What changed in this filing

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Item 1. Financial Statements

2023-05-19 compared with 2022-11-18 · 316 added, 573 removed, 444 unchanged (67% of the section changed)

13 unchanged sentences

Total non-current assets

$ 9,471  

$ 9,248  

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:

Accounts payable and accrued expenses

$ 3,061  

$ 4,068  

Note payable, net - related party

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1,800,000 shares authorized

Series A, 300,000 shares designated, 138,557 and 141,873 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively

Series B, 1,500,000 shares designated, 0 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively

Series A, 300,000 shares designated, 130,106 and 133,423 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively

Series B, 1,500,000 shares designated, 0 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively

Common stock ($ 0.001 par value);

500,000,000 shares authorized;

217,597,053 and 210,890,930 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively

224,112,168 and 219,163,631 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively

Additional paid-in capital

Accumulated deficit

( 4,544 )  

Total stockholders' equity

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$ 9,471  

$ 9,248  

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

4 unchanged sentences

For the three months ended

For the nine months ended

September 30,

Product revenue, net

$ 6,427  

$ 5,219  

$ 21,898  

$ 15,013  

Total revenues

21,898  

15,013  

Operating costs and expenses:

Cost of goods sold - product revenue

12,663  

General and administrative

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Total operating costs and expenses

22,034  

15,032  

Income (loss) from operations

( 136 )  

(Loss) income from operations

Other income (expense):

Interest expense

( 99 )  

Debt extinguishment gain

Change in fair value of derivative liabilities

Gain on debt extinguishment

Loss on disposal of fixed assets  

( 13 )  

Total other income

Income before income taxes

Provision for income taxes

$ 3,107  

$ 2,734  

Net earnings (loss) per share

$ 0.00  

$ 0.02  

$ 0.00  

$ 0.01  

$ ( 0.00 )  

$ 0.00  

$ ( 0.00 )  

$ 0.01  

Net (loss) income

Net (loss) earnings per share

Weighted average number of common shares outstanding

212,823,575  

206,321,051  

211,967,458  

201,206,587  

244,091,744  

238,550,798  

243,235,628  

243,674,985  

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

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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’

EQUITY (DEFICIT)

(in thousands)

For the Three Months Ended September 30, 2022

Series A Convertible Preferred Stock

Total Stockholders'

Paid-in Capital

Balance at July 1, 2022

Stock compensation

Balance at September 30, 2022

For the Three Months Ended September 30, 2021

Series A Convertible Preferred Stock

Total Stockholders'

Paid-in Capital

Deficit 

Balance at July 1, 2021

Conversion of Series A convertible preferred stock

Accrue dividends payable on Series A convertible preferred stock

Stock compensation

Balance at September 30, 2021

For the Nine Months Ended September 30, 2022

For the Three Months Ended March 31, 2023

Convertible Preferred Stock

Additional Paid-in

Total Stockholders'

Paid-in Capital

 Capital

Balance at January 1, 2023

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Stock compensation

Balance at September 30, 2022

For the Nine Months Ended September 30, 2021

Series A Convertible Preferred Stock

Balance at March 31, 2023

For the Three Months Ended March 31, 2022

Convertible Preferred Stock

Additional Paid-in

Total Stockholders'

Paid-in Capital

Deficit 

Balance at January 1, 2022

Issuance of common stock to related parties for cash

Conversion of Series A convertible preferred stock

Issuance of common stock for dividend payment

Accrue dividends payable on Series A convertible preferred stock

Stock compensation

Fraction shares adjustment due to reverse split

Balance at September 30, 2021

Balance at March 31, 2022

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

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(in thousands)

For the nine months ended

September 30,

For the three months ended

Cash Flows from Operating Activities:

$ 2,734  

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

Net (loss) income

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

Allowance for doubtful accounts

1 unchanged sentence

Accretion of debt discount

Loss on disposal of fixed assets

Change in fair value of derivative liabilities

( 598 )  

Debt extinguishment gain

Amortization of operating lease right-of-use asset

Stock based compensation

Gain from debt extinguishment

Subtotal of non-cash charges

1 unchanged sentence

Accounts receivable

( 451 )  

( 124 )  

Prepaid expenses and other current assets

( 105 )  

( 20 )  

Accounts payable and accrued expenses

( 1,100 )  

Deferred revenue

Lease liabilities

( 315 )  

Net cash used in operating activities

( 1,522 )  

Cash Flows from Investing Activities:

Purchase of property, plant and equipment

( 178 )  

Net cash used in investing activities

( 178 )  

Cash Flows from Financing Activities:

Proceeds from issuance of common stock to related parties

Proceeds from issuance of notes payable

Proceeds from issuance of note payable to related party

Repayment of notes payable

Dividend payment

Net cash provided by financing activities

Net decrease in cash

( 400 )  

Net increase (decrease) in cash

Cash, beginning of the period

Cash, end of the period

$ 1,270  

Supplemental disclosure of cash flow information

Cash paid for interest

$ ( 90 )  

Cash paid for interest to related party

$ ( 3 )  

Cash paid for income taxes

Supplemental disclosure of non-cash financing activities

Supplemental disclosure of cash flow information

Conversion of Series A convertible preferred stock

Issuance of common stock for dividend payment

Dividends paid on Series A convertible preferred stock

Accrued interest on notes payable

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

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Description of the Business

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

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

Company ”, “

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

The Company’s products are produced domestically by 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.

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

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

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

In June 2019 , The Company launched distribution of certain premium vapor, ingestible and topical products containing hemp-derived cannabidiol (“

CBD ”) and other compounds derived from hemp through Don Polly, a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, the Company's former Chief Executive Officer and current Chief Operating Officer, respectively, and a consolidated variable interest for which the Company is the primary beneficiary (“

Don Polly ”).

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

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

Charlie’s Chalk Dust, LLC (“

Charlie ’

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

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

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

The Company's common stock, par value $ 0.001 per share (the “

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s Plan of Operation

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

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 apply for FDA approval to continue selling and marketing its 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 United States Food and Drug Administration (“

FDA ”).

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

In addition, the outbreak of COVID- 19 (“

Coronavirus ”) has had a negative impact on the Company’s supply chain and sales.

For the nine months ended September 30, 2022, the Company generated a loss from operations of approximately $ 136,000 , and a consolidated net income of approximately $ 311,000 , but used cash in operations of approximately $ 1,522,000 .

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 three months ended March 31, 2023, the Company’s revenue declined sequentially, the Company generated a loss from operations of approximately $ 1,517,000 , and a consolidated net loss of approximately $ 1,390,000 and used cash in operations of approximately $ 241,000 .

The Company had stockholders’

equity of $ 3,529,000 at September 30, 2022.

During the three months ended September 30, 2022, the Company’s working capital requirements continued to evolve as current assets decreased to $ 8.1 million from $ 8.8 million as of June 30, 2022 and current liabilities decreased to $ 5.3 million from $ 6.0 million as of June 30, 2022.

Considering these facts, the issuance of one or several Marketing Denial Orders (“

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

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

Management's plans depend on its ability to increase revenues, raise additional capital, 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.

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, including the need to seek and obtain an order from FDA authorizing the continued marketing of these products. 

As such, the Company filed new PMTAs, for its synthetic Pacha products on May 13, 2022, prior to the May 14, 2022 deadline.

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

equity of $ 355,000 at March 31, 2023.

During the three months ended March 31, 2023, the Company’s working capital requirements continued to evolve as current assets decreased to $ 4,935,000 from $ 5,850,000 as of December 31, 2022 and current liabilities increased to $ 4,217,000 from $ 4,783,000 as of December 31, 2022.

Considering these facts, the issuance of one or several MDOs from the FDA would increase the potential for inventory obsolescence and uncollectable accounts receivables and potentially require us to remove products from circulation.

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

Management's plans depend on its ability to increase revenues, procure cost-effective financing, and continue its business development efforts, including the expenditure of approximately $ 5.1 million to date, to support the Pre-Market Tobacco Application (“PMTA”) process for the Company’s submissions to the FDA.

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

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

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

1 unchanged sentence

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

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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. 

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 intends to pursue an administrative appeal with FDA regarding its refusal to accept certain of the PMTAs we submitted for our synthetic nicotine products, and in parallel we intend to resubmit PMTAs for, and to continue to sell, the affected 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.

16 unchanged sentences

There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2022 Annual Report.

Recent Accounting Standards  

In June 2016, the Financial Accounting Standards Board (“

FASB ”) issued Accounting Standards Update (“

ASU ”) No.

2016 - 13, “

Measurement of Credit Losses on Financial Instruments ”

ASU 2016 - 13 "), which supersedes current guidance requiring recognition of credit losses when it is probable that a loss has been incurred.

ASU 2016 - 13 requires the establishment of an allowance for estimated credit losses on financial assets, including trade and other receivables, at each reporting date.

ASU 2016 - 13 will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash.

ASU 2016 - 13 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 condensed consolidated financial statements and related disclosures.

Recent Accounting Standards   

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued Accounting Standards Update ASU No.

2016‑13, Financial Instruments-Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, which was codified with its subsequent amendments as ASC Topic 326, Financial Instruments –

Credit Losses (“

ASC 326 ”).

ASC 326 seeks to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments, including trade receivables, and other commitments to extend credit held by a reporting entity at each reporting date.

The amendments require an entity to replace the incurred loss impairment methodology in other GAAP with a methodology that reflects current expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

The adoption of this guidance on January 1, 2023 did not have a material impact on the Company’s unaudited condensed consolidated financial statements and disclosures.

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 ”

ASU 2020 - 06 ”).

ASU 2020 - 06 eliminates the beneficial conversion and cash conversion accounting models for convertible instruments.

It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions.

In addition, ASU 2020 - 06 modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings per share ( “

EPS ”) computation.

The amendments in ASU 2020 - 06 are effective for smaller reporting companies as defined by the SEC for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.

Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020.

The Company is currently evaluating the impact of ASU 2020 - 06 on its condensed consolidated financial statements.

In May 2021, the FASB issued ASU No.

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 ) ”

ASU 2021 - 04 ”).

ASU 2021 - 04 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.

ASU 2021 - 04 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.

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:

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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.

ASU 2021 - 04 was adopted for all entities for fiscal years beginning after December 15, 2021.

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.

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

In June 2022, the FASB issued ASU 

2022 - 03,  ASC Subtopic 820  “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”.

The FASB is issuing this Update ( 1 ) to clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, ( 2 ) to amend a related illustrative example, and ( 3 ) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820.

For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years.

Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance.

The Company is currently evaluating the impact of ASU 2022 - 03 on its condensed consolidated financial statements.

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

NOTE 3 –

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

The following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy as of September 30, 2022, and December 31, 2021 ( amounts in thousands):

Fair Value at September 30, 2022

The following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy as of March 31, 2023, and December 31, 2022 (amounts in thousands):

Fair Value at March 31, 2023

Derivative liability - Warrants

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Total liabilities

There were no transfers between Level 1, 2 or 3 during the nine -month period ended September 30, 2022.

The following table presents changes in Level 3 liabilities measured at fair value for the nine -month period ended September 30, 2022.

There were no transfers between Level 1, 2 or 3 during the three month period ended March 31, 2023.

The following table presents changes in Level 3 liabilities measured at fair value for the three-month period ended March 31, 2023.

Both observable and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category.

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Change in fair value

Balance at September 30, 2022

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 September 30, 2022, and December 31, 2021, is as follows:

September 30,

Balance at March 31, 2023

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 March 31, 2023, and December 31, 2022, is as follows:

Exercise price

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NOTE 4 - PROPERTY AND EQUIPMENT

Depreciation and amortization expense totaled $ 55,000 and $ 53,000 respectively, during the three months ended September 30, 2022 and 2021.

Depreciation and amortization expense totaled $ 244,000 and $ 155,000 , respectively, during the nine months ended September 30, 2022 and 2021.

 Property and equipment as of September 30, 2022, and December 31, 2021, are as follows (dollar amounts in thousands):

September 30,

Depreciation and amortization expense totaled $ 42,000 and $ 67,000 respectively, during the three months ended March 31, 2023 and 2022.

Property and equipment as of March 31, 2023, and December 31, 2022, are as follows (dollar amounts in thousands):

Estimated Useful Life

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For the three months ended

For the nine months ended

September 30,

During the three months ended September 30, 2022 and 2021, purchases from four and two vendors, respectively, represented 89 % and 86 %, respectively, of total inventory purchases.

During the nine months ended September 30, 2022 and 2021, purchases from two vendors represented 73 % and 80 %, respectively, of total inventory purchases.

As of September 30, 2022, and December 31, 2021, amounts owed to these vendors totaled $ 2,542,000 and $ 1,565,000 , respectively, which are included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.

During the three months ended March 31, 2023 and 2022, purchases from two and three vendors, respectively, represented 78 % and 76 %, respectively, of total inventory purchases.

As of March 31, 2023 and December 31, 2022, amounts owed to these vendors totaled $ 417,000 and $ 200,000 , respectively, which are included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.

Accounts Receivable

The Company’s concentration of accounts receivable is as follows:

September 30,

One customer made up more than 10 % of net accounts receivable at September 30, 2022 and 2021.

Customer A owed the Company a total of $ 275,000 , representing 15 % of net receivables at September 30, 2022.

Three customers made up more than 10% of net accounts receivable at March 31, 2023 and 2022.

Customer A owed the Company a total of $ 158,000 , representing 20 % of net receivables at March 31, 2023.

Customer C owed the Company a total of $ 110,000 , representing 14 % of net receivables at December 31, 2022.

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

No customer exceeded 10% of total net sales for the nine -month periods ended September 30, 2022 and 2021.

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

No customer exceeded 10% of total net sales for the three-month periods ended March 31, 2023 and 2022.

NOTE 6 –

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ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses as of September 30, 2022, and December 31, 2021, are as follows (amounts in thousands):

September 30,

Accounts payable and accrued expenses as of March 31, 2023 and December 31, 2022, are as follows (amounts in thousands):

Accounts payable

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NOTES PAYABLE

Red Beard Holdings, LLC Note Payable

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

Minimum Interest ”).

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

The Red Beard Note was subsequently amended on August 27, 2020, September 30, 2020, October 29, 2020, December 1, 2020, and January 19, 2021, ultimately increasing Principal Amount to $ 1,400,000 and Minimum Interest to $ 150,000 .

On March 24, 2021, the Company and Red Beard entered into a Satisfaction and Release (the " Red Beard Release "), pursuant to which the Company made a payment to Red Beard in the amount of $ 1,550,000 in exchange for an acknowledgment of satisfaction and full release of the Company by Red Beard from liability and obligations arising under the Red Beard Note.

Small Business Administration Loan Programs

On April 30, 2020, Charlie's received approval to enter into a U.S.

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

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

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

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

During the year ended December 31, 2021, Charlie’s received notice from SBA Lender that the Charlie’s PPP Loan was forgiven, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the SBA.

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

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

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

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

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

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

Interest, however, continued to accrue during that time.

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

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

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

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

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

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

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

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

During the year ended December 31, 2021, Don Polly received notice from the Polly Lender that the Polly PPP Loan 2 was forgiven, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the SBA.

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

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

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

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

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

January 2023 Receivables Financing

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

Receivables Financing ”

Receivables Financing Agreement ”) with Austin Business Finance (“

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

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

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

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

During the three months ended March 31, 2022, the Company made approximately $ 263,000 cash payment.

As of March 31, 2023, the outstanding principal under the Receivables Financing Agreement was approximately $ 497,000 .

April 2022 Note Financing

On April 6, 2022, the Company issued a secured promissory note (" Note ") to one of its largest stockholders, Michael King (the " Lender ") in the principal amount of $ 1,000,000 , which Note is secured by certain assets of the Company pursuant to the terms of a Security Agreement entered into by and between the Company and the Lender (the " Note Financing ").

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 $ 90,000 accrued interest under the Note through such date.

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

or (ii) March 28, 2023.

The Company used the proceeds from the Note Financing for general corporate purposes, and its working capital requirements.

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.

Immediately following the second modification, the Company entered into a third modification agreement to further extend the maturity date to March 28, 2025.

The third modification agreement was effective on March 28, 2023 and superseded the second modification.

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 March 28, 2025, 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 –

4 unchanged sentences

The Loan bears an annual interest rate of 10 %.

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

The following summarizes the Company’s notes payable maturities as of September 30, 2022 ( amounts in thousands):

Remaining months Ending December 31, 2022

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.

The following summarizes the Company’s notes payable maturities as March 31, 2023 (amounts in thousands):

Nine months Ending December 31, 2023

Year Ending December 31, 2024

1 unchanged sentence

Year Ending December 31, 2026

Year Ending December 31, 2027

NOTE 9 –

EARNINGS (LOSS) PER SHARE APPLICABLE TO COMMON STOCKHOLDERS

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

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

(LOSS) EARNINGS PER SHARE APPLICABLE TO COMMON STOCKHOLDERS

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

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 three  and nine months ended September 30, 2022 and 2021, net income (loss) is adjusted for gain from change in fair value of warrant liabilities.

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

For the three months ended March 31, 2022, net income is adjusted for gain from change in 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 three months ended

For the nine months ended

September 30,

Net income - basic

Net (loss) income - basic

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

Net income (loss) - diluted

Net (loss) income - diluted

Weighted average shares outstanding - basic

Diluted stock options

Diluted warrants

Diluted preferred shares

Weighted average shares outstanding - diluted

Basic earnings per share

Diluted earnings (loss) per share

Basic (loss) earnings per share

Diluted (loss) earnings per share

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

For the nine months ended

September 30,

For the three months ended

NOTE 10 –

STOCKHOLDERS ’

Series A Preferred Share Dividend & Share Waiver

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 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 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 valued at $ 0.44313 per share, and approximately $ 880,000 in cash.

As of September 30, 2022, all dividend liability has been satisfied which is reflected on the Company’s condensed consolidated balance sheet.

Conversion of Series A Preferred Shares

During the nine months ended September 30, 2022, the Company issued approximately 748,000 shares of Common Stock upon conversion of 3,316 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, 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 (the “

Exchange Act ”).

During the three months ended March 31, 2023, the Company issued approximately 749,000 shares of Common Stock upon conversion of 3,317 shares of Series A Preferred.

NOTE 11 –

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Non-Qualified Stock Options

The following table summarizes stock option activities during the nine months ended September 30, 2022 ( all option amounts are in thousands):

The following table summarizes stock option activities during the three months ended March 31, 2023 (all option amounts are in thousands):

Stock Options

4 unchanged sentences

Options forfeited/expired

Outstanding at September 30, 2022

Options vested and exercisable at September 30, 2022

As of September 30, 2022, there was approximately $ 500 of total unrecognized compensation expense related to non-vested stock option compensation arrangements granted under the 2019 Plan, as amended.

That cost is expected to be recognized over a weighted average period of 1.3 years.

For the three and nine months ended September 30, 2022, the Company recorded compensation expense of approximately $ 200 and $ 11,000 , respectively, related to the granting of stock options.

Restricted Stock Awards  

The following table summarizes restricted stock awards activities during the nine months ended September 30, 2022 ( all share amounts are in thousands):

Outstanding at March 31, 2023

Options vested and exercisable at March 31, 2023

As of March 31, 2023, there was approximately $ 190 of total unrecognized compensation expense related to non-vested stock option compensation arrangements granted under the 2019 Plan, as amended.

That cost is expected to be recognized in 9 months.

For the three months ended March 31, 2023, the Company recorded compensation expense of approximately $ 160 related to the granting of stock options.

Restricted Stock Awards

The following table summarizes restricted stock awards activities during the three months ended March 31, 2023 (all share amounts are in thousands):

Number of Shares

2 unchanged sentences

Restricted stock granted

Nonvested at September 30, 2022

During the nine months ended September 30, 2022, the Company granted approximately 6.3 million restricted stock awards (“

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

Nonvested at March 31, 2023

During the three months ended March 31, 2023, the Company granted 4,200,000 restricted stock awards (“

RSAs ”) to 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.

As of September 30, 2022, there was approximately $ 201,000 of total unrecognized compensation expense related to non-vested restricted share-based compensation arrangements granted under the 2019 Plan, as amended.

The grant date fair value was approximately $ 137,000 .

As of March 31, 2023, there was approximately $ 240,000 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 2.3 years.

The Company recorded total stock-based compensation of approximately $ 30,000 and $ 76,000 during the three and nine months ended September 30, 2022 related to the RSAs, respectively.

The Company recorded total stock-based compensation of approximately $ 45,000 during the three months ended March 31, 2023 related to the RSAs, respectively.

NOTE 12 –

1 unchanged sentence

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 expires in 2022.

All of the Company’s lease liabilities result from the lease of its headquarters in Costa Mesa, California, which expires in 2024, and its warehouse in Huntington Beach, California, which was renewed in May 2022 and expires May 2025.

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

15 unchanged sentences

The terms of the Lease were negotiated and approved by the independent members of the Board of Directors, after reviewing a detailed analysis of comparable properties and rent rates compiled by an independent, third-party consultant.

The total rent paid to related parties for the nine months ended September 30, 2022 and 2021 was $ 206,920 and $ 208,530 , respectively.

The total rent paid to related parties for the three months ended March 31, 2023 and 2022 was approximately $ 74,000 and $ 69,000 , 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 September 30, 2022, the Company had operating lease liabilities of approximately $ 887,000 and right of use assets of approximately $ 886,000 which were included in the condensed consolidated balance sheet.

The following table summarizes quantitative information about the Company’s operating leases for the three and nine months ended September 30, 2022 and 2021 (amounts in thousands):

At March 31, 2023, the Company had operating lease liabilities of approximately $ 712,000 and right of use assets of approximately $ 709,000 which were included in the condensed consolidated balance sheet.

The following table summarizes quantitative information about the Company’s operating leases for the three months ended March 31, 2023 and 2022 (amounts in thousands):

For the three months ended

For the nine months ended

September 30,

Operating leases

4 unchanged sentences

Total rent expense

For the nine months ended

September 30,

For the three months ended

Operating cash flows from operating leases

Right-of-use assets exchanged for operating lease liabilities

Weighted-average remaining lease term –

2 unchanged sentences

operating leases

12.0 %  

Maturities of our operating leases as of September 30, 2022, excluding short-term leases, are as follows (amounts in thousands):

Three Months Ending December 31, 2022

Maturities of our operating leases as of March 31, 2023, excluding short-term leases, are as follows (amounts in thousands):

Nine Months Ending December 31, 2023

Year Ending December 31, 2024

Year Ending December 31, 2025

Less present value discount

Operating lease liabilities as of September 30, 2022

Operating lease liabilities as of March 31, 2023

Legal Proceedings

4 unchanged sentences

NOTE 13 –

Income taxes for the three and nine months ended September 30, 2022 and 2021 have been calculated based on an estimated annual effective tax rate.

For the three and nine months ended September 30, 2022, the Company recorded a tax expense of approximately $ 45,000 and $ 45,000 , respectively.

The Company’s income tax expense for the three and nine months ended September 30, 2022 was related to current year projected income that is not eligible to be offset with prior year tax attribute carryovers.

The Company’s income tax expense for the three and nine months ended September 30, 2021 was related to federal and state income not eligible to be offset with prior year net operating loss carryovers.

Income tax expense is comprised of domestic (US federal and state) income taxes at the applicable tax rates, adjusted for non-deductible expenses, stock compensation expenses, and other permanent differences.

Our income tax provision may be significantly affected by changes to our estimates. 

Our income tax provision may be affected by changes to our estimates.

However, due to the full valuation allowance on our deferred tax assets, the net impact to our overall income tax expense is limited.

2 unchanged sentences

We may have experienced such ownership changes in the past, and we may experience ownership changes in the future or subsequent shifts in our stock ownership, many of which are outside our control.

As of December 31, 2021, we had state NOLs of approximately $ 6.1 million and federal NOLs of approximately $ 4.3 million.

As of December 31, 2022, we had state net operating losses (“

NOLs ”) of approximately $ 7.7 million and federal NOLs of approximately $ 5.7 million.

The federal NOLs do not expire but the state NOLs expire if not utilized before 2042.

5 unchanged sentences

For these reasons, even if we attain profitability, we may be unable to use a material portion of our NOLs and other tax attributes.

For the three months ended March 31, 2023 and 2022, the Company's estimate for income taxes was not determined to be significant, and therefore, is not reflected in the Company's condensed consolidated financial statements and related disclosures.

NOTE 14 –

19 unchanged sentences

, or similar references mean Charlie ’

s Holdings, Inc.

(formerly True Drinks Holdings, Inc.), its subsidiaries and consolidated variable interest entity on a consolidated basis.

References to “

Charlie ’

refer to Charlie ’

s Chalk Dust, LLC, a California limited liability company and wholly-owned subsidiary of the Company, and “

Don Polly ”

refers to Don Polly, LLC, a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, the Company ’

s former Chief Executive Officer and current Chief Operating Officer, respectively, and a consolidated variable interest ( “

) for which the Company is the primary beneficiary.

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

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

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

s Holdings, Inc., its subsidiaries and consolidated variable interest entity on a consolidated basis.

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

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

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

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

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

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

CBD ”).

In the future we intend to continue developing and launching additional products containing other compounds derived from hemp.

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

Operational Plan

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

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

We believe there is a significant growth potential in the hemp-derived products space, and we have shifted our focus in this business to the market for products containing compounds that are synthetically derived from hemp, including Delta-8-Tetrahydrocannabinol (“

Delta-8-THC ”) and other synthetic tetrahydrocannabinol (“

Synthetic THC ”) compounds.

Also referred to as “alternative cannabis products,”

hemp-derived products mitigate the current PMTA regulatory risk that is related to the Company’s nicotine products.

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

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

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

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

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

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

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

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

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

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

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

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

vapor products market.

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

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

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

As a result of the Agriculture Improvement Act (the “

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

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

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

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

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

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

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

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

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

Accordingly, the category represents a unique opportunity for our Company to (i) market to adult consumers, and (ii) sell directly to adult consumers. 

For these reasons, the Company’s alternative cannabis products enable us to pursue what we believe is a significant commercial opportunity in a category that has grown rapidly in recent years.

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

Presently, approximately 15% of our vapor product sales come from international markets.

We are well positioned to increase sales in countries where we already have a presence and, leveraging our existing distribution platform, we intend to exploit new overseas markets.

Specifically, the Company intends to launch proprietary new disposables, along with e-liquids, both of which have been specially formulated for the European and Middle East markets.

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

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

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

Ever-changing nicotine vapor products continue to represent one of Charlie’s principal product categories.

We are continuing with our plan to seek and obtain marketing authorization for certain of our nicotine-based vapor products through the submission of our September 2020 Premarket Tobacco Applications (" PMTAs ”).

We have allocated further resources and new personnel to support our research and development initiatives in order to submit additional PMTAs, including our May 13, 2022 submissions pertaining to the Company’s synthetically derived nicotine Pacha product line.

Obtaining a marketing order from the United States Food and Drug Administration (“

FDA ”) would, we believe, advance the Company’s position as a trusted, industry leader committed to full regulatory compliance.

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

In order to facilitate the Company’s primary objectives of increasing sales and profits across all our product lines –

in addition to our ambition of meeting the listing criteria necessary to up-list Charlie’s Holdings, Inc.

shares to a major national exchange –

management is expanding and refining the Company’s sales team to prioritize:

(i) alternative cannabis products (over nicotine products), (ii) direct-to-retail sales (as opposed to purely distributor sales), and (iii) the independent convenience store channel. 

In these pursuits, we plan to increase the number of Company Account Executives and Brand Advocates;

ensure that no Account Executive manages a book of business that represents greater than 25% of the Company’s domestic sales;

and focus the sales team on direct-to-retail sales.

We will expand and refocus our sales team.

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

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

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

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

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

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

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

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

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

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

Recent Developments

April 2022 Note Financing

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

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

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

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

or (ii) March 28, 2023.

The Company used the proceeds from the Note Financing 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.

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

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

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

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

MDOs ”) for electronic nicotine delivery system (“

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

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

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

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

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

As of September 30, 2022, Charlie’s 2020 PMTA remains among the select minority of applications submitted to the FDA for a tobacco-derived nicotine ENDS product that has not received an MDO or Refuse-to-File designation.

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

Preferred Stock Amendment

The Board of Directors and the holders of a majority of the Series A Convertible Preferred Stock approved an amendment (the “Amendment”

) to our 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 31, 2023 and effective on such date.

January 2023 Receivables Financing

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

Receivables Financing ” or “

Receivables Financing Agreement ”) with Austin Business Finance (“

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 is paid prior to the July 21, 2023 termination date.

During the three months ended March 31, 2022, the Company made approximately $263,000 cash payment.

As of March 31, 2023, the outstanding principal under the Receivables Financing Agreement was approximately $497,000.

Impact of COVID-19

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COVID-19 ”, or, “

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

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

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

During the nine months ended September 30, 2022, we engaged in periodic, informal testing of our business operations, and we do not believe that our financial position, work efficiency and overall operational integrity have been materially affected.

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

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

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

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

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

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

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

Risks and Uncertainties

Risks and Uncertainties and Ability to Continue as a Going Concern

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

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

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

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

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

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

Beginning in 

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

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

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

In addition, in 

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

The application of any new laws or regulations that 

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

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

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

may  sell its products.

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

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

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

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

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

Further, the Company filed new PMTAs, for its synthetic Pacha products, on May 13, 2022.

On November 3, 2022, FDA accepted for scientific review certain of these PMTAs and, on November 4, 2022, FDA refused to accept others. 

The Company intends to pursue an administrative appeal with FDA regarding its refusal to accept certain of the PMTAs, and in parallel we intend to resubmit PMTAs for, and to continue to sell, the affected synthetic nicotine products while the administrative appeal process is pending.

Further, it is not a certainty that the Company will ultimately receive marketing orders for one or more of its products on any of its PMTAs.

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

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

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

Results of Operations for the Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021

Regarding results from operations for the quarter ended September 30, 2022, we generated revenue of approximately $6.4 million, as compared to revenue of $5.2 million for the three months ended September 30, 2021.

This $1.2 million increase in revenue was due primarily to a $1.2 million increase in sales of our nicotine-based vapor products.

We generated net income for the three months ended September 30, 2022, of approximately $241,000 as compared to net income of approximately $3,107,000 for the three months ended September 30, 2021.

The net income for the three months ended September 30, 2022 includes a non-cash gain in fair value of derivative liabilities of $246,000 compared to a non-cash gain in fair value of derivative liabilities of $2,729,000 during the three months ended September 30, 2021.

The net income for the three months ended September 30, 2021 also includes non-cash stock-based compensation expense of approximately $39,000.

A review of the three-month period ended September 30, 2022, follows:

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

The Company’s applications were submitted in 

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

Beginning in 

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

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

The Company has 

not  received an MDO for any of its submissions;

however, there is 

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

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

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

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

May 14, 2022  or be subject to FDA enforcement. 

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

May 13, 2022,  prior to the 

May 14, 2022  deadline.

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

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

The Company submitted an administrative appeal with FDA regarding its refusal to accept certain of the PMTAs, and has resubmitted PMTAs for, and continues to sell, the affected synthetic nicotine products while the administrative appeal process is pending. There can be no guarantee that FDA will grant our administrative appeal, and the FDA may bring an enforcement action against our synthetic nicotine products for lack of premarket authorization and/or issue an MDO to our pending applications at any time. 

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

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

See Liquidity and Capital Resources below for additional information.

Results of Operations for the Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022

Regarding results from operations for the quarter ended March 31, 2023, we generated revenue of approximately $4,030,000, as compared to revenue of $8,074,000 for the three months ended March 31, 2022.

This $4,044,000 decrease in revenue was due primarily to a $3,085,000 in sales of our nicotine-based vapor products, as well as a $959,000 decrease in sales of our hemp-derived products.

We generated net loss for the three months ended March 31, 2023, of approximately $1,390,000 as compared to net income of approximately $706,000 for the three months ended March 31, 2022.

The net loss for the three months ended March 31, 2023 includes a non-cash gain in fair value of derivative liabilities of $223,000 compared to a non-cash gain in fair value of derivative liabilities of $340,000 during the three months ended March 31, 2022.

A review of the three-month period ended March 31, 2023, follows:

For the three months ended

September 30,

($ in thousands)

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Total operating costs and expenses

Income (loss) from operations

(Loss) income from operations

Other income (expense):

Interest expense

Debt extinguishment gain

Change in fair value of derivative liabilities

Total other income

Income before income taxes

Provision for income taxes

Revenue for the three months ended September 30, 2022, increased by approximately $1,208,000 or 23.1%, to approximately $6,427,000, as compared to approximately $5,219,000 for same period in 2021 due to a $1,209,000 increase in sales of our nicotine-based vapor products, but was offset by a $1,000 decrease in sales of hemp-derived products.

The increase in our nicotine-based vapor product sales was driven by sales of our new 12ml Pacha Disposable line and our refreshed Pacha e-liquid line, both of which launched in the second quarter of 2022, as well as incremental market penetration of our existing Pacha Disposable products.

Net (loss) income

Revenue for the three months ended March 31, 2023, decreased by approximately $4,044,000 or 50.1%, to approximately $4,030,000, as compared to approximately $8,074,000 for same period in 2022 due to a $3,085,000 decrease in sales of our nicotine-based vapor products, as well as a $959,000 decrease in sales of our hemp-derived products.

The decrease in our nicotine-based vapor product sales was primarily driven by decreased sales of our Pacha Disposable line.

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

However, increased competition from low-priced Chinese products and brands, regulatory challenges including the recently announced requirement for synthetic nicotine products to obtain marketing authorization from the FDA, as well as continued uncertainty surrounding the FDA’s issuance of MDO’s and Refuse-to-File designations, tempered buying patterns in the domestic market as customers scrutinized inventories of related products.

The slight decrease in sales for our hemp-derived business was directly related to an intentional sunsetting of certain SKUs as the Company prepares to rebrand and launch new, innovative product formats in the fourth quarter.

The hemp-derived products market is currently experiencing a condensed and rapidly evolving product development cycle which requires corporate agility and swift market penetration;

Despite a strong performance during its initial launch, this category has faced challenges including increased competition from low-priced Chinese products, the requirement for synthetic nicotine products to obtain marketing authorization from the FDA, as well as continued uncertainty surrounding the FDA’s issuance of MDO’s and Refuse-to-File designations.

The decrease in sales for our hemp-derived business was directly related to a weaker than expected launch of our new PINWEEL brand of hemp-derived cannabinoid products.

The hemp-derived products market is currently experiencing a confluence of challenges including an influx of low-cost brands, as well as a rapid product development cycle which requires corporate agility and swift market penetration;

however, we continue to believe that this category offers significant short- and medium-term growth potential for our Company and will place enhanced focus on growing this segment as a portion of overall sales.

Cost of Revenue

Cost of revenue, which consists of direct costs of materials, direct labor, third party subcontractor services, and other overhead costs increased by approximately $1,361,000 or 58.9%, to approximately $3,671,000 or 57.1% of revenue, for the three months ended September 30, 2022, as compared to approximately $2,310,000, or 44.3% of revenue, for the same period in 2021.

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

Pricing pressure in certain channels due to enhanced competition has also contributed to higher cost of goods relative to sales.

Cost of revenue, which consists of direct costs of materials, direct labor, third party subcontractor services, and other overhead costs decreased by approximately $1,295,000 or 29.2%, to approximately $3,139,000 or 77.9% of revenue, for the three months ended March 31, 2023, as compared to approximately $4,434,000, or 54.9% of revenue, for the same period in 2022.

This cost, as a percent of revenue, increased significantly due to a large provision for inventory obsolescence related to certain of our nicotine and alternative cannabis disposable products.

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

General and Administrative Expenses

For the three months ended September 30, 2022, total general and administrative expense decreased by approximately $18,000 to $2,065,000 as compared to approximately $2,084,000 for the same period in 2021.

This change was primarily comprised of decreases of approximately $40,000 in our bad debt provision, $37,000 in rent and maintenance costs and $24,000 in other general and administrative expenses.

The decrease in bad debt expense was primarily due to an improved workflow for managing and collecting on aged receivables resulting in fewer delinquent invoices.

The decrease in rent and maintenance costs during the quarter ended September 30, 2022 was primarily due to the centralizing of certain administrative and shipping functions related to Don Polly, which resulted from the permanent closure of our Denver, Colorado office and warehouse location.

The decrease in other general and administrative costs was due to a reduction in certain state filing fees and property taxes.

This decrease in overall general and administrative expenses was offset by increases of $36,000 in payroll and benefits, $28,000 in professional fees, and $19,000 of other general and administrative expenses.

The increase in payroll and benefits was the result of employees added to our supply chain and procurement team during the quarter ended September 30, 2022.

The increased professional fees were directly related to tax analysis and tax return preparation as well as the addition of Dr.

Edward Carmines to the Board of Directors on March 2, 2022.

The increase in other general and administrative costs was primarily comprised of higher merchant processing fees associated with higher sales during the quarter ended September 30, 2022.

For the three months ended March 31, 2023, total general and administrative expenses decreased by approximately $571,000 to $1,988,000 as compared to approximately $2,559,000 for the same period in 2022.

This change was primarily due to decreases of $481,000 in payroll and benefits, $39,000 in professional fees and approximately $66,000 in other general and administrative expenses.

The decrease in payroll and benefits was primarily the result of staff consolidation, elective executive salary reductions and a reduced bonus accrual for the period.

During the three months ended March 23, 2023, professional fees decreased due to reduced tax preparation costs and other consulting fees.

The decrease in other general and administrative expenses was primarily due to lower merchant account fees and a reduced bad debt provision resulting from softened sales activity during the period.

The Company will continue to monitor its operating cost structure in the coming quarters and will continue evaluate the need to make further modifications.

Sales and Marketing Expense

For the three months ended September 30, 2022, total sales and marketing expense increased by approximately $193,000, 43.7%, to approximately $635,000 as compared to approximately $442,000 for the same period in 2021, which was primarily due to enhanced trade-show activity during the quarter in furtherance of our plan to grow market share across the nicotine and hemp-derived product categories.

Sales commissions increased due to revenue growth across our businesses, however the increase was mitigated by further restructuring of our sales team and compensation program at the beginning of 2022.

For the three months ended March 31, 2023, total sales and marketing expense decreased by approximately $335,000, 47.7%, to approximately $368,000 as compared to approximately $703,000 for the same period in 2022, which was primarily due to reduced marketing and commission costs during the period.

Digital marketing, use of promotional materials and tradeshow costs were all adjusted for weaker anticipated sales activity during the quarter ended March 31, 2023.

Our commission costs, included in sales and marketing expense, was also lower during the period due to lower sales during the period.

Research and Development Expense

For the three months ended September 30, 2022, total research and development costs increased to approximately $9,000 as compared to approximately $5,000 for the same period in 2021, which was primarily due to costs associated with our 2022 PMTA submissions.

Income from Operations

We had operating income of approximately $46,000 for the three months ended September 30, 2022, compared with $378,000 for the three months ended September 30, 2021, due primarily to an increase in sales and marketing expenses and lower margin sales mix.

For the three months ended March 31, 2023, total research and development costs increased to approximately $41,000 as compared to approximately $11,000 for the same period in 2022, which was primarily due to costs associated with the development of new technologies and product formats.

(Loss) Income from Operations

We had operating loss of approximately $1,517,000 for the three months ended March 31, 2023, compared with operating income of approximately $367,000 for the three months ended March 31, 2022, due primarily to a decrease in sales.

We also incurred certain non-cash, general and administrative expenses during the period including a $41,000 expense related to stock-based compensation.

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Change in Fair Value of Derivative Liabilities.

For the three months ended September 30, 2022, the gain in fair value of derivative liabilities was $246,000, compared to a gain in fair value of derivative liabilities of $2,084,000 for the three months ended September 30, 2021.

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

The gain for the quarter ended September 30, 2022, reflects the effect of the decrease in stock price as of September 30, 2022, compared to June 30, 2022.

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

We had 40,337,693 warrants outstanding as of September 30, 2022.

Interest Expense.

For the three months ended September 30, 2022, and 2021, we recorded interest expense related to notes payable of $7,000 and $2,000, respectively.

Other Income.

For the three months ended September 30, 2022, and 2021, we recorded other income of $1,000 and $2,000, respectively.

Income Tax Provision

For the three months ended September 30, 2022, we recorded a $45,000 provision for income taxes, or 15.7% of income before income taxes.

No provision for income taxes was recognized for the three months ended September 30, 2021.

For the three months ended September 30, 2022, we had net income of $241,000 as compared to a net income of $3,107,000 for the same period in 2021, which decrease was primarily the result of the change in fair value of derivative liabilities.

Results of Operations for the Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021

A review of the nine-month period ended September 30, 2022, follows:

For the nine months ended

September 30,

($ in thousands)

Product revenue, net

Total revenues

Operating costs and expenses:

Cost of goods sold - product revenue

General and administrative

Sales and marketing

Research and development

Total operating costs and expenses

Loss from operations

Other income (expense):

Interest expense

Change in fair value of derivative liabilities

Gain on debt extinguishment

Loss on disposal of fixed assets

Total other income

Income before income taxes

Provision for income taxes

Revenue for the nine months ended September 30, 2022 increased approximately $6,885,000 or 45.9%, to approximately $21,898,000, as compared to approximately $15,013,000 for same period in 2021 due to a $5,993,000 increase in sales of our nicotine-based vapor products, as well as a $892,000 increase in sales of our hemp-derived products.

The increase in our nicotine-based vapor product sales was driven by sales of our new 8ml Pacha Disposable line, which launched in December 2021, as well as our 12ml Pacha Disposable and refreshed Pacha e-liquid lines, which launched in the second quarter of 2022.

However, competition from low-priced Chinese products and brands, regulatory challenges including the recently announced requirement for synthetic nicotine products to obtain marketing authorization from the FDA, as well as continued uncertainty surrounding the FDA’s issuance of MDO’s and Refuse-to-File designations, tempered buying patterns in the domestic market as customers scrutinized inventories of related products.

The increase in sales for our hemp-derived business was directly related to strong performance in our alternative cannabis category, which includes products containing synthetically derived cannabinoids, including Delta-8-THC and other synthetic THC compounds.

The hemp-derived products market is currently experiencing a condensed and rapidly evolving product development cycle which requires corporate agility and swift market penetration;

Cost of Revenue

Cost of revenue, which consists of direct costs of materials, direct labor, third party subcontractor services, and other overhead costs increased approximately $5,616,000, or 79.7%, to approximately $12,663,000, or 57.8% of revenue, for the nine months ended September 30, 2022, as compared to approximately $7,047,000, or 46.9% of revenue, for the same period in 2021.

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

Pricing pressure in certain channels, due to enhanced competition, has contributed to higher cost of goods relative to sales.

General and Administrative Expenses

For the nine months ended September 30, 2022, total general and administrative expense decreased approximately $277,000, or 4.1%, to $6,482,000 as compared to approximately $6,759,000 for the same period in 2021.

Notably, this decrease is comprised of reductions of approximately $476,000 of non-cash, stock-based compensation, $225,000 of payroll and benefits costs, and $41,000 in rent and maintenance costs.

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

The decrease in payroll and benefits expense during the nine months ended September 30, 2022, was primarily due to Employee Retention Credits received in conjunction with the Infrastructure Investment and Jobs Act which was enacted in November 2021.

The decrease in rent and maintenance costs during the nine months ended September 30, 2022 was primarily due to the centralizing of certain administrative and shipping functions related to Don Polly, which resulted from the permanent closure of our Denver, Colorado office and warehouse location.

The decreases were primarily offset by increases of $126,000 in provision for bad debt, $100,000 in merchant processing fees as well as $239,000 of other general and administrative expenses.

The increases in provision for bad debt and merchant processing fees were directly related to higher sales achieved during the nine-month period ended September 30, 2022.

The increase in other general and administrative expenses was primarily comprised of other consulting services related to an internal project focused on the creation of a solution “network”

necessary to effectively meet the requirements of both the Consolidated Appropriations Act of 2021 and the PACT Act as well as higher than anticipated costs related to our annual audit and costs related to the calculation of our 2021 income taxes.

Sales and Marketing Expense

For the nine months ended September 30, 2022, total sales and marketing expense increased approximately $913,000, or 75.3%, to approximately $2,125,000 as compared to approximately $1,212,000 for the same period in 2021, which was primarily due to enhanced trade-show activity during the quarter in furtherance of our plan to grow market share across the nicotine and hemp-derived product categories.

Sales commissions also increased due to revenue growth across our businesses, however the increase was mitigated by further restructuring of our sales team and compensation program at the beginning of 2022.

Research and Development Expense

For the nine months ended September 30, 2022, total research and development expense increased approximately $750,000 to approximately $764,000 as compared to $14,000 for the same period in 2021, which was primarily due to costs associated with our 2022 PMTA submissions.

Loss from Operations

We had operating losses of approximately $136,000 for the nine months ended September 30, 2022, compared with operating losses of $19,000 for the nine months ended September 30, 2022, due primarily to an increase of $750,000 in research and development expense.

We also incurred certain general and administrative expenses that contributed to the loss from operations including a $87,000 expense related to non-cash, stock-based compensation.

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

Change in Fair Value of Derivative Liabilities.

For the nine months ended September 30, 2022, the gain in fair value of derivative liabilities was $598,000 as compared to $1,901,000 during the nine months ended September 30, 2021.

For the three months ended March 31, 2023, the gain in fair value of derivative liabilities was $223,000, compared to a gain in fair value of derivative liabilities of $340,000 for the three months ended March 31, 2022.

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

The gain for both nine months ended September 30, 2022 and 2021 reflects the effect of the decrease in stock price as of September 30, 2022, compared to December 31, 2021, as well as a decrease in stock price as of September 30, 2021, compared to December 31, 2020.

The gain for the quarter ended March 31, 2023, reflects the effect of the decrease in stock price as of March 31, 2023, compared to December 31, 2022.

We had 40,337,693 warrants outstanding as of September 30, 2022.

We had 40,337,693 warrants outstanding as of March 31, 2023.

Interest Expense.

For the nine months ended September 30, 2022, and 2021, we recorded interest expense related to notes payable of $99,000 and $33,000, respectively.

We entered into additional debt financing arrangements during the nine months ended September 30, 2022.

Gain on debt extinguishment.

For the nine months ended September 30, 2021, we recorded a debt extinguishment gain of $875,000 related to the forgiveness of the Don Polly PPP Loan and the Charlie’s PPP Loan.

Loss on disposal of fixed assets.

For the nine months ended September 30, 2022, and 2021, we recorded a loss on disposal of fixed assets of $13,000 and $0, respectively.

Other Income.

For the nine months ended September 30, 2022 and 2021, we recorded other income of $6,000 and $10,000, respectively.

Income Tax Provision

For the nine months ended September 30, 2022, we recorded a $45,000 provision for income taxes, or 12.6% of income before income taxes.

No provision for income taxes was recognized for the nine months ended September 30, 2021.

For the nine months ended September 30, 2022, we had a net income of $311,000 as compared to a net income of $2,734,000 for the same period in 2021, which decrease was primarily the result of the change in fair value of derivative liabilities.

For the three months ended March 31, 2023 and 2022, we recorded interest expense related to notes payable of $131,000 and $1,000, respectively.

The increase was primarily due to amortization of debt discount associated with the future receivable sale financing, and contractual interest associated with April 2022 and August 2022 promissory notes.

Debt extinguishment gain.

For the three months ended March 31, 2023 and 2022, we recorded a debt extinguishment gain of $35,000 and $0, respectively.

The gain resulted from a modification to the promissory note issued to Michael King, a significant shareholder, which extended the maturity date to March 2025.

Net (Loss) Income

For the three months ended March 31, 2023, we had net loss of $1,390,000 as compared to a net income of $706,000 for the same period in 2022.

Liquidity and Capital Resources

As of September 30, 2022, we had working capital of approximately $2,879,000, which consisted of current assets of approximately $8,145,000 and current liabilities of approximately $5,266,000, as compared to working capital of approximately $2,460,000 at December 31, 2021.

The current liabilities include approximately $3,061,000 of accounts payable and accrued expenses, notes payable of $1,298,000, approximately $245,000 of deferred revenue associated with product shipped but not yet received by customers, approximately $361,000 of lease liabilities, and $301,000 of derivative liability associated with the Investor Warrants and Placement Agent Warrants (the derivative liability of $301,000 is included in determining the working capital of $2,879,000 but is not expected to use any cash to ultimately satisfy the liability).

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

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

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

or (ii) March 28, 2023.

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

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

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

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

The Loan bears an annual interest rate of 10%.

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

Our cash and cash equivalents balance at September 30, 2022 was approximately $466,000.

For the nine months ended September 30, 2022, net cash used in operating activities was approximately $1,522,000, resulting from a net income of $311,000, offset by a $598,000 of change in fair value of derivative liabilities and $2,108,000 of changes in our operating assets and liabilities.

For the nine months ended September 30, 2021, net cash used in operating activities was approximately $980,000, resulting from a net income of $2,734,000, offset by a $1,901,000 of change in fair value of derivative liabilities, $563,000 of share-based compensation, and $2,080,000 changes in our operating assets and liabilities.

For the nine months ended September 30, 2022, we used cash for investment activities of approximately $178,000 as compared to $73,000 for the same period in 2021.

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

For the nine months ended September 30, 2022 we generated approximately $1,300,000 cash from financing activities related to the issuance of a promissory note to a large shareholder and a short-term loan from our chief operating officer and director, Ryan Stump, each as discussed above.

For the nine months ended September 30, 2021 we generated approximately $901,000 cash from financing activities from the Private Placement (as defined in Note 10 of Item 1, Part 1 of this Report) offset by the repayment of the Red Beard Note (as defined in Note 8 of Item 1, Part 1 of this Report).

We also paid cash dividends of $880,000 during the nine months ended September 30, 2021.

As of March 31, 2023, we had working capital of approximately $718,000, which consisted of current assets of approximately $4,935,000 and current liabilities of approximately $4,217,000, as compared to working capital of approximately $1,067,000 at December 31, 2022.

The current liabilities include approximately $2,210,000 of accounts payable and accrued expenses, notes payable of $497,000 which was net of a $52,000 debt discount, note payable from a related party of $300,000, approximately $471,000 of deferred revenue associated with product shipped but not yet received by customers, approximately $385,000 of lease liabilities, and $406,000 of derivative liability associated with the Investor Warrants and Placement Agent Warrants (the derivative liability of $406,000 is included in determining working capital of $718,000 but is not expected to use any cash to ultimately satisfy the liability).

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

Receivables Financing ” 

Receivables Financing Agreement ”) with Austin Business Finance (“

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.

During the three months ended March 31, 2022, the Company made approximately $263,000 cash payment.

As of March 31, 2023, the outstanding principal under the Receivables Financing Agreement was approximately $497,000.

Our cash and cash equivalents balance at March 31, 2023 was approximately $383,000.

For the three months ended March 31, 2023, net cash used in operating activities was approximately $241,000, resulting from a net loss of $1,390,000, offset by a change in operating assets and liabilities of $1,063,000 and net non-cash activity of $86,000.

For the three months ended March 31, 2022, net cash used in operating activities was approximately $372,000, resulting from a net income of $706,000, offset by a $340,000 of change in fair value of derivative liabilities and $1,037,000 of changes in our operating assets and liabilities.

For the three months ended March 31, 2023, we generated approximately $630,000 cash from financing activities related to sale of future receivables and made repayment of $263,000 under the same agreement.

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

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

In addition, the outbreak of COVID-19 has had a negative impact on the Company’s supply chain and sales.

For the nine months ended September 30, 2022, the Company generated loss from operations of approximately $136,000, and a consolidated net income of approximately $311,000 but used cash in operations of approximately $1,522,000.

For the three months ended March 31, 2023, the Company’s revenue declined sequentially, the Company generated a loss from operations of approximately $1,517,000, and a consolidated net loss of approximately $1,390,000 and used cash in operations of approximately $241,000.

The Company had stockholders’

equity of $3.5 million at September 30, 2022.

During the three months ended September 30, 2022, the Company’s working capital requirements continued to evolve as current assets decreased to $8.1 million from $8.8 million as of June 30, 2022 and currently liabilities decreased to $5.3 million from $6.0 million as of June 30, 2022.

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

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

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

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 these PMTAs and, on November 4, 2022, FDA refused to accept others. 

In the fourth quarter of 2022 and during 2023, the Company intends to allocate further resources and new personnel to support research and development initiatives in order to support existing, or subsequent PMTAs.

equity of $355,000 at March 31, 2023.

During the three months ended March 31, 2023, the Company’s working capital requirements continued to evolve as current assets decreased to $4,935,000 from $5,850,000 as of December 31, 2022 and current liabilities increased to $4,217,000 from $4,783,000 as of December 31, 2022.

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

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

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

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

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

Farm Bill ”).

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

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

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

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

Off-Balance Sheet Arrangements

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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 September 30, 2022, certain of our disclosure controls and procedures are not designed at a reasonable assurance level and are not 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 and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Based on our evaluation, our President, the principal executive officer, and Chief Financial Officer concluded that, as of March 31, 2023, 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 and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

(b) Changes in internal control over financial reporting

In connection with the evaluation required by Rule 13a-15 of the Exchange Act that occurred during the quarter ended September 30, 2022, we determined a material weakness existed in our process for recording and reviewing lease transactions.

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.

Management is in the process of instituting appropriate levels of review in the reconciliation process and modifying the configuration of corresponding controls in our close-management software system.

The Company will monitor these controls and continue to test their effectiveness during the fourth quarter of 2022.

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15 of the Exchange Act that occurred during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II –

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

What changed 10-Q

Item 1. Financial Statements