, directly or indirectly implicating flavored e-cigarette liquid and products used for the vaporization of nicotine could significantly limit the Company’s ability to sell such products, result in additional compliance expenses, and/or require the Company to change its labeling and/or methods of distribution.

Any ban of the sale of flavored e-cigarettes directly limits the markets in which the Company may sell its products.

Beginning in 

September 2019,  certain states temporarily banned the sale of flavored e-cigarettes, and several states and municipalities are considering implementing similar restrictions.

Federal, state, and local governmental bodies across the United States have indicated that flavored e-cigarette liquid, vaporization products and certain other consumption accessories 

may  become subject to new laws and regulations at the federal, state, and local levels.

In addition, in 

June 2022,  the FDA announced a plan to reduce nicotine levels in cigarettes to minimally or non-addictive levels.

The application of any new laws or regulations that 

may  be adopted in the future, at a federal, state, or local level, directly or indirectly implicating nicotine, flavored e-cigarette liquid, and other electronic nicotine delivery system (“

ENDS ”) products, could significantly limit the Company’s ability to sell such products, result in additional compliance expenses, and/or require the Company to change its labeling and/or methods of distribution.

Any ban of the sale of flavored e-cigarettes directly limits the markets in which the Company 

may  sell its products.

In the event the prevalence of such bans and/or changes in laws and regulations increase across the United States, or internationally, the Company’s business, results of operations, and financial condition could be adversely impacted.

In addition, the Company is presently seeking to obtain marketing authorization for certain of its nicotine based vapor products.

Our PMTA applications were submitted in September 2020 on a timely basis, which if approved, will allow the Company to continue to sell certain of its products in the United States.

At this date, Charlie’s PMTA remains among the select minority of applications submitted to the FDA that has not received an MDO or Refuse-to-File designation.

However, it is possible that the FDA will request additional information or that the Company will need to amend its PMTA at some point in the future.

The Company may also require additional financing in the future to support potential PMTA related expenses and general working capital.

There is no assurance that regulatory approval to sell our products will be granted or that we can raise the additional financing required, and if not, this could have a significant impact on our sales.

On March 11, 2020, the World Health Organization designated the ongoing and evolving COVID-19 outbreak as a pandemic.

The outbreak has caused substantial disruption in international and U.S.

economies and markets as it continues to evolve.

The outbreak is having a temporary adverse impact on our industry as well as our business, with regards to certain supply chain disruptions and sales volume.

While the disruption from COVID-19 is currently expected to be temporary, there is uncertainty around the duration.

In addition, the Company is presently seeking to obtain marketing authorization for certain of its tobacco-derived nicotine e-liquid products.

The Company’s applications were submitted in 

September 2020  on a timely basis, which if approved, will allow the Company to continue to sell its approved products in the United States.

Beginning in 

August 2021,  the FDA began issuing Marketing Denial Orders (“

MDO ”) for ENDS products that lack evidence to demonstrate that permitting the marketing of such products would be appropriate for the protection of the public health.

The Company has 

not  received an MDO for any of its submissions;

however, there is 

no  assurance that regulatory approval to sell our products will be granted or that we would be able to raise additional financing if required, which could have a significant impact on our sales.

March 15, 2022,  a new rider to the Federal Food, Drug and Cosmetic Act was passed granting the FDA authority over synthetic nicotine. 

These regulations make the Company’s synthetic nicotine products subject to the same FDA rules as tobacco-derived nicotine products. 

As such, the Company was required to file a PMTA for its existing synthetic nicotine products marketed under the Pacha brands by 

May 14, 2022  or be subject to FDA enforcement. 

The Company filed new PMTAs, for its synthetic Pacha products on 

May 13, 2022,  prior to the 

May 14, 2022  deadline.

November 3, 2022,  FDA accepted for scientific review certain of our PMTAs for synthetic nicotine products and, on 

November 4, 2022,  FDA refused to accept certain other PMTAs for these products, rendering the latter products subject to FDA enforcement.

The Company submitted an administrative appeal with FDA regarding its refusal to accept certain of the PMTAs, and has resubmitted PMTAs for, and continues to sell, the affected synthetic nicotine products while the administrative appeal process is pending. There can be 

no  guarantee that FDA will grant our administrative appeal, and the FDA 

may  bring an enforcement action against our synthetic nicotine products for lack of premarket authorization and/or issue an MDO to our pending applications at any time. 

More generally, FDA’s regulatory initiatives and enforcement priorities regarding ENDS products are unpredictable and continue to evolve, and we cannot predict whether FDA’s priorities and review of our premarket submissions will impact our products to a greater degree than our competitors in the industry.

In the event the FDA denies our PMTAs, we would be required to remove products and cease selling them.

As discussed below, our financial statements and working capital raise substantial doubt about the Company’s ability to continue as a going concern.

Our financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

See Liquidity and Capital Resources below for additional information.

Recent Developments

Resignation of Brandon Stump

On October 29, 2021, Brandon Stump resigned from his position as:

(i) Chief Executive Officer and Chairman of the Board of Directors;

and (ii) all positions held for each direct and indirect subsidiary of the Company (each, a " Subsidiary "), including as a member of the Board of Directors of the Company and each Subsidiary.

In connection with Mr.

Stump's resignation, the Company and Mr.

Stump entered into an agreement regarding Mr.

Stump's resignation (the " Termination Agreement "), which Termination Agreement is dated October 29, 2021.

Pursuant to the Termination Agreement, in consideration for Mr.

Stump agreeing to terminate his employment agreement with the Company, as amended and restated on February 12, 2020 (the " Employment Agreement "), and agreeing to certain restrictions and covenants, the Company will:

(i) continue to pay Mr.

Stump his base salary (as defined in the Employment Agreement), through April 22, 2022;

Stump certain bonus compensation owed to Mr.

Stump in an amount equal to $300,000, payable in installments of $75,000 on each of November 1, 2021, December 1, 2021, January 1, 2022, and February 1, 2022;

and (iii) continue to make available to Mr.

Stump certain employee benefits offered by the Company until April 22, 2022.

Reverse Stock Split

Our Board of Directors approved a reverse stock split of our authorized, issued, and outstanding shares of common stock, par value $0.001 per share (the “

Common Stock ”), at a ratio of 1-for-100 (the “

Reverse Split ”).

The Reverse Split was effective as of June 16, 2021 (the “

Effective Date ”).

All share and per share amounts in this Report have been retroactively adjusted to account for the reverse stock split.

March 2021 Private Placement

On March 19, 2021, the Company entered into Securities Purchase Agreements by and between the Company and certain family trusts in which Mr.

Brandon Stump, the Company's former Chief Executive Officer and significant shareholder of the Company, and Mr.

Ryan Stump, the Company's Chief Operating Officer, are trustees and beneficiaries (the " Purchase Agreements "), for the private placement of an aggregate of 3,517,000 shares of its Common Stock, at a purchase price per share of $0.853 (the " Private Placement "), which Private Placement was consummated on March 22, 2021.

The Private Placement resulted in gross proceeds to the Company of approximately $3.0 million.

The Private Placement was undertaken pursuant to Rule 506 promulgated under the Securities Act of 1933, as amended, and was consummated in a transaction approved by the Company's independent directors in accordance with Rule 16b-3(d)(1) of the Securities Exchange Act of 1934, as amended.

Red Beard Holdings, LLC Note Payable

On April 1, 2020, the Company, Charlie's and its VIE, Don Polly, issued a secured promissory note (the "Red Beard Note" ) to one of the Company's largest stockholders, Red Beard Holdings, LLC ( "Red Beard" ) in the principal amount of $750,000 (the "Principal Amount" ), requiring a guaranteed minimum interest amount of $75,000 (“

Minimum Interest ”).

The Red Beard Note is secured by all assets of the Company pursuant to the terms of a Security Agreement entered into by and between the Company and Red Beard (the "Red Beard Note Financing" ).

The Red Beard Note was subsequently amended on August 27, 2020, September 30, 2020, October 29, 2020, December 1, 2020, and January 19, 2021, ultimately increasing Principal Amount to $1.4 million and Minimum Interest to $150,000.

On March 24, 2021, the Company and Red Beard entered into a Satisfaction and Release (the " Red Beard Release "), pursuant to which the Company made a payment to Red Beard in the amount of $1.55 million in exchange for an acknowledgment of satisfaction and full release of the Company by Red Beard from liability and obligations arising under the Red Beard Note.

Small Business Administration Loan Programs

On April 30, 2020, Charlie's, a wholly owned subsidiary of the Company, received approval to enter into a U.S.

Small Business Administration (" SBA ") Promissory Note (the " Charlie's PPP Loan ") with TBK Bank, SSB (the " SBA Lender "), pursuant to the Paycheck Protection Program (" PPP ") of the Coronavirus Aid, Relief, and Economic Security Act (the " CARES Act ") as administered by the SBA (the " PPP Loan Agreement ").

The Charlie's PPP Loan provided for working capital to CCD in the amount of $650,761.

The Charlie's PPP Loan was set to mature on April 30, 2022 and accrued interest at a rate of 1.00% per annum.

Payments of principal and interest were deferred for six months from the date of the Charlie's PPP Loan, or until November 30, 2020.

Interest, however, continued to accrue during that time.

On April 14, 2020, Don Polly also obtained a loan pursuant to the PPP enacted under the CARES Act (the " Polly PPP Loan " and together with the Charlie's PPP Loan, the " PPP Loans ") from Community Banks of Colorado, a division of NBH Bank (the " Polly Lender ").

The Polly PPP Loan obtained by Don Polly provided for working capital to Don Polly in the amount of $215,600.

The Polly PPP Loan was set to mature on April 14, 2022 and accrued interest at a rate of 1.00% per annum.

Payments of principal and interest were deferred for six months from the date of the Polly PPP Loan, or until November 14, 2020.

Interest continued to accrue during that time.

The aforementioned PPP Loans were made under the PPP enacted by Congress under the CARES Act.

The CARES Act (including the guidance issued by SBA and U.S.

Department of the Treasury) provides that all or a portion of the PPP Loans may be forgiven upon request from the respective borrower to the SBA Lender or the Polly Lender, as the case may be, subject to requirements in the PPP Loans and under the CARES Act.

On February 19, 2021, Don Polly received notice from the Polly Lender, that the Polly PPP Loan was fully repaid, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the U.S.

Small Business Administration.

There is no further action required on the part of Don Polly to satisfy this liability.

On March 17, 2021, Don Polly obtained a second draw PPP loan (“

Polly PPP Loan 2 ”) under the CARES Act from Polly Lender.

The Polly PPP Loan 2 obtained by Don Polly provided general working capital in the amount of $184,200.

The Polly PPP Loan 2 was set to mature on March 17, 2026 and accrued interest at a rate of 1.00% per annum.

Payments of principal and interest were deferred, however interest continued to accrue during that time.

On April 28, 2021, Charlie’s received notice from SBA Lender that the Charlie’s PPP Loan was fully repaid, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the U.S.

Small Business Administration.

There is no further action required on the part of Charlie’s to satisfy this liability.

On November 9, 2021, Don Polly received notice from the Polly Lender, that the Polly PPP Loan 2 was fully repaid, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the U.S.

Small Business Administration.

There is no further action required on the part of Don Polly to satisfy this liability.

On June 24, 2020, SBA authorized (under Section 7(b) of the Small Business Act, as amended) an Economic Injury Disaster Loan (“

EID Loan ”) to Don Polly in the amount of $150,000.

Installment payments, including principal and interest of $731 monthly will begin twelve months from date of the EID Loan.

The balance of principal and interest will be payable thirty years from the date of the EID Loan and interest will accrue at the rate of 3.75% per annum.

During the quarter ended September 30, 2020, the FDA's Center for Tobacco Products informed us that our PMTA has received a valid submission tracking number, passed the FDA’s filing review phase, and recently entered the substantive review phase.

To date, Charlie’s has invested over $4.4 million for our initial PMTA submission.

April 2022 Note Financing

On April 6, 2022, the Company issued a secured promissory note (the “

Note ”) to one of its large individual stockholders, Michael King (the “

Lender "), in the principal amount of $1,000,000, which Note is secured by accounts receivable of the Company pursuant to the terms of a Security Agreement entered into by and between the Company and the Lender (the " Note Financing ").

On September 28, 2022, the Company and the Lender entered into a modification to the Note to extend the maturity date to March 28, 2023 and the Company paid all accrued interest under the Note through such date.

On March 28, 2023, the Company entered into a second modification to the Note to extend the maturity date to April 28, 2024, contingent upon the payment of all interest accrued under the Note through March 28, 2023 and certain other modifications to the Note.

Principal shall be payable on the 28th day of each month in installments of $25,000, commencing April 28, 2023, continuing up to and including April 28, 2024 whereby a balloon payment for the remaining principal balance will be paid.

Interest shall accrue on the aggregate outstanding principal amount at a rate equal to 20% simple interest per annum and shall be payable on the same day as installments of principal are payable.

The Company may prepay all or any portion of the principal amount, together with all accrued but unpaid interest thereon, at any time without premium or penalty.

All outstanding principal and interest are due earlier of April 28, 2024, or a liquidity event.

August 2022 Note Financing  

Related Party

On August 17, 2022, the Company and its Chief Operating Officer and Director, Ryan Stump (the " Stump  

Lender ") entered into a loan agreement (the “

Loan ”) in the principal amount of $300,000.

The Loan will be due in full in 120 days or sooner if, before the end of term, the Company secures (i) new debt financing or (ii) sufficient PMTA strategic partnership funds.

The Loan bears an annual interest rate of 10%.

The Company also incurred additional $3,000 issuance cost resulting from the payment of the Stump Lender’s legal fees.

On December 17, 2022, the Company and Stump Lender entered into a modification to the Loan to extend the maturity date to April 16, 2023 and the Company has paid all accrued interest under the Loan through such date.

On April 13, 2023, the Company and Stump Lender entered into a second modification to the Loan to extend the maturity date to August 14, 2023.

During the quarter ended September 30, 2020, the FDA's Center for Tobacco Products informed us that our PMTA received a valid submission tracking number, passed the FDA’s filing review phase, and entered the substantive review phase.

To date, the Company has invested more than $5.1 million for our PMTA submissions.

We engaged a team of more than 200 professionals, including doctors, scientists, biostatisticians, data analysts, and numerous contract research organizations to create our comprehensive PMTA submission.

During the quarter ended September 30, 2021, the FDA began issuing Marketing Denial Orders (“

MDO ”) for electronic nicotine delivery system (“

MDOs ”) for electronic nicotine delivery system (“

ENDS ”) products that lack evidence to demonstrate that permitting the marketing of such products would be appropriate for the protection of the public health.

As of December 31, 2021, the Company had not received an MDO for any of its submissions.

This news highlights our progress toward achieving full regulatory compliance and our objective of providing customers with a trusted product portfolio.

On March 15, 2022, a new rider to the Federal Food, Drug and Cosmetic Act was passed granting the FDA authority over synthetic nicotine. 

These regulations make synthetic nicotine products subject to the same FDA rules as tobacco-derived nicotine products. 

As such, the Company was required to file a PMTA for its existing synthetic nicotine products marketed under the Pacha brands by May 14, 2022 or be subject to FDA enforcement. 

The Company filed new PMTAs for its synthetic Pacha products, on May 13, 2022, prior to the May 14, 2022, deadline. On November 3, 2022, FDA accepted for scientific review certain of our PMTAs for synthetic nicotine products and, on November 4, 2022, FDA refused to accept certain other PMTAs for these products, rendering the latter products subject to FDA enforcement. 

As of December 31, 2022, Charlie’s 2020 PMTA remains among the select minority of applications submitted to the FDA for a tobacco-derived nicotine ENDS product that has not received an MDO or Refuse-to-File designation.

This fact highlights our progress toward achieving full regulatory compliance and demonstrates the emphasis our Company places on providing customers with a trusted product portfolio.

Impact of COVID-19

The outbreak of a novel strain of coronavirus (“

COVID-19 ”, or, “

Coronavirus ”) has had, and continues to have, a negative impact on the global economy and the markets in which we operate.

Beginning in March 2020, the Company transitioned nearly all employees to a remote working environment for their safety and to protect the integrity of Company operations.

We have updated certain sales, accounting, and administrative processes, and corresponding information technology platforms, in an effort to help facilitate the virtual work environment which still persists for some employees.

During the year ended December 31, 2022, we engaged in periodic, informal testing of our business operations, and we do not believe that our financial position, work efficiency, and overall operational integrity have been materially affected.

Our Huntington Beach, CA warehouse location has returned fully to “on premise”

status, while our corporate headquarters in Costa Mesa, CA remains remote for some employees.

We will continue to monitor the COVID-19 situation in all regions in which we operate and will maintain strict adherence to local health guidelines and mandates.

We may need to take further actions that we determine are in the best interests of our employees or are required by federal, state, or local authorities.

Basis of Presentation

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Total operating costs and expenses

Income (loss) from operations

(Loss) income from operations

Other income (expense):

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Gain on debt extinguishment

Total other income (loss)

Income (loss) before income taxes

Income tax expense

Net income (loss)

Total other income

(Loss) income before income taxes

Income taxes (benefit) provision

Net (loss) income

Revenue for the year ended December 31, 2022, increased approximately $4,928,000 , or 22.9%, to approximately $26,424,000, as compared to approximately $21,496,000 for the year ended December 31, 2021, due to a $4,030,000 increase in our nicotine-based product sales, and a $898,000 increase in sales of our hemp-derived products.

The increase in our nicotine-based vapor product sales is directly related to the launch of our Pacha Syn (formerly Pachamama Disposable) product line, which currently represents Charlie’s most important, fastest-growing product category.

Pacha Syn Disposables became Charlie’s first-ever entrant into the rapidly expanding, disposable e-cigarette market and offer users a variety of premium flavors containing synthetic nicotine (not derived from tobacco) in a compact, discrete format.

Uncertainty surrounding the FDA’s application review timeline, following the PMTA submission deadline, affected buying patterns of tobacco-derived nicotine products in the domestic vape market as customers reduced inventories of non-PMTA submitted products.

In December 2020, the Prevent All Cigarette Tracking Act (“

PACT Act ”) was signed into law which requires that the United States Postal Service (" USPS ") promulgate regulations clarifying the applicability of the prohibition on delivery sales of cigarettes to ENDS products.

The resulting shipping and logistical challenges that ensued, affected industry-wide sales to consumers and smaller, single-location resellers.

During the quarter ended March 31, 2021, we began to streamline our existing hemp-derived wellness product offering and pursue the developing market for products containing synthetically-derived cannabinoids, including Delta-8-THC and other Synthetic THC compounds.

The addition of these new product categories, coupled with a narrowed focus in our existing portfolio, resulted in higher sales velocity and overall growth compared to the year ended December 31, 2020.

The increase in our nicotine-based vapor product sales is directly related to the launch of our Pacha (formerly Pachamama Disposable) product line which grew significantly during the first half of 2022 with the launch of additional size and flavor offerings.

Pacha Disposables became Charlie’s first-ever entrant into the rapidly expanding, disposable e-cigarette market and offer users a variety of premium flavors containing synthetic nicotine (not derived from tobacco) in a compact, discrete format.

Ongoing uncertainty surrounding the FDA’s application review timeline, following the May 13, 2022 PMTA submission deadline, as well as the entrant of lower-priced competitors selling direct from China affected buying patterns of disposable nicotine products in domestic vape market during the second half of 2022.

Sales growth slowed during the quarter ended December 31, 2022 as customers reduced emphasis on offering a wide product variety and focused on low-cost, high-sales velocity offerings.

During the quarter ended March 31, 2021, we began to streamline our existing hemp-derived wellness product offering and to pursue the developing market for products containing hemp-derived cannabinoids.

We view this market segment as having higher growth potential and better alignment with our existing sales channels, and therefore, we will continue to develop and launch additional products in this category.

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Cost of revenue, which consists of direct costs of materials, direct labor, third party subcontractor services, and other overhead costs increased approximately $6,016,000 or 57.7%, to approximately $16,439,000, or 62.2% of revenue, for the year ended December 31, 2022, as compared to approximately $10,423,000, or 48.5% of revenue, for the year ended December 31, 2021.

This cost, as a percent of revenue, increased due to a higher sales mix consisting of our Pacha Syn Disposable product line, which carries a lower margin per unit relative to our other vapor products.

Cost of revenue was also negatively affected by a larger than normal provision for inventory obsolescence during the period related to certain of our hemp-derived wellness products, as well as higher per unit shipping costs due to implications of the Pact Act.

This cost, as a percent of revenue, increased due to a higher sales mix consisting of our Pacha Disposable product line, which carries a lower margin per unit relative to our other vapor products.

Cost of revenue was also significantly affected by a large provision for inventory obsolescence related to certain of our nicotine and alternative cannabis disposable products.

The increased provision for inventory obsolescence was mostly the result of compressed product lifecycles in both the nicotine disposable and alternative cannabis product categories.

General and Administrative Expense

For the year ended December 31, 2022, total general and administrative expense decreased approximately $369,000 to approximately $8,381,000, or 31.7% of revenue, as compared to approximately $8,750,000, or 40.7% of revenue, for the year ended December 31, 2021.

This decrease is primarily comprised of reductions of approximately $2,519,000 of non-cash stock-based compensation as well as $418,000 of salary and benefits expenses.

The reduction in non-cash stock-based compensation is primarily due to the forfeiture of stock awards by Brandon Stump and Ryan Stump pursuant to the adoption of the Amended Employment Agreements entered February 12, 2020, as well as the conclusion of the vesting period for shares of Common Stock awarded to several employees in conjunction with the Share Exchange in April 2019.

The decrease in salary and benefits costs is the result of lower overall salary expenses, Paid-Time-Off benefits and employee bonuses.

This overall decrease in total general and administrative expense was offset by increases of $442,000 in professional fees as well as $372,000 of other general administrative expenses.

The increase in professional fees was largely the result of several internal projects largely focused on the creation of a solution “network”

necessary to effectively meet the requirements of both the Consolidated Appropriations Act of 2021 and the PACT Act as well as costs associated with certain corporate actions including our Reverse Split, completed June 16, 2021, and the private sale of 3,517,000 shares of our common stock to the Company’s founders Brandon Stump and Ryan Stump, completed March 23, 2021.

Other general administrative expenses including, merchant account fees and bad debt provision, increased due to an increase in sales activity during the period.

This decrease is primarily comprised of reductions of approximately $509,000 of wages and benefits and $391,000 of non-cash stock-based compensation.

The decrease in payroll and benefits expense during the year ended December 31, 2022, was primarily due to strategic headcount reduction, salary reductions and cancelled bonuses for Company officers and senior managers, as well as Employee Retention Credits received in conjunction with the Infrastructure Investment and Jobs Act which was enacted in November 2021.

The reduction in non-cash stock-based compensation is primarily related to the conclusion of the vesting period for shares of Common Stock awarded to several employees in conjunction with the Share Exchange completed in April 2019 (See Note 3).

The decreases were primarily offset by increases of $161,000 in provision for bad debt, $91,000 of merchant processing and bank fees as well as $279,000 in other general and administrative expenses.

The increases in provision for bad debt and merchant processing fees were primarily related to higher sales achieved during the year ended December 31, 2022.

The increase in other general and administrative costs was primarily related to additional infrastructure and information technology system upgrades as well as higher audit fees and costs related to the calculation of our 2021 income taxes.

Sales and Marketing Expense

For the year ended December 31, 2021, total sales and marketing expense increased to approximately $1,734,000 as compared to approximately $1,733,000 for the year ended December 31, 2020, which was primarily due to a shift in spending on product sales support materials and other marketing activities in favor of increased trade show attendance, as activity returned to pre-pandemic levels.

For the year ended December 31, 2022, total sales and marketing expense increased to approximately $2,605,000 as compared to approximately $1,734,000 for the year ended December 31, 2021, which was primarily due to a shift in spending on product sales support materials and digital marketing campaigns related to the launch of our new alternative cannabis product lines.

Our participation in tradeshows increased substantially during the year as we continue to believe it is the best method for directly reaching consumers and distributors of our products.

Research and Development Expense

For the year ended December 31, 2021, total research and development expense decreased approximately $3,354,000, or 99.3%, to approximately $24,000 as compared to approximately $3,378,000 for the year ended December 31, 2020.

During the year ended December 31, 2021, we incurred significantly less expense related to our PMTA submission, which resulted in lower overall research and development costs.

For the year ended December 31, 2022, total research and development expense increased approximately $780,000, to $804,000 as compared to approximately $24,000 for the year ended December 31, 2021.

During the year ended December 31, 2022, we (i) filed new PMTAs for our synthetic nicotine Pacha products, (ii) invested in “age-gating technology”

research and development, and (iii) invested in the development of new novel products which resulted in higher research and development expenses relative to the year ended December 31, 2021.

Income (Loss) from Operations

We generated income from operations of approximately $565,000 for the year ended December 31, 2021, as compared to loss from operations of approximately $6,770,000 for the year ended December 31, 2020.

We generated loss from operations of approximately $1,805,000 for the year ended December 31, 2022, as compared to income from operations of approximately $565,000 for the year ended December 31, 2021.

Net income (loss) is determined by adjusting income (loss) from operations by the following items:

Change in fair value of derivative liabilities.

For the years ended December 31, 2021 and 2020, the gain (loss) in fair value of derivative liabilities was approximately $3,545,000 and ($300,000), respectively.

For the years ended December 31, 2022 and 2021, the gain in fair value of derivative liabilities was approximately $270,000 and $3,545,000, respectively.

The derivative liability is associated with the issuance of the Investor Warrants and the Placement Agent Warrants (see Note 3) in connection with the Share Exchange.

The gain for the year ended December 31, 2022, reflects the effect of the decrease in stock price as of December 31, 2022 compared to December 31, 2021.

During the year ended December 31, 2021, we experienced a substantial variation in trading volume for our stock, which may persist in the future.

Due to the limited supply of shares currently freely trading, our stock price may experience volatility and therefore, considerable fluctuations in the value of our warrant derivative liability may occur in the future.

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For the years ended December 31, 2022 and 2021, we recorded other income related to interest and sublease income of $6,000 and $14,000, respectively.

Income Tax Expense

The Company’s income tax expense was $342,000, or 6.6% of income before income taxes, for the year ended December 31, 2021.

Income Taxes (Benefit) Provision

The Company’s income tax benefit was $92,000, or 5.5% of income before income taxes, for the year ended December 31, 2022.

The Company’s income tax expense was $342,000 for the year ended December 31, 2021.

Net Income (Loss)

For the years ended December 31, 2021, and 2020, we had a net income of $4,808,000 and net loss of $7,187,000, respectively.

For the years ended December 31, 2022, and 2021, we had a net loss of $1,592,000 and net income of $4,808,000, respectively.

Effects of Inflation

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Liquidity and Capital Resources

As of December 31, 2021, we had working capital of approximately $2,460,000, which consisted of current assets of approximately $7,994,000 and current liabilities of approximately $5,534,000.

This compares to negative working capital of approximately $6,020,000 at December 31, 2020.

The current liabilities, as presented in the consolidated balance sheet at December 31, 2021 included elsewhere in this Report, primarily include approximately $4,068,000 of accounts payable and accrued expenses, approximately $238,000 of deferred revenue associated with product shipped but not yet received by customers, approximately $329,000 of lease liabilities, and $899,000 of derivative liability associated with the Investor and Placement Agent Warrants (the derivative liability of $899,000 is included in determining the working capital of $2,460,000 but is not expected to use any cash to ultimately satisfy the liability).

As of December 31, 2022, we had working capital of approximately $1,067,000, which consisted of current assets of approximately $5,850,000 and current liabilities of approximately $4,783,000, as compared to working capital of approximately $2,460,000 at December 31, 2021.

The current liabilities include approximately $2,333,000 of accounts payable and accrued expenses, notes payable of $1,000,000, note payable from a related party of $300,000, approximately $148,000 of deferred revenue associated with product shipped but not yet received by customers, approximately $373,000 of lease liabilities, and $629,000 of derivative liability associated with the Investor Warrants and Placement Agent Warrants (the derivative liability of $629,000 is included in determining the working capital of $1,067,000 but is not expected to use any cash to ultimately satisfy the liability).

On April 6, 2022, the Company issued a secured promissory note (the “

Note ”) to one of its large individual stockholders, Michael King (the “

The Company used the proceeds from the Note for general corporate purposes, and its working capital requirements, pending the availability of alternative debt financing.

On August 17, 2022, the Company and its Chief Operating Officer and Director, Ryan Stump (the " Stump Lender ") entered into a loan agreement (the “

Loan ”) in the principal amount of $300,000.

The Loan will be due in full in 120 days or sooner if, before the end of term, the Company secures (i) new debt financing or (ii) sufficient PMTA strategic partnership funds.

The Loan bears an annual interest rate of 10%.

The Company also incurred additional $3,000 issuance cost resulting from the payment of the Stump Lender’s legal fees.

On April 13, 2023, the Company and Stump Lender entered into a second modification to the Loan to extend the maturity date to August 14, 2023.

Our cash and cash equivalents balance at December 31, 2022 was approximately $257,000.

For the year ended December 31, 2021, we used cash from operations of $1,347,000, as compared to $3,273,000 for the year ended December 31, 2020.

This decrease in the cash used by operations is due primarily to increased net income and accounts payables, but was offset by an increase in inventory.

For the year ended December 31, 2021, we used cash for investment activities of $110,000 as compared to $169,000 for the year ended December 31, 2020.

For the year ended December 31, 2021, the cash used for investment activities was primarily for the ongoing development and configuration of enterprise resource planning software.

For the year ended December 31, 2020, the cash used for investment activities was primarily for the ongoing development and configuration of enterprise resource planning software.

For the year ended December 31, 2021, we generated cash from financing activities of $901,000 as compared to generated cash from financing activities of $2,416,000 for the year ended December 31, 2020.

In the 2021 period, we generated cash from financing activities from the Polly PPP Loan 2 and the Private Placement.

We paid cash dividends of $883,000 and notes payable of $1,400,000 during the year ended December 31, 2021.

In the 2020 period, we generated cash from financing activities from the Red Beard Note, PPP Loans and EID Loan (as defined in Note 8 of Item 1, Part 1 of this Report).

For the year ended December 31, 2022, net cash used in operating activities was approximately $1,720,000, resulting from a net loss of $1,592,000 and a change in operating assets and liabilities of $996,000, offset by net non-cash activity of $868,000.

For the year ended December 31, 2021, net cash used in operating activities was approximately $1,347,000, resulting from a net income of $4,808,000, offset by a $3,545,000 of change in fair value of derivative liabilities, $1,060,000 from debt extinguishment, and $2,866,000 changes in our operating assets and liabilities.

For the year ended December 31, 2022, we used cash for investment activities of approximately $189,000 as compared to $110,000 for the same period in 2021.

The cash used for investment activities is primarily for the on-going development and configuration of enterprise resource planning software as well as the disposal of fixed assets related to the permanent closure of our Denver, Colorado location.

For the year ended December 31, 2022, we generated approximately $1,300,000 cash from financing activities related to the issuance of a promissory note to a large shareholder and a short-term loan from our chief operating officer and director, Ryan Stump, each as discussed above.

For the year ended December 31, 2021 we generated approximately $3,184,000 cash from financing activities from the Private Placement (as defined in Note 10 of Item 1, Part 1 of this Report) offset by the repayment of the Red Beard Note (as defined in Note 8 of Item 1, Part 1 of this Report).

We also paid cash dividends of $883,000 during the nine months ended September 30, 2021 to our preferred stockholders. 

Going Concern Uncertainty Regarding the Legal and Regulatory Environment, Liquidity and Management ’

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There was significant cost associated with the application process and there can be no assurance the FDA will approve previous and/or future application.

In addition, the recent outbreak of Coronavirus in March 2020 has had a negative impact on the global economy and markets which could impact the Company’s supply chain and/or sales.

For the year ended December 31, 2021, the Company generated income from operations of $565,000 and a consolidated net income of approximately $4,808,000 and the Company has stockholders’

equity of $3,131,000.

During the year ended December 31, 2021, the Company’s working capital requirements changed significantly as inventory increased to $5.0 million, from $1.6 million as of December 31, 2020, and cash on hand decreased to approximately $0.9 million, from $1.4 million as of December 31, 2020.

Though the Company’s balance sheet and overall performance generally improved during 2021, the issuance of one or several Marketing Denial Orders (“

MDO ”) from the FDA would increase the potential for inventory obsolescence and uncollectable accounts receivables.

These regulatory risks, as well as other industry-specific challenges remain factors that raise substantial doubt about the Company’s ability to continue as a going concern.

For the year ended December 31, 2022, the Company generated a loss from operations of approximately $1,805,000, and a consolidated net loss of approximately $1,592,000 and used cash in operations of approximately $1,720,000.

The Company had stockholders’

equity of $1,700,000 at December 31, 2022.

During the year ended December 31, 2022, the Company’s working capital requirements continued to evolve as current assets decreased to $5,850,000 from $7,994,000 as of December 31, 2021 and currently liabilities decreased to $4,783,000 from $5,534,000 as of December 31, 2021.

Considering these facts, the issuance of one or several MDOs from the FDA would increase the potential for inventory obsolescence and uncollectable accounts receivables and the removal of certain products for sale.

These regulatory risks, as well as other industry-specific challenges and our low working capital and cash position, remain factors that raise substantial doubt about the Company’s ability to continue as a going concern.

Our plans and growth depend on our ability to increase revenues, procure cost-effective financing, and continue our business development efforts, including the expenditure of approximately $5,100,000 to date, to support our PMTA process for the Company’s submissions to the FDA.

The Company has undergone cost-cutting measures including salary reductions of up to 25% for officers and certain managers and a reduction in headcount for certain departments.

During 2023, we also plan to launch additional products that are not subject to FDA review or covered under the Agriculture Improvement Act (the “

Farm Bill ”).

During 2023, the Company intends to allocate further resources and new personnel to support research and development initiatives in order to support existing, or subsequent PMTAs.

The Company may require additional financing in the future to support subsequent PMTA filings, and/or in the event the FDA requests additional testing for one, or several, of the Company’s prior PMTA submissions.

There can be no assurance that additional financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and, in the Company’s best interests.

The financial statements do not include any adjustments to the carrying amount and classification of recorded assets and liabilities should the Company be unable to continue operations.

Management's plans depend on its ability to increase revenues and continue its business development efforts, including the expenditure of approximately $4,400,000 to date, to complete the PMTA registration process.

On March 23, 2021, The Company closed a $3,000,000 capital raise through the private sale of 3,517,000 shares of its common stock to the Company’s founders Brandon Stump and Ryan Stump.

The Company used the proceeds to fund future growth, increase working capital, retire outstanding debt, and for other general corporate purposes.

However, the Company may require additional financing in the future should the FDA require additional testing for one, or several, of the Company’s PMTA submissions.

There can be no assurance that such financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and, in the Company’s best interests.

If we do not have sufficient funds to continue operations, we could be required to seek bankruptcy protection or other alternatives that would likely result in our stockholders losing some or all their investment in us.

Off-Balance Sheet Arrangements

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The related stock-based compensation expense is recognized over the vesting period during which an employee is required to provide service in exchange for the award.

We measure the fair value of liability-classified awards using a Monte Carlo valuation model.

Compensation cost is recognized over the service period and is remeasured at each reporting period through settlement.

Income taxes are computed under the liability method.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

Not required for smaller reporting companies.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity