Charlie's Holdings, Inc. 10-K

ITEM 9A. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our President, the principal executive officer, and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”) as of the end of the period covered by this Annual Report on Form 10-K. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Based on our evaluation, our President, the principal executive officer, and Chief Financial Officer concluded that, as of December 31, 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. (b) Management ’ s Annual Report on Internal Control over Financial Reporting. Section 404(a) of the Sarbanes-Oxley Act of 2002 requires that management document and test the Company’s internal control over financial reporting and include in this Annual Report on Form 10-K a report on management’s assessment of the effectiveness of our internal control over financial reporting. -39- 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. (c) 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. ITEM 9B. OTHER INFORMATION None . ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTION Not applicable. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information concerning our executive officers, directors and corporate governance is incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2024 Annual Meeting of Stockholders. Set forth below is information regarding our directors, executive officers, and key personnel as of March 1, 2024: Name Age Position Henry Sicignano 56 President (Principal Executive Officer) Matthew P. Montesano 38 Chief Financial Officer Ryan Stump 35 Chief Operating Officer and Director Scot Cohen 54 Director Jeffrey Fox 60 Director Edward Carmines 69 Director Michael King 54 Director The following biographical information regarding the foregoing directors and officers of the Company is presented below: Henry Sicignano, III, President (Principal Executive Officer). Mr. Sicignano was appointed as President of the Company on April 1, 2021. Prior to joining the Company, Mr. Sicignano held multiple positions, including Chief Executive Office r of 2 2nd Century Group, Inc. (NASDAQ: XXII), a plant-based biotechnology company that is focused on tobacco harm reduction, very low nicotine content tobacco, and hemp/cannabis research from March 2015 through July 2019. He also served as President and as a member of the Board of Directors wi th 2 2nd Century from January 2011 through July 2019. In addition, from December 2014 to August 2018, Mr. Sicignano served on the Board of Directors of Anandia Laboratories, Inc., a cannabis-focused science company that was sold to Aurora Cannabis (NYSE: ACB). Mr. Sicignano holds a B.A. Degree in Government from Harvard College and an M.B.A. Degree from Harvard University. -40- Matthew P. Montesano, Interim Chief Financial Officer. Mr. Montesano was appointed as Chief Financial officer of the Company on May 10, 2021. Prior to his appointment, and since 2014, Mr. Montesano has served as Chief Financial Officer of Charlie’s Chalk Dust, LLC, the Company’s largest and most profitable operating division. Beginning in 2019, he also began serving as the Chief Financial Officer of Don Polly, LLC, the Company’s hemp-derived products division. Mr. 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 KeyBanc Capital Markets as an investment banker where he focused on debt, equity and merger and acquisitions transactions in the industrials space. Ryan Stump, Director and Chief Operating Officer. Mr. Stump was appointed as a director and the Company’s Chief Marketing Officer on April 26, 2019 in connection with the Share Exchange. Mr. Stump has served as the Chief Operating Officer of Charlie’s since 2014, during which time he has been responsible for all global operations of Charlie’s. Prior to joining Charlie’s, Mr. Stump worked as an Associate Territory Manager and then as a Territory Manager for ConMed, a medical sales device company, from 2010 to 2013. Mr. Stump also co-founded and continues to be engaged with multiple companies, including The Ohio House since 2011, the Buckeye Recovery Network since 2017, and The Mend California since 2018. Mr. Stump earned a B.S. and B.A. in Sports Marketing and Marketing from Duquesne University The Board of Directors believes that Mr. Stump’s experience operating high growth companies, as well as entrepreneurial experience, is valuable to the Board as it manages the Company’s anticipated continued growth. Scot Cohen , Director . Mr. Cohen was appointed to the Board in March 2013 and is the Founder and Managing Partner of V3 Capital Partners, a private investment firm focused on early-stage companies primarily in the consumer products industry, and Co-Manager of Red Fortune Fund, a private equity fund based in Hong Kong. Mr. Cohen also is the Founder of Petro River Oil, LLC and Chairman of Petro River Oil Corp. (OTCBB: PTRC), a publicly traded oil and gas producer with assets in Kansas and Oklahoma, and Petro Spring, a global oil and gas technology solutions provider. Prior to creating V3 Capital Partners, Mr. Cohen was the Founder and Managing Partner at Iroquois Capital Opportunity Fund, a special situations private equity investment fund, and a Co-Founder of Iroquois Capital, a hedge fund with investments in small and micro-cap private and public companies. Mr. Cohen currently serves as a director on the Board of Directors of Wrap Technologies, Inc. (NASDAQ: WRTC), and is active in philanthropic activities with numerous charities including the Jewish Enrichment Council. Mr. Cohen received a Bachelor of Science degree from Ohio University in 1991. The Board of Directors believes Mr. Cohen’s success with multiple private investment firms, his extensive contacts within the investment community, and his financial expertise are a valuable resource to the Company’s efforts to expand and implement its business plan. Jeffrey Fox, Director . Mr. Fox was appointed to the Board effective July 16, 2019. He has been a leading business strategist, brand marketing authority and general management executive for some of the’ world's largest restaurant and consumer companies including roles as Chief Brand & Concept Officer for Pizza Hut, Co-founder of Collider LLC, a cultural marketing strategy firm, Managing Director of the California office of advertising agency Foote, Cone and Belding (FCB), various positions with the Yum! Brands and within Sony's interactive and PlayStation video game divisions, and Hill & Knowlton Public Relations. He is currently a member of the board of directors of Cici’s Pizza and Flix Brewhouse. Mr. Fox holds a bachelor’s degree in Journalism from San Diego State University and received a master's degree in Mass Communications from California State University, Northridge. The Board of Directors believes that Mr. Fox’s strong experience in brand building across several diverse Fortune 100 consumer product companies will be significantly valuable to the Company as it continues to rapidly grow its product offerings and launch new brands and products around the world. -41- Dr. Edward Carmines, Director. Dr. Carmines was appointed to the Board effective March 2, 2022. He is currently Chief Scientific Officer of Chemular, Inc., where he designs and directs scientific and regulatory programs for PMTAs for a host of contract clients across a wide range of tobacco product categories. He also currently serves as an Advisory Board Member of Sparq Life, Inc, focusing on the science of inhalation of non-tobacco products, and Principal for Carmines Consulting, LLC, where Dr. Carmines consults to the regulated tobacco industry in the field of toxicology and regulatory affairs. Previously, Dr. Carmines managed the safety of novel and oral tobacco products as a scientist with R.J. Reynolds Tobacco Co. From 1996-2009, Dr. Carmines served as a principal scientist for Philip Morris USA (Altria Client Services, Inc.), where he developed guidelines for safely testing cigarette ingredients and components based on the FDA Red Book. Dr. Carmines received a B.S. degree in Chemistry and a Ph.D. degree in Toxicology from the Medical College of Virginia (Virginia Commonwealth University). The Board of Directors believes that Dr. Carmines extensive experience within the nicotine industry and navigating the regulatory process relating to the nicotine industry is significantly valuable to the Company due to the ongoing and evolving nature of the Company’s industry. Michael D. King, Director . Mr. King was appointed as a director in June 2023 pursuant to the terms of a nomination and standstill agreement dated April 26, 2023. Mr. 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. Mr. 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. Other than as described above, there have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any director or nominee set forth above during the past ten years. Code of Ethics We have adopted a Code of Ethics that applies to all of our directors, officers and employees, a copy of which is attached as an exhibit to our Annual Report on Form 10-K, filed with the SEC on April 1, 2019. -42- ITEM 11. EXECUTIVE COMPENSATION Information is incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2024 Annual Meeting of Stockholders ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information is incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2024 Annual Meeting of Stockholders ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information is incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2024 Annual Meeting of Stockholders ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information is incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2024 Annual Meeting of Stockholders -43- PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES Exhibit No. Description 3.1 Amended and Restated Bylaws of Charlie's Holdings, Inc., incorporated by reference from Exhibit 3.1 to the Current Report on Form 8-K filed on September 11, 2019. 3.2 Amended and Restated Articles of Incorporation of Charlie’s Holdings, Inc., incorporated by reference from Exhibit 3.1 to the Current Report on Form 8-K filed July 2, 2019 3.2.1 Certificate of Change for Charlie’s Holdings, Inc., effective as of June 14, 2021, incorporated by reference from Exhibit 3.1 to the Current Report on Form 8-K filed on June 16, 2021. 4.1 Certificate of Designations, Preferences and Rights of the Series A Convertible Preferred Stock, dated April 25, 2019, incorporated by reference to Exhibit 3.7 to the Current Report on Form 8-K, filed April 30, 2019. 4.2 Form of Investor Warrant, dated April 26, 2019, incorporated by reference to Exhibit 3.8 to the Current Report on Form 8-K, filed April 30, 2019. 4.3 Description of Securities Registered Pursuant to Section 12 (filed herewith) 4.4 Certificate of Amendment dated April 4, 2023 to Series A preferred stock, incorporated by reference to Form 8-K filed on April 4, 2023. 10.1 Form of Exchange Agreement, dated April 26, 2019, incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed April 30, 2019. 10.2 Form of Registration Rights Agreement, dated April 26, 2019, incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K, filed April 30, 2019. 10.3 Subscription Agreement, dated April 26, 2019, incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K, filed April 30, 2019. 10.4 Employment Agreement by and between 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. 10.5 License Agreement by and between the Company and Don Polly, LLC, dated June 5, 2019, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed June 11, 2019. 10.6 Services Agreement by and between the Company and Don Polly, LLC, dated June 5, 2019, incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed June 11, 2019. 10.7 Commercial Lease Agreement, by and between Charlie’s Chalk Dust, LLC and Brandon Stump, Ryan Stump and Keith Stump, dated November 19, 2019, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed November 22, 2019. 10.8 Employment Agreement, dated April 1, 2021, by and between Charlie's Holdings, Inc. and Henry Sicignano, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed April 6, 2021. 10.9 2019 Omnibus Equity Incentive Plan, as amended, incorporated by reference to Appendix B to the Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on May 28, 2019 10.10 Amendment to 2019 Omnibus Equity Incentive Plan, incorporated by reference to the Definitive Information Statement on Schedule 14C filed with the Securities and Exchange Commission on February 4, 2022 10.11 Promissory Note with Michael King dated April 6, 2022, incorporated by reference to Form 10-K filed on April 17, 2023 10.11.1 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 10.11.2 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 10.12 Loan Agreement with Ryan Stump dated August 17, 2022, incorporated by reference to Form 10-K filed on April 17, 2023 10.12.1 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 10.12.2 Amendment dated April 13, 2023 to Loan Agreement with Ryan Stump dated August 17, 2022, 10.13 Form of July 2023 Promissory Note, incorporated by reference to Form 10-Q filed on November 14, 2023 10.14 Nomination and Standstill Agreement with Michael King dated April 26, 2023 (filed herewith) 14.1 Code of Ethics filed with Form 10-K on March 31, 2011 and incorporated herein by reference. 19.1 Charlie's Holdings, Inc. Insider Trading Policy, filed herewith. 21.1 Subsidiaries of Charlie's Holdings, Inc., filed herewith. 23.1 Consent of Mazars USA LLP filed herewith. 23.2 Consent of Baker Tilly US, LLP filed herewith. 31.1 Certification of Principal Executive Officer as Required by Rule 13a-14(a)/15d-14, filed herewith. 31.2 Certification of Principal Financial Officer as Required by Rule 13a-14(a)/15d-14, filed herewith. 32.1 Certification of Principal Executive Officer as Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code, filed herewith. 32.2 Certification of Principal Financial Officer as Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code, filed herewith. 101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.SCH Inline XBRL Taxonomy Extension Schema 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase 101.LAB Inline XBRL Taxonomy Extension Label Linkbase 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) ITEM 16. FORM 10-K SUMMARY None. -44- SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized. Date: April 15, 2024 CHARLIE’S HOLDINGS, INC. By: /s/ Henry Sicignano III Henry Sicignano III President (Principal Executive Officer) /s/ Matthew P. Montesano Matthew P. Montesano Chief Financial Officer (Principal Financial and Accounting Officer) In accordance with the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Signature Title Date /s/ Henry Sicignano III Henry Sicignano III President (Principal Executive Officer) April 15, 2024 /s/ Matthew P. Montesano Matthew P. Montesano Chief Financial Officer (Principal Financial and Accounting Officer) April 15, 2024 /s/ Ryan Stump Ryan Stump Chief Operating Officer and Director April 15, 2024 /s/ Scot Cohen Scot Cohen Director April 15, 2024 /s/ Jeffrey Fox Jeffrey Fox Director April 15, 2024 /s/ Edward Carmines Edward Carmines Director April 15, 2024 /s/ Michael King Michael King Director 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 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 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 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 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 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 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 The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has continued to experience financial and regulatory issues. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. /s/ Baker Tilly US, LLP PCAOB ID: 23 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 The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 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. F-2 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: ● 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 PCAOB ID: 339 We have served as the Company’s auditor since 2023. Fort Washington, PA April 15, 2024 F-3 CHARLIE ’ S HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) December 31, December 31, 2023 2022 ASSETS Current assets: Cash $ 367 $ 257 Accounts receivable, net 289 1,161 Inventories, net 3,826 3,652 Prepaid expenses and other current assets 604 780 Total current assets 5,086 5,850 Non-current assets: Property, plant and equipment, net 157 311 Right-of-use asset, net 424 799 Other assets 101 101 Total non-current assets 682 1,211 TOTAL ASSETS $ 5,768 $ 7,061 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable and accrued expenses $ 2,846 $ 2,333 Notes payable, net 716 1,000 Notes payable - related parties 700 300 Derivative liability 79 629 Lease liabilities 355 373 Deferred revenue 58 148 Total current liabilities 4,754 4,783 Non-current liabilities: Note payable, net of current portion 150 150 Note payable, net - related party, net of current portion 898 - Lease liabilities, net of current portion 73 428 Total non-current liabilities 1,121 578 Total liabilities 5,875 5,361 COMMITMENTS AND CONTINGENCIES (see Note 12) Stockholders' (deficit) equity: Convertible preferred stock ($ 0.001 par value); 1,800,000 shares authorized 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); 500,000,000 shares authorized; 228,535,886 and 219,163,631 shares issued and outstanding as of December 31, 2023 and 2022, respectively 229 219 Additional paid-in capital 8,204 7,928 Accumulated deficit ( 8,540 ) ( 6,447 ) Total stockholders' (deficit) equity ( 107 ) 1,700 TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY $ 5,768 $ 7,061 The accompanying notes are an integral part of these consolidated financial statements. F-4 CHARLIE ’ S HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) For the years ended December 31, 2023 2022 Revenues: Product revenue, net $ 16,250 $ 26,424 Total revenues 16,250 26,424 Operating costs and expenses: Cost of goods sold - product revenue 10,206 16,439 General and administrative 6,970 8,381 Sales and marketing 1,107 2,605 Research and development 169 804 Total operating costs and expenses 18,452 28,229 Loss from operations ( 2,202 ) ( 1,805 ) Other income (expense): Interest expense ( 477 ) ( 155 ) Debt extinguishment gain 36 - Change in fair value of derivative liabilities 550 270 Other income - 6 Total other income 109 121 Loss before income taxes ( 2,093 ) ( 1,684 ) Income taxes benefit - ( 92 ) Net loss $ ( 2,093 ) $ ( 1,592 ) Net loss per share Basic $ ( 0.01 ) $ ( 0.01 ) Diluted $ ( 0.01 ) $ ( 0.01 ) Weighted average number of common shares outstanding Basic 216,053,743 212,269,453 Diluted 216,053,743 212,269,453 The accompanying notes are an integral part of these consolidated financial statements. F-5 CHARLIE ’ S HOLDINGS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUITY (DEFICIT) (in thousands) Series A Additional Total Stockholders' Convertible Preferred Stock Common Stock Paid-in Accumulated Equity Shares Par value Shares Par value Capital Deficit (Deficit) Balance at January 1, 2022 142 $ - 210,890 $ 211 $ 7,775 $ ( 4,855 ) $ 3,131 Conversion of Series A convertible preferred stock ( 9 ) - 1,907 2 ( 2 ) - - Stock compensation - - 6,366 6 155 - 161 Net loss - - - - - ( 1,592 ) ( 1,592 ) Balance at December 31, 2022 133 - 219,163 219 7,928 ( 6,447 ) 1,700 Conversion of Series A convertible preferred stock ( 5 ) - 1,183 2 ( 2 ) - - Forfeiture of restricted stock awards - - ( 911 ) ( 1 ) ( 14 ) - ( 15 ) Stock compensation - - 9,100 9 292 - 301 Net loss - - - - - ( 2,093 ) ( 2,093 ) Balance at December 31, 2023 128 $ - 228,535 $ 229 $ 8,204 $ ( 8,540 ) $ ( 107 ) The accompanying notes are an integral part of these consolidated financial statements. F-6 CHARLIE ’ S HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the years ended December 31, 2023 2022 Cash Flows from Operating Activities: Net (loss) income $ ( 2,093 ) $ ( 1,592 ) Reconciliation of net (loss) income to net cash used in operating activities: Allowance for doubtful accounts 113 269 Depreciation and amortization 154 296 Accretion of debt discount 157 3 Loss on disposal of fixed assets - 13 Change in fair value of derivative liabilities ( 550 ) ( 270 ) Debt extinguishment gain ( 36 ) - Amortization of operating lease right-of-use asset 375 396 Stock based compensation 286 161 Subtotal of non-cash charges 499 868 Changes in operating assets and liabilities: Accounts receivable 759 ( 62 ) Inventories ( 174 ) 1,353 Prepaid expenses and other current assets 176 20 Other assets - ( 33 ) Accounts payable and accrued expenses 513 ( 1,783 ) Deferred revenue ( 90 ) ( 90 ) Lease liabilities ( 373 ) ( 401 ) Net cash used in operating activities ( 783 ) ( 1,720 ) Cash Flows from Investing Activities: Purchase of property, plant and equipment - ( 189 ) Net cash used in investing activities - ( 189 ) Cash Flows from Financing Activities: Proceeds from issuance of notes payable 1,569 1,000 Proceeds from issuance of notes payable to related party 1,200 300 Repayment of notes payable ( 996 ) - Repayment of notes payable to related party ( 880 ) - Net cash provided by financing activities 893 1,300 Net increase (decrease) in cash 110 ( 609 ) Cash, beginning of the year 257 866 Cash, end of the year $ 367 $ 257 Supplemental disclosure of cash flow information Cash paid for interest $ 114 $ 90 Cash paid for interest to related party $ 279 $ 10 Cash paid for income taxes $ 4 $ 106 Supplemental disclosure of cash flow information Conversion of Series A convertible preferred stock $ 2 $ 2 Recognize minimum accrued interest $ - $ 45 The accompanying notes are an integral part of these consolidated financial statements. F-7 CHARLIE ’ S HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION Description of the Business Charlie’s Holdings, Inc., a Nevada corporation, together with its wholly owned subsidiaries and consolidated variable interest entity (collectively, the “ Company ”, “ we ”), currently formulates, markets and distributes premium, non-combustible nicotine-related products, alternative alkaloid vapor products, and hemp-derived vapor and edible products. The Company’s products are produced through contract manufacturers for sale 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. 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 ”). 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 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. These regulatory risks, as well as other industry-specific challenges, our low working capital and cash position remain factors that raise substantial doubt about the Company’s ability to continue as a going concern. F-8 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 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. There can be no assurance that additional financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and, in the Company’s best interests. The financial statements do not include any adjustments to the carrying amount and classification of recorded assets and liabilities should the Company be unable to continue operations. If we do not have sufficient funds to continue operations, we could be required to seek bankruptcy protection or other alternatives that would likely result in our stockholders losing some or all their investment in us. Risks and Uncertainties The Company operates in an environment that is subject to rapid changes and developments in laws and regulations that could have a significant impact on the Company’s ability to sell its products. Beginning in September 2019, certain states temporarily banned the sale of flavored e-cigarettes, and several states and municipalities are considering implementing similar restrictions. Federal, state, and local governmental bodies across the United States have indicated that flavored e-cigarette liquid, vaporization products and certain other consumption accessories may become subject to new laws and regulations at the federal, state, and local levels. In addition, in June 2022, the FDA announced a plan to reduce nicotine levels in cigarettes to minimally or non-addictive levels. The application of any new laws or regulations that may be adopted in the future, at a federal, state, or local level, directly or indirectly implicating nicotine, flavored e-cigarette liquid and other electronic nicotine delivery system (“ENDS”) products, could significantly limit the Company’s ability to sell such products, result in additional compliance expenses, and/or require the Company to change its labeling and/or methods of distribution. Any ban of the sale of flavored e-cigarettes directly limits the markets in which the Company may sell its products. In the event the prevalence of such bans and/or changes in laws and regulations increase across the United States, or internationally, the Company’s business, results of operations and financial condition could be adversely impacted. In addition, the Company is presently seeking to obtain marketing authorization for certain of its tobacco-derived nicotine e-liquid products. The Company’s applications were submitted in September 2020 on a timely basis, which if approved, will allow the Company to continue to sell its approved products in the United States. Beginning in August 2021, the FDA began issuing Marketing Denial Orders (“MDO”) for ENDS products that lack evidence to demonstrate that permitting the marketing of such products would be appropriate for the protection of the public health. The Company has not received an MDO for any of its submissions; however, there is no assurance that regulatory approval to sell our products will be granted or that 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. The Company filed new PMTAs, for its synthetic Pacha products on May 13, 2022, prior to the May 14, 2022 deadline. On November 3, 2022, FDA accepted for scientific review certain of our PMTAs for synthetic nicotine products and, on November 4, 2022, FDA refused to accept certain other PMTAs for these products, rendering the latter products subject to FDA enforcement. The Company intends to pursue an administrative appeal with FDA regarding its refusal to accept certain of the PMTAs 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 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. F-9 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. § 321(rr). 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. market. 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. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. F-10 Fair Value of Financial Instruments U.S. GAAP requires disclosing the fair value of financial instruments to the extent practicable for financial instruments which are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. In assessing the fair value of financial instruments, the Company uses a variety of methods and assumptions, which are based on estimates of market conditions and risks existing at the time. The fair value of derivative liabilities was estimated using a Monte Carlo simulation method, based on both observable and unobservable inputs. For certain instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses, it was estimated that the carrying amount approximated fair value because of the short maturities of these instruments. The Company determined that the carrying amounts of the current portion of outstanding notes payable approximate fair value due to the short-term nature of borrowings and current market interest rates. The Company determined the carrying amounts of the non-current portion of outstanding notes payable approximate fair value due to the current interest rates payable in relation to current market conditions. Revenue Recognition The Company recognizes revenues in accordance with Accounting Standards Codification (“ ASC ”) 606 – Contracts with Customers. Revenues are generated from contracts with customers that consist of sales to retailers and distributors. Contracts with customers are generally short term in nature with the delivery of product as a single performance obligation. Revenue from the sale of product is recognized at the point in time when the single performance obligation has been satisfied and control of the product has transferred to the customer. In evaluating the timing of the transfer of control of products to customers, the Company considers several indicators, including significant risks and rewards of products, the right to payment, and the legal title of the products. Based on the assessment of control indicators, sales are generally recognized when products are received by customers. Shipping generally occurs prior to the transfer of control to the customer and is therefore accounted for as a fulfillment expense. In circumstances where shipping and handling activities occur after the customer has obtained control of the product, the Company has elected to account for shipping and handling activities as a fulfillment cost rather than an additional promised service. Contract durations are generally less than one year and, therefore, costs paid to obtain contracts, which generally consist of sales commissions, are recognized as expenses in the period incurred. Revenue is measured by the transaction price, which is defined as the amount of consideration expected to be received in exchange for providing goods to customers. The transaction price is adjusted for estimates of known or expected variable consideration, which includes refunds and returns as well as incentive offers, volume rebates and promotional discounts on current orders. Our volume rebates are short-term in nature and reset on a quarterly basis. Estimates for sales returns are based on, among other things, an assessment of historical trends, information from customers, and anticipated returns related to current sales activity. These estimates are established in the period of sale and reduce revenue in the period of the sale. Variable consideration related to incentive offers and promotional programs are recorded as a reduction to revenue based on amounts the Company expects to collect. Estimates are regularly updated and the impact of any adjustments are recognized in the period the adjustments are identified. In many cases, key sales terms such as pricing and quantities ordered are established at the time an order is placed and incentives have very short-term durations. Amounts billed and due from customers are short term in nature and are classified as receivables since payments are unconditional and only the passage of time related to credit terms is required before payments are due. The Company does not grant payment financing terms greater than one year. Payments received in advance of revenue recognition are recorded as deferred revenue. Cash and Cash Equivalents The Company considers all liquid investments purchased with original maturities of ninety days or less to be cash equivalents. Accounts Receivable Accounts receivable are recorded at the invoiced amount and do not bear interest. We determine the allowance for doubtful accounts by regularly evaluating historical customer information and individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions and establish an allowance for doubtful accounts when collection is uncertain. Customers’ accounts are written off against the allowance when all attempts to collect have been exhausted. Recoveries of accounts receivable previously written off are recorded as income when received. As of December 31, 2023 and 2022, the allowance for bad debt totaled $ 24,000 and $ 158,000 , respectively. F-11 Inventories Inventories primarily consist of finished goods and are stated at the lower of cost (determined by the average cost method) or net realizable value. We calculate estimates of excess and obsolete inventories determined primarily by reviewing inventory on hand, historical sales activity, industry trends and expected net realizable value. As of December 31, 2023 and 2022, the reserve for excess and obsolete inventories totaled $ 1,100,000 and $ 733,000 , respectively. Plant, Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are provided for using the straight-line method, in amounts sufficient to charge the cost of depreciable assets to operations over their estimated service lives. Repairs and maintenance costs are charged to operations as incurred. Costs for capital assets not yet placed into service are capitalized as construction in progress on the consolidated balance sheets and will be depreciated once placed into service. The Company assesses its long-lived assets for impairment whenever facts and circumstances indicate that the carrying amounts may not be fully recoverable. To analyze recoverability, the Company projects undiscounted net future cash flows over the remaining lives of such assets. If these projected undiscounted net future cash flows are less than the carrying amounts, an impairment loss would be recognized, resulting in a write-down of the assets with a corresponding charge to earnings. The impairment loss is measured based upon the difference between the carrying amounts and the fair values of the assets. Leases The Company recognizes a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. The Company determines whether an arrangement contains a lease at contract inception. Operating leases with a duration greater than one year are included in right-of-use assets, lease liabilities, and lease liabilities, net of current portion in the Company’s consolidated balance sheets. Right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the net present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date. The incremental borrowing rate represents the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company considers a lease term to be the noncancelable period that it has the right to use the underlying asset. The operating lease right-of-use assets also include any lease payments made and exclude lease incentives. Lease expense is recognized on a straight-line basis over the expected lease term. Variable lease expenses are recorded when incurred. Stock-Based Compensation The Company accounts for all stock-based compensation using a fair value-based method. The fair value of equity-classified awards granted to employees is estimated on the date of the grant using the Black-Scholes option-pricing model and the related stock-based compensation expense is recognized over the vesting period during which an employee is required to provide service in exchange for the award. Income Taxes Income taxes are computed under the 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. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and are reflected in the consolidated financial statements in the period of enactment. A valuation allowance is recorded when it is more likely than not that some, or all of the deferred tax assets will not be realized. F-12 Financial statement effects of a tax position are initially recognized when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that meets the more-likely-than-not threshold of being realized upon ultimate settlement with a taxing authority. 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. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity is performed or when the goods have been received, rather than when payment is made. Segments Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business in one operating segment. The following table disaggregates revenue from our single operating segment by geographic market and customer type for the periods ending December 31, 2023 and 2022, respectively: December 31, 2023 December 31, 2022 Geographic Market International 10 % 16 % United States 90 % 84 % Customer Type Retailer 30 % 30 % Distribution 70 % 70 % Recently Adopted Accounting Standards Measurement of Credit Losses on Financial Instruments In June 2016, the FASB issued Accounting Standards Update ASU No. 2016‑13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which was codified with its subsequent amendments as ASC Topic 326, Financial Instruments – Credit Losses (“ ASC 326 ”). ASC 326 seeks to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments, including trade receivables, and other commitments to extend credit held by a reporting entity at each reporting date. The amendments require an entity to replace the incurred loss impairment methodology in other GAAP with a methodology that reflects current expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The adoption of this guidance on January 1, 2023 did not have a material impact on the Company’s consolidated financial statements and disclosures. F-13 Debt – Debt with conversion and Other Options In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. The ASU is effective for the Company on December 1, 2022, Early adoption is permitted, but no earlier than December 1, 2021. The Company elected to early adopt this guidance on January 1, 2022 with no impact on its consolidated financial statements and related disclosures. Earnings per Share In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. This ASU will be effective for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. On October 1, 2022, the Company adopted this standard with no impact on its consolidated financial statements and related disclosures. 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. ASC 820 also establishes a hierarchy categorizing inputs into three levels used to measure and disclose fair value. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to unobservable inputs. An explanation of each level in the hierarchy is described below: Level 1 – Unadjusted quoted prices in active markets for identical instruments that are accessible by the Company on the measurement date Level 2 – Quoted prices in markets that are not active or inputs which are either directly or indirectly observable Level 3 – Unobservable inputs for the instrument requiring the development of assumptions by the Company F-14 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 Total Level 1 Level 2 Level 3 Liabilities: Derivative liability - Warrants 79 - - 79 Total liabilities $ 79 $ - $ - $ 79 Fair Value at December 31, 2022 Total Level 1 Level 2 Level 3 Liabilities: Derivative liability - Warrants 629 - - 629 Total liabilities $ 629 $ - $ - $ 629 There were no transfers between Level 1, 2 or 3 during the years ended December 31, 2023 and 2022. 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). Derivative liability - Warrants Balance at January 1, 2022 $ 899 Change in fair value ( 270 ) Balance at December 31, 2022 629 Change in fair value ( 550 ) Balance at December 31, 2023 $ 79 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, 2023 and 2022 is as follows: December 31, December 31, 2023 2022 Exercise price $ 0.4431 $ 0.4431 Contractual term (years) 0.32 1.32 Volatility (annual) 90.0 % 100.0 % Risk-free rate 5.4 % 4.6 % Dividend yield (per share) 0 % 0 % On April 26, 2019 (the “ Closing Date ”), the Company entered into a Securities Exchange Agreement (“ Share Exchange ”) with each of the former members (“ Members ”) of Charlie’s, and certain direct investors in the Company (“ Direct Investors ”), pursuant to which the Company acquired all outstanding membership interests of Charlie’s beneficially owned by the Members in exchange for the issuance by the Company of units. Immediately prior to, and in connection with, the Share Exchange, Charlie’s consummated a private offering of membership interests that resulted in net proceeds to Charlie’s of approximately $ 27.5 million (the “ Charlie ’ s Financing ”). In conjunction with the Share Exchange, the Company issued to holders of its Series A Convertible Preferred Stock (“ Series A Preferred ”) warrants to purchase an aggregate of 31,028,996 shares of Common Stock (the “ Investor Warrants ”) and to its placement agent Katalyst Securities LLC warrants to purchase an aggregate of 9,308,699 shares of Common Stock (the “ Placement Agent Warrants ”). Both the Investor Warrants and Placement Agent Warrants have a five-year term and a strike price of $ 0.44313 per share. Due to the exercise features of these warrants, they are not considered to be indexed to the Company’s own stock and are therefore not afforded equity treatment in accordance with ASC Topic 815, Derivatives and Hedging (“ ASC 815 ”). In accordance with ASC 815, the Company has recorded the Investor Warrants and Placement Agent Warrants as derivative instruments on its consolidated balance sheet. ASC 815 requires derivatives to be recorded on the balance sheet as an asset or liability and to be measured at fair value. Changes in fair value are reflected in the Company’s earnings for each reporting period. F-15 NOTE 4 – PROPERTY AND EQUIPMENT Property and Equipment detail as of December 31, 2023 and 2022 are as follows (amounts in thousands): December 31, December 31, 2023 2022 Estimated Useful Life (years) Machinery and equipment $ 41 $ 41 5 Trade show booth 202 202 5 Office equipment 539 539 5 Leasehold improvements 254 254 Lesser of lease term or estimated useful life 1,036 1,036 Accumulated depreciation ( 879 ) ( 725 ) $ 157 $ 311 Depreciation and amortization expense totaled $ 154,000 and $ 296,000 , respectively, during the years ended December 31, 2023 and 2022. NOTE 5 – CONCENTRATIONS Vendors The Company’s concentration of purchases are as follows: For the years ended December 31, 2023 2022 Vendor A - % 40 % Vendor B 32 % 36 % Vendor C 29 % - % During the year ended December 31, 2023, purchases from two vendors represented 61 % 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. F-16 Accounts Receivable The Company’s concentration of accounts receivable are as follows: For the years ended December 31, 2023 2022 Customer A $ 93,000 27 % $ 184,000 15 % Customer B - - $ 136,000 11 % Customer C $ 71,000 20 % - Customer D $ 47,000 13 % - Customer E $ 39,000 11 % - Customer F $ 33,000 10 % - 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 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. Effective April 25, 2019, we began consolidating the financial statements of Don Polly and it is still considered a VIE of the Company. Don Polly operates under exclusive licensing and service contracts with the Company whereby the Company receives 100 % of net income, or incurs 100 % of the net loss of the VIE. There are no non-controlling interests recorded. NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses as of December 31, 2023 and 2022 are as follows (amounts in thousands): December 31, December 31, 2023 2022 Accounts payable $ 1,472 $ 1,222 Accrued compensation 573 631 Accrued income taxes 128 137 Customer deposits 386 119 Other accrued expenses 287 224 $ 2,846 $ 2,333 F-17 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 September 28, 2022, the Company and the Lender entered into a modification to the Note to extend the maturity date to March 28, 2023 and the Company paid all accrued interest under the Note through such date. On March 28, 2023, the Company entered into a second modification to the Note to extend the maturity date to April 28, 2024, contingent upon the payment of all interest accrued under the Note through March 28, 2023 and certain other modifications to the Note. Principal shall be payable on the 28th day of each month in installments of $ 25,000 , commencing April 28, 2023, continuing up to and including April 28, 2024 whereby a balloon payment for the remaining principal balance will be paid. Interest shall accrue on the aggregate outstanding principal amount at a rate equal to 20 % simple interest per annum and shall be payable on the same day as installments of principal are payable. The Company may prepay all or any portion of the principal amount, together with all accrued but unpaid interest thereon, at any time without premium or penalty. All outstanding principal and interest are due earlier of April 28, 2024, or a liquidity event. The Company used the proceeds from the Note for general corporate purposes, and its working capital requirements, pending the availability of alternative debt financing. August 2022 Note Financing – Related Party On August 17, 2022, the Company and its Chief Operating Officer and Director, Ryan Stump (the " Stump Lender ") entered into a loan agreement (the “ Loan ”) in the principal amount of $ 300,000 . The Loan will be due in full in 120 days or sooner if, before the end of term, the Company secures (i) new debt financing or (ii) sufficient PMTA strategic partnership funds. The Loan bears an annual interest rate of 10 %. The Company also incurred additional $ 3,000 issuance cost resulting from the payment of the Stump Lender’s legal fees. On December 17, 2022, the Company and Stump Lender entered into a modification to the Loan to extend the maturity date to April 16, 2023 and the Company has paid all accrued interest under the Loan through such date. On April 13, 2023, the Company and Stump Lender entered into a second modification to the Loan to extend the maturity date to August 14, 2023. 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 . The balance of principal and interest will be payable thirty years from the date of the EID Loan and interest will accrue at the rate of 3.75 % per annum. F-18 The following summarizes the Company’s notes payable maturities as of December 31, 2023 ( amounts in thousands): Year Ending December 31, 2024 $ 1,587 Year Ending December 31, 2025 920 Year Ending December 31, 2026 - Year Ending December 31, 2027 - Year Ending December 31, 2028 - Thereafter 150 2,657 Debt discount ( 193 ) Total $ 2,464 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 December 31, 2023 2022 Options 5,272 6,003 Warrants 40,338 40,338 Series A convertible preferred shares 28,926 - Total 74,536 46,341 F-19 NOTE 10 – STOCKHOLDERS ’ EQUITY Conversion of Series A Preferred Shares For the year ended December 31, 2023, the Company issued approximately 1,183,000 shares of Common Stock upon conversion of 5,242 shares of Series A Preferred. 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. NOTE 11 – STOCK-BASED COMPENSATION On May 8, 2019, our Board of Directors approved the Charlie’s Holdings, Inc. 2019 Omnibus Incentive Plan (the “ 2019 Plan ”), and the 2019 Plan was subsequently approved by holders of a majority of our outstanding voting securities on the same date. Up to 11,072,542 stock options were originally grantable under the 2019 Plan. On December 22, 2021, our Board of Directors unanimously adopted resolutions by written consent approving an amendment to increase the number of shares of Common Stock available for issuance under the 2019 Plan by 15.0 million shares, from 11,072,542 to 26,072,542 shares (the “ 2019 Plan Amendment ”). Furthermore, the Company received written consents approving the 2019 Plan Amendment from holders of approximately 50.3 % of our outstanding voting securities. In accordance with Rule 14c of the Exchange Act, our Board of Directors’ authority to implement the 2019 Plan Amendment became effective February 28, 2022, twenty calendar days after notification of our shareholders. F-20 Non-Qualified Stock Options The following table summarizes stock option activities during the year ended December 31, 2023 and 2022 (all option amounts are in thousands): Stock Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value Outstanding at January 1, 2022 7,123 $ 0.54 7.5 $ - Options forfeited/expired ( 1,120 ) 0.44 - - Outstanding at December 31, 2022 6,003 0.56 6.4 - Options forfeited/expired ( 731 ) 0.45 - - Outstanding at December 31, 2023 5,272 $ 0.58 5.3 $ - Options vested and exercisable at December 31, 2023 5,272 $ 0.58 5.3 $ - 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. F-21 Restricted Stock Awards The following table summarizes restricted stock awards activities during the years ended December 31, 2023 and 2022 (all share amounts are in thousands). Number of Shares Weighted Average Grant Date Fair Value per Share Nonvested at January 1, 2022 1,750 $ 0.044 Restricted stock granted 7,142 0.041 Vested ( 1,500 ) - Forfeited ( 776 ) - Nonvested at December 31, 2022 6,616 0.041 Restricted stock granted 9,100 0.033 Vested ( 4,710 ) 0.054 Forfeited ( 911 ) 0.036 Nonvested at December 31, 2023 10,095 $ 0.055 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 are subject to a vesting schedule and have all the rights of a shareholder of the Company with respect to voting, share adjustments, receipt of dividends (if any) and distributions (if any) on such shares. The RSAs had a grant date fair value of approximately $ 290,000 . 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. That cost is expected to be recognized over a weighted average period of 3.0 years. The Company recorded total stock-based compensation of approximately $ 288,000 and $ 150,000 during the years ended December 31, 2023 and 2022 related to the RSAs, respectively. F-22 NOTE 12 - COMMITMENTS AND CONTINGENCIES Leases The Company leases office space under agreements classified as operating leases that expire on various dates through 2024. All of the Company’s lease liabilities result from the lease of its headquarters in Costa Mesa, California, which expires in 2024, its warehouse in Santa Ana, California, which was renewed in May 2022 and expires May 2025, its office and warehouse in Denver, Colorado, which expired in May 2022, and its warehouse space in Huntington Beach, California, which was renewed in June 2022. On April 29, 2022, the Company entered into a commercial lease agreement for the Company’s sales and marketing operations in Williamsville, New York (“ Williamsville Lease ”) with Henry Sicignano Jr., a relative of the Company’s President, Henry Sicignano III. The Williamsville Lease, which became effective on May 1, 2022, has a term of one year and a base rent of $ 1,650 per month. The Williamsville Lease is considered a modified gross lease and therefore the Company will also be responsible for additional monthly expenses including gas, electricity, and internet. The Williamsville Lease was evaluated and approved by the Company’s Board of Directors. Such leases do not require any contingent rental payments, impose any financial restrictions, or contain any residual value guarantees. Certain of the Company’s leases include renewal options and escalation clauses; renewal options have not been included in the calculation of the lease liabilities and right of use assets as the Company is not reasonably certain to exercise the options. Variable expenses generally represent the Company’s share of the landlord’s operating expenses. The Company does not act as a lessor or have any leases classified as financing leases. The Company excludes short-term leases having initial terms of 12 months or less from Topic 842 as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term. The Company entered into a commercial lease for the Company’s corporate headquarters (the “ Lease ”) in Costa Mesa, California with Brandon Stump, the Company’s former Chief Executive Officer, Ryan Stump, the Company’s Chief Operating Officer, and Keith Stump, a former member of the Company’s Board of Directors. The Stumps purchased the property that is the subject of the Lease in July 2019. The Lease, which was effective as of September 1, 2019, on a month-to-month basis, was then formalized on November 1, 2019 to have a term of five years and a base rent rate of $ 22,940 per month, which rate is subject to annual adjustments based on the consumer price index, as may be mutually agreed upon by the parties to the Lease. The terms of the Lease were negotiated and approved by the independent members of the Board, and executed by Mr. David Allen, the Company’s former Chief Financial Officer, after reviewing a detailed analysis of comparable properties and rent rates compiled by an independent, third-party consultant. The total amount paid to related parties for the years ended December 31, 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. 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. F-23 The following summarizes quantitative information about the Company’s operating leases (amounts in thousands): For the years ended December 31, 2023 2022 Operating leases Operating lease cost $ 451 $ 480 Variable lease cost - - Operating lease expense 451 480 Short-term lease rent expense 20 13 Total rent expense $ 471 $ 493 For the years ended December 31, 2023 2022 Operating cash flows from operating leases $ 449 $ 484 Right-of-use assets exchanged for operating lease liabilities $ - $ 440 Weighted-average remaining lease term – operating leases (in years) 1.11 2.06 Weighted-average discount rate – operating leases 12.0 % 12.0 % Maturities of our operating leases, excluding short-term leases, are as follows (amounts in thousands): Year Ending December 31, 2024 $ 385 Year Ending December 31, 2025 75 Total 460 Less present value discount ( 32 ) Operating lease liabilities as of December 31, 2023 $ 428 Legal proceedings From time to time, the Company may be involved in various claims and counterclaims and legal actions arising in the ordinary course of business. There are not material pending or threatened legal proceedings at this time. F-24 NOTE 13- INCOME TAXES The Company is taxed as a C corporation and files a consolidated return with Charlie's Holdings, Inc. This tax footnote also includes the tax impact of the Company's VIE, Don Polly LLC, which is also taxed as a C corporation, but which files a separate return from Charlie's Holdings, Inc. The table below presents the components of the (benefit) 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, 2023 2022 Current US Federal $ - $ ( 89 ) US State - ( 3 ) Total current (benefit) provision - ( 92 ) Deferred US Federal - - US State - - Total deferred (benefit) provision - - Total (benefit) provision for income taxes $ - $ ( 92 ) The tax effects of temporary differences and tax loss carryovers that give rise to significant portions of deferred tax assets and liabilities at December 31, 2023 and 2022 are comprised of the following (in thousands): As of December 31, 2023 2022 Deferred tax assets: Bad debt $ 7 $ 50 Inventory 300 190 Accrued expenses 138 128 Lease liability 114 218 Research and development credits 141 141 Stock compensation 90 156 Net operating loss carryovers 2,077 1,642 Capitalized R&D 191 - Other 7 7 Derivatives 5 39 Depreciation 4 - Total deferred income tax assets 3,073 2,571 Deferred income tax liabilities: ROU assets ( 113 ) ( 217 ) Fixed assets - ( 27 ) Total deferred income tax liabilities ( 244 ) Net deferred income tax assets Valuation allowance ( 2,960 ) ( 2,327 ) Deferred tax asset, net of allowance $ - $ - The Company recognizes Federal and state deferred tax assets or liabilities based on the Company's estimate of future tax effects attributable to temporary differences and carryovers. The Company records a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all 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. The Company considers projected future taxable income and planning strategies in making this assessment. As of December 31, 2023, as a result of a three-year cumulative loss and lack of sufficient positive evidence, we concluded that a full valuation allowance was necessary to offset our deferred tax assets. We intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal. The Company will continue to evaluate its deferred tax balances to determine any assets that are more likely than not to be realized. F-25 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, 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. The utilization of net operating loss carryforwards and research tax credit carryovers could be subject to annual limitations under Section 382 and 383 of the Internal Revenue Code of 1986, and similar state tax provisions, due to ownership change limitations that may have occurred previously or that could occur in the future. These ownership changes limit the amount of net operating loss carryforwards and other deferred tax assets that can be utilized to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382 and 383, results from transactions increasing ownership of certain stockholders or public groups in the stock of the corporation by more than 50 percent points over a three-year period. The Company has not conducted an analysis of an ownership change under section 382. The Company experienced an ownership change in 2019. Absent an analysis, the Company has assumed that net operating losses generated prior to the change are not available to offset income subsequent to the ownership change date. To the extent that a study is completed, and certain pre-acquisition losses are deemed to be available to be utilized to offset taxable income, the Company's tax liabilities could be reduced. To the extent that a study is completed and additional or future ownership changes are deemed to occur, the Company's net operating losses and tax credits could be further limited. A reconciliation of the statutory income tax rates and the Company's effective tax rate for the years ended December 31, 2023 2022, are as follows: Year ended December 31, 2023 Year ended December 31, 2022 Statutory federal income tax rate 21.0 % 21.0 % Non-taxed loss from VIE 0.0 % 0.0 % Research credits 0.0 % 13.5 % State taxes, net of federal tax benefit 6.0 % 5.3 % Stock compensation ( 4.3 )% ( 4.5 )% Permanent Items ( 0.4 )% 0.1 % Section 382 NOL Adjustments ( 0.2 )% 0.0 % Derivatives 4.2 % 2.6 % Return to provision adjustments 2.0 % 0.1 % Other 2.0 % ( 3.9 )% Change in valuation allowance ( 30.3 )% ( 28.8 )% Total effective tax rate 0.0 % 5.4 % ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The following table summarizes the activity related to the Company’s gross unrecognized tax benefits at the beginning and end of the years ended December 31, 2023 and 2022 (in thousands): Year ended December 31, 2023 Year ended December 31, 2022 Gross unrecognized tax benefits at the beginning of the year $ 109 $ 32 Increases related to current year positions - - Increases related to prior year positions - 77 Decreases related to prior year positions - - Expiration of unrecognized tax benefits - - Gross unrecognized tax benefits at the end of the year $ 109 $ 109 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’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. The Company is not aware of any examinations that are currently taking place by federal or state taxing authorities. NOTE 14- SUBSEQUENT EVENTS 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. F-26