What changed in this filing

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Item 9A. Controls and Procedures

2024-04-15 compared with 2023-04-17 · 343 added, 440 removed, 538 unchanged (59% of the section changed)

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Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our President, the principal executive officer, and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “

Exchange Act ”) as of the end of the period covered by this Annual Report on Form 10-K.

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

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

Management ’

s Annual Report on Internal Control over Financial Reporting.

Section 404(a) of the Sarbanes-Oxley Act of 2002 requires that management document and test the Company’s internal control over financial reporting and include in this Annual Report on Form 10-K a report on management's assessment of the effectiveness of our internal control over financial reporting.

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

Management ’ s Annual Report on Internal Control over Financial Reporting.

Section 404(a) of the Sarbanes-Oxley Act of 2002 requires that management document and test the Company’s internal control over financial reporting and include in this Annual Report on Form 10-K a report on management’s assessment of the effectiveness of our internal control over financial reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act.

Under the supervision of our principal executive and financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“

COSO ”).

Based on that evaluation, our principal executive and financial officer concluded that our internal control over financial reporting was effective as of December 31, 2023.

This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financing reporting because we are not an “accelerated filer”

or a “large accelerated filer”.

Our management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Annual Report on Form 10-K.

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

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

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

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

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

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

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

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 December 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

OTHER INFORMATION

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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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

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

Information concerning our executive officers, directors and corporate governance is incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2024 Annual Meeting of Stockholders.

Set forth below is information regarding our directors, executive officers, and key personnel as of March 1, 2024:

Henry Sicignano

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Chief Operating Officer and Director

Adam Mirkovich

Chief Information Officer

Edward Carmines

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Prior to joining the Company, Mr.

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

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

He also served as President and as a member of the Board of Directors with 22nd Century from January 2011 through July 2019.

Sicignano held multiple positions, including Chief Executive Office r of 2 2nd Century Group, Inc.

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

He also served as President and as a member of the Board of Directors wi th 2 2nd Century from January 2011 through July 2019.

In addition, from December 2014 to August 2018, Mr.

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Degree from Harvard University.

Montesano, Chief Financial Officer.

Montesano, Interim Chief Financial Officer.

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

Prior to his appointment, and since 2014, Mr.

Montesano has served as Chief Financial Officer of Charlie’s Chalk Dust, LLC, the Company’s largest and most profitable operating division.

Beginning in 2019, he also began serving as the Chief Financial Officer of Don Polly, LLC, the Company’s hemp-derived products division.

Montesano has served as Chief Financial Officer of Charlie’s Chalk Dust, LLC, the Company’s largest and most profitable operating division.

Beginning in 2019, he also began serving as the Chief Financial Officer of Don Polly, LLC, the Company’s hemp-derived products division.

Montesano is the Founder and Managing Partner for MPM Advisors, LLC, an outsourced accounting, and business process firm.

Prior to joining the Company, Mr.

Montesano worked for L’Oreal USA in a variety of corporate finance positions for the company’s Professional Products and Salon Centric divisions.

Prior to L’Oreal USA, Mr.

Montesano worked for L’Oreal USA in a variety of corporate finance positions for the company’s Professional Products and Salon Centric divisions.

Prior to L’Oreal USA, Mr.

Montesano worked for KeyBanc Capital Markets as an investment banker where he focused on debt, equity and merger and acquisitions transactions in the industrials space.

Ryan Stump, Director and Chief Operating Officer.

Stump was appointed as a director and the Company’s Chief Marketing Officer on April 26, 2019 in connection with the Share Exchange.

Stump has served as the Chief Operating Officer of Charlie’s since 2014, during which time he has been responsible for all global operations of Charlie’s.

Prior to joining Charlie’s, Mr.

Stump was appointed as a director and the Company’s Chief Marketing Officer on April 26, 2019 in connection with the Share Exchange.

Stump has served as the Chief Operating Officer of Charlie’s since 2014, during which time he has been responsible for all global operations of Charlie’s.

Prior to joining Charlie’s, Mr.

Stump worked as an Associate Territory Manager and then as a Territory Manager for ConMed, a medical sales device company, from 2010 to 2013.

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The Board of Directors believes that Mr.

Stump’s experience operating high growth companies, as well as entrepreneurial experience, is valuable to the Board as it manages the Company’s anticipated continued growth.

Adam Mirkovich, Chief Information Officer.

Mirkovich was appointed as the Company’s Chief Information Officer on May 20, 2019.

Mirkovich has over a decade of experience managing supply chains for consumer products.

Mirkovich has served as an independent management consultant specializing in building and optimizing value chains for startups and growth stage companies in the beverage, nicotine vape, and nutritional supplements industries since 2013.

Prior to joining the Company, Mr.

Mirkovich served as the Chief Operating Officer of Orchid Ventures, Inc.

ORCD), a multi-state premium cannabis vape company, from September 2018 to April 2019.

From December 2014 to February 2016, Mr.

Mirkovich served as the Director of Supply Chain and Operations at Space Jam Juice, LLC, a distributor of premium vapor products.

From November 2010 to April 2013, Mr.

Mirkovich served as the Product Lifecycle Management Program Manager for Niagara Bottling, LLC, a leading bottled water manufacturer.

While there, he led the product revision, introduction, and discontinuance practices for customers’

private labeled water, flavored, and carbonated beverages.

Prior to that, Mr.

Mirkovich served as a member of the Supply Chain Logistics team at Niagara Bottling, providing strategic support of company expansion activities and tactical support of purchasing, production planning, and multi-region logistics in North American operations.

Mirkovich earned a Bachelor of Science degree in Business Administration and Economics from Chapman University.

Scot Cohen ,  

Director . Mr.

Stump’s experience operating high growth companies, as well as entrepreneurial experience, is valuable to the Board as it manages the Company’s anticipated continued growth.

Scot Cohen , Director .

Cohen was appointed to the Board in March 2013 and is the Founder and Managing Partner of V3 Capital Partners, a private investment firm focused on early-stage companies primarily in the consumer products industry, and Co-Manager of Red Fortune Fund, a private equity fund based in Hong Kong.

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The Board of Directors believes Mr.

Cohen’s success with multiple private investment firms, his extensive contacts within the investment community, and his financial expertise are a valuable resource to the Company’s efforts to expand and implement its business plan.

Jeffrey Fox, Director .

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Brands and within Sony's interactive and PlayStation video game divisions, and Hill & Knowlton Public Relations.

He is currently a member of the board of directors of Cici’s Pizza and Flix Brewhouse.

Fox holds a bachelor's degree in Journalism from San Diego State University and received a master's degree in Mass Communications from California State University, Northridge. 

The Board of Directors believes that Mr. Fox’s strong experience in brand building across several diverse Fortune 100 consumer product companies will be significantly valuable to the Company as it continues to rapidly grow its product offerings and launch new brands and products around the world.

He is currently a member of the board of directors of Cici’s Pizza and Flix Brewhouse.

Fox holds a bachelor’s degree in Journalism from San Diego State University and received a master's degree in Mass Communications from California State University, Northridge.

The Board of Directors believes that Mr.

Fox’s strong experience in brand building across several diverse Fortune 100 consumer product companies will be significantly valuable to the Company as it continues to rapidly grow its product offerings and launch new brands and products around the world.

Edward Carmines, Director.

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The Board of Directors believes that Dr.

Carmines extensive experience within the nicotine industry and navigating the regulatory process relating to the nicotine industry is significantly valuable to the Company due to the ongoing and evolving nature of the Company’s industry.

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

King, Director .

King was appointed as a director in June 2023 pursuant to the terms of a nomination and standstill agreement dated April 26, 2023.

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.

The Board of Directors believes that Mr.

King’s experience (i) sourcing, purchasing, and shipping products in China and other Asian countries;

(ii) reducing costs of goods and improving quality;

and (iii) operating a high growth company is valuable to the Board as it manages the Company’s anticipated continued growth.

Code of Ethics

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EXECUTIVE COMPENSATION

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

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

Information is incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2024 Annual Meeting of Stockholders

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

Information is incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2024 Annual Meeting of Stockholders

CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information is incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2024 Annual Meeting of Stockholders

PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information is incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2024 Annual Meeting of Stockholders

EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES

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

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

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

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

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

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

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

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

Certificate of Amendment dated April 4, 2023 to Series A preferred stock, incorporated by reference to Form 8-K filed on April 4, 2023.

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

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

Employment Agreement by and between True Drinks Holdings, Inc.

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

Employment Agreement by and between the Company and Ryan Stump, dated June 15, 2023, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed June 20, 2023.

License Agreement by and between the Company and Don Polly, LLC, dated June 5, 2019, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed June 11, 2019.

Services Agreement by and between the Company and Don Polly, LLC, dated June 5, 2019, incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed June 11, 2019.

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

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

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

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

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

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

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

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

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

Promissory Note with Michael King dated April 6, 2022, incorporated by reference to Form 10-K filed on April 17, 2023

Modification Agreement dated September 29, 2022 related to Promissory Note with Michael King dated April 6, 2022, incorporated by reference to Form 10-K filed on April 17, 2023

Modification Agreement dated March 28, 2022 related to Promissory Note with Michael King dated April 6, 2022, incorporated by reference to Form 10-K filed on April 17, 2023

Loan Agreement with Ryan Stump dated August 17, 2022, incorporated by reference to Form 10-K filed on April 17, 2023

Amendment dated December 17, 2022 to Loan Agreement with Ryan Stump dated August 17, 2022, incorporated by reference to Form 10-K filed on April 17, 2023

Amendment dated April 13, 2023 to Loan Agreement with Ryan Stump dated August 17, 2022,

Form of July 2023 Promissory Note, incorporated by reference to Form 10-Q filed on November 14, 2023

Nomination and Standstill Agreement with Michael King dated April 26, 2023 (filed herewith)

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

Board Charter filed with Form 10-K on March 31, 2011 and incorporated herein by reference.

Charlie's Holdings, Inc.

Insider Trading Policy, filed herewith.

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

Consent of Baker Tilly US filed herewith.

Consent of Mazars USA LLP filed herewith.

Consent of Baker Tilly US, LLP filed herewith.

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

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April 15, 2024

CHARLIE’S HOLDINGS, INC.

/s/ Henry Sicignano III

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April 15, 2024

/s/ Michael King

April 15, 2024

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

Opinion on the Financial Statements

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

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

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

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

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

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

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits.

Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

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

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

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

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Going Concern Uncertainty

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

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

Management’s plans in regard to these matters are also described in Note 1.

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

Management’s plans in regard to these matters are also described in Note 1.

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

/s/ Baker Tilly US, LLP

We have served as the Company's auditor from 2018 to 2023.

Irvine, California

April 17, 2023

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Charlie’s Holdings, Inc.

Opinion on the Consolidated Financial Statements

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

(the “Company”) as of December 31, 2023, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows, for the year then ended, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Substantial Doubt about the Company ’ s Ability to Continue as a Going Concern

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

As discussed in Note 2 to the financial statements, the Company has incurred significant operating losses, has negative cash flows from operations, and has an accumulated deficit.

The Company is dependent on its ability to increase revenues and obtain financing to execute its development plans and continue operations.

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

Management’s plans regarding those matters are also described in Note 1.

The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

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

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

Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matter

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

Allowance for Excess and Obsolete Inventory

Critical Audit Matter Description

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

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

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

We identified inventory valuation as a critical audit matter.

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

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

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

How We Addressed the Matter in Our Audit

Reserve for Excess and Slow-Moving Inventory

The Company provides valuation allowances for excess and slow-moving inventory on hand that are not expected to be sold to reduce the carrying amount of slow-moving inventory to its estimated net realizable value.

The valuation allowances are based on upon estimates about future demand from its customers and distributors and market conditions.

We determined the reserve for excess and slow-moving inventory to be a critical audit matter because it requires especially subjective auditor judgment.

These reserves are sensitive to changes in the Company’s operations and assumptions used to estimate the reserve including management’s assumptions with regards to projections of future product demand and market conditions, which includes historical usage and on-hand quantities.

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

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

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

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

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

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

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

Baker Tilly US LLP

Inquiring with management to obtain an understanding of management’s process of determining the reserve for excess and slow-moving inventories, including obtaining an understanding of the key assumptions used in the estimate;

Evaluating and recalculating the methodology used in connection with the Company’s reserve analysis;

Performing a retrospective review analysis to assess the adequacy of the prior year reserve in comparison to inventory write-offs during the current year;

Reviewing the significant assumptions used related to the reserve assigned to each item in inventory, and evaluating whether management’s reserve assumptions are appropriate based on historical results ;

Testing selected inventory items to evaluate whether the applied reserve percentages were appropriate based on the movement of the item within the past year, as well as the most recent sales price of the inventory item to evaluate its net realizable value;

/s/ Mazars USA LLP

We have served as the Company’s auditor since 2023.

Irvine, California

Fort Washington, PA

April 15, 2024

CHARLIE ’

S HOLDINGS, INC.

CHARLIE ’ S HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

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Accounts payable and accrued expenses

Note payable, net - related party

Notes payable, net

Notes payable - related parties

Derivative liability

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Non-current liabilities:

Notes payable, net of current portion

Note payable, net of current portion

Note payable, net - related party, net of current portion

Lease liabilities, net of current portion

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COMMITMENTS AND CONTINGENCIES (see Note 12)

Stockholders' equity (deficit):

Stockholders' (deficit) equity:

Convertible preferred stock ($ 0.001 par value);

1,800,000 shares authorized

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

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

Series A, 300,000 shares designated;

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

Series B, 1,500,000 shares designated;

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

Common stock ($ 0.001 par value);

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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 consolidated financial statements.

CHARLIE ’

S HOLDINGS, INC.

CHARLIE ’ S HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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Total operating costs and expenses

Income (loss) from operations

Loss from operations

Other income (expense):

Interest expense

Debt extinguishment gain

Change in fair value of derivative liabilities

Gain on debt extinguishment

Total other income

(Loss) income before income taxes

Income taxes (benefit) provision

Net (loss) income

Net earnings (loss) per share

Loss before income taxes

Income taxes benefit

Net loss per share

Weighted average number of common shares outstanding

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

CHARLIE ’

S HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’

EQUITY (DEFICIT)

CHARLIE ’ S HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUITY (DEFICIT)

(in thousands)

Convertible Preferred Stock

Additional Paid-in

Total Stockholders'

Convertible Preferred Stock

Balance at January 1, 2022

Issuance of common stock to related parties for cash

Conversion of Series A convertible preferred stock

Issuance of common stock for dividend payment

Accrue dividends payable on Series A convertible preferred stock

Stock compensation

Fraction shares adjustment due to reverse split

Balance at December 31, 2022

Conversion of Series A convertible preferred stock

Forfeiture of restricted stock awards

Stock compensation

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

CHARLIE ’

S HOLDINGS, INC.

CHARLIE ’ S HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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Cash Flows from Operating Activities:

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

Net (loss) income

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

Allowance for doubtful accounts

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Change in fair value of derivative liabilities

Debt extinguishment gain

Amortization of operating lease right-of-use asset

Stock based compensation

Gain from debt extinguishment

Subtotal of non-cash charges

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Cash Flows from Financing Activities:

Proceeds from issuance of common stock to related parties

Proceeds from issuance of notes payable

Proceeds from issuance of note payable to related party

Proceeds from issuance of notes payable to related party

Repayment of notes payable

Dividend payment

Repayment of notes payable to related party

Net cash provided by financing activities

Net decrease in cash

Net increase (decrease) in cash

Cash, beginning of the year

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Conversion of Series A convertible preferred stock

Issuance of common stock for dividend payment

Recognize minimum accrued interest

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

CHARLIE ’

S HOLDINGS, INC.

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

CHARLIE ’ S HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 –

DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

NOTE 1 – DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

Description of the Business

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

Company ”, “

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

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

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

Charlie’s Chalk Dust, LLC (“

Charlie ’

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

Charlie’s Holdings, Inc., a Nevada corporation, together with its wholly owned subsidiaries and consolidated variable interest entity (collectively, the “ Company ”, “ we ”), currently formulates, markets and distributes premium, non-combustible nicotine-related products, alternative alkaloid vapor products, and hemp-derived vapor and edible products.

The Company’s products are produced through contract manufacturers for sale through select distributors, specialty retailers, and third-party online resellers throughout the United States, and in select international markets including the United Kingdom, Italy, Spain, New Zealand, Australia, and Canada.

Charlie’s Chalk Dust, LLC (“ Charlie ’ s ” or “ CCD ”), is the Company’s wholly owned subsidiary which produces and sells nicotine-based and alternative alkaloid vapor products.

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

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

Reverse Stock Split

The Company’s Board of Directors approved a reverse stock split of the Company’s authorized, issued and outstanding shares of Common Stock, par value $ 0.001 per share, at a ratio of 1-for- 100 (the “Reverse Split”).

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

Effective Date ”).

All share and per share amounts in the Form 10-K have been retroactively adjusted to account for the reverse stock split.

Basis of Presentation

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

Generally Accepted Accounting Principles (“

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

SEC ”).

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

s plan of operation

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

Generally Accepted Accounting Principles (“ GAAP ”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “ SEC ”).

Substantial Doubt about the Company ’ s Ability to Continue as a Going Concern, Liquidity and Management ’ s Plan of Operation

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;

new laws and regulations or changes to existing laws and regulations could significantly limit the Company’s ability to sell its products, and/or result in additional costs.

Additionally, the Company was required to obtain approval from the United States Food and Drug Administration (" FDA" ) to continue selling and marketing certain of products used for the vaporization of nicotine in the United States.

Currently, a substantial portion of the Company’s sales are derived from products that are subject to approval by the FDA.

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

For the year ended December 31, 2022, the Company generated a loss from operations of approximately $ 1,805,000 , and a consolidated net loss of approximately $ 1,592,000 and used cash in operations of approximately $ 1,720,000 .

The Company had stockholders’

equity of $ 1,700,000 at December 31, 2022.

During the year ended December 31, 2022, the Company’s working capital requirements continued to evolve as current assets decreased to $ 5,850,000 from $ 7,994,000 as of December 31, 2021 and currently liabilities decreased to $ 4,783,000 from $ 5,534,000 as of December 31, 2021.

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

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

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.

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 applications.

For the year ended December 31, 2023, the Company’s revenue declined, the Company generated a loss from operations of approximately $ 2,202,000 , and a consolidated net loss of approximately $ 2,093,000 .

Cash used in operations was approximately $ 783,000 .

The Company had a stockholders’ deficit of $ 107,000 at December 31, 2023.

During the year ended December 31, 2023, the Company’s working capital position decreased to $ 332,000 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.

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 December 31, 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 ”).

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

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

During the fourth quarter of 2023, the Company launched 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.

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.

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Risks and Uncertainties

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

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

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

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

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

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

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

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

The Company’s applications were submitted in September 2020 on a timely basis, which if approved, will allow the Company to continue to sell its approved products in the United States.

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

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

The Company’s applications were submitted in September 2020 on a timely basis, which if approved, will allow the Company to continue to sell its approved products in the United States.

Beginning in August 2021, the FDA began issuing Marketing Denial Orders (“MDO”) for ENDS products that lack evidence to demonstrate that permitting the marketing of such products would be appropriate for the protection of the public health.

The Company has not received an MDO for any of its submissions;

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

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.

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

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

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On November 3, 2022, FDA accepted for scientific review certain of our PMTAs for synthetic nicotine products and, on November 4, 2022, FDA refused to accept certain other PMTAs for these products, rendering the latter products subject to FDA enforcement.

The Company submitted an administrative appeal with FDA regarding its refusal to accept certain of the PMTAs, and has resubmitted PMTAs for, and continues to sell, the affected synthetic nicotine products while the administrative appeal process is pending.

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

NOTE 2 –

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

During the fourth quarter of 2023 the Company launched new disposable vape products, under the “SPREE BAR™” brand.

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 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

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

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Revenue Recognition

The Company recognizes revenues in accordance with Accounting Standards Codification (“

ASC ”) 606 –

Contracts with Customers.

The Company recognizes revenues in accordance with Accounting Standards Codification (“ ASC ”) 606 – Contracts with Customers.

Revenues are generated from contracts with customers that consist of sales to retailers and distributors.

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The Company considers all liquid investments purchased with original maturities of ninety days or less to be cash equivalents.

Accounts  

Accounts Receivable

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

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

Customers’

accounts are written off against the allowance when all attempts to collect have been exhausted.

Customers’ accounts are written off against the allowance when all attempts to collect have been exhausted.

Recoveries of accounts receivable previously written off are recorded as income when received.

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

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

Operating leases with a duration greater than one year are included in right-of-use assets, lease liabilities, and lease liabilities, net of current portion in the Company’s consolidated balance sheets.

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

Right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term.

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The fair value of equity-classified awards granted to employees is estimated on the date of the grant using the Black-Scholes option-pricing model and the related stock-based compensation expense is recognized over the vesting period during which an employee is required to provide service in exchange for the award.

Income taxes are computed under the liability method.

Income taxes are computed under the asset and liability method.

This method requires the recognition of deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities.

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A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that meets the more-likely-than-not threshold of being realized upon ultimate settlement with a taxing authority.

We recognize potential accrued interest and penalties related to unrecognized tax benefits as income tax expense.

The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits as income tax expense.

Research and Development

We expense the cost of research and development as incurred. 

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

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Customer Type

Recently Issued Accounting Pronouncements

Recently Adopted Accounting Standards

Measurement of Credit Losses on Financial Instruments

In June 2016 the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which supersedes current guidance requiring recognition of credit losses when it is probable that a loss has been incurred.

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

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

This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022.

Early adoption is permitted.

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

In December 2019, the FASB issued ASU No.

2019-12, “Income Taxes (Topic 740):

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

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

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

On January 1, 2021, the Company adopted this standard without any material impact on its consolidated financial statements and related disclosures.

Debt –

Debt with conversion and Other Options

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

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

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

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

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

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

Debt – Debt with conversion and Other Options

In August 2020, the FASB issued ASU No.

2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current GAAP.

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

2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):

The ASU is effective for the Company on December 1, 2022, Early adoption is permitted, but no earlier than December 1, 2021.

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

Earnings per Share

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40).

This ASU reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange.

This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic.

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

NOTE 3 –

FAIR VALUE MEASUREMENTS

Recently Issued Accounting Standards Not Yet Adopted

Improvements to Reportable Segment Disclosures

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures (“ASU 2023-07”).

ASU 2023-07 updates segment reporting disclosure requirements and brings about significant changes, particularly in the realm of transparency and accountability within organizations.

The primary thrust of ASU 2023-07 is the inclusion of detailed disclosures regarding significant reportable segment expenses.

These are expenses regularly provided to the Chief Operating Decision Maker (“CODM”) and are integral components of each reported measure reflecting a segment's profit or loss.

Furthermore, the ASU mandates disclosure of the CODM's title, position, and a comprehensive explanation of how the reported measures of segment profit or loss factor into assessing segment performance and resource allocation decisions.

This transparency aims to provide stakeholders with a clearer understanding of the decision-making processes within an organization and how segment performance is evaluated.

Improvements to Income Tax Disclosures

In December 2023, the FASB issued ASU No.

2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures (ASU 2023-09), which improves the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the effective tax rate reconciliation and income taxes paid disaggregated by jurisdiction.

It also includes certain other amendments to improve the effectiveness of income tax disclosures.

This guidance will be effective for the annual periods beginning the year ended December 31, 2025.

Early adoption is permitted.

Upon adoption, the guidance can be applied prospectively or retrospectively.

The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

NOTE 3 – FAIR VALUE MEASUREMENTS

In accordance with ASC 820 (Fair Value Measurements and Disclosures), the Company uses various inputs to measure the outstanding warrants on a recurring basis to determine the fair value of the liability.

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

Level 1 –

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

Level 2 –

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

Level 3 –

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

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

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

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

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

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

Fair Value at December 31, 2023

Derivative liability –

Derivative liability - Warrants

Total liabilities

Fair Value at December 31, 2022

Derivative liability –

Derivative liability - Warrants

Total liabilities

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The following table presents changes in Level 3 liabilities measured at fair value for the years ended December 31, 2023 and 2022.

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

Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long- dated volatilities) inputs (amounts in thousands).   

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

Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long- dated volatilities) inputs (amounts in thousands).

Derivative liability - Warrants

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Balance at December 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 December 31, 2022 and 2021 is as follows:

Warrant Liability

Exercise price

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Dividend yield (per share)

On April 26, 2019 (the “

Closing Date ”), the Company entered into a Securities Exchange Agreement (“

Share Exchange ”) with each of the former members (“

Members ”) of Charlie’s, and certain direct investors in the Company (“

Direct Investors ”), pursuant to which the Company acquired all outstanding membership interests of Charlie’s beneficially owned by the Members in exchange for the issuance by the Company of units.

Immediately prior to, and in connection with, the Share Exchange, Charlie’s consummated a private offering of membership interests that resulted in net proceeds to Charlie’s of approximately $ 27.5 million (the “

Charlie ’

s Financing ”).

In conjunction with the Share Exchange, the Company issued to holders of its Series A Convertible Preferred Stock (“

Series A Preferred ”) warrants to purchase an aggregate of 31,028,996 shares of Common Stock (the “

Investor Warrants ”) and to its placement agent Katalyst Securities LLC warrants to purchase an aggregate of 9,308,699 shares of Common Stock (the “

Placement Agent Warrants ”).

On April 26, 2019 (the “ Closing Date ”), the Company entered into a Securities Exchange Agreement (“ Share Exchange ”) with each of the former members (“ Members ”) of Charlie’s, and certain direct investors in the Company (“ Direct Investors ”), pursuant to which the Company acquired all outstanding membership interests of Charlie’s beneficially owned by the Members in exchange for the issuance by the Company of units.

In conjunction with the Share Exchange, the Company issued to holders of its Series A Convertible Preferred Stock (“ Series A Preferred ”) warrants to purchase an aggregate of 31,028,996 shares of Common Stock (the “ Investor Warrants ”) and to its placement agent Katalyst Securities LLC warrants to purchase an aggregate of 9,308,699 shares of Common Stock (the “ Placement Agent Warrants ”).

Both the Investor Warrants and Placement Agent Warrants have a five-year term and a strike price of $ 0.44313 per share.

Due to the exercise features of these warrants, they are not considered to be indexed to the Company’s own stock and are therefore not afforded equity treatment in accordance with ASC Topic 815, Derivatives and Hedging (“

ASC 815 ”).

In accordance with ASC 815, the Company has recorded the Investor Warrants and Placement Agent Warrants as derivative instruments on its consolidated balance sheet.

ASC 815 requires derivatives to be recorded on the balance sheet as an asset or liability and to be measured at fair value.

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

NOTE 4 –

PROPERTY AND EQUIPMENT

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

NOTE 4 – PROPERTY AND EQUIPMENT

Property and Equipment detail as of December 31, 2023 and 2022 are as follows (amounts in thousands):

Estimated Useful Life (in years)

Estimated Useful Life (years)

Machinery and equipment

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Leasehold improvements

Lesser of lease term or estimated useful life

Lesser of lease term or

estimated useful life

Accumulated depreciation

Depreciation and amortization expense totaled $ 154,000 and $ 296,000 , respectively, during the years ended December 31, 2023 and 2022.

NOTE 5 –

CONCENTRATIONS

The Company’s concentration of purchases are as follows:

NOTE 5 – CONCENTRATIONS

The Company’s concentration of purchases are as follows:

For the years ended

During the year ended December 31, 2023, purchases from two vendors represented 61 % of total inventory purchases.

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

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

As of December 31, 2023 and 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 consolidated balance sheets.

Accounts Receivable

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

For the years ended

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

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

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

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

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

For the years ended December 31,

Five customers made up more than 10 % of net accounts receivable at December 31, 2023, and two customers made up more than 10 % of net accounts receivable as of December 31, 2022.

No customer exceeded 10% of total net sales for the years ended December 31, 2023 and 2022, respectively.

NOTE 6 –

DON POLLY, LLC.

Don Polly, LLC is a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, a former and current executive officer of the Company, respectively, and a consolidated variable interest for which the Company is the primary beneficiary.

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

Don Polly is classified as a variable interest entity (“

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

NOTE 6 – DON POLLY, LLC.

Don Polly, LLC is a Nevada limited liability company that is owned by an entity controlled by Ryan Stump, a current executive officer of the Company, and a consolidated variable interest for which the Company is the primary beneficiary.

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

Don Polly is classified as a variable interest entity (“ VIE ”) for which the Company is the primary beneficiary.

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

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

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

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

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

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

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There are no non-controlling interests recorded.

NOTE 7 –

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accounts payable

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Accrued income taxes

Customer deposits

Other accrued expenses

NOTE 8 –

NOTES PAYABLE

NOTE 8 – 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 .

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

During the year ended December 31, 2023, the Company made a $ 1,070,000 repayment to the Notes, including a $ 70,000 interest payment.

As of December 31, 2023, $ 400,000 of Notes remained outstanding with Ryan Stump and Henry Sicignano III, and the maturity dates of the outstanding notes have been extended to May 17, 2024.

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 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 December 31, 2023, the Company had fully repaid the outstanding principal balance and accrued interest totaling $ 760,250 on its Receivables Financing Agreement.

On December 13, 2023 the Company entered into a second future receivables sale agreement (“ Second 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 Second Receivables Financing Agreement, was $ 750,000 which was paid to the Company on December 13, 2023, net of a 3 % origination fee.

The Second Receivables Financing Agreement required fifty-two equal payments of $ 17,740 to be paid weekly for a total repayment of $ 922,500 over the term of the agreement.

April 2022 Note Financing

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

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

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

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

On September 28, 2022, the Company and the Lender entered into a modification to the Note to extend the maturity date to March 28, 2023 and the Company paid all accrued interest under the Note through such date.

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

August 2022 Note Financing –

Related Party

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

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

August 2022 Note Financing – Related Party

On August 17, 2022, the Company and its Chief Operating Officer and Director, Ryan Stump (the " Stump Lender ") entered into a loan agreement (the “ Loan ”) in the principal amount of $ 300,000 .

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

The Loan bears an annual interest rate of 10 %.

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

On December 17, 2022, the Company and Stump Lender entered into a modification to the Loan to extend the maturity date to April 16, 2023 and the Company has paid all accrued interest under the Loan through such date.

On April 13, 2023, the Company and Stump Lender entered into a second modification to the Loan to extend the maturity date to August 14, 2023.

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.

On December 15, 2023, the Company and Stump Lender entered into a fourth modification to the Loan to extend the maturity date to April 15, 2024.

Economic Injury Disaster Loan

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

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

On June 24, 2020, SBA authorized (under Section 7(b) of the Small Business Act, as amended) an Economic Injury Disaster Loan (“ EID Loan ”) to Don Polly in the amount of $ 150,000 .

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

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

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

Year Ending December 31, 2024

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Year Ending December 31, 2028

NOTE 9 –

EARNINGS (LOSS) PER SHARE BASIC AND FULLY DILUTED

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

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

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

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

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

For the years ended

Net (loss) income - basic

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

Net (loss) income - diluted

Weighted average shares outstanding - basic

Diluted stock options

Diluted warrants

Diluted preferred shares

Weighted average shares outstanding - diluted

Basic (loss) earnings per share

Diluted (loss) earnings per share

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

Debt discount

NOTE 9 – LOSS PER SHARE BASIC AND FULLY DILUTED

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

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

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

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

For the years ended

NOTE 10 –

STOCKHOLDERS ’

Series A Preferred Share Dividend & Share Waiver

On April 25, 2020 , the Company was required to pay a one-time dividend equal to eight percent ( 8 %) of the stated value of its Series A Preferred, equal to $ 1,650,000 (“

Dividend Amount ”), which Dividend Amount was required to be paid in cash on or before April 25, 2020 .

On August 13, 2020 , the Company received a formal notice of default from a holder of its Series A Preferred requesting full payment of dividends due and payable with respect to the Series A Preferred held by such holder on or before August 23, 2020 ( “

Dividend Default ”).

On April 21, 2021 , the Company issued a waiver and exchange agreement (“

Waiver Agreement ”) to shareholders of its Series A Preferred shares (“

Stock Payees ”) requesting such Stock Payee's respective amount of the dividend payment (each individual Stock Payee's respective amount the "Stock Payee Indebtedness" ) to be paid in the form of shares of Common Stock (the "Stock Payment" ) and agreeing to consummate an exchange of such Stock Payee's right to the Stock Payee Indebtedness in cash for shares of Common Stock (the "Exchange" ), pursuant to which the entire Stock Payee Indebtedness shall be exchanged for that number of shares of Common Stock (the “

Shares ”) equal to the total Stock Payee Indebtedness divided by $0.44313.

On May 25, 2021 , the Company entered into a Dividend Waiver and Exchange Agreement (the “

Exchange Agreement ”), between the Company and the holders (the “

Series A Holders ”) of its Series A Convertible Preferred Stock, par value $ 0.001 (“

Series A Preferred ”), pursuant to which the Company paid to the Series A Holders total consideration of approximately $ 1,650,000 (the “

Dividend Amount ”), which Dividend Amount was paid in the form of 1,736,501 shares of the Company’s common stock, par value $ 0.001 (“

Common Stock ”), valued at $ 0.44313 per share (the “

Shares ”), and approximately $ 880,000 in cash.

During the year ended December 31, 2021 , the Company incurred an additional $ 3,000 dividend payment in order to fully satisfy the Series A Preferred dividend.

As of December 31, 2021 , all dividend liability has been satisfied, which is reflected on the Company’s consolidated balance sheet.

Series A convertible preferred shares

NOTE 10 – STOCKHOLDERS ’ EQUITY

Conversion of Series A Preferred Shares

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For the year ended December 31 2022 , the Company issued approximately 1,907,000 shares of Common Stock upon conversion of 8,450 shares of Series A Preferred.

March 2021 Private Placement

On March 19, 2021 , the Company entered into Securities Purchase Agreements by and between the Company and certain family trusts in which Mr.

Brandon Stump and Mr.

Ryan Stump, the Company's former Chief Executive Officer and Chief Operating Officer, respectfully, are trustees and beneficiaries (the " Purchase Agreements "), for the private placement of an aggregate of 3,517,000 shares of its common stock, par value $ 0.001 (" Common Stock "), at a purchase price per share of $ 0.853 (the " Private Placement "), which Private Placement was consummated on March 22, 2021 .

The Private Placement resulted in gross proceeds to the Company of approximately $ 3.0 million.

The Private Placement was undertaken pursuant to Rule 506 promulgated under the Securities Act of 1933 , as amended, and was consummated in a transaction approved by the Company's independent directors in accordance with Rule 16b-3(d)( 1 ) of the Securities Exchange Act of 1934 , as amended.

NOTE 11 –

STOCK-BASED COMPENSATION

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

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

NOTE 11 – STOCK-BASED COMPENSATION

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

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

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

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

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

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

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

In accordance with Rule 14c of the Exchange Act, our Board of Directors’ authority to implement the 2019 Plan Amendment became effective February 28, 2022, twenty calendar days after notification of our shareholders.

Non-Qualified Stock Options

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Outstanding at January 1, 2022

Options granted

Options forfeited/expired

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Options vested and exercisable at December 31, 2023

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

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

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

For the years ended

Exercise price

Contractual term (years)

Volatility (annual)

Risk-free rate

Dividend yield (per share)

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

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

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

Common Stock Awards

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

The 7.1 million shares of common stock vested over a two-year period.

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

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

As of December 31, 2023, all stock options were fully vested and no stock-based compensation expense related to the issuance of stock options was recognized.

For the year ended December 31, 2022, the Company recognized approximately $ 11,000 in stock-based compensation expense related to the issuance of stock options.

Restricted Stock Awards

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Number of Shares

Weighted Average

Grant Date Fair

Value per Share

Weighted Average Grant Date Fair Value per Share

Nonvested at January 1, 2022

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Nonvested at December 31, 2023

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

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

During the year ended December 31, 2023, the Company granted 9,100,000 restricted stock awards (“ RSAs ”) to employees, officers, directors and contractors of the Company pursuant to the 2019 Plan, as amended.

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

The grant date fair value was approximately $ 585,000 .

During the year ended December 31, 2023, approximately 911,000 RSAs issued to employees and contractors were forfeited.

During the year ended December 31, 2022, the Company granted approximately 7,142,000 RSAs to employees, officers and directors of the Company pursuant to the 2019 Plan, as amended.

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

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

Sicignano to serve as President of the Company.

Pursuant to the Agreement, Mr.

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

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

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

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

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

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

On November 1, 2021 (“

Grant Date ”) the Company granted to Jeff Fox, an Independent Director, 250,000 shares of Common Stock of the Company (“

Fox Shares ”) pursuant to the 2019 Plan.

The grant of the Fox Shares was made in consideration for services rendered by Mr.

Fox to the Company.

Fox will have all the rights of a shareholder of the Company with respect to voting the 250,000 restricted shares awarded under this grant and share adjustments, receipt of dividends (if any) and distributions (if any) on such shares.

Fox Shares will be subject to forfeiture in 125,000 share increments until the first to occur of the following:

(i) each anniversary of the Grant Date;

(ii) the event of a change in control of the Company;

or (iii) the death, disability, or retirement of Mr.

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

As of December 31, 2023, there was approximately $ 413,000 of total unrecognized compensation expense related to non-vested restricted share-based compensation arrangements granted under the 2019 Plan, as amended.

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

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

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

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

On April 29, 2022, the Company entered into a commercial lease agreement for the Company’s sales and marketing operations in Williamsville, New York (“ Williamsville Lease ”) with Henry Sicignano Jr., a relative of the Company’s President, Henry Sicignano III.

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

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

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

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

Certain of the Company’s leases include renewal options and escalation clauses;

renewal options have not been included in the calculation of the lease liabilities and right of use assets as the Company is not reasonably certain to exercise the options.

Variable expenses generally represent the Company’s share of the landlord’s operating expenses.

The Company does not act as a lessor or have any leases classified as financing leases.

The Company excludes short-term leases having initial terms of 12 months or less from Topic 842 as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term.

The Company entered into a commercial lease for the Company’s corporate headquarters (the “

Lease ”) in Costa Mesa, California with Brandon Stump, the Company’s former Chief Executive Officer, Ryan Stump, the Company’s Chief Operating Officer, and Keith Stump, a former member of the Company’s Board of Directors.

The Company entered into a commercial lease for the Company’s corporate headquarters (the “ Lease ”) in Costa Mesa, California with Brandon Stump, the Company’s former Chief Executive Officer, Ryan Stump, the Company’s Chief Operating Officer, and Keith Stump, a former member of the Company’s Board of Directors.

The Stumps purchased the property that is the subject of the Lease in July 2019.

1 unchanged sentence

The terms of the Lease were negotiated and approved by the independent members of the Board, and executed by Mr.

David Allen, the Company’s former Chief Financial Officer, after reviewing a detailed analysis of comparable properties and rent rates compiled by an independent, third-party consultant.

The total amount paid to related parties for the years ended December 31, 2023 and 2022 was $ 275,280 and $ 293,536 , respectively.

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

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

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

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

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 December 31, 2023, the Company had operating lease liabilities of approximately $ 428,000 and right of use assets of approximately $ 424,000 , which were included in the consolidated balance sheet.

The following summarizes quantitative information about the Company’s operating leases (amounts in thousands):

For the years ended

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Right-of-use assets exchanged for operating lease liabilities

Weighted-average remaining lease term –

operating leases (in years)

Weighted-average discount rate –

operating leases

Weighted-average remaining lease term – operating leases (in years)

Weighted-average discount rate – operating leases

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

1 unchanged sentence

Year Ending December 31, 2025

Less present value discount

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

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

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

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

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

As of December 31,

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Net operating loss carryovers

Capitalized R&D

Total deferred income tax assets

6 unchanged sentences

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

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

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

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

3 unchanged sentences

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

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

At December 31, 2023, the Company had federal and state net operating loss carryovers for income tax purposes of approximately $ 7.1 million and $ 8.5 million, respectively.

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

The state net operating losses expire at various dates through 20423, if not utilized beforehand.

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

At December 31, 2023, the Company had federal research and development credit carryovers of approximately $ 0.2 million.

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

7 unchanged sentences

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

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

A reconciliation of the statutory income tax rates and the Company's effective tax rate for the years ended December 31, 2023 2022, are as follows:

Statutory federal income tax rate

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For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.

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

The following table summarizes the activity related to the Company’s gross unrecognized tax benefits at the beginning and end of the years ended December 31, 2023 and 2022 (in thousands):

Gross unrecognized tax benefits at the beginning of the year

4 unchanged sentences

Gross unrecognized tax benefits at the end of the year

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

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

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

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

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

The Company policy is to recognize interest and penalties related to uncertain tax positions as a component of income tax expense.

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

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

The Company’s policy is to recognize interest and penalties related to uncertain tax positions as a component of income tax expense.

As of December 31, 2023 and 2022, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s statement of operations.

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

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

1 unchanged sentence

NOTE 14- SUBSEQUENT EVENTS

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

Future Receivables Sale Agreement

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

Receivables Financing ”

Receivables Financing Agreement ”) with Austin Business Finance (“

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

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

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

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

Preferred A Shareholders Consent

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

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

Certificate of Designations ”).

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

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

The Company evaluated subsequent events for their potential impact on the consolidated financial statements and disclosures through April 15, 2024, the date the consolidated financial statements were available to be issued, and determined that no subsequent events occurred that were reasonably expected to impact the consolidated financial statements presented herein.

Common and Restricted Stock Issuance

As of April 15, 2024, the Company issued an additional 525,000 shares of restricted stock to new employees and cancelled 50,000 shares of restricted stock related to terminated employees.

As of April 15, 2024, 338,502 shares of common stock were issued related to the conversion of Series Convertible Preferred A stock.

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

What changed 10-K

Item 9A. Controls and Procedures