What changed in this filing

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Item 1. Financial Statements

2023-08-14 compared with 2023-05-19 · 360 added, 202 removed, 558 unchanged (50% of the section changed)

30 unchanged sentences

1,800,000 shares authorized

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

Series A, 300,000 shares designated;

128,181 shares issued and outstanding as of June 30, 2023 and 133,423 shares issued and outstanding as of December 31, 2022

Series B, 1,500,000 shares designated;

0 shares issued and outstanding as of June 30, 2023 and 0 shares issued and outstanding as of December 31, 2022

Common stock ($ 0.001 par value);

500,000,000 shares authorized;

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

224,730,552 issued and outstanding as of June 30, 2023 and 219,163,631 shares issued and outstanding as of December 31, 2022

Additional paid-in capital

8 unchanged sentences

For the three months ended

For the six months ended

Product revenue, net

6 unchanged sentences

Total operating costs and expenses

(Loss) income from operations

Loss from operations

Other income (expense):

2 unchanged sentences

Change in fair value of derivative liabilities

Total other income

Net (loss) income

Net (loss) earnings per share

Total other income (loss)

Net income (loss)

Net income (loss) per share

Weighted average number of common shares outstanding

4 unchanged sentences

(in thousands)

For the Three Months Ended March 31, 2023

For the Three Months Ended June 30, 2023

Convertible Preferred Stock

Additional Paid-in

Total Stockholders'

 Capital

Stockholders'

Paid-in Capital

Balance at April 1, 2023

Conversion of Series A convertible preferred stock

Stock compensation

Balance at June 30, 2023

For the Three Months Ended June 30, 2022

Convertible Preferred Stock

Stockholders'

Paid-in Capital

Balance at April 1, 2022

Conversion of Series A convertible preferred stock

Stock compensation

Balance at June 30, 2022

For the Six Months Ended June 30, 2023

Convertible Preferred Stock

Stockholders'

Paid-in Capital

Balance at January 1, 2023

1 unchanged sentence

Stock compensation

Balance at March 31, 2023

For the Three Months Ended March 31, 2022

Balance at June 30, 2023

For the Six Months Ended June 30, 2022

Convertible Preferred Stock

Additional Paid-in

Total Stockholders'

Stockholders'

Paid-in Capital

Balance at January 1, 2022

1 unchanged sentence

Stock compensation

Balance at March 31, 2022

Balance at June 30, 2022

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

3 unchanged sentences

(in thousands)

For the three months ended

For the six months ended

Cash Flows from Operating Activities:

Net (loss) income

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

Reconciliation of net (loss) income to net cash provided by (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

3 unchanged sentences

Subtotal of non-cash charges

Subtotal of net (loss) income including adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities

Changes in operating assets and liabilities:

4 unchanged sentences

Lease liabilities

Net cash used in operating activities

Net cash provided by (used in) operating activities

Cash Flows from Investing Activities:

4 unchanged sentences

Repayment of notes payable

Net cash provided by financing activities

Net cash (used in) provided by financing activities

Net increase (decrease) in cash

Cash, beginning of the period

Cash, end of the period

Cash, beginning of the year

Cash, end of the year

Supplemental disclosure of cash flow information

4 unchanged sentences

Conversion of Series A convertible preferred stock

Issuance of common stock for dividend payment

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

5 unchanged sentences

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

Company ”, “

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

Company ”), 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.

6 unchanged sentences

Common Stock ”), trades under the symbol "CHUC" on the OTCQB Venture Market.

Reverse Stock Split

The Company’s Board of Directors approved a reverse stock split of the Company’s authorized, issued and outstanding shares of Common Stock, at a ratio of 1-for- 100 (the “

Reverse Split ”).

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

Effective Date ”).

All share and per share amounts in this quarterly report on Form 10-Q (this “

Report ”) have been retroactively adjusted to account for the Reverse Split.

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

Substantial Doubt to Continue as a Going Concern Regarding the Legal and Regulatory Environment, Liquidity and Management ’

s Plan of Operation

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

The accompanying consolidated 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;

2 unchanged sentences

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 .

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

For the six months ended June 30, 2023, the Company’s revenue declined, the Company generated a loss from operations of approximately $ 1,559,000 , and a consolidated net loss of approximately $ 1,358,000 .

Cash provided by operations was approximately $ 124,000 .

The Company had stockholders’

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.

equity of $ 424,000 at June 30, 2023.

During the six months ended June 30, 2023, the Company’s working capital position decreased to $ 792,000 from $ 1,067,000 , as of December 31, 2022.

Considering these facts, the issuance of one or several Marketing Denial Orders ( "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”).

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 several departments.

In the second half of 2023, the Company plans to launch new 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.

If the Company does not have sufficient funds to continue operations, the Company 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

12 unchanged sentences

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.

however, there is no assurance that regulatory approval to sell our products will be granted or that Charlie’s 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.

3 unchanged sentences

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.

The Company intends to pursue an administrative appeal with FDA regarding its refusal to accept certain of the PMTAs Charlie’s submitted for our synthetic nicotine products, and in parallel the Company intends 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.

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.

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

In the second half of 2023 the Company plans to launch new disposable vape products, under the “SPREE BAR™”

brand, that the Company expects will (i) replace most of its legacy products and (ii) become the single largest, most important commercial opportunity in Charlie's history.

The Company and its attorneys believe SPREE BAR products are not subject to FDA review.

Based on the information provided by the Company’s contracted chemical suppliers and its consultants, the proprietary Metatine™

(patented in the United States and in China by the Company’s chemical supplier) in the Company’s SPREE BAR products does not meet the definition of nicotine set forth in 21 U.S.C.

387(12) and therefore its products containing Metatine, as their active ingredient, are not subject to regulation as “tobacco products”

under 21 U.S.C.

Further, according to information provided by the Company’s chemists, the other ingredients in the Company’s SPREE BAR vape liquid are not made or derived from tobacco, nor do they contain nicotine from any source.

The documentary support for these facts, including a Certificate of Analysis (“COA”) for the Metatine used in the Company’s SPREE BAR products, corroborates these conclusions.

However, should any of these understandings be incorrect, the Company’s position on Metatine not qualifying as a “tobacco product”

would need to be revisited.

Further, should Congress bestow regulatory control over Metatine to the FDA, or should the FDA deem Metatine disposable vape devices “tobacco products”

despite the facts that Metatine is not a salt or complex of nicotine, and is not itself derived from nicotine or tobacco, SPREE BAR products might then be subject to the FDA tobacco requirements, including, but not limited to, the requirement that all newly deemed tobacco products obtain premarket authorization before entering the U.S.

If this were to happen, the FDA could bring an enforcement action against our Metatine products for lack of premarket authorization.

More generally, FDA’s regulatory initiatives and enforcement authority regarding our products are unpredictable and continue to evolve and we cannot predict whether FDA’s priorities and/or potential jurisdiction over our products will require us to remove our products from the market and to cease selling them.

NOTE 2 –

6 unchanged sentences

nevertheless, the Company believes that the disclosures are adequate to make the information presented in this Report not misleading.

Amounts related to disclosure of December 31, 2022 balances within the interim condensed consolidated financial statements were derived from audited financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2022 (the “

2022 Annual Report ”).

The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented.

Use of Estimates

4 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   

Measurement of Credit Losses on Financial Instruments

7 unchanged sentences

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 –

Debt with Conversion and Other Options

26 unchanged sentences

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

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

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

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

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

Level 1 –

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

Level 2 –

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

Level 3 –

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

The following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy as of June 30, 2023 and December 31, 2022 (amounts in thousands):

Fair Value at June 30, 2023

Derivative liability - Warrants

3 unchanged sentences

Total liabilities

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.

There were no transfers between Level 1, 2 or 3 during the six-month period ended June 30, 2023.

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

3 unchanged sentences

Change in fair value

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:

Balance at June 30, 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 June 30, 2023 and December 31, 2022, is as follows:

Exercise price

22 unchanged sentences

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

NOTE 4 - PROPERTY AND EQUIPMENT

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):

NOTE 4 –

PROPERTY AND EQUIPMENT

Depreciation and amortization expense totaled $ 80,000 and $ 189,000 , respectively, during the six months ended June 30, 2023 and 2022.

Property and equipment as of June 30, 2023 and December 31, 2022, are as follows (dollar amounts in thousands):

Estimated Useful Life

3 unchanged sentences

Leasehold improvements

Lesser of lease term or estimated useful life

Lesser of lease term or estimated useful life which approximates 5 years 

Accumulated depreciation

NOTE 5 - CONCENTRATIONS

NOTE 5 –

CONCENTRATIONS

The Company’s concentration of inventory purchases is as follows:

For the three months ended

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.

For the three months

ended June 30,

For the six months

ended June 30,

During the three months ended June 30, 2023, and 2022, purchases from four vendors represented 68 % and 92 %, respectively, of total inventory purchases.

During the six months ended June 30, 2023, and 2022, purchases from three vendors represented 84 % and 88 %, respectively, of total inventory purchases.

As of June 30, 2023, and December 31, 2022, amounts owed to these vendors totaled $ 266,000 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:

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.

Six customers made up 77 % of net accounts receivable at June 30, 2023.

Two customers made up 26 % of net accounts receivable at December 31, 2022.

Customer A owed the Company a total of $ 85,000 , representing 17 % of net receivables at June 30, 2023.

Customer B owed the Company a total of $ 83,000 , representing 16 % of net receivables at June 30, 2023.

Customer C owed the Company a total of $ 60,000 , representing 12 % of net receivables at June 30, 2023.

Customer D owed the Company a total of $ 58,000 , representing 11 % of net receivables at June 30, 2023.

Customer E owed the Company a total of $ 58,000 , representing 11 % of net receivables at June 30, 2023.

Customer F owed the Company a total of $ 52,000 , representing 10 % of net receivables at June 30, 2023.

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

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

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

No customer exceeded 10% of total net sales for the six months ended June 30, 2023 and 2022, respectively.

NOTE 6 –

9 unchanged sentences

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

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

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

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

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

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

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

There are no non-controlling interests recorded.

1 unchanged sentence

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

Accounts payable and accrued expenses as of June 30, 2023 and December 31, 2022, are as follows (amounts in thousands):

Accounts payable

1 unchanged sentence

Accrued income taxes

Customer deposits

Other accrued expenses

8 unchanged sentences

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 .

During the six months ended June 30, 2023, the Company made approximately $ 643,500 in cash payments.

As of June 30, 2023, the outstanding principal under the Receivables Financing Agreement was approximately $ 117,000 .

April 2022 Note Financing

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

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

Note ”) to one of its individual stockholders, and a member of the Company’s Board of Directors, 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 ").

The Note initially required the payment of principal in full and guaranteed interest in an amount the greater of 18 % per annum, or $ 90,000 , on or before the earlier date of (i) a Liquidity Event, as defined under the terms of the Note;

or (ii) September 28, 2022.

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.

6 unchanged sentences

All outstanding principal and interest are due earlier of March 28, 2025, or a liquidity event.

The third modification was recognized as a debt extinguishment, resulting in a gain on debt extinguishment of approximately $ 35,000 .

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

5 unchanged sentences

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.

The Company also incurred an 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.

On August 7, 2023, the Company and Stump Lender entered into a third modification to the Loan to extend the maturity date to December 15, 2023.

Economic Injury Disaster Loan

2 unchanged sentences

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

The following summarizes the Company’s notes payable maturities as June 30, 2023 (amounts in thousands):

Six months Ending December 31, 2023

Year Ending December 31, 2024

2 unchanged sentences

Year Ending December 31, 2027

Debt discount

NOTE 9 –

3 unchanged sentences

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 months ended March 31, 2022, net income is adjusted for gain from change in fair value of warrant liabilities.

For the three and six months ended June 30, 2023, 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

Net (loss) income - basic

For the six months ended

Net income (loss) - basic

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

3 unchanged sentences

Weighted average shares outstanding - diluted

Basic (loss) earnings per share

Diluted (loss) earnings per share

Basic earnings (loss) per share

Diluted earnings (loss) 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 three months ended

For the six months ended

Series A convertible preferred shares

NOTE 10 –

2 unchanged sentences

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.

During the six months ended June 30, 2023, the Company issued approximately 1,183,000 shares of Common Stock upon conversion of 5,242 shares of Series A Preferred.

NOTE 11 –

9 unchanged sentences

Non-Qualified Stock Options

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

The following table summarizes stock option activities during the six months ended June 30, 2023 (all option amounts are in thousands):

Stock Options

Weighted Average Exercise Price

Weighted Average Remaining Contractual Life (in years)

Aggregate Intrinsic Value

Weighted Average

Exercise Price

Weighted Average

Remaining Contractual

Life (in years)

Intrinsic Value

Outstanding at January 1, 2023

Options forfeited/expired

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.

Outstanding at June 30, 2023

Options vested and exercisable at June 30, 2023

As of June 30, 2023, there was a de-minimis amount of unrecognized compensation expense related to these option agreements.

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):

The following table summarizes restricted stock awards activities during the six months ended June 30, 2023 (all share amounts are in thousands):

Number of Shares

Weighted Average Grant Date Fair Value per Share

Weighted Average

Grant Date Fair Value

Nonvested at January 1, 2023

Restricted stock granted

Nonvested at March 31, 2023

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

Nonvested at June 30, 2023

During the six months ended June 30, 2023, the Company granted 4,700,000 restricted stock awards (“

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

1 unchanged sentence

The grant date fair value was approximately $147,000.

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.

As of June 30, 2023, there was approximately $ 198,000 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 $ 45,000 during the three months ended March 31, 2023 related to the RSAs, respectively.

The Company recorded total stock-based compensation of approximately $ 83,000 during the six months ended June 30, 2023 related to the RSAs, respectively.

NOTE 12 –

5 unchanged sentences

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

The Williamsville Lease was extended for additional one year with same terms on May 1, 2023.

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

12 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 three months ended March 31, 2023 and 2022 was approximately $ 74,000 and $ 69,000 , respectively.

The total rent paid to related parties for the six months ended June 30, 2023 and 2022 was approximately $ 138,000 and $ 134,000 , 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.

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):

At June 30, 2023, the Company had operating lease liabilities of approximately $ 621,000 and right of use assets of approximately $ 617,000 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 six months ended June 30, 2023 and 2022 (amounts in thousands):

For the three months ended

For the six months ended

Operating leases

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Total rent expense

For the three months ended

For the six months ended

Operating cash flows from operating leases

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operating leases

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

Maturities of our operating leases as of June 30, 2023, excluding short-term leases, are as follows (amounts in thousands):

Six Months Ending December 31, 2023

Year Ending December 31, 2024

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Less present value discount

Operating lease liabilities as of March 31, 2023

Operating lease liabilities as of June 30, 2023

Legal Proceedings

As of the date hereof, we are not a party to any material legal or administrative proceedings.

As of the date hereof, the Company is not a party to any material legal or administrative proceedings.

There are no proceedings in which any of our directors, executive officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our interest.

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Litigation or any other legal or administrative proceeding, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our management’s time and attention.

NOTE 13 –

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 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.

Under Sections 382 and 383 of the Code, if a corporation undergoes an “ownership change”

(generally defined as a greater than 50 percentage points (by value) in the ownership of its equity over a three year period), the corporation’s ability to use its pre-change tax attributes to offset its post change income may be limited.

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, 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.

Our ability to utilize these NOLs and tax credit carryforwards may be limited by any “ownership changes”

as described above that have occurred in prior years or that may occur in the future.

If we undergo future ownership changes, many of which may be outside of our control, our ability to utilize our NOLs and tax credit carryforwards could be further limited by Sections 382 and 383 of the Code.

There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise become unavailable to offset future income tax liabilities.

Additionally, our NOLs and tax credit carryforwards could be limited under state law.

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.

New Executive Employment Agreement

On June 15, 2023, the Company entered into a new employment agreement with Ryan Stump (the “

New Agreement ”).

Pursuant to the New Agreement, Mr.

Stump will earn a base salary of $ 300,000 per year and serve as Chief Operating Officer for a term of two years, renewable on an annual basis unless earlier terminated by the Company or Mr.

In the event that Mr.

Stump is terminated by the Company without Cause (as defined therein) or for Good Reason (as defined therein), he will be entitled to receive his base salary and benefits for a period of one year.

In the event of a change in control, all unvested equity awards will immediately vest.

Notwithstanding his contracted annual salary, to cut costs during a time when the Company is striving to launch the SPREE BAR line, Mr.

Stump has elected to reduce his current compensation to the rate of $ 225,000 annually.

As a point of reference, all the Company’s other executives have also elected to reduce their current compensation.

It is anticipated that, after the launch of SPREE BAR, executive base salaries will revert to their previous levels.

NOTE 13 –

SUBSEQUENT EVENTS

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

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

July 2023 Note Financing

Between July 17, 2023 and August 1, 2023, the Company issued unsecured promissory notes (the “

Notes ”) to several of its executives, Ryan Stump, Henry Sicignano III, Keith Stump, and Jessica Greenwald, and to three of its largest stockholders, Brandon Stump, Red Beard Holdings LLC, and Michael King (the “

Lenders "), in the cumulative principal amount of $ 1,400,000 .

Notes shall bear interest at twenty-one percent ( 21 %) per annum and have maturity dates ranging from November 17, 2023 to December 10, 2023.

Receivables Financing Agreement

As of July 27, 2023, the Company had fully repaid the outstanding principal balance and accrued interest totaling $ 760,500 on its Receivables Financing Agreement.

Restricted Stock Award Forfeiture

On July 25, 2023, 108,000 shares of restricted stock, issued under the Company’s 2019 Plan, were forfeited by employees whose employment was terminated.

ITEM 2 –

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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.

In September 2023 the Company plans to begin shipping its new Metatine disposable vape products, under the “SPREE BAR™”

We believe that our transition to the SPREE BAR product line will give Charlie's an extraordinary opportunity to capture significant sales and market share in the vapor products marketplace in 2024 and beyond.

SPREE BAR, with Metatine, is indistinguishable from a conventional disposable vape;

SPREE BAR provides adult consumers with the same cerebral satisfaction that typical nicotine disposables provide, but without nicotine.

As a disposable pod system - with a reusable battery - 6,000-puff SPREE BAR flavor pods have a retail price that is LESS THAN HALF that of the industry-leading 5,500-puff disposables.

Because Metatine is not made or derived from tobacco, and because Metatine does not consist of or contain nicotine from any source, SPREE BAR is not subject to FDA Pre-Market Tobacco Application ( "PMTA" ) requirements.

As of the date of this writing, before receiving any finished product from our Chinese manufacturers, we have awarded Master Distributor and Distributor contracts to six large customers.

As part of these agreements, we have accepted purchase orders, and corresponding 50% up-front deposits, for each distributor’s initial order.

It is our plan to sign additional Master Distributor agreements with as many as ten new SPREE BAR Distributors before the end of 2023.

Given the novelty of the product, its compelling value in the marketplace as a disposable pod system (with a reusable battery), and its very significant regulatory advantages, SPREE BAR represents the single largest, most important commercial opportunity in Charlie's history.

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

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vapor products market.

Underlining the importance of Charlie’s work with age-gating technology is an initiative taken by JUUL Labs, one of the largest competitors in our industry.

In July JUUL announced that it has submitted a PMTA with the FDA for a new e-cigarette device that also included information on novel, data-driven technologies to restrict underage access .

JUUL’s chief product officer explained, “With our next-generation platform, we have designed a technological solution for two public-health problems:

improving adult-smoker switching from combustible cigarettes and restricting underage access to vapor products...”

Similar to the age-gating technology under development at Charlie’s, the JUUL device includes a mobile and web-based app that enables age-verification technology, including device-locking, and real-time product information and usage insights for age-verified consumers with industry-leading data-privacy protections.

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

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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.

In the second half of 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”

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

We will expand and refocus our sales team.

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

With a new focus on the SPREE BAR product line and on the Master Distributors with whom we have awarded SPREE BAR distribution agreements, we will cost-effectively expand and strategically refocus our 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.

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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.

In order to mitigate FDA regulatory risk in the domestic market and to capture what management continues to believe 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.

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

Further, in late 2023 and throughout 2024 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

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 (“

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.

Impact of COVID-19

The outbreak of a novel strain of coronavirus (“

COVID-19 ”, or, “

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.

New Executive Employment Agreement .

On June 15, 2023, the Company entered into a new employment agreement with Ryan Stump (the “

New Agreement ”).

Pursuant to the New Agreement, Mr.

Stump will earn a base salary of $300,000 per year and serve as Chief Operating Officer for a term of two years, renewable on an annual basis unless earlier terminated by the Company or Mr.

In the event that Mr.

Stump is terminated by the Company without Cause (as defined therein) or for Good Reason (as defined therein), he will be entitled to receive his base salary and benefits for a period of one year.

In the event of a change in control, all unvested equity awards will immediately vest.

Notwithstanding his contracted annual salary, to cut costs during a time when the Company is striving to launch the SPREE BAR line, Mr.

Stump has elected to reduce his current compensation to the rate of $225,000 annually.

As a point of reference, all the Company’s other executives have also elected to reduce their current compensation.

It is anticipated that, after the launch of SPREE BAR, executive base salaries will revert to their previous levels.

New Director .

At the Company’s Annual Meeting of Stockholders, the Company’s stockholders appointed Michael D.

King as a director.

King is the Founder and current Chief Executive Officer of OEM Solutions, a private company that has developed a supply network in Asia with world-class manufacturing companies that offer a wide variety of custom-made medical products, scientific instruments, consumer products, and food service devices.

Operating OEM Solutions has been Mr.

King’s sole occupation and employment for the past 22 years.

From 1998 until 2001, Mr.

King worked as a Sales Representative at Allied Enterprises in Pittsburgh, Pennsylvania.

From 1991 through 1998, Mr.

King worked for the Ford Motor Company in the Finance Department as an analyst and eventually supervisor.

King graduated with a Master of Business Administration degree from the State University of New York at Buffalo in 1991.

Risks and Uncertainties and Ability to Continue as a Going Concern

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

In the second half of 2023 the Company plans to launch new disposable vape products, under the “SPREE BAR™”

brand, that the Company expects will (i) replace most of its legacy products and (ii) become the single largest, most important commercial opportunity in Charlie's history.

The Company and its attorneys believe SPREE BAR products are not subject to FDA review.

Based on the information provided by the Company’s contracted chemical suppliers and its consultants, the proprietary Metatine™

(patented in the United States and in China by the Company’s chemical supplier) in the Company’s SPREE BAR products does not meet the definition of nicotine set forth in 21 U.S.C.

387(12) and therefore its products containing Metatine, as their active ingredient, are not subject to regulation as “tobacco products”

under 21 U.S.C.

§ 321(rr). 

The documentary support for these facts, including a Certificate of Analysis (COA) for the Metatine used in the Company’s SPREE BAR products, corroborates these conclusions.

However, should any of these understandings be incorrect, the Company’s position on Metatine not qualifying as a “tobacco product”

would need to be revisited.

Further, should Congress bestow regulatory control over Metatine to the FDA, or should the FDA deem Metatine disposable vape devices “tobacco products”

If this were to happen, the FDA could bring an enforcement action against our Metatine products for lack of premarket authorization.

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

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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:

Results of Operations for the Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 2022

Regarding results from operations for the quarter ended June 30, 2023, we generated revenue of approximately $3,970,000, as compared to revenue of $7,397,000 for the three months ended June 30, 2022.

This $3,427,000 decrease in revenue was due primarily to a $3,594,000 decrease in sales of our nicotine-based vapor products, offset by a $167,000 increase in sales of our hemp-derived products.

We generated net income for the three months ended June 30, 2023, of approximately $32,000 as compared to net loss of approximately $636,000 for the three months ended June 30, 2022.

The net income for the three months ended June 30, 2023 includes a non-cash gain in fair value of derivative liabilities of $185,000 compared to a non-cash gain in fair value of derivative liabilities of $12,000 during the three months ended June 30, 2022.

A review of the three-month period ended June 30, 2023, follows:

For the three months ended

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Total operating costs and expenses

Loss from operations

Other income (expense):

Interest expense

Change in fair value of derivative liabilities

Total other income

Net income (loss)

Revenue for the three months ended June 30, 2023, decreased by approximately $3,427,000 or 46.3%, to approximately $3,970,000, as compared to approximately $7,397,000 for same period in 2022 due to a $3,594,000 decrease in sales of our nicotine-based vapor products, offset by a $167,000 increase 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 as well as periodic, voluntary stockouts of our e-liquid products.

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.

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 FDA enhanced enforcement efforts during the quarter, including the periodic halting of shipments into U.S.

shipping ports which caused supply chain issues and further marketplace unrest.

Voluntary stockouts of e-liquid products were the result of diverting working capital to the launch of our new Spree Bar line of nicotine substitute vapor products.

The increase in sales for our hemp-derived business was directly related to a steady increase in market share for our 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, potential for regulatory challenges in the third quarter 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 decreased by approximately $2,679,000 or 58.8%, to approximately $1,879,000 or 47.3% of revenue, for the three months ended June 30, 2023, as compared to approximately $4,558,000, or 61.6% of revenue, for the same period in 2022.

This cost, as a percent of revenue, decreased significantly due to a more favorable sales mix of our e-liquid products as well as a reduction in provision for inventory obsolescence related to certain of our nicotine and alternative cannabis disposable products.

General and Administrative Expenses

For the three months ended June 30, 2023, total general and administrative expenses decreased by approximately $95,000 to $1,775,000 as compared to approximately $1,870,000 for the same period in 2022.

This change was primarily due to decreases of $91,000 in provision for bad debt, $85,000 in depreciation expense and approximately $101,000 in other general and administrative expenses.

The decrease in provision for bad debt was primarily the result of lower sales activity during the period.

The decrease in depreciation expense was primarily due to the permanent closure of our Denver, Colorado office and warehouse.

The reduction in other general and administrative costs primarily consisted of decreased occupancy costs resulting from an overall reduced office and warehouse footprint and lower merchant fees resulting from lower sales activity.

These reductions were offset by increases of $112,000 in professional fees as well as $70,000 in payroll and benefits costs.

Professional fees increased due to higher costs necessary to complete our 2022 audit.

Payroll and benefits costs increased due to Employee Retention Credits (“

ERCs ”) received during 2022, in conjunction with the Infrastructure Investment and Jobs Act which was enacted in November 2021.

Excluding the effect of ERCs, payroll and benefits costs decreased significantly as the result of staff consolidation, elective executive salary reductions and a reduced bonus accrual for the period.

Sales and Marketing Expense

For the three months ended June 30, 2023, total sales and marketing expense decreased by approximately $468,000 to approximately $319,000 as compared to approximately $787,000 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 June 30, 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 June 30, 2023, total research and development costs decreased by approximately $705,000 to approximately $39,000 as compared to approximately $744,000for 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 incurred a loss from operations of approximately $42,000 for the three months ended June 30, 2023, compared to a loss of approximately $562,000for the three months ended June 30, 2022, due primarily to a significant decrease in sales.

We also incurred certain non-cash, general and administrative expenses during the period including a $37,000 expense related to stock-based compensation.

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

Change in Fair Value of Derivative Liabilities.

For the three months ended June 30, 2023, the gain in fair value of derivative liabilities was $185,000, compared to a gain in fair value of derivative liabilities of $12,000 for the three months ended June 30, 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 the quarter ended June 30, 2023, reflects the effect of the decrease in stock price as of June 30, 2023, compared to March 31, 2023.

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 June 30, 2023.

Interest Expense.

For the three months ended June 30, 2023 and 2022, we recorded interest expense related to notes payable of $111,000 and $91,000, 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.

Net (Loss) Income

For the three months ended June 30, 2023, we had net income of $32,000 as compared to a net loss of $636,000 for the same period in 2022.

Results of Operations for the Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022

Regarding results from operations for the six months ended June 30, 2023, we generated revenue of approximately $8,000,000, as compared to revenue of $15,471,000 for the six months ended June 30, 2022.

This $7,471,000 decrease in revenue was due primarily to a $6,680,000 decrease in sales of our nicotine-based vapor products, as well as a $791,000 decrease in sales of our hemp-derived products.

We generated a net loss for the six months ended June 30, 2023, of approximately $1,358,000 as compared to a net income of approximately $70,000 for the six months ended June 30, 2022.

The net loss for the six months ended June 30, 2023 includes a non-cash gain in fair value of derivative liabilities of $408,000 compared to a non-cash gain in fair value of derivative liabilities of $352,000during the six months ended June 30, 2022.

A review of the six-month period ended June 30, 2023, follows:

For the six months ended

($ 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):

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Change in fair value of derivative liabilities

Total other income

Total other income (loss)

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.

Revenue for the six months ended June 30, 2023, decreased by approximately $7,471,000 or 48.3%, to approximately $8,000,000,as compared to approximately $15,471,000 for same period in 2022, primarily due to a $6,680,000 decrease in sales of our nicotine-based vapor products, as well as a $791,000 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 and periodic stockouts of our e-liquid line of products.

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 FDA enhanced enforcement efforts during the period, including the periodic halting of shipments into U.S.

shipping ports which caused supply chain issues and further marketplace unrest.

Voluntary stockouts of e-liquid products during the second quarter were the result of diverting working capital to the launch of our new Spree Bar line of nicotine substitute vapor products.

The decrease in sales for our hemp-derived business was directly related to an eight-week pause in manufacturing, and a subsequent lack of inventory, when the Company changed some of the ingredients in its PINWEEL products in order to avoid compounds that were newly deemed “controlled substances.”

However, inventory was restored during the second quarter, resulting in a modest rise in sales.

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;

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Cost of Revenue

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.

Cost of revenue, which consists of direct costs of materials, direct labor, third party subcontractor services, and other overhead costs decreased by approximately $3,974,000 or 44.2%, to approximately $5,018,000 or 62.7% of revenue, for the six months ended June 30, 2023, as compared to approximately $8,992,000, or 58.1% of revenue, for the same period in 2022.

This cost, as a percent of revenue, increased significantly due to an increase of approximately $199,000 in our provision for inventory obsolescence during the period 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 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.

For the six months ended June 30, 2023, total general and administrative expenses decreased by approximately $666,000 to $3,763,000 as compared to approximately $4,429,000 for the same period in 2022.

This change was primarily due to decreases of $397,000 in payroll and benefits, $108,000 in depreciation expense and approximately $234,000 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.

During the six months ended June 30, 2023, our depreciation expense decreased due to the permanent closure of our Denver, Colorado facilities.

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.

These decreases were offset primarily by a $73,000 increase in professional fees resulting from higher costs in relation to our 2022 audit.

Sales and Marketing Expense

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.

For the six months ended June 30, 2023, total sales and marketing expense decreased by approximately $803,000, or 53.9%, to approximately $687,000 as compared to approximately $1,490,000 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 June 30, 2023.

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

Research and Development Expense

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.

For the six months ended June 30, 2023, total research and development costs decreased by approximately $664,000, 88.0%, to approximately $91,000 as compared to approximately $755,000 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.

We incurred a loss from operations of approximately $1,559,000 for the six months ended June 30, 2023, compared to an operating loss of approximately $195,000 for the six months ended June 30, 2022, due primarily to a decrease in sales.

We also incurred certain non-cash, general and administrative expenses during the period including an $82,000 expense related to stock-based compensation.

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

Change in Fair Value of Derivative Liabilities.

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.

For the six months ended June 30, 2023, the gain in fair value of derivative liabilities was $408,000, compared to a gain in fair value of derivative liabilities of $352,000 for the six months ended June 30, 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 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.

The gain for the quarter ended June 30, 2023, reflects the effect of the decrease in stock price as of June 30, 2023, compared to December 31, 2022.

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

We had 40,337,693 warrants outstanding as of June 30, 2023.

Interest Expense.

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.

For the six months ended June 30, 2023 and 2022, we recorded interest expense related to notes payable of $242,000 and $92,000, respectively.

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.

For the six months ended June 30, 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.

For the six months ended June 30, 2023, we incurred a net loss of $1,358,000 as compared to net income of $70,000 for the same period in 2022.

Liquidity and Capital Resources

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).

As of June 30, 2023, we had working capital of approximately $792,000, which consisted of current assets of approximately $4,349,000 and current liabilities of approximately $3,557,000, as compared to working capital of approximately $1,067,000 at December 31, 2022.

The current liabilities include approximately $2,450,000 of accounts payable and accrued expenses, notes payable of $115,000 which was net of a $2,000 debt discount, note payable from a related party of $300,000, approximately $73,000 of deferred revenue associated with product shipped but not yet received by customers, approximately $398,000 of current lease liabilities, and $221,000 of derivative liability associated with the Investor Warrants and Placement Agent Warrants (the derivative liability of $221,000 is included in determining working capital of $792,000 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 (“

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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 ’

During the six months ended June 30, 2023, the Company made approximately $644,000 in cash payments.

As of June 30, 2023, the outstanding principal under the Receivables Financing Agreement was approximately $117,000.

Our cash and cash equivalents balance at June 30, 2023 was approximately $343,000.

For the six months ended June 30, 2023, net cash provided by operating activities was approximately $124,000, resulting from a net loss of $1,358,000, offset by a change in operating assets and liabilities of $1,364,000 and net non-cash activity of $118,000.

For the six months ended June 30, 2022, net cash used in operating activities was approximately $1,276,000, resulting from a net income of $70,0000, offset by a $352,000 of change in fair value of derivative liabilities and $1,654,000 of changes in our operating assets and liabilities.

For the six months ended June 30, 2023, we used approximately $38,000 cash in financing activities related to sale of future receivables for approximately $630,000 and repayment of $668,000 under the same agreement.

Substantial Doubt to Continue as a Going Concern Regarding the Legal and Regulatory Environment, Liquidity and Management ’

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.

Our consolidated 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;

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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.

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

For the six months ended June 30, 2023, the Company’s revenue declined, the Company generated a loss from operations of approximately $1,559,000, and a consolidated net loss of approximately $1,358,000 and cash provided by operations of approximately $124,000.

The Company had stockholders’

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.

equity of $424,000 at June 30, 2023.

During the six months ended June 30, 2023, the Company’s working capital position decreased to $792,000 from $1,067,000, as of December 31, 2022.

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.

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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 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.

Based on our evaluation, our President, the principal executive officer, and Chief Financial Officer concluded that, as of June 30, 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

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.

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 June 30, 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