What changed in this filing

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Item 1. Financial Statements

2023-11-14 compared with 2023-08-14 · 262 added, 222 removed, 696 unchanged (41% of the section changed)

4 unchanged sentences

(in thousands, except share and per share amounts)

September 30,

Current assets:

10 unchanged sentences

Accounts payable and accrued expenses

Note payable, net - related party

Notes payable

Notes payable - related parties

Derivative liability

4 unchanged sentences

Notes payable, net of current portion

Notes payable, net - related parties, net of current portion

Lease liabilities, net of current portion

2 unchanged sentences

COMMITMENTS AND CONTINGENCIES (see Note 12)

Stockholders' equity:

Stockholders' (deficit) equity:

Convertible preferred stock ($ 0.001 par value);

1 unchanged sentence

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

128,181 shares issued and outstanding as of September 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

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

Common stock ($ 0.001 par value);

500,000,000 shares authorized;

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

224,569,219 issued and outstanding as of September 30, 2023 and 219,163,631 shares issued and outstanding as of December 31, 2022

Additional paid-in capital

Accumulated deficit

Total stockholders' equity

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

Total stockholders' (deficit) equity

TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY

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

4 unchanged sentences

For the three months ended

For the six months ended

For the nine months ended

September 30,

Product revenue, net

6 unchanged sentences

Total operating costs and expenses

Loss from operations

(Loss) income from operations

Other income (expense):

2 unchanged sentences

Change in fair value of derivative liabilities

Total other income (loss)

Net income (loss)

Other income (expense)

Total other income

(Loss) income before income taxes

Provision for income taxes

Net (loss) income

Net income (loss) per share

5 unchanged sentences

(in thousands)

For the Three Months Ended June 30, 2023

For the Three Months Ended September 30, 2023

Convertible Preferred Stock

Stockholders'

Total Stockholders'

Paid-in Capital

Balance at April 1, 2023

Conversion of Series A convertible preferred stock

 Equity (Deficit)

Balance at July 1, 2023

Forfeiture of restricted stock awards

Stock compensation

Balance at June 30, 2023

For the Three Months Ended June 30, 2022

Balance at September 30, 2023

For the Three Months Ended September 30, 2022

Convertible Preferred Stock

Stockholders'

Total Stockholders'

Paid-in Capital

Balance at April 1, 2022

Conversion of Series A convertible preferred stock

Balance at July 1, 2022

Stock compensation

Balance at June 30, 2022

For the Six Months Ended June 30, 2023

Balance at September 30, 2022

For the Nine Months Ended September 30, 2023

Convertible Preferred Stock

Stockholders'

Total Stockholders'

Paid-in Capital

 Equity (Deficit)

Balance at January 1, 2023

Conversion of Series A convertible preferred stock

Forfeiture of restricted stock awards

Stock compensation

Balance at June 30, 2023

For the Six Months Ended June 30, 2022

Balance at September 30, 2023

For the Nine Months Ended September 30, 2022

Convertible Preferred Stock

Stockholders'

Total Stockholders'

Paid-in Capital

2 unchanged sentences

Stock compensation

Balance at June 30, 2022

Balance at September 30, 2022

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

3 unchanged sentences

(in thousands)

For the six months ended

For the nine months ended

September 30,

Cash Flows from Operating Activities:

Net (loss) income

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

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

Allowance for doubtful accounts

7 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 provided by (used in) operating activities

Net cash used in operating activities

Cash Flows from Investing Activities:

3 unchanged sentences

Proceeds from issuance of notes payable

Proceeds from issuance of notes payable to related party

Repayment of notes payable

Net cash (used in) provided by financing activities

Repayment of notes payable to related party

Net cash provided by financing activities

Net increase (decrease) in cash

7 unchanged sentences

Conversion of Series A convertible preferred stock

Recognize minimum accrued interest

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

22 unchanged sentences

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 .

For the nine months ended September 30, 2023, the Company’s revenue declined, the Company generated a loss from operations of approximately $ 2,301,000 , and a consolidated net loss of approximately $ 2,066,000 .

Cash used in operations was approximately $ 736,000 .

The Company had stockholders’

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.

deficit of $ 248,000 at September 30, 2023.

During the nine months ended September 30, 2023, the Company’s working capital position decreased to $ 122,000 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 (“

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 as of September 30, 2023, 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 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.

During the quarter ended September 30, 2023, the Company prepared to launch SPREE BAR, a non-nicotine, disposable vapor product which is 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 the development of new product categories as well as 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.

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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™”

During the fourth quarter 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.

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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.

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”

45 unchanged sentences

and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange.

This ASU will be effective for all entities for fiscal years beginning after December 15, 2021.

An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments.

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

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

This ASU is 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. 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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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

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, 2023 and December 31, 2022 (amounts in thousands):

Fair Value at September 30, 2023

Derivative liability - Warrants

3 unchanged sentences

Total liabilities

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.

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

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

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

September 30,

Exercise price

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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

Depreciation and amortization expense totaled $ 117,000 and $ 244,000 , respectively, during the nine months ended September 30, 2023 and 2022.

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

September 30,

 Estimated Useful Life

Machinery and equipment

2 unchanged sentences

Leasehold improvements

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

Lesser of lease term or estimated useful life

Accumulated depreciation

3 unchanged sentences

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.

ended September 30,

For the nine months

ended September 30,

During the three months ended September 30, 2023, and 2022, purchases from five vendors represented 74 % and 89 %, respectively, of total inventory purchases.

During the nine months ended September 30, 2023, and 2022, purchases from 5 vendors represented 76 % and 80 %, respectively, of total inventory purchases.

As of September 30, 2023, and December 31, 2022, amounts owed to these vendors totaled $ 303,000 and $ 464,000 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:

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.

September 30,

Six customers made up 89 % of net accounts receivable at September 30, 2023.

Four customers made up approximately 

36 % of net accounts receivable at December 31, 2022.

Customer A owed the Company a total of $ 66,000 , representing 22 % of net receivables at September 30, 2023.

Customer C owed the Company a total of $ 63,000 , representing 21 % of net receivables at September 30, 2023.

Customer D owed the Company a total of $ 55,000 , representing 18 % of net receivables at September 30, 2023.

Customer E owed the Company a total of $ 52,000 , representing 17 % of net receivables at September 30, 2023.

Customer F owed the Company a total of $ 32,000 , representing 11 % of net receivables at September 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 six months ended June 30, 2023 and 2022, respectively.

No customer exceeded 10% of total net sales for the nine-month periods ended September 30, 2023 and 2022.

NOTE 6 –

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ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

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

September 30,

Accounts payable

5 unchanged sentences

NOTES PAYABLE

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 and employees, 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 .

The Company recognized $ 1,200,000 in Notes payable –

related party on the condensed consolidated balance sheet as of September 30, 2023.

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

January 2023 Receivables Financing

4 unchanged sentences

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.

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 .

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

As of September 30, 2023, the Company had fully repaid the outstanding principal balance and accrued interest totaling $ 760,500 on its Receivables Financing Agreement.

April 2022 Note Financing

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

Note ”) to one of its individual stockholders, and a member of the Company’s Board of Directors, Michael King (the “

Note ”) to one of its individual stockholders, and a member of the Company’s Board of Directors since June 13, 2023, 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 ").

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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 June 30, 2023 (amounts in thousands):

Six months Ending December 31, 2023

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

Three months Ending December 31, 2023

Year Ending December 31, 2024

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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 six months ended June 30, 2023, net income is adjusted for gain from change in fair value of warrant liabilities.

For the three and nine months ended September 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

For the six months ended

For the nine months ended

September 30,

Net income (loss) - basic

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

Net (loss) income - diluted

Net loss - diluted

Weighted average shares outstanding - basic

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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 six months ended

For the nine months ended

September 30,

Series A convertible preferred shares

2 unchanged sentences

Conversion of Series A Preferred Shares

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.

During the nine months ended September 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 –

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Non-Qualified Stock Options

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

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

Stock Options

2 unchanged sentences

Weighted Average

Remaining Contractual

Life (in years)

Intrinsic Value

Contractual Life (in

Aggregate Intrinsic Value

Outstanding at January 1, 2023

Options forfeited/expired

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.

Outstanding at September 30, 2023

Options vested and exercisable at September 30, 2023

As of September 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 six months ended June 30, 2023 (all share amounts are in thousands):

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

Number of Shares

Weighted Average

Grant Date Fair Value

Grant Date Fair

Value per Share

Nonvested at January 1, 2023

Restricted stock granted

Nonvested at June 30, 2023

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

Nonvested at September 30, 2023

During the nine months ended September 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 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.

During the nine months ended September 30, 2023, approximately 477,000 RSAs issued to employees and contractors were forfeited.

As of September 30, 2023, there was approximately $ 157,000 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 2.0 years.

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

The Company recorded total stock-based compensation of approximately $ 119,000 during the nine months ended September 30, 2023 related to the RSAs, respectively.

NOTE 12 –

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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 six months ended June 30, 2023 and 2022 was approximately $ 138,000 and $ 134,000 , respectively.

The total rent paid to related parties for the nine months ended September 30, 2023 and 2022 was approximately $ 207,000 and $ 207,000 , 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 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):

At September 30, 2023, the Company had operating lease liabilities of approximately $ 526,000 and right of use assets of approximately $ 522,000 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, 2023 and 2022 (amounts in thousands):

For the three months ended

For the six months ended

For the nine months ended

September 30,

Operating leases

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Total rent expense

For the six months ended

For the nine months ended

September 30,

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

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

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

Three Months Ending December 31, 2023

Year Ending December 31, 2024

1 unchanged sentence

Less present value discount

Operating lease liabilities as of June 30, 2023

Operating lease liabilities as of September 30, 2023

Legal Proceedings

11 unchanged sentences

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.

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.

4 unchanged sentences

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.

On October 1, 2023, 100,000 shares of restricted stock, issued under the Company’s 2019 Plan, were forfeited by employees whose service was terminated.

SPREE BAR Launch

As of November 2, 2023, approximately $ 1.6 million of revenue related to the launch of the Company’s SPREE BAR product has been recognized as four of its Master Distributors received shipments from China.

Synthetic Nicotine PMTA Update

On November 4, 2022, FDA issued two Refuse to Accept Letters (“

RTAs ”) covering multiple PMTA submissions for certain of the Company's synthetic nicotine products.

The Company exercised its right to appeal the decision with the FDA and on March 6, 2023, the Company filed a request for supervisory review with FDA's Center for Tobacco Products.

On October 30, 2023, the Company received notification from the FDA that its supervisory review appeal had been granted.

Therefore, the FDA has rescinded the RTAs, notified the Company that Acceptance Letters for the PMTAs will be issued, and will place these applications into filing review.

ITEM 2 –

30 unchanged sentences

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.

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

Accordingly, if the Company is successful utilizing Metatine in 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 began shipping its new Metatine-based, SPREE BAR™

disposable vape products to master distributors, in preparation for launch (and sales to be recognized) in October 2023.

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.

SPREE BAR provides adult consumers with the same 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 of the end of the quarter, we have awarded SPREE BAR Master Distributor and Distributor contracts to seven large customers.

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

17 unchanged sentences

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 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”

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.

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.

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

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

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 SPREE BAR.

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.

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Recent Developments

Synthetic Nicotine PMTA Update .

On November 4, 2022, FDA issued two Refuse to Accept Letters (“

RTAs ”) covering multiple PMTA submissions for certain of the Company's synthetic nicotine products.

The Company exercised its right to appeal the decision with the FDA and on March 6, 2023, the Company filed a request for supervisory review with FDA's Center for Tobacco Products.

On October 30, 2023, the Company received notification from the FDA that its supervisory review appeal had been granted.

Therefore, the FDA has rescinded the RTAs, notified the Company that Acceptance Letters for the PMTAs will be issued, and will place these applications into filing review.

New Executive Employment Agreement .

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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.

In the fourth quarter 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.

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See Liquidity and Capital Resources below for additional information.

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:

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

Regarding results from operations for the quarter ended September 30, 2023, we generated revenue of approximately $2,706,000, as compared to revenue of $6,427,000 for the three months ended September 30, 2022.

This $3,721,000 decrease in revenue was due primarily to a $3,590,000 decrease in sales of our nicotine-based vapor products, as well as a $131,000 decrease in sales of our hemp-derived products.

We generated net loss for the three months ended September 30, 2023, of approximately $708,000 as compared to net income of approximately $241,000 for the three months ended September 30, 2022.

The net loss for the three months ended September 30, 2023 includes a non-cash gain in fair value of derivative liabilities of $155,000 compared to a non-cash gain in fair value of derivative liabilities of $246,000 during the three months ended September 30, 2022.

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

For the three months ended

September 30,

($ in thousands)

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Total operating costs and expenses

Loss from operations

(Loss) income from operations

Other income (expense):

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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.

(Loss) income before income taxes

Provision for income taxes

Net (loss) income

Revenue for the three months ended September 30, 2023, decreased by approximately $3,721,000 or 57.9%, to approximately $2,706,000, as compared to approximately $6,427,000 for same period in 2022 due to a $3,590,000 decrease in sales of our nicotine-based vapor products, and a $131,000 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 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.

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

The FDA has continued to enhance enforcement efforts in recent quarters, including the periodic halting of shipments into U.S.

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

As a result, the domestic market for nicotine-based disposable vapor products has continued to move “underground”

as brands attempt to avoid attention from FDA.

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.

The decrease in sales for our hemp-derived business during the quarter was directly related to the diversion of working capital and other resources towards the launch of our SPREE BAR line of nicotine substitute vapor products.

Despite achieving increased market share for our PINWEEL brand of hemp-derived products, we believe that the market for alternative alkaloid products, such as SPREE BAR, offers the Company the most significant opportunity for growth.

However, we continue to believe that the hemp-derived category offers short- and medium-term potential for our Company and we will continue to pursue actionable opportunities in this segment.

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.

Cost of revenue, which consists of direct costs of materials, direct labor, third party subcontractor services, and other overhead costs decreased by approximately $2,062,000 or 56.2%, to approximately $1,609,000, or 59.5% of revenue, for the three months ended September 30, 2023, as compared to approximately $3,671,000, or 57.1% of revenue, for the same period in 2022.

This cost, as a percent of revenue, increased compared to last year due to lower overhead cost absorption resulting from reduced sales activity, as well as a decrease in the amount of shipping cost passed on to customers.

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.

For the three months ended September 30, 2023, total general and administrative expenses decreased by approximately $469,000 to $1,597,000 as compared to approximately $2,066,000 for the same period in 2022.

This change was primarily due to decreases of approximately $356,000 in non-commission payroll and benefits costs, $40,000 in merchant account fees, $33,000 in provision for bad debt, and approximately $149,000 in other general and administrative expenses, but was offset by an increase of approximately $109,000 in certain professional fees.

The decrease in payroll and benefits costs was primarily driven by elective salary reductions for executives and a reduced bonus accrual.

The decrease in merchant account fees and bad debt provision was largely the result of lower sales activity during the period.

The reduction in other general and administrative expenses largely consisted of decreased consulting expenses, fees paid to board members and tax preparation expenses.

These reductions were offset by an increase in certain professional fees of approximately $109,000.

Higher costs necessary to complete our 2022 audit were responsible for increased professional fees.

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.

For the three months ended September 30, 2023, total sales and marketing expense decreased by approximately $434,000 to approximately $201,000 as compared to approximately $635,000 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 September 30, 2023.

Our commission costs, included in sales and marketing expense, was also lower 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.

For the three months ended September 30, 2023, total research and development costs increased by approximately $32,000 to approximately $41,000 as compared to approximately $9,000 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 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 incurred a loss from operations of approximately $742,000 for the three months ended September 30, 2023, compared to income of approximately $46,000 for the three months ended September 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 $36,000 expense related to stock-based compensation.

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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.

For the three months ended September 30, 2023, the gain in fair value of derivative liabilities was $155,000, compared to a gain in fair value of derivative liabilities of $246,000 for the three months ended September 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.

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

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

For the three months ended September 30, 2023 and 2022, we recorded interest expense related to notes payable of $121,000 and $7,000, respectively.

The increase was primarily due to an aggregate of $1,400,000 notes that were entered in July 2023, which bear interest at twenty-one percent (21%) per annum.

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.

For the three months ended September 30, 2023, we incurred a net loss of $708,000 as compared to net income of $241,000 for the same period in 2022.

Results of Operations for the Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022

Regarding results from operations for the nine months ended September 30, 2023, we generated revenue of approximately $1,706,000, as compared to revenue of $21,898,000 for the nine months ended September 30, 2022.

This $11,192,000 decrease in revenue was due primarily to a $10,270,000 decrease in sales of our nicotine-based vapor products, as well as a $922,000 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

We generated a net loss for the nine months ended September 30, 2023, of approximately $2,066,000 as compared to a net income of approximately $311,000 for the nine months ended September 30, 2022.

The net loss for the nine months ended September 30, 2023 includes a non-cash gain in fair value of derivative liabilities of $563,000 compared to a non-cash gain in fair value of derivative liabilities of $598,000 during the nine months ended September 30, 2022.

A review of the nine-month period ended September 30, 2023, follows:

For the nine months ended

September 30,

($ in thousands)

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Change in fair value of derivative liabilities

Total other income (loss)

Other expense, net

Total other income

(Loss) income before income taxes

Provision for income taxes

Net (loss) income

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 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.”

Revenue for the nine months ended September 30, 2023, decreased by approximately $11,192,000 or 51.1%, to approximately $10,706,000, as compared to approximately $21,898,000 for same period in 2022, primarily due to a $10,270,000 decrease in sales of our nicotine-based vapor products, as well as a $922,000 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 as well as periodic, voluntary stockouts of our e-liquid products.

Despite a strong performance during its initial launch in 2022, our Pacha Disposables line has faced challenges including increased competition from low-priced Chinese products, the requirement for synthetic nicotine products to obtain marketing authorization from the FDA, and continued uncertainty surrounding the FDA’s issuance of MDO’s and Refuse-to-File designations.

The FDA has continued to enhance enforcement efforts in recent quarters, including the periodic halting of shipments into U.S.

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

As a result, the domestic market for nicotine-based disposable vapor products has continued to move “underground”

as brands attempt to avoid attention from FDA.

Voluntary stockouts of e-liquid products beginning in 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 during the first quarter of 2023, 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;

The decrease in sales for our hemp-derived business during the period was also related to the diversion of working capital and other resources towards the launch of our SPREE BAR line of nicotine substitute vapor products.

Despite achieving increased market share for our PINWEEL brand of hemp-derived products during the nine-month period ended September 30, 2023, we believe that the market for alternative alkaloid products, such as SPREE BAR, offers the Company the most significant opportunity for long-term growth.

However, we do recognize that the hemp-derived category offers short- and medium-term potential for our Company and we will continue to pursue actionable opportunities in this segment while available.

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 $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.

Cost of revenue, which consists of direct costs of materials, direct labor, third party subcontractor services, and other overhead costs decreased by approximately $6,036,000 or 47.7%, to approximately $6,627,000 or 61.9% of revenue, for the nine months ended September 30, 2023, as compared to approximately $12,663,000, or 57.8% of revenue, for the same period in 2022.

This cost, as a percent of revenue, increased significantly due to reduced overhead cost absorption resulting from lower sales during the period.

Also contributing to the increase was an increase of approximately $49,000 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 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.

For the nine months ended September 30, 2023, total general and administrative expenses decreased by approximately $1,122,000 to $5,360,000 as compared to approximately $6,482,000 for the same period in 2022.

This change was primarily due to decreases of $730,000 in non-commission payroll and benefits, $171,000 in merchant account fees, $126,000 in depreciation expense and $230,000 in other general and administrative expenses, but was offset by an increase of approximately $135,000 in professional fees.

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 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.

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

Merchant account fees decreased during the period due to reduced sales activity.

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

The decrease in other general and administrative expenses largely consisted of a reduced bad debt provision and lower occupancy costs resulting from the permanent closure of our Denver, Colorado facilities.

These reductions were offset by an increase in other professional fees of approximately $135,000, including a $63,000 increase in audit fees related to our 2022 audit and a $72,000 increase in legal fees related to regulatory compliance and our annual meeting held in June 2023.

Sales and Marketing Expense

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.

For the nine months ended September 30, 2023, total sales and marketing expense decreased by approximately $1,237,000, or 58.2%, to approximately $888,000 as compared to approximately $2,125,000 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 September 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 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.

For the nine months ended September 30, 2023, total research and development costs decreased by approximately $632,000, 82.7%, to approximately $132,000 as compared to approximately $764,000 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 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 incurred a loss from operations of approximately $2,301,000 for the nine months ended September 30, 2023, compared to an operating loss of approximately $136,000 for the nine months ended September 30, 2022, due primarily to a decrease in sales.

We also incurred certain non-cash, general and administrative expenses during the period including an $118,000 expense related to stock-based compensation.

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Change in Fair Value of Derivative Liabilities.

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.

For the nine months ended September 30, 2023, the gain in fair value of derivative liabilities was $563,000, compared to a gain in fair value of derivative liabilities of $598,000 for the nine months ended September 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 December 31, 2022.

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

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

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

Interest Expense.

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.

For the nine months ended September 30, 2023 and 2022, we recorded interest expense related to notes payable of $363,000 and $99,000, 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, August 2022 and July 2023 promissory notes.

Debt extinguishment gain.

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.

For the nine months ended September 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 and member of the Company’s Board of Directors, which extended the maturity date to March 2025.

Net (Loss) Income

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.

For the nine months ended September 30, 2023, we incurred a net loss of $2,066,000 as compared to net income of $311,000 for the same period in 2022.

Liquidity and Capital Resources

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).

As of September 30, 2023, we had working capital of approximately $122,000, which consisted of current assets of approximately $5,804,000 and current liabilities of approximately $5,682,000, as compared to working capital of approximately $1,067,000 at December 31, 2022.

The current liabilities include approximately $3,363,000 of accounts payable and accrued expenses, notes payable of $200,000, note payable from related parties of $1,500,000, approximately $142,000 of deferred revenue associated with product shipped but not yet received by customers, approximately $411,000 of current lease liabilities, and $66,000 of derivative liability associated with the Investor Warrants and Placement Agent Warrants (the derivative liability of $66,000 is included in determining working capital of $122,000 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 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.

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.

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

During nine months ended September 30, 2023, the Company made $760,500 in cash payments.

As of September 30, 2023, the Company had fully repaid the outstanding principal balance and accrued interest totaling $760,500 on its Receivables Financing Agreement.

Our cash and cash equivalents balance at September 30, 2023 was approximately $739,000.

For the nine months ended September 30, 2023, net cash used in operating activities was approximately $736,000, resulting from a net loss of $2,066,000, offset by a change in operating assets and liabilities of $1,157,000 and net non-cash activity of $173,000.

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 $2,108,000 of changes in our operating assets and liabilities and net non-cash activity of $275,000.

For the nine months ended September 30, 2023, cash provided by financing activities was approximately $1,218,000, which related to sale of future receivables for approximately $631,000 and repayment of $761,000 under the same agreement, issuance of notes payable for $200,000, issuance of notes payable to related parties for $1,200,000 and repayment of notes payable to a related party for $52,000.

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

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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 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.

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 nine months ended September 30, 2023, the Company’s revenue declined, the Company generated a loss from operations of approximately $2,301,000, and a consolidated net loss of approximately $2,066,000 and cash used in operations of approximately $736,000.

The Company had stockholders’

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.

deficit of $248,000 at September 30, 2023.

During the nine months ended September 30, 2023, the Company’s working capital position decreased to $122,000 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.

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.

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 as of September 30, 2023, 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.

The Company intends to allocate further resources and new personnel to support research and development initiatives in order to support existing, or subsequent PMTAs as well as other vapor product technologies.

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

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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 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.

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