Charlie's Holdings, Inc. 10-K

ITEM 9A. CONTROLS AND PROCEDURES    (a) Evaluation of Disclosure Controls and Procedures.   Our management, with the participation of our President, the principal executive officer, and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”) as of the end of the period covered by this Annual Report on Form 10-K. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.   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 ’ s Annual Report on Internal Control over Financial Reporting.   Section 404(a) of the Sarbanes-Oxley Act of 2002 requires that management document and test the Company’s internal control over financial reporting and include in this Annual Report on Form 10-K a report on management's assessment of the effectiveness of our internal control over financial reporting.   -38-     Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision of our principal executive and financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“ COSO ”). Based on that evaluation, our principal executive and financial officer concluded that our internal control over financial reporting was effective as of December 31, 2022.   This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financing reporting because we are not an “accelerated filer” or a “large accelerated filer”. Our management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Annual Report on Form 10-K.   (c) Changes in internal control over financial reporting.   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.   ITEM 9B. OTHER INFORMATION   None.   ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTION   Not applicable.     PART III   ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE   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:   Name   Age   Position Henry Sicignano   55   President (Principal Executive Officer) Matthew P. Montesano   37   Chief Financial Officer Ryan Stump   34   Chief Operating Officer and Director Adam Mirkovich   37   Chief Information Officer Scot Cohen   53   Director Jeffrey Fox   59   Director Edward Carmines   68   Director   The following biographical information regarding the foregoing directors and officers of the Company is presented below:   Henry Sicignano, III, President (Principal Executive Officer). Mr. Sicignano was appointed as President of the Company on April 1, 2021. Prior to joining the Company, Mr. Sicignano held multiple positions, including Chief Executive Officer of 22nd Century Group, Inc. (NASDAQ:  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. He also served as President and as a member of the Board of Directors with 22nd Century from January 2011 through July 2019. In addition, from December 2014 to August 2018, Mr. Sicignano served on the Board of Directors of Anandia Laboratories, Inc., a cannabis-focused science company that was sold to Aurora Cannabis (NYSE: ACB). Mr. Sicignano holds a B.A. Degree in Government from Harvard College and an M.B.A. Degree from Harvard University.   -39-     Matthew P. Montesano, Chief Financial Officer. Mr. Montesano was appointed as Chief Financial officer of the Company on May 10, 2021. Prior to his appointment, and since 2014, Mr. Montesano has served as Chief Financial Officer of Charlie’s Chalk Dust, LLC, the Company’s largest and most profitable operating division. Beginning in 2019, he also began serving as the Chief Financial Officer of Don Polly, LLC, the Company’s hemp-derived products division. Prior to joining the Company, Mr. Montesano worked for L’Oreal USA in a variety of corporate finance positions for the company’s Professional Products and Salon Centric divisions. Prior to L’Oreal USA, Mr. Montesano worked for KeyBanc Capital Markets as an investment banker where he focused on debt, equity and merger and acquisitions transactions in the industrials space.   Ryan Stump, Director and Chief Operating Officer. Mr. Stump was appointed as a director and the Company’s Chief Marketing Officer on April 26, 2019 in connection with the Share Exchange. Mr. Stump has served as the Chief Operating Officer of Charlie’s since 2014, during which time he has been responsible for all global operations of Charlie’s. Prior to joining Charlie’s, Mr. Stump worked as an Associate Territory Manager and then as a Territory Manager for ConMed, a medical sales device company, from 2010 to 2013. Mr. Stump also co-founded and continues to be engaged with multiple companies, including The Ohio House since 2011, the Buckeye Recovery Network since 2017, and The Mend California since 2018. Mr. Stump earned a B.S. and B.A. in Sports Marketing and Marketing from Duquesne University   The Board of Directors believes that Mr. Stump’s experience operating high growth companies, as well as entrepreneurial experience, is valuable to the Board as it manages the Company’s anticipated continued growth.   Adam Mirkovich, Chief Information Officer. Mr. Mirkovich was appointed as the Company’s Chief Information Officer on May 20, 2019. Mr. Mirkovich has over a decade of experience managing supply chains for consumer products. Mr. Mirkovich has served as an independent management consultant specializing in building and optimizing value chains for startups and growth stage companies in the beverage, nicotine vape, and nutritional supplements industries since 2013. Prior to joining the Company, Mr. Mirkovich served as the Chief Operating Officer of Orchid Ventures, Inc. (CSE: ORCD), a multi-state premium cannabis vape company, from September 2018 to April 2019. From December 2014 to February 2016, Mr. Mirkovich served as the Director of Supply Chain and Operations at Space Jam Juice, LLC, a distributor of premium vapor products. From November 2010 to April 2013, Mr. Mirkovich served as the Product Lifecycle Management Program Manager for Niagara Bottling, LLC, a leading bottled water manufacturer. While there, he led the product revision, introduction, and discontinuance practices for customers’ private labeled water, flavored, and carbonated beverages. Prior to that, Mr. Mirkovich served as a member of the Supply Chain Logistics team at Niagara Bottling, providing strategic support of company expansion activities and tactical support of purchasing, production planning, and multi-region logistics in North American operations. Mr. Mirkovich earned a Bachelor of Science degree in Business Administration and Economics from Chapman University.   Scot Cohen ,   Director . Mr. Cohen was appointed to the Board in March 2013 and is the Founder and Managing Partner of V3 Capital Partners, a private investment firm focused on early-stage companies primarily in the consumer products industry, and Co-Manager of Red Fortune Fund, a private equity fund based in Hong Kong. Mr. Cohen also is the Founder of Petro River Oil, LLC and Chairman of Petro River Oil Corp. (OTCBB: PTRC), a publicly traded oil and gas producer with assets in Kansas and Oklahoma, and Petro Spring, a global oil and gas technology solutions provider. Prior to creating V3 Capital Partners, Mr. Cohen was the Founder and Managing Partner at Iroquois Capital Opportunity Fund, a special situations private equity investment fund, and a Co-Founder of Iroquois Capital, a hedge fund with investments in small and micro-cap private and public companies. Mr. Cohen currently serves as a director on the Board of Directors of Wrap Technologies, Inc. (NASDAQ: WRTC), and is active in philanthropic activities with numerous charities including the Jewish Enrichment Council. Mr. Cohen received a Bachelor of Science degree from Ohio University in 1991.   The Board of Directors believes Mr. Cohen’s success with multiple private investment firms, his extensive contacts within the investment community, and his financial expertise are a valuable resource to the Company’s efforts to expand and implement its business plan.   Jeffrey Fox, Director . Mr. Fox was appointed to the Board effective July 16, 2019. He has been a leading business strategist, brand marketing authority and general management executive for some of the world's largest restaurant and consumer companies including roles as Chief Brand & Concept Officer for Pizza Hut, Co-founder of Collider LLC, a cultural marketing strategy firm, Managing Director of the California office of advertising agency Foote, Cone and Belding (FCB), various positions with the Yum! Brands and within Sony's interactive and PlayStation video game divisions, and Hill & Knowlton Public Relations. He is currently a member of the board of directors of Cici’s Pizza and Flix Brewhouse. Mr. Fox holds a bachelor's degree in Journalism from San Diego State University and received a master's degree in Mass Communications from California State University, Northridge.    The Board of Directors believes that Mr. Fox’s strong experience in brand building across several diverse Fortune 100 consumer product companies will be significantly valuable to the Company as it continues to rapidly grow its product offerings and launch new brands and products around the world.   -40-     Dr. Edward Carmines, Director. Dr. Carmines was appointed to the Board effective March 2, 2022. He is currently Chief Scientific Officer of Chemular, Inc., where he designs and directs scientific and regulatory programs for PMTAs for a host of contract clients across a wide range of tobacco product categories. He also currently serves as an Advisory Board Member of Sparq Life, Inc, focusing on the science of inhalation of non-tobacco products, and Principal for Carmines Consulting, LLC, where Dr. Carmines consults to the regulated tobacco industry in the field of toxicology and regulatory affairs. Previously, Dr. Carmines managed the safety of novel and oral tobacco products as a scientist with R.J. Reynolds Tobacco Co. From 1996-2009, Dr. Carmines served as a principal scientist for Philip Morris USA (Altria Client Services, Inc.), where he developed guidelines for safely testing cigarette ingredients and components based on the FDA Red Book. Dr. Carmines received a B.S. degree in Chemistry and a Ph.D. degree in Toxicology from the Medical College of Virginia (Virginia Commonwealth University).   The Board of Directors believes that Dr. Carmines extensive experience within the nicotine industry and navigating the regulatory process relating to the nicotine industry is significantly valuable to the Company due to the ongoing and evolving nature of the Company’s industry.   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.      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.   -41-     ITEM 11. EXECUTIVE COMPENSATION   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    ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS     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 2022 Annual Meeting of Stockholders   ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE   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 2022 Annual Meeting of Stockholders   ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES   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 2022 Annual Meeting of Stockholders   -42-     PART IV   ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES   Exhibit No.   Description 3.1   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. 3.2   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 3.2.1   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. 4.1   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. 4.2   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. 4.3   Description of Securities Registered Pursuant to Section 12 (filed herewith) 4.4   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  10.1   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. 10.2   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. 10.3   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. 10.4   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. 10.5   License Agreement by and between the Company and Don Polly, LLC, dated June 5, 2019, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed June 11, 2019. 10.6   Services Agreement by and between the Company and Don Polly, LLC, dated June 5, 2019, incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed June 11, 2019. 10.7   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. 10.8   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. 10.9   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 10.10   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 10.11   Promissory Note with Michael King dated April 6, 2022 (filed herewith) 10.11.1   Modification Agreement dated September 29, 2022 related to Promissory Note with Michael King dated April 6, 2022 (filed herewith) 10.11.2   Modification Agreement dated March 28, 2022 related to Promissory Note with Michael King dated April 6, 2022 (filed herewith) 10.12   Loan Agreement with Ryan Stump dated August 17, 2022 (filed herewith) 10.12.1   Amendment dated December 17, 2022 to Loan Agreement with Ryan Stump dated August 17, 2022 (filed herewith) 10.12.2   Amendment dated April 13, 2023 to Loan Agreement with Ryan Stump dated August 17, 2022 (filed herewith) 14.1   Code of Ethics filed with Form 10-K on March 31, 2011 and incorporated herein by reference. 14.2   Board Charter filed with Form 10-K on March 31, 2011 and incorporated herein by reference. 21.1   Subsidiaries of Charlie's Holdings, Inc., filed herewith. 23.1   Consent of Baker Tilly US filed herewith. 31.1   Certification of Principal Executive Officer as Required by Rule 13a-14(a)/15d-14, filed herewith. 31.2   Certification of Principal Financial Officer as Required by Rule 13a-14(a)/15d-14, filed herewith. 32.1   Certification of Principal Executive Officer as Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code, filed herewith. 32.2   Certification of Principal Financial Officer as Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code, filed herewith. 101.INS   Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.SCH   Inline XBRL Taxonomy Extension Schema 101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase 101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase 101.LAB   Inline XBRL Taxonomy Extension Label Linkbase 101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase 104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)   ITEM 16. FORM 10-K SUMMARY   None.   -43-     SIGNATURES   In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.   Date: April 17, 2023   CHARLIE’S HOLDINGS, INC.               By: /s/ Henry Sicignano III       Henry Sicignano III President (Principal Executive Officer)               /s/ Matthew P. Montesano       Matthew P. Montesano Chief Financial Officer (Principal Financial and Accounting Officer)         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.   Signature   Title   Date /s/ Henry Sicignano III Henry Sicignano III   President (Principal Executive Officer)   April 17, 2023           /s/ Matthew P. Montesano Matthew P. Montesano   Chief Financial Officer (Principal Financial and Accounting Officer)   April 17, 2023           /s/ Ryan Stump Ryan Stump   Chief Operating Officer and Director   April 17, 2023           /s/ Scot Cohen Scot Cohen   Director   April 17, 2023           /s/ Jeffrey Fox Jeffrey Fox   Director   April 17, 2023           /s/ Edward Carmines Edward Carmines   Director   April 17, 2023           REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM     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, 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.   Basis for Opinion   These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.   We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. 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. Accordingly, we express no such opinion.   Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.   Going Concern Uncertainty   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 and regulatory issues. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.   F-1     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 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 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 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.     /s/  Baker Tilly US LLP   We have served as the Company's auditor since 2018.   Irvine, California April 17, 2023   F-2       CHARLIE ’ S HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts)       December 31,     December 31,       2022     2021   ASSETS                 Current assets:                 Cash   $ 257     $ 866   Accounts receivable, net     1,161       1,368   Inventories, net     3,652       5,005   Prepaid expenses and other current assets     780       755   Total current assets     5,850       7,994                     Non-current assets:                 Property, plant and equipment, net     311       431   Right-of-use asset, net     799       755   Other assets     101       68   Total non-current assets     1,211       1,254                     TOTAL ASSETS   $ 7,061     $ 9,248                     LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                 Current liabilities:                 Accounts payable and accrued expenses   $ 2,333     $ 4,068   Note payable     1,000       -   Note payable, net - related party     300       -   Derivative liability     629       899   Lease liabilities     373       329   Deferred revenue     148       238   Total current liabilities     4,783       5,534                     Non-current liabilities:                 Notes payable, net of current portion     150       150   Lease liabilities, net of current portion     428       433   Total non-current liabilities     578       583                     Total liabilities     5,361       6,117                     COMMITMENTS AND CONTINGENCIES (see Note 12)                                   Stockholders' equity (deficit):                 Convertible preferred stock ($ 0.001 par value); 1,800,000 shares authorized                 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     -       -   Common stock ($ 0.001 par value); 500,000,000 shares authorized; 219,163,631 and 210,890,930 shares issued and outstanding as of December 31, 2022 and 2021, respectively     219       211   Additional paid-in capital     7,928       7,775   Accumulated deficit     ( 6,447 )     ( 4,855 ) Total stockholders' equity     1,700       3,131   TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 7,061     $ 9,248     The accompanying notes are an integral part of these consolidated financial statements.   F-3       CHARLIE ’ S HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts)       For the years ended       December 31,       2022     2021   Revenues:                 Product revenue, net   $ 26,424     $ 21,496   Total revenues     26,424       21,496   Operating costs and expenses:                 Cost of goods sold - product revenue     16,439       10,423   General and administrative     8,381       8,750   Sales and marketing     2,605       1,734   Research and development     804       24   Total operating costs and expenses     28,229       20,931   Income (loss) from operations     ( 1,805 )     565   Other income (expense):                 Interest expense     ( 155 )     ( 34 ) Change in fair value of derivative liabilities     270       3,545   Gain on debt extinguishment     -       1,060   Other income     6       14   Total other income     121       4,585   (Loss) income before income taxes     ( 1,684 )     5,150   Income taxes (benefit) provision     ( 92 )     342   Net (loss) income   $ ( 1,592 )   $ 4,808                     Net earnings (loss) per share                 Basic   $ ( 0.01 )   $ 0.02   Diluted   $ ( 0.01 )   $ 0.01   Weighted average number of common shares outstanding                 Basic     212,269,453       203,589,531   Diluted     212,269,453       237,686,875     The accompanying notes are an integral part of these consolidated financial statements.   F-4       CHARLIE ’ S HOLDINGS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUITY (DEFICIT) (in thousands)       Series A Convertible Preferred Stock     Common Stock     Additional Paid-in     Accumulated     Total Stockholders'       Shares     Par value     Shares     Par value     Capital     Deficit       Equity    Balance at January 1, 2021     204     $ -       189,907     $ 190     $ 3,477     $ ( 9,663 )   $ ( 5,996 ) Issuance of common stock to related parties for cash     -       -       3,517       3       2,997       -       3,000   Conversion of Series A convertible preferred stock     ( 62 )     -       13,977       14       ( 14 )     -       -   Issuance of common stock for dividend payment     -       -       1,736       2       768       -       770   Accrue dividends payable on Series A convertible preferred stock     -       -       -       -       ( 3 )     -       ( 3 ) Stock compensation     -       -       1,750       2       550       -       552   Fraction shares adjustment due to reverse split     -       -       3       -       -       -       -   Net income     -       -       -       -       -       4,808       4,808   Balance at December 31, 2021     142       -       210,890       211       7,775       ( 4,855 )     3,131   Conversion of Series A convertible preferred stock     ( 9 )     -       1,907       2       ( 2 )     -       -   Stock compensation     -       -       6,366       6       155       -       161   Net loss     -       -       -       -       -       ( 1,592 )     ( 1,592 ) Balance at December 31, 2022     133     $ -       219,163     $ 219     $ 7,928     $ ( 6,447 )   $ 1,700     The accompanying notes are an integral part of these consolidated financial statements.   F-5       CHARLIE ’ S HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)       For the years ended       December 31,       2022     2021   Cash Flows from Operating Activities:                 Net income   $ ( 1,592 )   $ 4,808   Reconciliation of net income to net cash used in operating activities:                 Allowance for doubtful accounts     269       109   Depreciation and amortization     296       210   Accretion of debt discount     3       -   Loss on disposal of fixed assets     13       -   Change in fair value of derivative liabilities     ( 270 )     ( 3,545 ) Amortization of operating lease right-of-use asset     396       445   Stock based compensation     161       552   Gain from debt extinguishment     -       ( 1,060 ) Subtotal of non-cash charges     868       ( 3,289 ) Changes in operating assets and liabilities:                 Accounts receivable     ( 62 )     ( 219 ) Inventories     1,353       ( 3,412 ) Prepaid expenses and other current assets     20       ( 305 ) Other assets     ( 33 )     3   Accounts payable and accrued expenses     ( 1,783 )     1,553   Deferred revenue     ( 90 )     ( 30 ) Lease liabilities     ( 401 )     ( 456 ) Net cash used in operating activities     ( 1,720 )     ( 1,347 ) Cash Flows from Investing Activities:                 Purchase of property, plant and equipment     ( 189 )     ( 110 ) Net cash used in investing activities     ( 189 )     ( 110 ) Cash Flows from Financing Activities:                 Proceeds from issuance of common stock to related parties     -       3,000   Proceeds from issuance of notes payable     1,000       184   Proceeds from issuance of note payable to related party     300       -   Repayment of notes payable     -       ( 1,400 ) Dividend payment     -       ( 883 ) Net cash provided by financing activities     1,300       901   Net decrease in cash     ( 609 )     ( 556 )                   Cash, beginning of the year     866       1,422   Cash, end of the year   $ 257     $ 866                     Supplemental disclosure of cash flow information                 Cash paid for interest   $ 90     $ 150   Cash paid for interest to related party   $ 10     $ -   Cash paid for income taxes   $ 106     $ -                     Supplemental disclosure of cash flow information                 Conversion of Series A convertible preferred stock   $ 2     $ 14   Issuance of common stock for dividend payment   $ -     $ 770   Recognize minimum accrued interest   $ 45     $ -     The accompanying notes are an integral part of these consolidated financial statements.    F-6     CHARLIE ’ S HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS       NOTE 1 – DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION   Description of the Business   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, 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.   Charlie’s Chalk Dust, LLC (“ Charlie ’ s ” or “ 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.   Reverse Stock Split   The Company’s Board of Directors approved a reverse stock split of the Company’s authorized, issued and outstanding shares of Common Stock, par value $ 0.001 per share, at a ratio of 1-for- 100 (the “Reverse Split”). The Reverse Split was effective as of June 16, 2021 ( the “ Effective Date ”). All share and per share amounts in the Form 10-K have been retroactively adjusted to account for the reverse stock split.   Basis of Presentation   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 ”).   Going Concern Uncertainty Regarding the Legal and Regulatory Environment, Liquidity and Management ’ 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. The Company operates in a rapidly changing legal and regulatory environment; new laws and regulations or changes to existing laws and regulations could significantly limit the Company’s ability to sell its products, and/or result in additional costs. Additionally, the Company was required to obtain approval from the United States Food and Drug Administration (" FDA ") to continue selling and marketing certain of products used for the vaporization of nicotine in the United States. Currently, a substantial portion of the Company’s sales are derived from products that are subject to approval by the FDA. There was significant cost associated with the application process and there can be no assurance the FDA will approve previous and/or future application. 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.   F-7     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. 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   The Company operates in an environment that is subject to rapid changes and developments in laws and regulations that could have a significant impact on the Company’s ability to sell its products. Beginning in September 2019, certain states temporarily banned the sale of flavored e-cigarettes, and several states and municipalities are considering implementing similar restrictions. Federal, state, and local governmental bodies across the United States have indicated that flavored e-cigarette liquid, vaporization products and certain other consumption accessories may become subject to new laws and regulations at the federal, state, and local levels. In addition, in June 2022, the FDA announced a plan to reduce nicotine levels in cigarettes to minimally or non-addictive levels. The application of any new laws or regulations that may be adopted in the future, at a federal, state, or local level, directly or indirectly implicating nicotine, flavored e-cigarette liquid and other electronic nicotine delivery system (“ ENDS ”) products, could significantly limit the Company’s ability to sell such products, result in additional compliance expenses, and/or require the Company to change its labeling and/or methods of distribution. Any ban of the sale of flavored e-cigarettes directly limits the markets in which the Company may sell its products. In the event the prevalence of such bans and/or changes in laws and regulations increase across the United States, or internationally, the Company’s business, results of operations and financial condition could be adversely impacted. In addition, the Company is presently seeking to obtain marketing authorization for certain of its tobacco-derived nicotine e-liquid products. The Company’s applications were submitted in September 2020 on a timely basis, which if approved, will allow the Company to continue to sell its approved products in the United States. Beginning in August 2021, the FDA began issuing Marketing Denial Orders (“ MDO ”) for ENDS products that lack evidence to demonstrate that permitting the marketing of such products would be appropriate for the protection of the public health. The Company has not received an MDO for any of its submissions; however, there is no assurance that regulatory approval to sell our products will be granted or that we would be able to raise additional financing if required, which could have a significant impact on our sales. 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 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   Principles of Consolidation   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.   Use of Estimates   The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.   F-8     Fair Value of Financial Instruments   U.S. GAAP requires disclosing the fair value of financial instruments to the extent practicable for financial instruments which are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement.   In assessing the fair value of financial instruments, the Company uses a variety of methods and assumptions, which are based on estimates of market conditions and risks existing at the time. The fair value of derivative liabilities was estimated using a Monte Carlo simulation method, based on both observable and unobservable inputs. 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   The Company recognizes revenues in accordance with Accounting Standards Codification (“ ASC ”) 606 – Contracts with Customers. Revenues are generated from contracts with customers that consist of sales to retailers and distributors. Contracts with customers are generally short term in nature with the delivery of product as a single performance obligation. Revenue from the sale of product is recognized at the point in time when the single performance obligation has been satisfied and control of the product has transferred to the customer. In evaluating the timing of the transfer of control of products to customers, the Company considers several indicators, including significant risks and rewards of products, the right to payment, and the legal title of the products. Based on the assessment of control indicators, sales are generally recognized when products are received by customers. Shipping generally occurs prior to the transfer of control to the customer and is therefore accounted for as a fulfillment expense.   In circumstances where shipping and handling activities occur after the customer has obtained control of the product, the Company has elected to account for shipping and handling activities as a fulfillment cost rather than an additional promised service. Contract durations are generally less than one year and, therefore, costs paid to obtain contracts, which generally consist of sales commissions, are recognized as expenses in the period incurred. Revenue is measured by the transaction price, which is defined as the amount of consideration expected to be received in exchange for providing goods to customers. The transaction price is adjusted for estimates of known or expected variable consideration, which includes refunds and returns as well as incentive offers, volume rebates and promotional discounts on current orders. Our volume rebates are short-term in nature and reset on a quarterly basis. Estimates for sales returns are based on, among other things, an assessment of historical trends, information from customers, and anticipated returns related to current sales activity. These estimates are established in the period of sale and reduce revenue in the period of the sale. Variable consideration related to incentive offers and promotional programs are recorded as a reduction to revenue based on amounts the Company expects to collect. Estimates are regularly updated and the impact of any adjustments are recognized in the period the adjustments are identified. In many cases, key sales terms such as pricing and quantities ordered are established at the time an order is placed and incentives have very short-term durations.   Amounts billed and due from customers are short term in nature and are classified as receivables since payments are unconditional and only the passage of time related to credit terms is required before payments are due. The Company does not grant payment financing terms greater than one year. Payments received in advance of revenue recognition are recorded as deferred revenue.   Cash and Cash Equivalents   The Company considers all liquid investments purchased with original maturities of ninety days or less to be cash equivalents.   Accounts   Receivable   Accounts receivable are recorded at the invoiced amount and do not bear interest. 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’ accounts are written off against the allowance when all attempts to collect have been exhausted. Recoveries of accounts receivable previously written off are recorded as income when received. As of December 31, 2022 and 2021, the allowance for bad debt totaled $ 158,000 and $ 109,000 , respectively.   F-9     Inventories   Inventories primarily consist of finished goods and are stated at the lower of cost (determined by the average cost method) or net realizable value. We calculate estimates of excess and obsolete inventories determined primarily by reviewing inventory on hand, historical sales activity, industry trends and expected net realizable value. As of December 31, 2022 and 2021, the reserve for excess and obsolete inventories totaled $ 733,000 and $ 156,000 , respectively.   Plant, Property and Equipment   Property and equipment are stated at cost. Depreciation and amortization are provided for using the straight-line method, in amounts sufficient to charge the cost of depreciable assets to operations over their estimated service lives. Repairs and maintenance costs are charged to operations as incurred.   Costs for capital assets not yet placed into service are capitalized as construction in progress on the consolidated balance sheets and will be depreciated once placed into service.   The Company assesses its long-lived assets for impairment whenever facts and circumstances indicate that the carrying amounts may not be fully recoverable. To analyze recoverability, the Company projects undiscounted net future cash flows over the remaining lives of such assets. If these projected undiscounted net future cash flows are less than the carrying amounts, an impairment loss would be recognized, resulting in a write-down of the assets with a corresponding charge to earnings. The impairment loss is measured based upon the difference between the carrying amounts and the fair values of the assets.   Leases   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. Operating leases with a duration greater than one year are included in right-of-use assets, lease liabilities, and lease liabilities, net of current portion in the Company’s consolidated balance sheets. Right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the net present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date. The incremental borrowing rate represents the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company considers a lease term to be the noncancelable period that it has the right to use the underlying asset.   The operating lease right-of-use assets also include any lease payments made and exclude lease incentives. Lease expense is recognized on a straight-line basis over the expected lease term. Variable lease expenses are recorded when incurred.   Stock-Based Compensation   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.   Income Taxes   Income taxes are computed under the liability method. This method requires the recognition of deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and are reflected in the consolidated financial statements in the period of enactment. A valuation allowance is recorded when it is more likely than not that some, or all of the deferred tax assets will not be realized.   F-10     Financial statement effects of a tax position are initially recognized when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that meets the more-likely-than-not threshold of being realized upon ultimate settlement with a taxing authority. We recognize potential accrued interest and penalties related to unrecognized tax benefits as income tax expense.   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. 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.   Segments   Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business in one operating segment.   The following table disaggregates revenue from our single operating segment by geographic market and customer type for the periods ending December 31, 2022 and 2021, respectively:       December 31, 2022     December 31, 2021   Geographic Market                 International     16 %     17 % United States     84 %     83 %                   Customer Type                 Retailer     30 %     38 % Distribution     70 %     62 %   Recently Issued Accounting Pronouncements   Measurement of Credit Losses on Financial Instruments   In June 2016 the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which supersedes current guidance requiring recognition of credit losses when it is probable that a loss has been incurred. The standard requires the establishment of an allowance for estimated credit losses on financial assets, including trade and other receivables, at each reporting date. The ASU will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted. The Company does not believe the impact of adopting this standard will be material to its consolidated financial statements and related disclosures.   Income Taxes   In December 2019, the FASB issued ASU No. 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. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. On January 1, 2021, the Company adopted this standard without any material impact on its consolidated financial statements and related disclosures.   F-11     Debt – Debt with conversion and Other Options   In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. 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 with no impact on its consolidated financial statements and related disclosures.   Earnings per Share   In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. This ASU will be effective for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. On October 1, 2022, the Company adopted this standard with no impact on its consolidated financial statements and related disclosures.     NOTE 3 – FAIR VALUE MEASUREMENTS   In accordance with ASC 820 (Fair Value Measurements and Disclosures), the Company uses various inputs to measure the outstanding warrants on a recurring basis to determine the fair value of the liability. ASC 820 also establishes a hierarchy categorizing inputs into three levels used to measure and disclose fair value. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to unobservable inputs. 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   F-12     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       Total     Level 1     Level 2     Level 3   Liabilities:                                 Derivative liability – Warrants     629       -       -       629   Total liabilities   $ 629     $ -     $ -     $ 629         Fair Value at December 31, 2021       Total     Level 1     Level 2     Level 3   Liabilities:                                 Derivative liability – Warrants     899       -       -       899   Total liabilities   $ 899     $ -     $ -     $ 899     There were no transfers between Level 1, 2 or 3 during the years ended December 31, 2022 and 2021.   The following table presents changes in Level 3 liabilities measured at fair value for the years ended December 31, 2022 and 2021. Both observable and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long- dated volatilities) inputs (amounts in thousands).          Derivative liability - Warrants   Balance at January 1, 2021     4,444   Change in fair value     ( 3,545 ) Balance at December 31, 2021     899   Change in fair value     ( 270 ) Balance at December 31, 2022   $ 629     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:   Warrant Liability                     December 31,     December 31,       2022     2021   Exercise price   $ 0.4431     $ 0.4431   Contractual term (years)     1.32       2.32   Volatility (annual)     100.0 %     90.0 % Risk-free rate     4.6 %     0.8 % Dividend yield (per share)     0 %     0 %   On April 26, 2019 (the “ Closing Date ”), the Company entered into a Securities Exchange Agreement (“ Share Exchange ”) with each of the former members (“ Members ”) of Charlie’s, and certain direct investors in the Company (“ Direct Investors ”), pursuant to which the Company acquired all outstanding membership interests of Charlie’s beneficially owned by the Members in exchange for the issuance by the Company of units. Immediately prior to, and in connection with, the Share Exchange, Charlie’s consummated a private offering of membership interests that resulted in net proceeds to Charlie’s of approximately $ 27.5 million (the “ Charlie ’ s Financing ”). In conjunction with the Share Exchange, the Company issued to holders of its Series A Convertible Preferred Stock (“ Series A Preferred ”) warrants to purchase an aggregate of 31,028,996 shares of Common Stock (the “ Investor Warrants ”) and to its placement agent Katalyst Securities LLC warrants to purchase an aggregate of 9,308,699 shares of Common Stock (the “ Placement Agent Warrants ”). Both the Investor Warrants and Placement Agent Warrants have a five-year term and a strike price of $ 0.44313 per share. Due to the exercise features of these warrants, they are not considered to be indexed to the Company’s own stock and are therefore not afforded equity treatment in accordance with ASC Topic 815, Derivatives and Hedging (“ ASC 815 ”). In accordance with ASC 815, the Company has recorded the Investor Warrants and Placement Agent Warrants as derivative instruments on its consolidated balance sheet. ASC 815 requires derivatives to be recorded on the balance sheet as an asset or liability and to be measured at fair value. Changes in fair value are reflected in the Company’s earnings for each reporting period.   F-13       NOTE 4 – PROPERTY AND EQUIPMENT   Property and Equipment detail as of December 31, 2022, and 2021 are as follows (amounts in thousands):   PP&E                                           December 31,     December 31,         2022     2021   Estimated Useful Life (in years) Machinery and equipment   $ 41     $ 42   5 Trade show booth     202       171   5 Office equipment     539       511   5 Leasehold improvements     254       380   Lesser of lease term or estimated useful life       1,036       1,104     Accumulated depreciation     ( 725 )     ( 673 )       $ 311     $ 431       Depreciation and amortization expense totaled $ 296,000 and $ 210,000 , respectively, during the years ended December 31, 2022 and 2021.     NOTE 5 – CONCENTRATIONS   Vendors   The Company’s concentration of purchases are as follows:       For the years ended       December 31,       2022     2021   Vendor A     40 %     42 % Vendor B     36 %     31 %   During the year ended December 31, 2022, purchases from two vendors represented 76 % of total inventory purchases. 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.   F-14     Accounts Receivable   The Company’s concentration of accounts receivable are as follows:       For the years ended       December 31,       2022     2021   Customer A     15 %     27 % Customer B     11 %     -     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.     NOTE 6 – DON POLLY, LLC.   Don Polly, LLC is a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, a former and current executive officer of the Company, respectively, and a consolidated variable interest for which the Company is the primary beneficiary. Don Polly formulates, sells and distributes the Company’s hemp-derived product lines.   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 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES   Accounts payable and accrued expenses as of December 31, 2022, and 2021 are as follows (amounts in thousands):   ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES                     December 31,     December 31,       2022     2021   Accounts payable   $ 1,222     $ 2,476   Accrued compensation     631       902   Accrued income taxes     137       342   Other accrued expenses     343       348       $ 2,333     $ 4,068     F-15       NOTE 8 – NOTES PAYABLE   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 . 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.   F-16     The following summarizes the Company’s notes payable maturities as of December 31, 2022 ( amounts in thousands):   Year Ending December 31, 2023     1,300   Year Ending December 31, 2024     -   Year Ending December 31, 2025     -   Year Ending December 31, 2026         Year Ending December 31, 2027         Thereafter     150   Total   $ 1,450       NOTE 9 – EARNINGS (LOSS) PER SHARE BASIC AND FULLY DILUTED   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, 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       December 31,       2022     2021   Net (loss) income - basic   $ ( 1,592 )   $ 4,808   Reversal of gain due to change in fair value of warrant liability     -       ( 3,545 ) Net (loss) income - diluted   $ ( 1,592 )   $ 1,263                     Weighted average shares outstanding - basic     212,269,453       203,589,531   Diluted stock options     -       168,309   Diluted warrants     -       1,912,544   Diluted preferred shares     -       32,016,491   Weighted average shares outstanding - diluted     212,269,453       237,686,875                     Basic (loss) earnings per share   $ ( 0.01 )   $ 0.02   Diluted (loss) earnings per share   $ ( 0.01 )   $ 0.01     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       December 31,       2022     2021   Options     6,003       6,955   Warrants     40,338       38,425   Total     46,341       45,380     F-17       NOTE 10 – STOCKHOLDERS ’ EQUITY   Series A Preferred Share Dividend & Share Waiver   On April 25, 2020 , the Company was required to pay a one-time dividend equal to eight percent ( 8 %) of the stated value of its Series A Preferred, equal to $ 1,650,000 (“ Dividend Amount ”), which Dividend Amount was required to be paid in cash on or before April 25, 2020 .   On August 13, 2020 , the Company received a formal notice of default from a holder of its Series A Preferred requesting full payment of dividends due and payable with respect to the Series A Preferred held by such holder on or before August 23, 2020 ( “ Dividend Default ”).   On April 21, 2021 , the Company issued a waiver and exchange agreement (“ Waiver Agreement ”) to shareholders of its Series A Preferred shares (“ Stock Payees ”) requesting such Stock Payee's respective amount of the dividend payment (each individual Stock Payee's respective amount the "Stock Payee Indebtedness" ) to be paid in the form of shares of Common Stock (the "Stock Payment" ) and agreeing to consummate an exchange of such Stock Payee's right to the Stock Payee Indebtedness in cash for shares of Common Stock (the "Exchange" ), pursuant to which the entire Stock Payee Indebtedness shall be exchanged for that number of shares of Common Stock (the “ Shares ”) equal to the total Stock Payee Indebtedness divided by $0.44313.   On May 25, 2021 , the Company entered into a Dividend Waiver and Exchange Agreement (the “ Exchange Agreement ”), between the Company and the holders (the “ Series A Holders ”) of its Series A Convertible Preferred Stock, par value $ 0.001 (“ Series A Preferred ”), pursuant to which the Company paid to the Series A Holders total consideration of approximately $ 1,650,000 (the “ Dividend Amount ”), which Dividend Amount was paid in the form of 1,736,501 shares of the Company’s common stock, par value $ 0.001 (“ Common Stock ”), valued at $ 0.44313 per share (the “ Shares ”), and approximately $ 880,000 in cash.   During the year ended December 31, 2021 , the Company incurred an additional $ 3,000 dividend payment in order to fully satisfy the Series A Preferred dividend.   As of December 31, 2021 , all dividend liability has been satisfied, which is reflected on the Company’s consolidated balance sheet.   Conversion of Series A Preferred Shares   For the year ended December 31 2022 , the Company issued approximately 1,907,000 shares of Common Stock upon conversion of 8,450 shares of Series A Preferred. For the year ended December 31, 2021 , the Company issued approximately 13,977,000 shares of Common Stock upon conversion of 61,937 shares of Series A Preferred.   March 2021 Private Placement   On March 19, 2021 , the Company entered into Securities Purchase Agreements by and between the Company and certain family trusts in which Mr. Brandon Stump and Mr. Ryan Stump, the Company's former Chief Executive Officer and Chief Operating Officer, respectfully, are trustees and beneficiaries (the " Purchase Agreements "), for the private placement of an aggregate of 3,517,000 shares of its common stock, par value $ 0.001 (" Common Stock "), at a purchase price per share of $ 0.853 (the " Private Placement "), which Private Placement was consummated on March 22, 2021 . The Private Placement resulted in gross proceeds to the Company of approximately $ 3.0 million. The Private Placement was undertaken pursuant to Rule 506 promulgated under the Securities Act of 1933 , as amended, and was consummated in a transaction approved by the Company's independent directors in accordance with Rule 16b-3(d)( 1 ) of the Securities Exchange Act of 1934 , as amended.     NOTE 11 – STOCK-BASED COMPENSATION   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. Up to 11,072,542 stock options were originally grantable under 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 “2019 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 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.   F-18     Non-Qualified Stock Options   The following table summarizes stock option activities during the year ended December 31, 2022 and 2021 (all option amounts are in thousands):   Options                                     Stock Options     Weighted Average Exercise Price     Weighted Average Remaining Contractual Life (in years)     Aggregate Intrinsic Value   Outstanding at January 1, 2021     7,503     $ 0.54       8.5     $ -   Options granted     80       0.44       10.0       -   Options forfeited/expired     ( 460 )     0.44       -       -   Outstanding at December 31, 2021     7,123       0.54       7.5     $ -   Options forfeited/expired     ( 1,120 )     0.44       -       -   Outstanding at December 31, 2022     6,003     $ 0.56       6.4     $ -   Options vested and exercisable at December 31, 2022     5,986     $ 0.56       6.4     $ -     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       December 31,       2021   Exercise price   $ 0.4431   Contractual term (years)     6.00   Volatility (annual)     85.0 % Risk-free rate     0.9 % Dividend yield (per share)     0 %   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 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.   F-19     Common Stock Awards   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. The 7.1 million shares of common stock vested over a two-year period. 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 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     1,750       0.044   Nonvested at December 31, 2021     1,750       0.044   Restricted stock granted     7,142       0.041   Vested     ( 1,500 )     -   Forfeited     ( 776 )     -   Nonvested at December 31, 2022     6,616     $ 0.041     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. 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. Mr. Sicignano was awarded 1,500,000 restricted shares (subject to forfeiture) of the Company. Mr. 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, 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 .   F-20     On November 1, 2021 (“ Grant Date ”) the Company granted to Jeff Fox, an Independent Director, 250,000 shares of Common Stock of the Company (“ Fox Shares ”) pursuant to the 2019 Plan. The grant of the Fox Shares was made in consideration for services rendered by Mr. Fox to the Company. Mr. Fox will have all the rights of a shareholder of the Company with respect to voting the 250,000 restricted shares awarded under this grant and share adjustments, receipt of dividends (if any) and distributions (if any) on such shares. Fox Shares will be subject to forfeiture in 125,000 share increments until the first to occur of the following: (i) each anniversary of the Grant Date; (ii) the event of a change in control of the Company; or (iii) the death, disability, or retirement of Mr. Fox. The fair value of the 250,000 restricted shares was approximately $ 12,775 .   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   Leases   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 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. Certain of the Company’s leases include renewal options and escalation clauses; renewal options have not been included in the calculation of the lease liabilities and right of use assets as the Company is not reasonably certain to exercise the options. Variable expenses generally represent the Company’s share of the landlord’s operating expenses. The Company does not act as a lessor or have any leases classified as financing leases.   The Company excludes short-term leases having initial terms of 12 months or less from Topic 842 as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term. The Company entered into a commercial lease for the Company’s corporate headquarters (the “ Lease ”) in Costa Mesa, California with Brandon Stump, the Company’s former Chief Executive Officer, Ryan Stump, the Company’s Chief Operating Officer, and Keith Stump, a former member of the Company’s Board of Directors. The Stumps 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 Mr. David Allen, the Company’s former Chief Financial Officer, after reviewing a detailed analysis of comparable properties and rent rates compiled by an independent, third-party consultant. 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.   F-21     The following summarizes quantitative information about the Company’s operating leases (amounts in thousands):       For the years ended       December 31,       2022     2021   Operating leases                 Operating lease cost   $ 480     $ 566   Variable lease cost     -       -   Operating lease expense     480       566   Short-term lease rent expense     13       -   Total rent expense   $ 493     $ 566         For the years ended       December 31,       2022     2021   Operating cash flows from operating leases   $ 484     $ 456   Right-of-use assets exchanged for operating lease liabilities   $ 440     $ -   Weighted-average remaining lease term – operating leases (in years)     2.06       2.38   Weighted-average discount rate – operating leases     12.0 %     12.0 %   Maturities of our operating leases, excluding short-term leases, are as follows (amounts in thousands):   Year Ending December 31, 2023     449   Year Ending December 31, 2024     385   Year Ending December 31, 2025     75   Total     909   Less present value discount     ( 108 ) Operating lease liabilities as of December 31, 2022   $ 801     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. There are not material pending or threatened legal proceedings at this time.   F-22       NOTE 13- INCOME TAXES   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,       2022     2021   Current                 US Federal   $ ( 89 )   $ 110   US State     ( 3 )     232   Total current (benefit) provision     ( 92 )     342   Deferred                 US Federal     -       -   US State     -       -   Total deferred (benefit) provision     -       -   Total (benefit) provision for income taxes   $ ( 92 )   $ 342     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):       As of December 31,       2022     2021   Deferred tax assets:                 Bad debt   $ 50     $ 47   Inventory     190       43   Accrued expenses     128       222   Lease liability     218       208   Research and development credits     141       -   Stock compensation     156       255   Net operating loss carryovers     1,642       1,224   Other     7       9   Derivatives     39       56   Total deferred income tax assets     2,571       2,064                     Deferred income tax liabilities:                 ROU assets     ( 217 )     ( 206 ) Fixed assets     ( 27 )     ( 18 ) Total deferred income tax liabilities     ( 244 )     ( 224 )                   Net deferred income tax assets             1,840   Valuation allowance     ( 2,327 )     ( 1,840 ) 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 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.   F-23     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.   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.   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. 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. 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, 2022     Year ended December 31, 2021   Statutory federal income tax rate     21.0 %     21.0 % Non-taxed loss from VIE     0.0 %     0.0 % Research credits     13.5 %     0.0 % State taxes, net of federal tax benefit     5.3 %     3.3 % Stock compensation     ( 4.5 )%     10.1 % Permanent Items     0.1 %     ( 4.3 )% Section 382 NOL Adjustments     0.0 %     3.1 % Derivatives     2.6 %     ( 11.1 )% Return to provision adjustments     0.1 %     ( 2.2 )% Other     ( 3.9 )%     ( 1.3 )% Change in valuation allowance     ( 28.8 )%     ( 12.0 )% Total effective tax rate     5.4 %     6.6 %   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. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. 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, 2022     Year ended December 31, 2021   Gross unrecognized tax benefits at the beginning of the year   $ 32     $ -   Increases related to current year positions     -       -   Increases related to prior year positions     77       32   Decreases related to prior year positions     -       -   Expiration of unrecognized tax benefits     -       -   Gross unrecognized tax benefits at the end of the year   $ 109     $ 32     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.   The Company policy is to recognize interest and penalties related to uncertain tax positions as a component of income tax expense. 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 2019 and 2018 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 is not aware of any examinations that are currently taking place by federal or state taxing authorities.   F-24       NOTE 14- SUBSEQUENT EVENTS   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 ” or “ 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.