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Item 9A. Controls and Procedures

2023-04-17 compared with 2022-04-12 · 270 added, 769 removed, 708 unchanged (59% of the section changed)

CONTROLS AND PROCEDURES

(a)   

Evaluation of Disclosure Controls and Procedures.

4 unchanged sentences

Based on our evaluation, our President, the principal executive officer, and Chief Financial Officer concluded that, as of December 31, 2022, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our President, the principal executive officer, and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

(b)   

Management ’

9 unchanged sentences

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15 of the Exchange Act that occurred during the period ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Although we have modified our workplace practices due to the COVID-19 pandemic, resulting in some of our employees working remotely since March 2020, this has not materially affected our internal controls over financial reporting.

We continue to monitor and assess the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.

As of September 30, 2022, we determined a material weakness existed in our process for recording and reviewing significant contracts.

Specifically, we determined design deficiencies existed in the reconciliation and review processes for leases, as well as within the configuration of the financial close-management software used in the review process.

During the quarter ended December 31, 2022, the Company began remediating the material weaknesses disclosed in the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2022.

These remediation measures included instituting appropriate levels of review in the reconciliation process and modifying the configuration of corresponding controls in our close-management software system.

During the quarter ended December 31, 2022, the Company monitored these controls and tested their effectiveness.

We determined that the design of internal control over financial statement processes is effective in relation to identified inherent risks for all significant processes, based on review of controls in whole, and testing of each control individually for its effectiveness in meeting control objectives.

As a result, we have determined that there were no material weaknesses of internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15 of the Exchange Act that occurred during the period ended December 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

OTHER INFORMATION

DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTION

Not applicable.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Executive Officers

The Company’s Board of Directors (the “

Board ”) and executive officers consist of the persons named in the table below.

Each director serves for a one-year term, until his or her successor is elected and qualified, or until earlier resignation or removal.

Our Bylaws provide that the authorized number of directors shall be fixed by the Board from time to time. The directors and executive officers are as follows:

Information concerning our executive officers, directors and corporate governance is incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2023 Annual Meeting of Stockholders.

Set forth below is information regarding our directors, executive officers, and key personnel as of March 1, 2023:

Henry Sicignano

6 unchanged sentences

The following biographical information regarding the foregoing directors and officers of the Company is presented below:

Henry Sicignano, President (Principal Executive Officer).

Henry Sicignano, III, President (Principal Executive Officer).

Sicignano was appointed as President of the Company on April 1, 2021.

1 unchanged sentence

Sicignano held multiple positions, including Chief Executive Officer of 22nd Century Group, Inc.

(NYSE American:

 XXII), a plant-based biotechnology company that is focused on tobacco harm reduction, very low nicotine content tobacco, and hemp/cannabis research from March 2015 through July 2019.

75 unchanged sentences

Other than as described above, there have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any director or nominee set forth above during the past ten years.   

Corporate Governance

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our officers, directors, and persons who beneficially own more than ten percent of our common stock to file reports of ownership and changes in ownership with the SEC.

Officers, directors, and greater-than-ten-percent stockholders are also required by the SEC to furnish us with copies of all Section 16(a) forms that they file.

Based solely upon a review of these forms that were furnished to us, we believe that none of our officers and directors failed to timely file at least one report due under Section 16(a) during the year ended December 31, 2021.

Code of Ethics

We have adopted a Code of Ethics that applies to all of our directors, officers and employees, a copy of which is attached as an exhibit to our Annual Report on Form 10-K, filed with the SEC on April 1, 2019.

Board Leadership Structure

The Board does not have a policy regarding the separation of the roles of the Chief Executive Officer and Chair of the Board, as the Board believes it is in the best interest of the Company and its stockholders to make that determination based on the position and director of the Company and the membership of the Board from time to time.

Board Role in Risk Assessment

Management, in consultation with outside professionals, as applicable, identifies risks associated with the Company’s operations, strategies and financial statements.

In addition, risk assessments were also performed through periodic reports received by the Audit Committee from management, counsel and the Company’s independent registered public accountants relating to risk assessment and management.

Audit Committee members met privately in executive sessions with representatives of the Company’s independent registered public accountants during and prior to the year ended December 31, 2021.

The Board also provides risk oversight through its periodic reviews of the financial and operational performance of the Company.

Director Nominations

The Board nominates directors for election at the Company’s annual meeting of stockholders and appoints new directors to fill vacancies when they arise, and has the responsibility to identify, evaluate and recruit qualified candidates to the Board for such nomination or appointment.

The Board of Directors identifies director nominees by first considering those current members of the Board who are willing to continue service.

Current members of the Board with skills and experience that are relevant to our business and who are willing to continue service are considered for re-nomination, balancing the value of continuity of service by existing members of the Board with that of obtaining a new perspective.

Nominees for director are selected by a majority of the members of the Board.

Although the Company does not have a formal diversity policy, in considering the suitability of director nominees, the Board considers such factors as it deems appropriate to develop a Board that is diverse in nature and comprised of experienced and seasoned advisors.

Factors considered by the Board include judgment, knowledge, skill, diversity, integrity, experience with businesses and other organizations of comparable size, including experience in the software and/or technology industries, software, intellectual property, business, finance, administration or public service, the relevance of a candidate’s experience to our needs and experience of other Board members, experience with accounting rules and practices, the desire to balance the considerable benefit of continuity with the periodic injection of the fresh perspective provided by new members, and the extent to which a candidate would be a desirable addition to the Board and any committees of the Board.

A stockholder who wishes to recommend a prospective nominee for the Board may notify the Secretary of the Company in writing with any supporting material the stockholder considers appropriate.

Nominees recommended by stockholders are considered in the same way as nominees suggested from other sources. 

In addition, the Company’s Bylaws contain provisions that address the process by which a stockholder may nominate an individual to stand for election to the Board at the Company’s annual meeting of stockholders.

In order to nominate a candidate for director, a stockholder must give timely notice in writing to the Secretary of the Company and otherwise comply with the provisions of the Company’s Bylaws.

Information required by the Company’s Bylaws to be in the notice include:

the name, contact information and share ownership information for the candidate and the person making the nomination, and other information about the nominee that must be disclosed in proxy solicitations under Section 14 of the Exchange Act and its related rules and regulations.

The Board may also require any proposed nominee to furnish such other information as may reasonably be required by the Board to determine the eligibility of such proposed nominee to serve as director of the Company.

The recommendation should be sent to:

Secretary, Charlie’s Holdings, Inc., 1007 Brioso Drive, Costa Mesa, California 92627. 

Board of Directors;

Attendance at Meetings

The Board held 13 meetings and acted by unanimous written consent 7 times during the year ended December 31, 2021.

Each director attended at least 75% of Board meetings during the year ended December 31, 2021.

We have no formal policy with respect to the attendance of Board members at annual meetings of shareholders, but encourage all incumbent directors and director nominees to attend each annual meeting of shareholders.

Board Committees and Charters

As of December 31, 2021, the Board had a standing Audit Committee.

Currently, the Board does not have an active compensation committee or nominating and corporate governance committee.

Instead, the full Board currently administers the duties of each of these committees, and will likely do so for the foreseeable future.

Written charters for each of the Board’s active committees are available on the Company’s website at www.charliesholdings.com under “

Investors/Corporate Governance ”.

Audit Committee

As of December 31, 2021, the Audit Committee consisted of Messrs.

Cohen (Chair) and Fox.

The Audit Committee met four times during the year ended December 31, 2021.

The Audit Committee assisted the Board in fulfilling its legal and fiduciary obligations in matters involving the Company’s accounting, auditing, financial reporting, internal control and legal compliance functions by approving the services performed by the Company’s independent accountants and reviewing their reports regarding the Company’s accounting practices and systems of internal accounting controls.

The Audit Committee was responsible for the appointment, compensation, retention and oversight of the independent accountants and for ensuring that the accountants are independent of management.

Compensation Committee

As noted above, the Board currently does not have an active compensation committee.

Instead, the full Board currently administers the duties that are typically allocated to the compensation committee, and will likely do so for the foreseeable future.

Nominating and Corporate Governance Committee

As noted above, the Board currently does not have an active nominating and corporate governance committee.

Instead, the full Board currently administers the duties that are typically allocated to the nominating and corporate governance committee, and will likely do so for the foreseeable future.

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth the compensation paid to the following persons for our fiscal years ended December 31, 2021 and 2020:

our principal executive officer;

our most highly compensated executive officers who were serving as an executive officer at the end of the fiscal year ended December 31, 2021 and 2020 who had total compensation exceeding $100,000 (together, with the principal executive officer, the “

Named Executive Officers ”);

any additional individuals who would have been considered Named Executive Officers, but for the fact that they were not serving in such capacity at the end of our most recently completed fiscal year.

Name and Principal Position

Henry Sicignano (2)

Montesano (3)

Chief Financial Officer

Chief Operating Officer and Director

Former Named Executive Officers

Brandon Stump (4)

Former Chief Executive Officer and Chair of the Board

David Allen (5)

Chief Financial Officer

The amounts in the “Equity Awards” columns do not represent any cash payments actually received by the individuals listed in the table with respect to any of such equity awards granted to them during the year ended December 31, 2021.  Rather, the amounts represent the aggregate grant date fair value of awards to the individuals listed in the table during the years ended December 31, 2021 and 2020, computed in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification Topic 718, Compensation – Stock Compensation.

Sicignano was appointed as President of the Company on April 1, 2021.

Montesano was appointed as Chief Financial Officer of the Company on May 10, 2021.

Stump resigned from his positions as (i) Chief Executive Officer, Chair of the Board of Directors, and a member of the Board of Directors of the Company;

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 each Subsidiary, on October 29, 2021.

Allen resigned from his position as Chief Financial Officer on May 10, 2021, and served as a member of the Board of Directors of the Company from May 10, 2021 through October 29, 2021.

Allen’s compensation does not include compensation earned as member of the Company’s Board of Directors.

Outstanding Equity Awards at Fiscal Year-End 2021

The following table sets forth all equity awards held by our Named Executive Officers at December 31, 2021:

Number of Securities Underlying Unexercised Options and Warrants

(#) Exercisable

Number of Securities

Underlying Unexercised Options and Warrants

(#) Unexercisable

Henry Sicignano

Chief Operating Officer

Matthew Montesano

Chief Financial Officer

Former Named Executive Officers

Brandon Stump

Former Chief Executive Officer and

Chairman of the Board

Former Chief Financial Officer and

Executive Compensation Arrangements

Employment Agreements

Brandon Stump (Former CEO).

On April 26, 2019, in connection with the Share Exchange and his appointment as Chief Executive Officer, the Company and Mr.

Brandon Stump entered into an employment agreement (the “

Stump Employment Agreement ”) pursuant to which (i) Mr.

Stump serves as the Company’s Chief Executive Officer, initially for a term of three years, renewable for one-year periods thereafter;

Stump is subject to a non-competition requirement for three years after his termination;

Stump is subject to a non-solicitation requirement for one year after his termination, and be entitled to receive the following compensation for his services as Chief Executive Officer:

(a) an annual base salary of $500,000, which shall increase on an annual basis by an amount not less than $25,000 per year, as determined by the Compensation Committee of the Company’s Board, (b) an annual cash bonus of up to $750,000 per year, which cash bonus will be determined based on the Company’s achievement of audited gross revenue targets of $35.0 million per year, as more particularly set forth in the B.

Stump Employment Agreement, (c) certain milestone based bonuses, (d) an annual award of shares of common stock having an aggregate value equal to one-half of Mr.

Stump’s annual base salary in effect for such year, which shares shall vest quarterly in equal amounts over a three year period commencing on the issuance date, (e) participation in the Company’s retirement plan, if any, (f) reimbursement of all reasonable business-related expense incurred by Mr.

Stump, (e) full health insurance coverage for he and his dependents, and at least $5.0 million of life insurance, (g) 21 paid vacation days per year, and (h) an automobile allowance of $750 per month.

Stump Employment Agreement provided that, in the event of Mr.

Stump’s death or disability, or for Cause, as defined in the B.

Stump Employment Agreement, the Company may terminate the B.

Stump Employment Agreement;

provided, however, that at no time may the Company terminate him without Cause.

Stump may terminate the B.

Stump Employment Agreement at any time for any reason.

In the event that his employment is terminated by him without Good Reason, as defined in the B.

Stump Employment Agreement, or by the Company for Good Cause as a result of a Change in Control, he shall be entitled to the following compensation:

(i) any earned but unpaid salary through the termination date, (ii) unpaid and unreimbursed expense, (iii) earned but unpaid bonuses, and (iv) any accrued vacation days;

provided, however, that in the event that the B.

Stump Employment Agreement is terminated by Mr.

Stump for any reason, he shall also be entitled to one year’s severance, consisting of one year’s base salary, milestone bonuses and certain other benefits.

In the event his employment is terminated by the Company without Cause or Mr.

Stump terminates it for Good Reason, as defined in the B.

Stump Employment Agreement, then he shall be entitled to the following compensation:

(i) all amounts due to him through the termination date, (ii) full vesting of any and all previously granted equity-based incentive awards, and (iii) health insurance coverage for a period of 18 months after the termination date.

In addition, effective upon a Change in Control, regardless of whether the B.

Stump Employment Agreement is terminated, his base salary for the year in which the Change in Control occurred and any years thereafter shall automatically increase by 20% and the milestone bonuses shall automatically decrease by 30%.

Stump Employment Agreement was amended on February 12, 2021.

The terms of the amendment are identical to the terms of the Amended Employment Agreement set forth under “Ryan Stump”.

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

(i) Chief Executive Officer, Chair of the Board of Directors, and a member of the Board of Directors of the Company;

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 each Subsidiary.

In connection with Mr.

Stump's resignation, the Company and Mr.

Stump entered into an agreement regarding Mr.

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

Pursuant to the Resignation Agreement, in consideration for Mr.

Stump agreeing to terminate the B.

Stump 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 B.

Stump 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.

On April 26, 2019, in connection with the Share Exchange and his appointment as Chief Operating Officer, the Company and Mr.

Ryan Stump entered into an employment agreement (the “

Stump Employment Agreement ”), pursuant to which (i) Mr.

Stump serves as the Company’s Chief Operating Officer for a term of three years, renewable for one-year periods thereafter, during which time he shall report to the Company’s Chief Executive Officer;

Stump is subject to a non-competition requirement for three years after his termination;

Stump is subject to a non-solicitation requirement for one year after his termination, and be entitled to receive the following compensation for his services as Chief Operating Officer:

(a) an annual base salary of $500,000, which shall increase on an annual basis by amount that is not less than $25,000 per year, as determined by the Compensation Committee of the Company’s Board, (b) an annual cash bonus of up to $750,000 per year, which cash bonus will be determined based on the Company’s achievement of a gross revenue target of $35.0 million per year, as more particularly set forth in the R.

Stump Employment Agreement, (c) certain milestone based bonuses, (d) an annual award of shares of Common Stock having an aggregate value equal to one-half of Mr.

The Company may terminate the R.

Stump Employment Agreement in the event of Mr.

Stump’s death or disability, or for Cause, as defined in the R.

Stump Employment Agreement;

provided, however , that at no time may the Company terminate him without Cause.

Stump may terminate the R.

Stump Employment Agreement at any time for any reason.

In the event that his employment is terminated by him without Good Reason, as defined in the R.

Stump Employment Agreement, or by the Company for Good Cause as a result of a Change in Control, he shall be entitled to the following compensation:

(i) any earned but unpaid salary through the termination date, (ii) unpaid and unreimbursed expense, (iii) earned but unpaid bonuses, and (iv) any accrued vacation days;

provided, however , that in the event that the R.

Stump Employment Agreement is terminated by Mr.

Stump for any reason, he shall also be entitled to one year’s severance, consisting of one year’s base salary, milestone bonuses and certain other benefits.

In the event that his employment is terminated by the Company without Cause or he terminates it for Good Reason, as defined in the R.

Stump Employment Agreement, then Mr.

Stump shall be entitled to the following compensation:

In addition, effective upon a Change in Control, regardless of whether the R.

On February 12, 2020, the Board of Directors (the “

Board ”) of the Company, entered into a form of Amended and Restated Employment Agreement with Mr.

Stump (the “

Amended Employment Agreement ”) effective February 12, 2020.

The terms of the Amended Employment Agreements have been amended as follows:

(i) the annual equity awards based upon, among other conditions, the Company’s market capitalization and a percentage of base salary have been eliminated;

however, the awards based on financial milestones remain in full force and effect;

and (ii) payment of the 2019 bonuses have been deferred, resulting in the accrual of such bonuses on the books and records of the Company.

All other terms of the respective Employment Agreements for Messrs.

Stump and Stump will remain in full force and effect subject to further review by the Board as it deems necessary and appropriate.

Henry Sicignano.

On April 1, 2021, the Board of Directors of the Company entered into an Employment Agreement (the " Agreement ") with Henry Sicignano III, MBA, pursuant to which the Company appointed Mr.

Sicignano to serve as President of the Company.

Pursuant to the Agreement, Mr.

Sicignano will serve as President for an initial period of two years, renewable on an annual basis unless earlier terminated by the Company or Mr.

Sicignano was awarded 1,500,000 restricted shares (subject to forfeiture) (“

Restricted Shares ”) of the Company.

Sicignano will have all the rights of a shareholder of the Company with respect to voting the 1,500,000 restricted shares awarded under this grant and share adjustments, receipt of dividends (if any) and distributions (if any) on such shares.

Restricted Shares will be subject to forfeiture in 750,000 share increments on April 1, 2022 and April 1, 2023 , and will also be subject to additional forfeiture-release features set forth in Addendum A to the Employment Agreement of Henry Sicignano, III, included in the Company’s 8 -K filed April 6, 2021.

The grant date fair value of the 1,500,000 restricted shares was approximately $65,000.

Director Compensation

The Company’s Director Compensation Plan currently provides that non-employee directors receive (a) a $60,000 annual retainer, payable in equal monthly installments in cash and (b) reimbursement for expenses related to Board meeting attendance and committee participation.

In addition, directors receive a one-time grant of an option to purchase 25 million shares of the Company’s common stock at an exercise price equal to the closing price of the Company’s common stock on the date of issuance, as reported on the OTCQB Venture Market.

Directors that were also employees of the Company did not receive additional compensation for serving on the Board.

The following table discloses certain information concerning the compensation of the Company’s non-employee directors for the year ended December 31, 2021:

Fees Earned or

Keith Stump (2)

David Allen (3)

Edward Carmines (4)

The amounts in the “Equity Awards” columns do not represent any cash payments actually received by the individuals listed in the table with respect to any of such stock options awarded to them during the year ended December 31, 2021.  Rather, the amounts represent the aggregate grant date fair value of options awards to the individuals listed in the table during the year ended December 31, 2021, computed in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification Topic 718, Compensation – Stock Compensation.

Stump resigned from his position as a member of the Board of Directors on October 29, 2021.

Allen resigned from his position as a member of the Board of Directors on October 29, 2021.

Allen’s compensation excludes compensation earned during 2021 as the Company’s former Chief Financial Officer.

Carmines was appointed to the Company’s Board of Directors on March 2, 2022 and did not receive any compensation during the year ended December 31, 2021

Outstanding Equity Awards as of December  

The following table sets forth all equity awards held by our Named Executive Officers at December 31, 2021:

Number of Securities Underlying Unexercised Options and Warrants

(#) Exercisable

Number of Securities

Underlying Unexercised Options and Warrants

(#) Unexercisable

Henry Sicignano

Chief Operating Officer

Matthew Montesano

Chief Financial Officer

Former Named Executive Officers

Brandon Stump

Former Chief Executive Officer and

Chairman of the Board

Former Chief Financial Officer and

Equity Compensation Plan Information

The following table includes information as of December 31, 2021 for our equity compensation plans:

Plan category

Number of securities to be issued upon exercise of outstanding options, warrants and rights

Weighted-average exercise price of outstanding options, warrants and rights

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

Equity compensation plans approved by stockholders

Equity compensation plans not approved by stockholders

2013 Stock Incentive Plan .

The 2013 Stock Incentive Plan (the “

2013 Plan ”) was adopted by the Company’s Board of Directors on December 31, 2013.

The 2013 Plan initially reserved for issuance 0.2 million shares of common stock for issuance to all employees (including, without limitation, officers and directors who are also employees) of the Company or any subsidiary of the Company (each a “

Subsidiary ”), any non-employee director, consultants and independent contractors of the Company or any Subsidiary, and any joint venture partners (including, without limitation, officers, directors and partners thereof) of the Company or any Subsidiary.

Awards under the 2013 Plan may be made in the form of:

(i) incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, once the 2013 Plan has been approved by a majority of the Company’s stockholders;

(ii) stock options that do not qualify as incentive stock options;

and/or (iii) awards of shares that are subject to certain restrictions specified in the 2013 Plan.

On May 8, 2019, the Board of Directors authorized increasing the number of shares reserved for issuance under the plan to a total of 0.65 million shares of common stock and to ratify the issuance of any and all awards made prior to that date, subject to stockholder approval.

During the year ended December 31, 2018, the Company did not issue any restricted stock awards pursuant to the 2013 Plan;

however, the Company issued an aggregate total of 346,529 stock option awards pursuant to the 2013 Plan during the 2018 fiscal year.

Subsequent to the year ended December 31, 2018, on May 16, 2019, the Board approved an amendment to all of the outstanding stock options held by Mr.

Sherman that were issued under the 2013 Plan, in the aggregate amount of 359,720, to extend the expiration date of such stock options by five years.

As of the date of the Share Exchange, April 26, 2019, a total of approximately 91.7 million awards were issued under 2013 Plan, consisting entirely of outstanding stock options.

As of December 31, 2021, approximately 0.6 million of these stock options remain vested and exercisable.

The Company will not grant any additional awards or shares of common stock under the Prior Plan beyond those that are currently outstanding.

2019 Omnibus Incentive Plan .

The 2019 Omnibus Incentive Plan (the “

2019 Plan ”) was adopted by the Company’s Board of Directors on May 8, 2019, subject to stockholder approval and registration or qualification of the shares subject to the 2019 Plan with the federal and state securities authorities.

The 2019 Plan reserved for issuance approximately 1.1 billion shares of common stock for issuance to all employees (including, without limitation, officers and directors who are also employees) of the Company or any Subsidiary, any non-employee director, consultants and independent contractors of the Company or any Subsidiary, and any joint venture partners (including, without limitation, officers, directors and partners thereof) of the Company or any Subsidiary.

Awards under the 2019 Plan may be made in the form of:

(i) incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, once the 2019 Plan has been approved by a majority of the Company’s stockholders;

(ii) stock options that do not qualify as incentive stock options;

and/or (iii) awards of shares that are subject to certain restrictions specified in the 2019 Plan.

On December 22, 2021, our Board of Directors unanimously adopted resolutions by written consent approving an amendment to increase the number of shares of Common Stock available for issuance under the 2019 Plan by 15.0 million shares, from 11,072,542 to 26,072,542 shares (the “

Plan Amendment ”).

Furthermore, the Company received written consents approving the 2019 Plan Amendment from holders of approximately 50.3% of our outstanding voting securities.

In accordance with Rule 14c of the Securities Exchange Act of 1934, Our Board of Directors’

authority to implement the 2019 Plan Amendment became effective February 28, 2022, twenty calendar days after notification of our shareholders.

The 2019 Plan Amendment will allow the Company to maintain a sufficient number of available shares for future grants under the 2019 Plan.

As of December 31, 2021, there were a total of 7,122,937 stock options outstanding pursuant to the 2019 Plan, 5,376,277 of which have vested.

Post-Employment Compensation, Pension Benefits, Nonqualified Deferred Compensation

There were no post-employment compensation, pension or nonqualified deferred compensation benefits earned by the Named Executive Officers during the year ended December 31, 2021.

Information is incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2023 Annual Meeting of Stockholders 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS  

The Company currently has two classes of voting securities issued and outstanding:

(i) common stock and (ii) Series A Preferred.

The following tables contain the beneficial ownership of our outstanding voting securities owned by:

Each of our officers and directors;

All officer and directors as a group;

Each person known by us to beneficially own five percent or more of the outstanding shares of our Series A Preferred and common stock.

Percent ownership is calculated based on 141,123 shares of Series A Preferred and 216,840,987 shares common stock outstanding as of April 12, 2022.

For purposes of this section, beneficial ownership is determined in accordance with the rules of the SEC.

In computing the number of shares beneficially owned by a person and the percentage of ownership by that person in each table below, shares of voting common stock subject to rights held by that person to acquire such shares currently or within 60 days are deemed outstanding.

Such shares are not deemed outstanding for the purpose of computing the percentage of ownership by any other person.

Beneficial Ownership of Series A Preferred

Name and Address (1)

Series A Convertible Preferred Stock

% Ownership of Class

Executive Officers and Directors

Former Director

Total Officers and Directors

Greater Than 5% Stockholders

Red Beard Holdings, LLC (2)

17595 Harvard Avenue, Suite C511

Irvine, California 92614

Hudson Bay Capital Management, LP (3)

777 Third Avenue, 30 th Floor

New York, New York 10017

Empery Asset Management, LP (4)

1 Rockefeller Plaza, Suite 1205

New York, New York

Altium Growth Fund, LP (5)

551 Fifth Avenue, 19 th Floor

New York, New York 10176

Each of the Company’s officers and directors who will not hold shares of Series A Preferred were excluded from this table.

Unless otherwise indicated, the address for each stockholder is 1007 Brioso Drive, Costa Mesa, California 92627.

Based on Company records as of February 2, 2022.

Smith is a manager of Red Beard, and has dispositive power and voting power over the securities reported herein.

Based on Company records as of February 2, 2022.

Sander Gerber, Authorized Signor for Hudson Bay Capital Management, LP may be deemed to be the beneficial owner of all shares of common stock underlying the common stock held by Hudson Bay Capital Management, LP.

Based on Company records as of February 2, 2022.

Ryan Lane, Managing Partner for Empery Asset Management, LP may be deemed to be the beneficial owner of all shares of Common Stock underlying the Series A Preferred held by Empery Asset Management, LP.

Based on Company records as of February 2, 2022.

Jacob Gottlieb, Chief Executive Officer of Altium Growth Fund, LP may be deemed to be the beneficial owner of all shares of common stock underlying the common stock held by Altium Growth Fund, LP.

Beneficial Ownership of Common Stock

Name, Address and Title (if applicable) (1)

Shares of Common Stock

Shares Issuable Upon Conversion of Preferred A Stock (2)

Shares Issuable upon Exercise of Warrants (3)

Shares Issuable upon Exercise of Vested Stock Options

Total Number of Shares Beneficially Owned

% Ownership of Class

Brandon Stump

Former Chief Executive Officer and Director

Chief Operating Officer and Director

Henry Sicignano

Matthew Montesano

Chief Financial Officer

Former Chief Financial Officer and Director

Adam Mirkovich

Chief Information Officer

Scot Cohen (4)

Edward Carmines

Former Director

Executive Officers and Directors, as a group (10 persons)

Greater Than 5% Stockholders

17595 Harvard Avenue, Suite C511

Irvine, California 92614

Red Beard Holdings, LLC (6)

17595 Harvard Avenue, Suite C511

Irvine, California 92614

Iroquois Capital Management, LLC (7)

125 Park Avenue, 25th Floor

New York, New York 10017

Unless otherwise indicated, the address for each stockholder is 1007 Brioso Drive, Costa Mesa, California 92627.

Pursuant to the Certificate of Designation of the Series A Preferred (“

Series A COD ”), shares of Series A Preferred may not be converted or exercised, as applicable, to the extent that the holder and its affiliates would own more than 4.99% (or 9.99% upon the election of any holder of Series A Preferred) of the Company’s outstanding common stock after such conversion (the “

Series A Ownership Limitation ”);

provided , 

however , that any holder of shares of Series A Preferred may waive the Conversion Limitation upon 61 days written notice to the Company.

The Series A COD also entitles each share of Series A Preferred to vote, on an as converted basis, along with the common stock; 

provided, however,  that the Series A Preferred may not be voted to the extent that the holder and its affiliates would control more than 9.99% of the Company’s voting power (the “

Series A Voting Limitation ”).

Ownership percentages in this table were calculated in accordance with Section 13(d) of the Exchange Act, and do not reflect any adjustments due to the Series A Ownership Limitation or the Series A Voting Limitation.

Certain of the warrants included in this table are subject to blockers that prevent a holder from exercising Investor Warrants or Placement Agent Warrants in the event that such exercise would result in the holder and its affiliates beneficially owning in excess of 4.99% of the Company’s issued and outstanding common stock immediately thereafter, which limit may be increased to 9.99% at the election of the holder (the “

Warrant Exercise Limitation ”).

Ownership percentages in this table were calculated in accordance with Section 13(d) of the Exchange Act, and do not reflect any adjustments due to the Warrant Exercise Limitation.

Includes securities held by V3 Capital Partners and the Scot Jason Cohen Foundation.

Cohen is the Managing Partner of V3 Capital Partners and an officer of the Scot Jason Cohen Foundation, and has dispositive and/or voting power over these shares.

Includes securities held by LB 2, LLC (“

LB 2 ”) and Red Beard, based on Company records and ownership information from Amendment No.

5 to Schedule 13D filed by Vincent C.

Smith on November 21, 2019.

Smith is manager of LB 2 and Red Beard.

Smith has dispositive power and voting power over, and may be deemed to be the beneficial owner of the securities held by each of these entities.

Based on Company records and ownership information from Amendment No.

5 to Schedule 13D filed by Vincent C.

Smith on November 21, 2019. Mr.

Smith is a manager of Red Beard, and has dispositive power and voting power over the securities reported herein.

Based on Company records and ownership information from Schedule 13G filed by Iroquois Capital Management, LLC (“

Iroquois Capital Management ”), Mr.

Richard Abbe and Ms.

Kimberly Page on September 21, 2021.

Abbe shares authority and responsibility for the investments made on behalf of Iroquois Master Fund with Ms.

Kimberly Page, each of whom is a director of the Iroquois Master Fund.

Page may each be deemed to be the beneficial owner of all shares of common stock underlying the common stock held by Iroquois Master Fund.

CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Certain Relationships and Related Transactions

On November 19, 2019, Charlie’s entered into commercial lease for the Company’s corporate headquarters in Costa Mesa, California (the “

Lease ”) with Brandon Stump, Ryan Stump and Keith Stump.

Stump, Stump and Stump purchased the property that is the subject of the Lease in July 2019.

The Lease, which was effective as of September 1, 2019, on a month-to-month basis, was then formalized on November 1, 2019 to have a term of five years and a base rent rate of $22,940 per month, which rate is subject to annual adjustments based on the consumer price index, as may be mutually agreed upon by the parties to the Lease.

The terms of the Lease were negotiated and approved by the independent members of the Board, and executed by the Company’s then Chief Financial Officer after reviewing a detailed analysis of comparable properties and rent rates compiled by an independent, third-party consultant.

On January 10, 2020, Bellerose CBD Trade Co.

Bellerose ”), an entity controlled by Brandon Stump, the Company’s former Chief Executive Officer, and Ryan Stump, the Company’s Chief Operating Officer, subleased 656 square feet from Don Polly within Don Polly’s warehouse located at 1288 S.

Broadway, Denver, Colorado (the “

Sublease ”), for use as a retail sales location for Bellerose’s operations. Subsequent to entering into Sublease, Don Polly completed certain leasehold improvements to which Bellerose reimbursed Don Polly $25,396 for modifications that affected the subleased space.

The Sublease had a base rent rate of $1,154 per month and was terminated on January 27, 2022. 

For the fiscal year ended December 31, 2021, Don Polly received $13,848 of lease income pursuant to the Sublease, as well as $18,362 of income from the sale of Don Polly Products to Bellerose.

Director and Executive Officer Compensation

See “Executive Compensation”

and “Director Compensation”

for information regarding compensation of directors and executive officers.

Employment Agreements

We have entered into employment agreements with our executive officers.

For more information regarding these agreements, see “

Executive Compensation —

Narrative to Summary Compensation Table and Outstanding Equity Awards at 2021 Fiscal Year End ”.

Independent Directors

The Board has determined that Messrs.

Cohen, Fox and Carmines may be considered independent directors as defined by the rules and regulations of the Nasdaq Stock Market.

In addition, the Board has determined that Mr.

Cohen satisfies the definition of an “audit committee financial expert”

under SEC rules and regulations.

This designation does not impose any duties, obligations or liabilities on Mr. Cohen that are greater than those generally imposed on them as members of the Audit Committee and the Board, and his designation as an audit committee financial expert does not affect the duties, obligations or liability of any other member of the Audit Committee or the Board.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

On November 1, 2020, the Company was notified that the audit practice of Squar Milner, an independent register public accounting firm, was combined with Baker Tilly US, LLP (“

Baker Tilly ”) in a transaction pursuant to which Squar Milner combined its operations with Baker Tilly and certain of the professional staff and partners of Squar Milner joined Baker Tilly either as employees or partners of Baker Tilly.

The following table presents approximate aggregate fees and other expenses for professional services rendered by Baker Tilly, our independent registered public accounting firm, for the audit of the Company’s annual financial statements for the years ended December 31, 2021, and 2020 and fees and other expenses for other services rendered during those periods.

Audit Fees (1)

Audit-Related Fees (2)

All Other Fees

Audit services in 2021 and 2020 consisted of the audit of our annual consolidated financial statements, and other services related to filings and filed by us and our subsidiaries, and other pertinent matters.

Audit-related fees consist of fees billed for services that are normally provided by our independent registered public accountants in connection with registration statements and other regulatory filings that are reasonably related to the performance of the audit or review of our consolidated financial statements but are not reported under “Audit Fees.”

For permissible professional services related to income tax return preparation and compliance.

EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES

Amended and Restated Bylaws of Charlie's Holdings, Inc., incorporated by reference from Exhibit 3.1 to the Current Report on Form 8-K filed on September 11, 2019.

Amended and Restated Articles of Incorporation of Charlie’s Holdings, Inc., incorporated by reference from Exhibit 3.1 to the Current Report on Form 8-K filed July 2, 2019

Certificate of Change for Charlie’s Holdings, Inc., effective as of June 14, 2021, incorporated by reference from Exhibit 3.1 to the Current Report on Form 8-K filed on June 16, 2021.

Certificate of Designations, Preferences and Rights of the Series A Convertible Preferred Stock, dated April 25, 2019, incorporated by reference to Exhibit 3.7 to the Current Report on Form 8-K, filed April 30, 2019.

Certificate of Designations, Preferences and Rights of the Series B Convertible Preferred Stock, dated April 26, 2019, incorporated by reference to Exhibit 3.9 to the Current Report on Form 8-K, filed April 30, 2019.

Form of Investor Warrant, dated April 26, 2019, incorporated by reference to Exhibit 3.8 to the Current Report on Form 8-K, filed April 30, 2019.

Debt Conversion Agreement by and between True Drinks Holdings, Inc.

and Red Beard, LLC, dated April 26, 2019, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed April 30, 2019.

Description of Securities Registered Pursuant to Section 12 (filed herewith)

CERTIFICATE OF AMENDMENT Dated April 4, 2023 TO THE CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF THE SERIES A CONVERTIBLE PREFERRED STOCK dated April 25, 2019 

Form of Exchange Agreement, dated April 26, 2019, incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed April 30, 2019.

Form of Registration Rights Agreement, dated April 26, 2019, incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K, filed April 30, 2019.

Engagement Letter by and between True Drinks Holdings, Inc., Charlie’s Chalk Dust LLC and Katalyst Securities LLC, dated February 15, 2019, incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K, filed April 30, 2019.

Amendment to Engagement Letter, dated April 16, 2019, incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K, filed April 30, 2019.

Subscription Agreement, dated April 26, 2019, incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K, filed April 30, 2019.

Employment Agreement by and between True Drinks Holdings, Inc.

and Brandon Stump, dated April 26, 2019, incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K, filed April 30, 2019.

Employment Agreement by and between True Drinks Holdings, Inc.

and Ryan Stump, dated April 26, 2019, incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K, filed April 30, 2019.

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Commercial Lease Agreement, by and between Charlie’s Chalk Dust, LLC and Brandon Stump, Ryan Stump and Keith Stump, dated November 19, 2019, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed November 22, 2019.

Promissory Note issued to Red Beard Holdings, LLC dated April 8, 2020, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on April 14, 2020).

Security Agreement by and among the Company and Red Beard Holdings, LLC dated April 8, 2020, incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed April 14, 2020.

Amendment No.

1 to Secured Promissory Note and Security Agreement, by and among the Company and Red Beard Holdings, LLC, dated August 27, 2020, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed September 1, 2020.

Amendment No.

2 to Secured Promissory Note and Security Agreement, by and among the Company and Red Beard Holdings, LLC, dated September 30, 2020, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed October 2, 2020.

Amendment No.

3 to Secured Promissory Note and Security Agreement, by and among the Company and Red Beard Holdings, LLC, dated October 29, 2020, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed November 3, 2020.

Amendment No.

4 to Secured Promissory Note and Security Agreement, by and among the Company and Red Beard Holdings, LLC, executed as of December 12, 2020 but effective as of December 1, 2020, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed December 15, 2020.

Amendment No.

5 to Secured Promissory Note and Security Agreement, by and among the Company and Red Beard Holdings, LLC, dated January 19, 2021 and effective as of January 1, 2021, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed January 20, 2021.

Satisfaction and Release, incorporated by reference to Exhibit 10.46 to the Annual Report on Form 10-K, filed April 5, 2021.

Employment Agreement, dated April 1, 2021, by and between Charlie's Holdings, Inc.

and Henry Sicignano, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed April 6, 2021.

Form of Dividend Exchange and Waiver, dated May 25, 2021, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed May 26, 2021.

Letter Agreement between Charlie's Holdings, Inc.

and Brandon Stump, dated October 29, 2021, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed November 3, 2021.

2019 Omnibus Equity Incentive Plan, as amended, incorporated by reference to Appendix B to the Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on May 28, 2019

Amendment to 2019 Omnibus Equity Incentive Plan, incorporated by reference to the Definitive Information Statement on Schedule 14C filed with the Securities and Exchange Commission on February 4, 2022

Promissory Note with Michael King dated April 6, 2022 (filed herewith)

Modification Agreement dated September 29, 2022 related to Promissory Note with Michael King dated April 6, 2022 (filed herewith)

Modification Agreement dated March 28, 2022 related to Promissory Note with Michael King dated April 6, 2022 (filed herewith)

Loan Agreement with Ryan Stump dated August 17, 2022 (filed herewith)

Amendment dated December 17, 2022 to Loan Agreement with Ryan Stump dated August 17, 2022 (filed herewith)

Amendment dated April 13, 2023 to Loan Agreement with Ryan Stump dated August 17, 2022 (filed herewith)

Code of Ethics filed with Form 10-K on March 31, 2011 and incorporated herein by reference.

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Subsidiaries of Charlie's Holdings, Inc., filed herewith.

Consent of Squar Milner LLP, dated June 26, 2018, filed herewith.

Consent of Baker Tilly US filed herewith.

Certification of Principal Executive Officer as Required by Rule 13a-14(a)/15d-14, filed herewith.

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CHARLIE’S HOLDINGS, INC.

/s/ Henry Sicignano

Henry Sicignano

/s/ Henry Sicignano III

Henry Sicignano III

(Principal Executive Officer)

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In accordance with the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.

/s/ Henry Sicignano

Henry Sicignano

/s/ Henry Sicignano III

Henry Sicignano III

(Principal Executive Officer)

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors

Charlie’s Holdings, Inc.

and Subsidiaries

To the stockholders and the board of directors of Charlie’s Holdings, Inc:

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Charlie’s Holdings, Inc.

and its subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years then ended, and the related notes to the consolidated financial statements (collectively referred to as the "consolidated financial statements").

and its subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, changes in stockholders' equity, and cash flows, for each of the years then ended, and the related notes (collectively referred to as the "consolidated financial statements").

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

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The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

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The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.

As discussed in Note 1 to the consolidated financial statements, the Company has continued to experience financial, supply chain and regulatory issues.

As discussed in Note 1 to the consolidated financial statements, the Company has continued to experience financial and regulatory issues.

These matters raise substantial doubt about the Company’s ability to continue as a going concern.

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The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Critical Audit  

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Fair Value of Derivative Liabilities

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Excess and Obsolete Inventory

Critical Audit Matter Description

As described in Note 10 to the consolidated financial statements, the Company previously issued warrants to purchase approximately 40 million shares of common stock.

The warrants have a 5-year term and an exercise price of $0.44313, subject to adjustment for anti-dilution events.

The Company is required to assess the fair value of warrant liabilities at each reporting period and recognize any change in the fair value as items of other income or expense, and accordingly uses various inputs to measure the outstanding warrants on a recurring basis to determine the fair value of the liability.

The fair value of the warrant liabilities was approximately $899,000 as of December 31, 2021.

We identified the fair value estimation of derivative liabilities as a critical audit matter because auditing the Company's subsequent accounting for the derivative liabilities was complex due to the significant judgment required in the fair value measurement of the warrants and related changes in fair value recorded in other income or expense.

The Company estimated the fair value of the warrants using a Monte Carlo simulation model, which included several assumptions involving a high degree of subjectivity.

As described in Note 2 to the financial statements, inventories primarily consist of finished goods are stated at the lower of cost (determined by the average cost method) or net realizable value.

Adjustments are made to inventory for any excess or obsolete inventories or when the net realizable value of inventories is less than the carrying value.

The Company's inventory reserves are primarily based on historical turnover and projected usage of its various inventory products.

We identified inventory valuation as a critical audit matter.

The inventory reserve at December 31, 2022 was approximately $733,000, while net inventories totaled approximately $2,900,000 at December 31, 2022.

We identified management’s estimation of the reserve for excess and obsolete inventory as a critical audit matter, because of the significant judgments made by management in estimating projected usage and market conditions which are used to arrive at the net realizable value.

This required a high degree of auditor judgment and increased auditor effort in auditing such assumptions.

How We Addressed the Matter in Our Audit

The primary procedures we performed to address this critical audit matter included:

Obtaining an understanding and evaluating the design effectiveness of controls over the Company's accounting for the derivative liabilities.

Obtaining an understanding of management's review of the key assumptions and inputs utilized in the estimate of the fair value of the warrants.

Testing of the Company's subsequent accounting for the derivative liabilities and the related estimate of fair value of the warrants included, among other procedures, evaluating the Company's selection of the valuation methodology and significant assumptions used by the Company.

Evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates.

Testing the appropriateness of the key assumptions by evaluating the appropriateness of the Company's estimates of its volatility, market risk free rate and the probability of an anti-dilution triggering event, as well as its analysis of the equity volatilities of comparable guideline public companies.

Utilizing a valuation specialist with specialized skill and knowledge to assist in our evaluation of the methodology used by the Company and the appropriateness of significant assumptions, including independent recalculation and comparison to the Company’s valuation.

/s/ Baker Tilly US LLP

Obtaining an understanding of management’s process for estimating the reserve for excess and obsolete inventory.

Making inquiries related to management's review and evaluating the appropriateness of key assumptions and inputs utilized in the estimates.

Obtaining management's analysis of excess and obsolete inventories, recalculating inputs into the analysis, and testing underlying data for completeness and accuracy.

This included, among other inputs, historical sales data and inventory turnover calculations by item.

Selecting a sample of inventory product on-hand and evaluating the appropriateness of reserve percentages applied considering historical sales by product, subsequent information, evidence obtained in other areas of the audit, and considering trends within the industry that could impact the movement of products sold by the Company.

Performing retrospective review of prior year reserve estimates and assumptions by evaluating current year inventory write-offs.

Baker Tilly US LLP

We have served as the Company's auditor since 2018.

Irvine, California

April 12, 2022 

April 17, 2023

CHARLIE ’

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Current assets:

$ 1,422  

Accounts receivable, net

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Total non-current assets

$ 9,248  

$ 6,525  

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

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Accounts payable and accrued expenses

$ 4,068  

$ 2,525  

Note payable, net - related party

Derivative liability

Lease liabilities

Notes payable, current portion

Dividends payable

Deferred revenue

Total current liabilities

10,743  

Non-current liabilities:

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Total liabilities

12,521  

COMMITMENTS AND CONTINGENCIES (see Note 12)

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1,800,000 shares authorized

Series A, 300,000 shares designated, 141,873 and 203,811 shares issued and outstanding as of December 31, 2021 and 2020, respectively

Series A, 300,000 shares designated, 133,423 and 141,873 shares issued and outstanding as of December 31, 2022 2021, respectively

Series B, 1,500,000 shares designated, 0 shares issued and outstanding as of December 31, 2022 and 2021, respectively

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500,000,000 shares authorized;

210,890,930 shares and 189,907,526 shares issued and outstanding as of December 31, 2021 and 2020, respectively

219,163,631 and 210,890,930 shares issued and outstanding as of December 31, 2022 and 2021, respectively

Additional paid-in capital

Accumulated deficit

( 4,855 )  

Total stockholders' equity (deficit)

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

$ 9,248  

$ 6,525  

Total stockholders' equity

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

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

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(in thousands, except share and per share amounts)

For the years ended

Product revenue, net

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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

Net earnings (loss) per share

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Additional Paid-in

Total Stockholders' Equity

(Deficit)  

Total Stockholders'

Balance at January 1, 2021

172,982  

$ 1,756  

$ ( 2,476 )  

Conversion of Series A convertible preferred stock

16,925  

( 17 )  

Reclassification of liability awards to equity

Accrue dividends payable on Series A convertible preferred stock

( 1,650 )  

Stock compensation

( 7,187 )  

Balance at December 31, 2020

189,907  

( 9,663 )  

Issuance of common stock to related parties for cash

Conversion of Series A convertible preferred stock

( 62 )  

13,977  

( 14 )  

Issuance of common stock for dividend payment

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Balance at December 31, 2021

210,890  

$ 7,775  

$ ( 4,855 )  

$ 3,131  

Conversion of Series A convertible preferred stock

Stock compensation

Balance at December 31, 2022

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

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Cash Flows from Operating Activities:

Net income (loss)

Reconciliation of net income (loss) to net cash used in operating activities:

Provision for bad debt expense

Reconciliation of net income to net cash used in operating activities:

Allowance for doubtful accounts

Depreciation and amortization

Accretion of debt discount

Loss on disposal of fixed assets

Change in fair value of derivative liabilities

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Proceeds from issuance of notes payable

Proceeds from issuance of note payable to related party

Repayment of notes payable

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Cash paid for interest

Cash paid for interest to related party

Cash paid for income taxes

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Issuance of common stock for dividend payment

Accrued dividends payable on Series A convertible preferred stock

Reclassification of liability awards to equity

Recognize minimum accrued interest

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

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Description of the Business

Charlie’s Holdings, Inc., (formerly True Drinks Holdings, Inc.) a Nevada corporation, together with its wholly owned subsidiaries and consolidated variable interest entity (collectively, the “

Charlie’s Holdings, Inc., a Nevada corporation, together with its wholly owned subsidiaries and consolidated variable interest entity (collectively, the “

Company ”, “

we ”), currently formulates, markets and distributes premium, nicotine-based vapor products.

The Company’s products are produced domestically through contract manufacturers for sale by select distributors, specialty retailers and third -party online resellers throughout the United States, as well as over 80 countries worldwide.

we ”), currently formulates, markets and distributes premium, non-combustible nicotine-related products, alternative alkaloid vapor products, and hemp-derived vapor and edible products.

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

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

In June 2019 , The Company launched distribution, through Don Polly, a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, the Company's former Chief Executive Officer and current Chief Operating Officer, respectively, and a consolidated variable interest for which the Company is the primary beneficiary (“

Don Polly ”), of certain premium vapor, ingestible and topical products containing hemp-derived cannabidiol (“

CBD ”) and other compounds derived from hemp.

Our hemp-based products are produced, marketed and sold through, Don Polly, and the Company currently intends to develop and launch additional products containing hemp-derived cannabinoids in the future.

In addition to Don Polly, we also wholly-own Charlie’s Chalk Dust, LLC (“

Charlie’s Chalk Dust, LLC (“

Charlie ’

CCD ”), which also produces and sells our premium, nicotine-based vapor products.

CCD ”), is the Company’s wholly owned subsidiary which produces and sells nicotine-based and alternative alkaloid vapor products.

Don Polly is a consolidated variable interest entity, for which the Company is the primary beneficiary, which develops, markets and distributes products containing cannabinoids derived from hemp.

The Company's Common Stock, par value $ 0.001 per share (the " Common Stock "), trades under the symbol "CHUC" on the OTCQB Venture Market.

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Basis of Presentation

The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “

The consolidated financial statements have been prepared in accordance with U.S.

Generally Accepted Accounting Principles (“

GAAP ”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “

SEC ”).

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s plan of operation

The accompanying 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.

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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 (“

COVID- 19 ”) in March 2020 has had a negative impact on the global economy and markets which has impacted the Company’s supply chain and sales.

For the year ended December 31, 2021, the Company generated income from operations of approximately $ 0.6 million and a consolidated net income of approximately $ 4.8 million.

The Company has a stockholders’

equity of approximately $ 3.1 million as of December 31, 2021.

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 potentially require us to remove products from circulation.

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

Management's plans depend on its ability to increase revenues, procure cost-effective financing, and continue its business development efforts, including the expenditure of approximately $ 5.1 million to date, to support the Pre-Market Tobacco Application (“

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 ”).

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 Premarket Tobacco Application (“

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 has 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.

Risks and Uncertainties

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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.

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 other 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.

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.

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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.

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

The outbreak has caused and continues to cause a substantial disruption in international and U.S.

economies and markets.

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.

The impact from COVID- 19 has affected our supply chain, and if disruptions from the COVID- 19 outbreak are prolonged, it will continue to have an adverse impact on our business.

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.

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 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.

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.

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 addition, the impact from COVID- has affected our supply chain, and if disruptions from the COVID- outbreak persist and are prolonged, it will continue to have an adverse impact on our business.

NOTE 2 –

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Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its two 100 % wholly owned subsidiaries, Charlie’s Chalk Dust, LLC and Bazi, Inc, and Don Polly, LLC, a consolidated variable interest for which the Company is the primary beneficiary.

The consolidated financial statements include the accounts of the Company and its 100 % wholly owned subsidiary, Charlie’s Chalk Dust, LLC and Don Polly, LLC, a consolidated variable interest for which the Company is the primary beneficiary.

All inter-company balances and transactions have been eliminated in consolidation.

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For certain instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses, it was estimated that the carrying amount approximated fair value because of the short maturities of these instruments.

The Company determined that the carrying amounts of the current portion of outstanding notes payable approximate fair value due to the short-term nature of borrowings and current market interest rates.

The Company determined the carrying amounts of the non-current portion of outstanding notes payable approximate fair value due to the current interest rates payable in relation to current market conditions.

Revenue Recognition

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Accounts receivable are recorded at the invoiced amount and do not bear interest.

We determine the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions and establish an allowance for doubtful accounts when collection is uncertain.

We determine the allowance for doubtful accounts by regularly evaluating historical customer information and individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions and establish an allowance for doubtful accounts when collection is uncertain.

Customers’

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The impairment loss is measured based upon the difference between the carrying amounts and the fair values of the assets.

Subsequent to the adoption of the new leasing standard on January 1, 2019, the Company recognizes a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation.

The Company recognizes a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation.

The Company determines whether an arrangement is, or contains a lease at contract inception.

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Stock-Based Compensation

We account for all stock-based compensation using a fair value-based method.

The Company accounts for all stock-based compensation using a fair value-based method.

The fair value of equity-classified awards granted to employees is estimated on the date of the grant using the Black-Scholes option-pricing model and 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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Research and Development

We expense the cost of research and development as incurred.  Research and development expenses include costs incurred in funding research and development activities, license fees, and other external costs.

We expense the cost of research and development as incurred. 

Research and development expenses include costs incurred in funding research and development activities, license fees, and other external costs.

Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity is performed or when the goods have been received, rather than when payment is made.

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2019-12, “Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes (“ASU 2019 - 12”

), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019 - 12  removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application.

Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes.

ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application.

This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted.

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The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. The ASU is effective for the Company on December 1, 2022, Early adoption is permitted, but no earlier than December 1, 2021.

The Company elected to early adopt this guidance on January 1, 2022 and there will be no impact on its consolidated financial statements and related disclosures.

The Company elected to early adopt this guidance on January 1, 2022 with no impact on its consolidated financial statements and related disclosures.

Earnings per Share

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Early adoption is permitted, including adoption in an interim period.

The Company does not believe the impact of adopting this standard will be material to its consolidated financial statements and related disclosures.

On October 1, 2022, the Company adopted this standard with no impact on its consolidated financial statements and related disclosures.

NOTE 3 –

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An explanation of each level in the hierarchy is described below:

Level 1 - Unadjusted quoted prices in active markets for identical instruments that are accessible by the Company on the measurement date

Level 2 - Quoted prices in markets that are not active or inputs which are either directly or indirectly observable

Level 3 - Unobservable inputs for the instrument requiring the development of assumptions by the Company

Table of Conte

Level 1 –

Unadjusted quoted prices in active markets for identical instruments that are accessible by the Company on the measurement date

Level 2 –

Quoted prices in markets that are not active or inputs which are either directly or indirectly observable

Level 3 –

Unobservable inputs for the instrument requiring the development of assumptions by the Company

The following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy as of December 31, 2022 and 2021 (amounts in thousands):

Fair Value at December 31, 2022

Derivative liability - Warrants

Derivative liability –

Total liabilities

Fair Value at December 31, 2021

Derivative liability - Warrants

Derivative liability –

Total liabilities

$ 4,444  

There were no transfers between Level 1, 2 or 3 during the years ended December 31, 2022 and 2021.

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Balance at January 1, 2021

$ 4,144  

Change in fair value

3 unchanged sentences

A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in the Monte Carlo simulation measuring the Company’s derivative liabilities that are categorized within Level 3 of the fair value hierarchy as of December 31, 2022 and 2021 is as follows:

For the years ended

Warrant Liability

Exercise price

$ 0.4431  

Contractual term (years)

Volatility (annual)

85.0 %  

Risk-free rate

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Changes in fair value are reflected in the Company’s earnings for each reporting period.

NOTE 4 - PROPERTY AND EQUIPMENT

NOTE 4 –

PROPERTY AND EQUIPMENT

Property and Equipment detail as of December 31, 2022, and 2021 are as follows (amounts in thousands):

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Depreciation and amortization expense totaled $ 296,000 and $ 210,000 , respectively, during the years ended December 31, 2022 and 2021.

NOTE 5 - CONCENTRATIONS

NOTE 5 –

CONCENTRATIONS

The Company’s concentration of purchases are as follows:

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During the year ended December 31, 2022, purchases from two vendors represented 76 % of total inventory purchases.

During the year ended December 31, 2020, purchases from four vendors represented 90 % of total inventory purchases.

As of December 31, 2021, and 2020, amounts owed to these vendors totaled $ 1,494,000 and $ 270,000 respectively, which are included in accounts payable in the accompanying consolidated balance sheets.

Table of Content

During the year ended December 31, 2021, purchases from the same two vendors represented 73 % of total inventory purchases.

As of December 31, 2022, and 2021, amounts owed to these vendors totaled $ 200,000 and $ 1,494,000 respectively, which are included in accounts payable and accrued expenses in the accompanying consolidated balance sheets.

Accounts Receivable

1 unchanged sentence

For the years ended

One customer made up 27 % of net accounts receivable at December 31, 2021 and two customers accounted for 27 % of net accounts receivable at December 31, 2020.

Customer C owed the Company a total of $ 454,000 , representing 27 % of net receivables at December 31, 2021.

Two customers made up more than 10 % of net accounts receivable at December 31, 2022 and 2021.

Customer A owed the Company a total of $ 184,000 , representing 15 % of net receivables at December 31, 2022.

Customer B owed the Company a total of $ 136,000 , representing 11 % of net receivables at December 31, 2022.

Customer A owed the Company a total of $ 454,000 , representing 27 % of net receivables at December 31, 2021.

No customer exceeded 10% of total net sales for the years ended December 31, 2022 and 2021, respectively.

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Don Polly formulates, sells and distributes the Company’s hemp-derived product lines.

We evaluate our ownership, contractual and other interests in entities that are not wholly-owned to determine if these entities are variable interest entities (“

VIEs ”), and, if so, whether we are the primary beneficiary of the VIE.

In determining whether we are the primary beneficiary of a VIE and therefore required to consolidate the VIE, we apply a qualitative approach that determines whether we have both ( 1 ) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and ( 2 ) the obligation to absorb losses of, or the rights to receive benefits from, the VIE that could potentially be significant to that VIE.

We continuously perform this assessment, as changes to existing relationships or future transactions may result in the consolidation or deconsolidation of a VIE.

Effective April 25, 2019, we consolidated the financial statements of Don Polly and it is still considered a VIE of the Company.

Since the Company has been determined to be the primary beneficiary of Don Polly, we have included Don Polly’s assets, liabilities, and operations in the accompanying consolidated financial statements of the Company since April 25, 2019.

Don Polly operates under exclusive licensing and service contracts with the Company whereby the Company receives 75 % of net income from the licensing agreement and 25 % of net income from the service agreement;

therefore, as the Company receives 100 % of the net income or incurs 100% of the net loss of the VIE, no non-controlling interests are recorded.

Don Polly is classified as a variable interest entity (“

VIE ”) for which the Company is the primary beneficiary.

Under ASC 810-10-15, Variable Interest Entities, a VIE is an entity that:

(1) has an insufficient amount of equity investment at risk to permit the entity to finance its activities without additional subordinated financial support by other parties;

(2) the equity investors are unable to make significant decisions about the entity’s activities through voting rights or similar rights;

or (3) the equity investors do not have the obligation to absorb expected losses or the right to receive residual returns of the entity.

The Company is required to consolidate a VIE if it is determined to be the primary beneficiary, that is, the enterprise has both (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the VIE.

The Company evaluates its relationships with VIE to determine whether it is the primary beneficiary of a VIE at the time it becomes involved with the entity and it re-evaluates that conclusion each reporting period.

Effective April 25, 2019, we began consolidating the financial statements of Don Polly and it is still considered a VIE of the Company.

Don Polly operates under exclusive licensing and service contracts with the Company whereby the Company receives 100 % of net income, or incurs 100% of the net loss of the VIE.

There are no non-controlling interests recorded.

NOTE 7 –

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Accounts payable and accrued expenses as of December 31, 2022, and 2021 are as follows (amounts in thousands):

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accounts payable

$ 2,476  

Accrued compensation

Accrued income taxed  

Accrued income taxes

Other accrued expenses

$ 4,068  

$ 2,525  

NOTE 8 –

NOTES PAYABLE

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 $ 1,400,000 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 $ 1,550,000 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.

Table of Cont

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 provides for working capital to CCD in the amount of $ 650,761 .

The Charlie's PPP Loan matures on April 30, 2022 and accrues interest at a rate of 1.00% per annum.

Per the PPP Loan Agreement, 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 this time.

Charlie’s was notified by SBA Lender that all payments, including principal and interest, on all PPP loans issued by the bank have been deferred indefinitely in order to allow borrowers adequate time to apply for forgiveness.

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 provides for working capital to Don Polly in the amount of $ 215,600 .

The Polly PPP Loan matures on April 14, 2022 and accrues 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, however, continued to accrue during this 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.

For the period ended March 31, 2021, the Company recorded a debt extinguishment gain of approximately $ 217,000 , including principal and accrued interest, which is reflected in the other income section of the Company’s consolidated statements of operations.

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 matures 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 the year ended December 31, 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.

During the year ended December 31, 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.

During the year ended December 31, 2021, the Company recorded a debt extinguishment gain of approximately $ 1,060,000 , including principal and accrued interest, which is reflected in the other income section of the Company’s consolidated statements of operations.

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.

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

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.

Economic Injury Disaster Loan

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 the 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.

The following summarizes the Company’s notes payable maturities as of December 31, 2021 ( amounts in thousands): 

Remaining months Ending December 31, 2021

The following summarizes the Company’s notes payable maturities as of December 31, 2022 ( amounts in thousands):

Year Ending December 31, 2023

2 unchanged sentences

Year Ending December 31, 2026

Year Ending December 31, 2027

NOTE 9 –

EARNINGS (LOSS) PER SHARE BASIC AND FULLY DILUTED

Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the reporting period.

Diluted earnings (loss) per common share is computed similar to basic earnings (loss) per common share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock.

Basic (loss) earnings per common share is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the reporting period.

Diluted (loss) earnings per common share is computed similar to basic (loss) earnings per common share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock.

Diluted weighted average common shares include common stock potentially issuable under the Company’s convertible preferred stock, warrants and vested and unvested stock options.

For the years ended December 31, 2021, and 2020, net income (loss) is adjusted for gain (loss) from changes in the fair value of warrant liabilities.

The following table sets forth the computation of earnings (loss) per share (amounts in thousands, except share and per share amounts): 

For the years ended December 31, 2022, and 2021, net (loss) income is adjusted for gain (loss) from changes in the fair value of warrant liabilities.

The following table sets forth the computation of (loss) earnings per share (amounts in thousands, except share and per share amounts):

For the years ended

Net income (loss) - basic

$ 4,808  

Net (loss) income - basic

Reversal of gain due to change in fair value of warrant liability

( 3,545 )  

Net income (loss) - diluted

$ 1,263  

Net (loss) income - diluted

Weighted average shares outstanding - basic

203,589,531  

189,844,867  

Diluted stock options

168,309  

Diluted warrants

1,912,544  

Diluted preferred shares

32,016,491  

Weighted average shares outstanding - diluted

237,686,875  

189,844,867  

Basic earnings (loss) per share

$ 0.02  

Diluted earnings (loss) per share

$ 0.01  

The following securities were not included in the diluted earnings (loss) per share calculation because their effect was anti-dilutive as of the periods presented (amounts in thousands):

Basic (loss) earnings per share

Diluted (loss) earnings per share

The following securities were not included in the diluted (loss) earnings per share calculation because their effect was anti-dilutive as of the periods presented (amounts in thousands):

For the years ended

Series A convertible preferred shares

55,643  

38,425  

40,338  

45,380  

103,484  

NOTE 10 –

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STOCK-BASED COMPENSATION

The True Drinks Holdings, Inc.

2013 Stock Incentive Plan (the “

Prior Plan ”) was first approved in December 2013 and was approved by a majority of the stockholders in October 2014 .

The Prior Plan originally authorized 0.2 million shares of common stock for issuance as equity-based awards, which amount was increased to 1.2 million in January 2018 by authorization of the Board of Directors at that time (the “

Prior Plan Amendment ”).

As of the date of the Share Exchange, April 26, 2019 , a total of approximately 0.9 million awards were issued under the Prior Plan and the Prior Plan Amendment, consisting entirely of outstanding stock options.

As of December 31, 2021 , approximately 0.6 million of these stock options remain vested and exercisable under this plan.

The Company will not grant any additional awards or shares of common stock under the Prior Plan beyond those that are currently outstanding.

On May 8, 2019, our Board of Directors approved the Charlie’s Holdings, Inc.

2019 Omnibus Incentive Plan (the “

2019 Plan ”), and the 2019 Plan was subsequently approved by holders of a majority of our outstanding voting securities on the same date.

The 2019 Plan will supersede and replace the Prior Plan and no new awards will be granted under the Prior Plan.

Any awards outstanding under the Prior Plan on the date of stockholder approval of the 2019 Plan will remain subject to the terms in the Prior Plan, including those granted under the Prior Plan Amendment, and any shares subject to outstanding awards under the Prior Plan that subsequently expire, terminate, or are surrendered or forfeited for any reason without issuance of shares will automatically become available for issuance under the 2019 Plan.

Up to 11,072,542 stock options may be granted under the 2019 Plan.

The shares of common stock issuable under the 2019 Plan will consist of authorized and unissued shares, treasury shares, and shares purchased on the open market or otherwise. 

Plan Amendment ”).

2019 Omnibus Incentive Plan (the “2019 Plan”), and the 2019 Plan was subsequently approved by holders of a majority of our outstanding voting securities on the same date.

Up to 11,072,542 stock options were originally grantable under the 2019 Plan.

Furthermore, the Company received written consents approving the 2019 Plan Amendment from holders of approximately 50.3 % of our outstanding voting securities.

In accordance with Rule 14c of the Securities Exchange Act of 1934, Our Board of Directors’

In accordance with Rule 14c of the Exchange Act, our Board of Directors’

authority to implement the 2019 Plan Amendment became effective February 28, 2022, twenty calendar days after notification of our shareholders.

The 2019 Plan Amendment will allow the Company to maintain a sufficient number of available shares for future grants under the 2019 Plan.

Non-Qualified Stock Options

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Outstanding at January 1, 2021

$ 0.54  

Options granted

Options forfeited/expired

( 560 )  

Outstanding at December 31, 2021

Options granted

Options forfeited/expired

( 460 )  

Outstanding at December 31, 2022

$ 0.54  

Options vested and exercisable at December 31, 2022

$ 0.57  

During the year ended December 31, 2021, and 2020, the Company granted 80,000 and 50,000 options under the 2019 Plan, respectively.

The fair value of the option on the grant date was approximately $ 12,000 and $ 5,400 , respectively based on the following weighted average assumptions:

During the year ended December 31, 2022, no options were granted and 1,120,000 were forfeited under the 2019 Plan.

During the year ended December 31, 2021, 80,000 options were granted and 460,000 were forfeited under the 2019 Plan.

During the year ended December 31, 2021, the fair value of options granted on the issuance date totaled approximately $ 12,000 based on the following weighted average assumptions:

For the years ended

Exercise price

$ 0.4431  

Contractual term (years)

Volatility (annual)

85.0 %  

Risk-free rate

Dividend yield (per share)

During the year ended December 31, 2020, the Company modified 0.6 million options to accelerate certain employees’

option grants to allow the employee to exercise or receive the award.

The Company accounted for the modification as a Type III (improbable-to-probable) modification.

The Company recognized approximately $ 79,000 of additional compensation expense related to this modification during the year ended December 31, 2020.

As of December 31, 2022, there was approximately $ 340 of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the 2019 Plan.

That cost is expected to be recognized over a weighted average period of 2.7 years.

That cost is expected to be recognized by December 31, 2023.

For the year ended December 31, 2022, and 2021, the Company recorded compensation expense of $ 11,000 and $ 151,000 , respectively, related to the issuance of stock options.

Common Stock Awards

On April 26, 2019, in connection with employment agreements with its Chief Executive Officer and Chief Operating Officer, the Company issued market condition awards contingent upon the achievement of certain market capitalization targets.

The awards are subject to a three -year service vesting period.

The awards are settleable in a variable number of common shares based on defined percentages of the Company's total shares determined by market capitalization targets and are, therefore, classified as liabilities in accordance with ASC 718.

The fair value of the awards is remeasured at each reporting period until settlement.

Compensation cost is attributed over the period encompassing the derived service period and the explicit service period.

The fair value of the market condition awards on the termination date of February 12, 2020, was approximately $ 1,638,000 .

The market condition awards were valued using a Monte Carlo simulation technique, a risk-free interest rate of 1.44 % and a volatility of 75 % based on volatility over 3 years using daily stock prices.

For the year ended December 31, 2020, the Company recorded an expense of $ 1,322,000 for these awards.

In addition, as these market awards were eliminated during the first quarter of 2020 (see paragraph below), the Company reversed the entire compensation liability of $ 1,638,000 to Additional Paid In Capital during the year ended December 31, 2020.

On February 12, 2020, the Company, entered into a form of Amended and Restated Employment Agreement (together the “

Amended Employment Agreements ”) with both the Company’s Chief Executive Officer and Chief Operating Officer.

The terms of the Amended Employment Agreements have been amended as follows:

(i) the annual equity awards based upon, among other conditions, the Company’s market capitalization and a percentage of base salary have been eliminated;

however, the awards based on financial milestones remain in full force and effect;

and (ii) payment of the 2019 bonuses has been deferred, resulting in the accrual of such bonuses on the books and records of the Company.

All other terms of the respective Employment Agreements will remain in full force and effect subject to further review by the Board of Directors as it deems necessary and appropriate.

On April 26, 2019, as additional consideration for advisory services provided in connection with the Charlie’s Financing and the Share Exchange (see Note 3 above), the Company issued an aggregate of 9.0 million shares of common stock (the “

Advisory Shares ”), including to a member of the Company’s Board of Directors, pursuant to a subscription agreement.

The fair value of a share of common stock was $ 0.32 which is based upon a valuation prepared by the Company on the date of the Share Exchange.

The Company recorded stock-based compensation of approximately $ 2.9 million on the grant date.

Prior to the Share Exchange, Charlie’s employees held Member units, which were automatically converted into 71,000 shares of common stock and 69,815 shares of Series B Preferred (or 6.98 million shares of common stock equivalents) due to the effect of the Share Exchange.

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The fair value of a share of common stock was $ 0.32 which is based upon a valuation prepared by the Company on the date of the Share Exchange.

The Company recorded stock-based compensation of approximately $ 376,000 and $ 1,128,000 during the years ended December 31, 2021, and 2020, respectively.

The Company recognized the remaining stock-based compensation of approximately $ 376,000 during the year ended December 31, 2021.

Restricted Stock Awards

The following table summarizes restricted stock awards activities during the years ended December 31, 2022 and 2021 (all share amounts are in thousands).

Number of Shares

Weighted Average

Grant Date Fair

Value per Share

Nonvested at January 1, 2021

Restricted stock granted

Nonvested at December 31, 2021

Restricted stock granted

Nonvested at December 31, 2022

During the year ended December 31, 2022, the Company granted approximately 7,142,000 restricted shares (subject to forfeiture) ( “

RSAs ”) to employees, officers and directors of the Company pursuant to the 2019 Plan, as amended.

The RSAs are subject to a vesting schedule and have all the rights of a shareholder of the Company with respect to voting, share adjustments, receipt of dividends (if any) and distributions (if any) on such shares.

The RSAs had a grant date fair value of approximately $ 290,000 .

On April 1, 2021, the Board of Directors of the Company entered into an Employment Agreement (the " Agreement ") with Henry Sicignano III, MBA, pursuant to which the Company appointed Mr.

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Sicignano will serve as President for an initial period of two years, renewable on an annual basis unless earlier terminated by the Company or Mr.

Sicignano was awarded 1,500,000 restricted shares (subject to forfeiture) (“

Restricted Shares ”) of the Company.

Sicignano was awarded 1,500,000 restricted shares (subject to forfeiture) of the Company.

Restricted Shares will be subject to forfeiture in 750,000 share increments on April 1, 2022, and April 1, 2023, and will also be subject to additional forfeiture-release features set forth in Addendum A to the Employment Agreement of Henry Sicignano, III, included in the Company’s 8 -K filed April 6, 2021.

Restricted Shares, in the amount of 750,000 , were no longer subject to forfeiture as of April 1, 2022, with the remaining 750,000 shares still subject to forfeiture until April 1, 2023.

Restricted Shares are also subject to additional forfeiture-release features set forth in Addendum A to the Employment Agreement of Henry Sicignano, III, included in the Company’s 8-K filed April 6, 2021.

The grant date fair value of the 1,500,000 restricted shares was approximately $ 65,000 .

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The fair value of the 250,000 restricted shares was approximately $ 12,775 .

On March 2, 2022, the Company granted approximately 5.8 million restricted stock awards (“

RSAs ”) to employees, officers and directors of the Company pursuant to the 2019 Plan, as amended.

The RSAs will be subject to a vesting schedule and will have all the rights of a shareholder of the Company with respect to voting, share adjustments, receipt of dividends (if any) and distributions (if any) on such shares.

The Company recorded total stock-based compensation expense of approximately $ 552,000 and $ 3,072,000 during the years ended December 31, 2021, and 2020, respectively.

As of December 31, 2022, there was approximately $ 165,000 of total unrecognized compensation expense related to non-vested restricted share-based compensation arrangements granted under the 2019 Plan, as amended.

That cost is expected to be recognized over a weighted average period of 2.5 years.

The Company recorded total stock-based compensation of approximately $ 150,000 and $ 26,000 during the years ended December 31, 2022 and 2021 related to the RSAs, respectively.

NOTE 12 - COMMITMENTS AND CONTINGENCIES

The Company leases office space under agreements classified as operating leases that expire on various dates through 2024.

All of the Company’s lease liabilities result from the lease of its headquarters in Costa Mesa, California, which expires in 2024, its warehouse in Santa Ana, California, which expired in 2021, its office and warehouse in Denver, Colorado, which expires in 2022, and its warehouse space in Huntington Beach, California, which expires in 2022.

All of the Company’s lease liabilities result from the lease of its headquarters in Costa Mesa, California, which expires in 2024, its warehouse in Santa Ana, California, which was renewed in May 2022 and expires May 2025, its office and warehouse in Denver, Colorado, which expired in May 2022, and its warehouse space in Huntington Beach, California, which was renewed in June 2022.

On April 29, 2022, the Company entered into a commercial lease agreement for the Company’s sales and marketing operations in Williamsville, New York (“

Williamsville Lease ”) with Henry Sicignano Jr., a relative of the Company’s President, Henry Sicignano III.

The Williamsville Lease, which became effective on May 1, 2022, has a term of one year and a base rent of $ 1,650 per month.

The Williamsville Lease is considered a modified gross lease and therefore the Company will also be responsible for additional monthly expenses including gas, electricity, and internet.

The Williamsville Lease was evaluated and approved by the Company’s Board of Directors.

Such leases do not require any contingent rental payments, impose any financial restrictions, or contain any residual value guarantees.

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The total amount paid to related parties for the years ended December 31, 2022 and 2021 was $ 293,536 and $ 278,040 , respectively.

Effective June 1, 2022, the Company’s lease at 5331 Production Drive, Huntington Beach, CA was renewed for an additional three-year term, concluding May 31, 2025.

The renewal was not reflected in the Company’s June 30, 2022 interim financial statements, but was corrected during the quarter ended September 30, 2022.

Had it been properly recorded during the quarter ended June 30, 2022, the effect on the Company’s financial statements would have included an additional $ 429,000 in right-of-use assets, $ 430,000 in lease liabilities as well as an additional $ 1,000 in rent expense.

The Company performed a thorough assessment to determine the significance of the prior period error and concluded that it was neither quantitatively or qualitatively material to the Company’s financial position, results of operations or cash flows for the quarters ended June 30, 2022 and September 30, 2022.

At December 31, 2022, the Company had operating lease liabilities of approximately $ 801,000 and right of use assets of approximately $ 799,000 , which were included in the consolidated balance sheet.

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Operating cash flows from operating leases

Right-of-use assets exchanged for operating lease liabilities

Weighted-average remaining lease term –

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operating leases

12.0 %  

Maturities of our operating leases, excluding short-term leases, are as follows (amounts in thousands):

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Legal proceedings

From time to time, the Company may be involved in various claims and counterclaims and legal actions arising in the ordinary course of business. Other than as set forth below, there are no additional pending or threatened legal proceedings at this time.

Robinson Worldwide, Inc.

True Drinks, Inc .

On September 5, 2018, C.H.

Robinson Worldwide (“

Robinson ”) filed a complaint against True Drinks, Inc.

in the California Superior Court for the County of Orange located in Santa Ana, California alleging open book account, account stated, reasonable value of services received, agreement, and unjust enrichment related to shipping services provided by Robinson.

Robinson has asserted $ 121,743 in damages plus interest, attorney’s fees and costs.

On November 13, 2020 the Company and Robinson reached a Settlement Agreement and Mutual Release (“

Settlement Agreement ”) by which the Company agreed to pay the total sum of $ 50,000 in two equal installments of $ 25,000 .

The first payment was to be due on or before November 19, 2020 and the second payment was to be due on or before December 17, 2020.

The Company has satisfied its obligations set forth in the Settlement Agreement and has been relieved of any future liability in this matter. 

From time to time, the Company may be involved in various claims and counterclaims and legal actions arising in the ordinary course of business.

There are not material pending or threatened legal proceedings at this time.

NOTE 13- INCOME TAXES

The Company was classified as a partnership through the Closing Date, and therefore, not subject to entity level tax.

After the Closing Date, the Company is taxed as a C corporation and files a consolidated return with Charlie’s Holdings, Inc. 

This tax footnote also includes the tax impact of the Company’s VIE, Don Polly, LLC, which is also taxed as a C corporation, but which files a separate return from Charlie’s Holdings, Inc.

The table below presents the components of the provision for income taxes. 

The Company's provision is driven primarily current year operating income, nontaxable derivative fair value adjustments, and state taxes (in thousands).

The Company is taxed as a C corporation and files a consolidated return with Charlie's Holdings, Inc.

This tax footnote also includes the tax impact of the Company's VIE, Don Polly LLC, which is also taxed as a C corporation, but which files a separate return from Charlie's Holdings, Inc.

The table below presents the components of the (benefit) provision for income taxes.

The Company's (benefit) provision is driven primarily current year operating income, nontaxable derivative fair value adjustments, and state taxes (in thousands).

As of December 31,

Total current provision

Total deferred benefit

Total provision for income taxes

Total current (benefit) provision

Total deferred (benefit) provision

Total (benefit) provision for income taxes

The tax effects of temporary differences and tax loss carryovers that give rise to significant portions of deferred tax assets and liabilities at December 31, 2022 and 2021 are comprised of the following (in thousands):

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Lease liability

Research and development credits

Stock compensation

Transaction costs

Net operating loss carryovers

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Deferred tax asset, net of allowance

The Company recognizes Federal, and state deferred tax assets or liabilities based on the Company's estimate of future tax effects attributable to temporary differences and carryovers. 

The Company records a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized. 

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. 

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. 

The Company considers projected future taxable income and planning strategies in making this assessment. 

The Company recognizes Federal, and state deferred tax assets or liabilities based on the Company's estimate of future tax effects attributable to temporary differences and carryovers.

The Company records a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized.

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all the deferred tax assets will be realized.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible.

The Company considers projected future taxable income and planning strategies in making this assessment.

As of December 31, 2022, as a result of a three-year cumulative loss and lack of sufficient positive evidence, we concluded that a full valuation allowance was necessary to offset our deferred tax assets.

We intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal. 

The Company will continue to evaluate its deferred tax balances to determine any assets that are more likely than not to be realized.

At December 31, 2021, the Company had federal and state net operating loss carryovers for income tax purposes of approximately $ 4.2 million and $ 6.1 million, respectively.

At December 31, 2022, the Company had federal and state net operating loss carryovers for income tax purposes of approximately $ 5,704,000 and $ 7,458,000 , respectively.

The Federal net operating losses can be carried forward indefinitely but are limited to offsetting only 80% of taxable income each year.

The state net operating losses expire at various dates through 2042, if not utilized beforehand.

The utilization of net operating loss carryforwards and research tax credit carryovers could be subject to annual limitations under Section 382 and 383 of the Internal Revenue Code of 1986, and similar state tax provisions, due to ownership change limitations that may have occurred previously or that could occur in the future. 

At December 31, 2022, the Company had federal research and development credit carryovers of approximately $ 218,000 .

The federal research credits expire by 2040 if not utilized beforehand.

These ownership changes limit the amount of net operating loss carryforwards and other deferred tax assets that can be utilized to offset future taxable income and tax, respectively.

In general, an ownership change, as defined by Section 382 and 383, results from transactions increasing ownership of certain stockholders or public groups in the stock of the corporation by more than 50 percent points over a three -year period. 

The Company has not conducted an analysis of an ownership change under section 382.

The Company experienced an ownership change in 2019.

Absent an analysis, the Company has assumed that net operating losses generated prior to the change are not available to offset income subsequent to the ownership change date. 

To the extent that a study is completed, and certain pre-acquisition losses are deemed to be available to be utilized to offset taxable income, the Company's tax liabilities could be reduced. 

Absent an analysis, the Company has assumed that net operating losses generated prior to the change are not available to offset income subsequent to the ownership change date.

To the extent that a study is completed, and certain pre-acquisition losses are deemed to be available to be utilized to offset taxable income, the Company's tax liabilities could be reduced.

To the extent that a study is completed and additional or future ownership changes are deemed to occur, the Company's net operating losses and tax credits could be further limited.

A reconciliation of the statutory income tax rates and the Company's effective tax rate for the years ended December 31, 2022 and December 31, 2021, are as follows:

Year ended December 31, 2021

Year ended December 31, 2020

Statutory federal income tax rate

Non-taxed loss from VIE

Research credits

State taxes, net of federal tax benefit

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Change in valuation allowance

Income taxes provision (benefit)

Total effective tax rate

ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return.

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The following table summarizes the activity related to the Company’s gross unrecognized tax benefits at the beginning and end of the years ended December 31, 2022 and December 31, 2021 (in thousands):

Year ended December 31, 2021

Year ended December 31, 2020

Gross unrecognized tax benefits at the beginning of the year

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Gross unrecognized tax benefits at the end of the year

The unrecognized tax benefit amounts are reflected in the determination of the Company’s deferred tax assets. 

If recognized, none of these amounts would affect the Company’s effective tax rate, since it would be offset by an equal corresponding adjustment in the deferred tax asset valuation allowance. 

The unrecognized tax benefit amounts are reflected in the determination of the Company’s deferred tax assets.

If recognized, none of these amounts would affect the Company’s effective tax rate, since it would be offset by an equal corresponding adjustment in the deferred tax asset valuation allowance.

The Company does not foresee material changes to its liability for uncertain tax benefits within the next twelve months.

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As of December 31, 2022 and December 31, 2021, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s statement of operations.

The Company’s tax years from 2018 and 2017 forward remain open for examination by the Federal and state taxing authorities, respectively. 

In addition, to the extent that the Company's tax attributes are utilized in future years to offset income or income taxes, those years which generated the tax attributes are open and subject to examination by the taxing authorities. 

The Company’s tax years from 2019 and 2018 forward remain open for examination by the Federal and state taxing authorities, respectively.

The Company is not aware of any examinations that are currently taking place by federal or state taxing authorities.

NOTE 14- SUBSEQUENT EVENTS

On April 6, 2022, Charlie's Holding's, Inc., its wholly-owned subsidiary, Charlie's Chalk Dust, LLC and its variable interest entity, Don Polly LLC (collectively, the "Company" ), issued a secured promissory note ( "Note" ) to one of the Company's largest stockholders, Michael King (the "Lender" ) in the principal amount of $ 1,000,000 , which Note is secured by certain assets of the Company pursuant to the terms of a Security Agreement entered into by and between the Company and the Lender (the "Note Financing" ).

The Note requires the payment of principal and guaranteed interest in the amount of at least $ 90,000 on or before the earlier date of (i) a Liquidity Event, as defined under the terms of the Note;

or (ii) September 28, 2022.

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

The Company has evaluated events subsequent to December 31, 2021, to assess the need for potential recognition or disclosure in this report.

Such events were evaluated through April 12, 2022.

Based upon this evaluation, other than as set forth above, there were no items requiring disclosure.

The Company evaluated subsequent events for their potential impact on the consolidated condensed financial statements and disclosures through the date the consolidated condensed financial statements were available to be issued and determined that, except as set forth below, no subsequent events occurred that were reasonably expected to impact the consolidated condensed financial statements presented herein.

Future Receivables Sale Agreement

On January 19, 2023 the Company entered into a future receivables sale agreement (“

Receivables Financing ”

Receivables Financing Agreement ”) with Austin Business Finance (“

Austin Purchaser ”) by which Austin Purchaser purchases from the Company, its future accounts and contract rights arising from the sale of goods or rendition of services to the Company’s customers.

The purchase price, as defined by the Receivables Financing Agreement, was $ 650,000 which was paid to the Company on January 19, 2023, net of a 3 % origination fee.

The Receivables Financing Agreement requires twenty six equal payments of $ 29,500 to be paid weekly for a total repayment of $ 760,500 over the term of the agreement.

The Company is eligible for an early repayment discount if the balance paid prior to the July 21, 2023 termination date.

Preferred A Shareholders Consent

The Board of Directors and the holders of a majority of our Series A Preferred approved an amendment (the “

Amendment ”) to the Company’s Certificate of Designations, Preferences, and Rights of the outstanding shares of Series A Convertible Preferred Stock (the “

Certificate of Designations ”).

The Amendment (i) adds the New York Stock Exchange and the NYSE American markets to the list of national security exchanges that would satisfy the condition in Section 4(b)(i) of the Certificate of Designations which, upon a listing on such exchanges, causes an automatic conversion of the Series A Convertible Preferred Stock into shares of common stock and (ii) increases the amount of Permitted Indebtedness (as defined in the Certificate of Designations) from $ 2.5 million to an amount not to exceed $ 6.0 million.

The Amendment was effectuated through the filing of the Certificate of Amendment with the Secretary of the State of Nevada on March 29, 2023 and effective on such date.

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 9A. Controls and Procedures