Charlie's Holdings, Inc. 10-K

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the OTCQB Venture Marketplace under the symbol “CHUC”. The prices of our common stock on the OTCQB Venture Marketplace represent quotations between dealers without adjustment for retail markup, markdown, or commission and may not represent actual transactions. Holders As of March 31, 2026, there were 274,203,242 shares of our common stock outstanding and 220 stockholders of record and 93,906 shares of our Series A Preferred outstanding held by 76 stockholders of record. Transfer Agent Our Transfer Agent and Registrar for our common stock is Continental Stock Transfer and Trust located in New York, New York. Dividend Policy We have not previously and do not plan to declare or pay any dividends on our common stock. Our current policy is to retain all funds and any earnings for use in the operation and expansion of our business. Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including current financial condition, operating results and current and anticipated cash needs. Recent Sales of Unregistered Securities None. Issuer Purchases of Equity Securities None. Shares authorized for issuance under equity compensation plans The stockholders previously approved the Charlie’s Holdings Inc. 2019 Omnibus Incentive Plan, as amended (the “ Plan ”). The Plan allows for the granting of equity awards to eligible individuals over the life of the Plan, including the issuance of up to 26,072,542 shares of the Company’s common stock. As of December 31, 2025, we had available 4,803,394 shares remaining for future awards under the Plan. The following table summarizes the number of shares of common stock to be issued upon exercise of outstanding options and vesting of restricted stock units under the Plan, the weighted-average exercise price of such stock options, and the number of securities available to be issued under the Plan as of December 31, 2025: Number of securities Number of securities to remaining available for be issued upon exercise issuance under equity of outstanding options, Weighted average compensation plans and restricted stock exercise price of (excluding securities units, outstanding options reflected in column (a)) (a) (b) (c) Equity compensation plans approved by security holders 24,385,814 (1) $ 0.46 1,686,728 Equity compensation plans not approved by security holders — N/A — Total 24,385,814 — 1,686,728 (2) (1) The number of outstanding options is 4,647,814 and the number of outstanding restricted stock units is 19,738,000. (2) Consists of shares available for award under the Plan. ITEM 6. [RESERVED] -19- ITEM 7. MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis in conjunction with our financial statements, including the notes thereto contained in this Annual Report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of certain factors, including those set forth under “ Risk Factors ” and elsewhere in this Annual Report. Overview Charlie's is a leader in the premium vapor products industry. Long known for its pioneering history and award-winning products, the Company’s mission is to provide adult smokers with better alternatives to combustible cigarettes. To this end, Charlie’s has developed a family of proprietary e-liquids as well as an array of compact, easy-to-use disposable vaping devices. The Company’s products are sold around the world to select distributors, specialty retailers, and third-party online resellers. The Company’s objective is to become a sales leader in two broad product categories: (i) non-combustible nicotine-related products and (ii) alternative alkaloid (non-nicotine) vapor products. In pursuit of these targets, Charlie’s primary strategic focus is on the development of intellectual property related to product access and compliance. The Company is investing in the development of advanced age-gating and access-control technologies designed to prevent youth access while maintaining availability for adult smokers who seek alternatives to combustible cigarettes. The Company believes that effective age-verification mechanisms are a critical component in supporting the Charlie’s Premarket Tobacco Applications (“ PMTAs ”) for both flavored and “plain” tobacco nicotine vapor products. In December, the Company signed a definitive licensing agreement with IKE Tech LLC (“ IKE ”) to commercialize the first-ever AI-powered blockchain-based age-gating system for vapor products in the United States. Under this license, Charlie’s could become the first Company to demonstrate to the FDA that flavored ENDS products are “appropriate for the protection of public health.” Such a regulatory achievement could prove transformational for Charlie’s and for the entire vapor products industry. Strategic Priorities In today’s economic landscape, particularly within the vapor products industry, seeking and securing competitive advantage is paramount. Unlike many competitors in our industry, Charlie’s has focused on achieving full compliance with FDA regulations – while also establishing a regulatory “hedge” through the development of alternative “zero-nicotine” product lines that are not currently subject to FDA review. Simultaneous to undertaking these initiatives, in 2025 management took aggressive steps to (i) monetize sixteen of the Company’s PMTA products, (ii) launch the SBX product line, (iii) establish a U.S. manufacturing facility, and (iv) achieve profitability. Charlie’s success, in all these endeavors, set the stage for continued growth, potential FDA marketing orders, and a potential uplist to a national securities exchange. Accordingly, here are the primary strategic initiatives on which we intend to focus in 2026: ● Grow sales and retail distribution through chain convenience stores in select markets across the US. ● Utilize the IKE age-gating technology/license; amass market data with age-gated SBX disposables – while simultaneously amending the Company’s PACHA PMTA’s with age-gating technology to become the first Company to demonstrate to the FDA that flavored vape products are “appropriate for the protection of public health.” ● Introduce cutting edge 75K-Puff disposable devices for both the SBX and the Pachamama product lines ● Form new strategic partnership(s) to monetize the Company's PMTA-submitted PACHA synthetic nicotine products. ● Grow international sales to mitigate US regulatory risks. ● Uplist to a National Securities Exchange Collectively, all these initiatives represent Charlie's commitment to adult smokers. Through innovation and a hyper-focus on quality, our Company strives to provide our customers with an exceptionally satisfying vaping experience. In order to put the value of some of these initiatives into context, here is a more detailed overview of our business plans and strategy: I. Grow Charlie ’ s sales and retail distribution Grow SBX sales and distribution through chain convenience stores in select markets across the United States Our market research indicates that adult consumers overwhelmingly prefer "flavored" vapor products over plain tobacco products and are highly receptive to nicotine substitute products that offer the same vaping experience as that provided by conventional nicotine vapor products. SBX Disposables feature Charlie's award-winning flavors (preferred over plain tobacco vapor by more than 80% of adult consumers). -20- SBX nicotine analogue-based vape liquids are not made from or derived from tobacco, nor do they contain nicotine from any source. Accordingly, the Company's proprietary nicotine substitute alkaloid (patented in the United States and in China by the Company's chemical supplier) does not meet the definition of "nicotine" and therefore SBX products are not subject to FDA PMTA requirements and are LEGAL across most of the United States. SBX Beats Juul … 15:1 In a Company-sponsored focus group survey of adult consumers who vape, Charlie's SBX Disposables were overwhelmingly preferred over Juul tobacco-flavored vapes. Of 306 survey participants, 287 preferred SBX over Juul. Because no flavored ENDS product is legal to be sold under the current FDA PMTA framework and because there is little enforcement in the marketplace, there is widespread availability of illicit flavored ENDS products across the United States. The FDA Center for Tobacco Products estimates that more than half of the U.S. e-cigarette market is illicit. In this environment, some states have begun passing legislation to ban certain flavored products. In these select states, where flavored nicotine products are now beginning to face significant regulatory restrictions, we are focusing our SBX sales initiatives. We believe that the list of states that give SBX a “regulatory advantage” will grow. Grow Pachamama/PACHA sales and distribution in select markets across the United States Distinguished by award-winning flavors and by Charlie’s commitment to regulatory compliance, PACHA and Pachamama are well-known brands that are positioned to grow significantly in 2026. The Company plans to leverage the brands’ emerging and distinct competitive advantages: ● Pachamama is the ONLY vapor products brand that has been on the market for more than a decade and is now fully compliant with Texas domestic manufacturing requirements; ● Pachamama will be one of the select brands that is fully compliant with Indiana’s “foreign adversary prohibited” manufacturing legislation (going into effective July 1, 2026); ● PACHA Virginia Tobacco 12mL, 8mL, and 4mL Disposables were all approved in March 2026 for inclusion on the State of California’s Unflavored Tobacco List (“ UTL ”). This designation means that PACHA Virginia Tobacco Disposables are legal to sell in all smoke shops, gas stations, and c-stores throughout the State of California. ● PACHA flavored 12mL, 8mL, and 4mL Disposables, as well as the Company’s PACHA e-liquids, have all been approved for inclusion on the Nebraska State Directory. ● PACHA flavored 4mL and 8mL Disposables are among the select few flavored disposables that have been approved by the state of Louisiana With growing number of states instituting state registries each year, we believe that Pachamama, and PACHA (and non-nicotine SBX) will expect to see continued (and growing) success in the marketplace and that Charlie’s competitive advantages will expand significantly. II. Utilize the IKE Age-Gating technology to secure unprecedented Regulatory Competitive Advantages Currently, there is a need for age-gated product technologies that can satisfy or accommodate concerns the FDA has related to under-age youth access. We believe age-gating is both a responsible business practice as well as a potential future competitive advantage for Charlie's. Utilizing the Company’s licensing agreement with IKE for the first-ever AI-powered blockchain-based age-gating system for vapor products in the United States, in Q2 2026 Charlie’s plans to test-market the patented IKE age-gating system with a special line of the Company’s popular SBX nicotine analogue product; simultaneously, Charlie’s intends to amend certain of its existing Premarket Tobacco Applications (PMTAs) with the FDA for PACHA brand ENDS with the IKE system. SBX Nicotine Analogue Products – not subject to FDA PMTA Review New tobacco products (those containing either plant-derived nicotine or synthetic nicotine) are required to submit a PMTA to the FDA to obtain a marketing order prior to their sale in the United States. The SBX product line does contain nicotine from any source, and instead utilizes Charlie’s proprietary nicotine substitute, Metatine™. Accordingly, SBX is not subject to FDA PMTA requirements and Charlie ’ s will be able to introduce age-gated, flavored SBX devices almost immediately. It is the Company’s intention to test market age-gated SBX Disposables in 200-300 compliance-minded retail stores in Q2 2026. -21- PACHA brand Electronic Nicotine Delivery Systems (ENDS) with FDA PMTA ’ s In order to legally sell flavored nicotine products in the United States, Charlie’s intends to collect market data from sales of its non-nicotine SBX age-gated disposables which it will use to amend the Company’s existing PMTAs with the FDA to include age-gating provisions for certain of the Charlie’s PACHA brand nicotine disposables. There is a large un-met need for technologies that can satisfy or accommodate concerns the FDA has related to youth access, which means there is an enormous market opportunity for flavored vapes that are inoperable for underage individuals. By amassing market data with age-gated SBX disposables – while simultaneously amending the Company’s PACHA PMTA’s with age-gating technology – we believe Charlie’s could become the first Company to demonstrate to the FDA that flavored vape products are “appropriate for the protection of public health.” The Company believes that such a success would not only be game-changing for Charlie’s, but would also transformational for the entire industry. III. Introduce cutting edge 75K Puff disposable devices for both the SBX and the Pachamama product lines Specifically designed with consumer needs and preferences in mind, Charlie’s new generation of 75K Disposables feature an impressive Dual Mesh Coil and provide significantly more vape… and surprisingly better taste… than market-leading disposables. With a large tank capacity, SBX and Pachamama 75K Disposables offer 75,000 uniquely satisfying puffs and feature a transparent shell for accurate liquid measurement, easy-to-use button control, and low-key LED indicators. Both brands feature three power modes, allowing users to select "ECO MODE," "BOOST MODE," or "X MODE"… while simultaneously providing adjustable airflow settings that range from "tight and very enjoyable," to "the standard experience," to "no restrictions." SBX and Pachamama 75K Disposables each offer fourteen of Charlie's most popular award-winning flavors. Initial orders will ship in Q2 2026. IV. Form new strategic partnership(s) to monetize the Company's PMTA-submitted PACHA synthetic nicotine products. In 2025, in three separate transactions, Charlie's sold sixteen of the Company's PACHA synthetic nicotine PMTA products and related assets for $7.5MM cash plus a contingent one-time payment of up to $4.2 million. In the last of the three transactions, the buyer purchased a single Charlie’s PMTA product for $1MM. Based on these sales, taking into account the fact that Charlie’s continues to own 674 PMTA products, and considering the interest other companies have expressed in Charlie's portfolio, the Company believes Charlie's remaining PMTA products, as a stand-alone asset, could have a significant monetary value . To maximize the value of this portfolio, the Company intends to (i) continue to amend and strengthen Charlie’s PMTAs with new scientific data, (ii) add age-gating functionality to certain of our PMTAs, and (iii) explore new strategic partnerships with industry competitors, big and small, that value regulatory compliance in the vapor products marketplace. V. Grow International Sales to mitigate US regulatory risks In order to further mitigate FDA regulatory risk in the domestic market and to capture what management continues to believe is a significant commercial opportunity, we have dedicated additional resources to efforts focused on growing our market share internationally. Presently, approximately 8% of our vapor product sales come from the international market. We are well-positioned to increase sales in countries where we already have presence and to capture new business in several additional overseas markets. VI. Uplist to a National Securities Exchange We believe that upon a successful uplisting to a national securities exchange, we believe we will significantly improve our capital markets appeal to a broader range of investors, increase our liquidity, and ultimately, achieve a higher market cap for the Company. -22- 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 September 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 2020 PMTA submissions; however, there is no assurance that regulatory approval to sell our products will be granted or that we would be able to raise additional financing if required, which could have a significant impact on our sales. 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 submitted an administrative appeal with FDA regarding its refusal to accept certain of the PMTAs. The administrative appeal was granted on October 30, 2023 and the products were accepted to move forward in the PMTA review process. On October 28, 2025, the Company received an MDO from the FDA with respect to certain of our timely-submitted PMTAs. On November 5, 2025, the Company filed a motion for a temporary administrative stay with the United States Court of Appeals for the Fifth Circuit. On November 10, 2025, the Court granted the Company’s opposed motion for a temporary administrative stay pending resolution of our forthcoming stay motion. We intend to promptly seek a preliminary injunction to remain in effect during the pendency of the litigation. Though a very small percentage of our current sales are related to our affected PMTA Products, we plan to vigorously defend our PMTAs and pursue all available legal remedies. The FDA may bring an enforcement action against our synthetic nicotine products for lack of premarket authorization and/or issue an MDO to our other pending applications at any time. More generally, FDA’s regulatory initiatives and enforcement priorities regarding ENDS products are unpredictable and continue to evolve, and we cannot predict whether FDA’s priorities and review of our premarket submissions will impact our products to a greater degree than our competitors in the industry. In the event the FDA denies our PMTAs, absent a court-ordered stay, we would be required to remove products and cease selling them. The Company recently launched new alternative alkaloid Metatine-based disposable vape products, under the “SBX™” brand, that the Company expects will (i) replace a significant portion of its legacy products and (ii) become the single largest, most important commercial opportunity in Charlie’s history. The Company and its attorneys believe Metatine-based 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 alternative alkaloid 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 alternative alkaloids 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 alternative alkaloid products, corroborates these conclusions. However, 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, Metatine-based 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 prompt the Agency to attempt to require us to remove our products from the market and to cease selling them. -23- Recent Developments Entry into a Material Definitive Agreement for the Disposition of Assets On April 16, 2025, the Company entered into and closed an Asset Purchase Agreement (the “ Agreement ”) with a buyer (the “ Buyer ”) pursuant to which the Buyer purchased 12 of the Company’s PACHA synthetic products and related assets (the “ Assets ”) that are covered by a premarket tobacco application (“ PMTA ”) first submitted by the Company in 2022. The purchase price for the Assets was $5.0 million paid at closing, plus a contingent one-time payment of up to $4.2 million based on product sold by the Buyer during the one year following the first day of commercialization of the Assets. The Agreement contains customary representations, warranties, and indemnities by each of the parties. On May 29, 2025, the Company amended the Agreement with the Buyer pursuant to which the Buyer purchased three additional PACHA synthetic products and related assets (the “ May Additional Assets ”) that are covered by a PMTA first submitted by the Company in 2022, bringing the total purchased by the Buyer, to date, to 15 products. The purchase price for the May Additional Assets was $1.5 million paid at closing. On August 8, 2025, the Company entered into and closed on another Amendment to the Agreement with the Buyer pursuant to which the Buyer purchased one additional PACHA synthetic product and related asset (the “ August Additional Assets ”) that are covered by a PMTA first submitted by the Company in 2022, bringing the total purchased by the Buyer to sixteen. The purchase price for the August Additional Assets was $1.0 million paid at closing. $2.0 Million Credit Facility with Independent Board Member In order to facilitate increased SBX inventory purchases and to fuel the Company's growth in the mass market convenience store channel, on August 26, 2025 the Company announced that, it signed a $2 million credit facility with Michael D. King, one of the independent members of Charlie's Board of Directors. Mr. King agreed to loan the Company up to $2,000,000 (in three separate tranches) at an interest rate of 13% for a period of 12 months per tranche, with a balloon payment for interest and principal to be paid at the one-year anniversary of each tranche. Accordingly, with an initial $1 million loan, and two subsequent $500,000 tranches, this debt/credit facility gave the Company the discretion to borrow funds, as needed, as demand continues to grow for the SBX product line. This credit facility is not convertible to equity, does not include warrants, and is exceptionally "company friendly.” On March 24, 2026, we entered into an amendment to the loan to extend the maturity date of the loan to June 1, 2027 with a ballon principal payment due on maturity with interest only paid monthly until maturity. Company Secures More Than $6MM in Sales During NACS Show; $4.4 million SBX purchase is the single largest sale in Charlie's history On October 23, 2025, we reported that the Company secured more than $6 million in purchase orders during the National Association of Convenience Stores ("NACS") National Show in Chicago; one customer placed a cash deposit with a $4.4 million SBX purchase order. This is the single largest sale in Charlie's history. SBX is greatly expanding Charlie's retail distribution through chain convenience stores that wish to carry flavored disposable vapes that are not in violation of the FDA's PMTA review process. Marketing Denial Orders and Court-granted Administrative Stay on Certain Premarket Tobacco Applications On October 28, 2025, we received Marketing Denial Orders (“ MDOs ”) from the U.S. Food and Drug Administration (“ FDA ”) with respect to certain of our timely-submitted Premarket Tobacco Product Applications (“ PMTAs ”). On November 5, 2025, we filed a motion for a temporary administrative stay with the United States Court of Appeals for the Fifth Circuit, which the Court granted on November 10, 2025. On December 24, 2025, a Fifth Circuit panel granted our motion to stay the MDOs pending judicial review. As a result of the stay, the affected PMTAs revert to pending status and continue to be treated as timely filed (May 2022) while the case is litigated on the merits. Accordingly, the subject products remain eligible, where permitted by state law, for listing on state vapor products directories (e.g. Louisiana) that allow the sale of products associated with timely submitted synthetic nicotine PMTAs that are pending FDA’s review, subject to satisfaction of all other applicable state requirements. Though only a very small percentage of our current sales are related to our affected PMTA Products, we plan to vigorously defend our PMTAs on the merits while also continuing to amend our applications with the latest science. -24- Company opens US Manufacturing Facility On December 1, 2025 we reported that the Company opened its first US-manufacturing facility in Huntington Beach, California. Effective September 1, 2025, Texas implemented a new law that bans the sale and possession of certain vape products, including those manufactured or marketed as coming from China or certain other "adversary countries." Tennessee and other states have similar legislation pending. To sell and distribute products that are fully compliant in these markets, Charlie's became one of the first companies to launch a US-filled vapor product line. The Company's popular Pachamama 25K line now meets the domestic manufacturing requirements of the state of Texas and enables Charlie's premium products to appeal, broadly, to adult consumers who prefer "Made in America" products. Age Gating Partnership with IKE Tech, LLC On December 18, 2025, Charlie’s Holdings, Inc. entered into a Master Hardware, Software, and Cloud Subscription Agreement with IKE Tech LLC to integrate IKE’s age-verification technology into certain of the Company’s nicotine analogue and electronic nicotine delivery system (“ ENDS ”) products. Under the agreement, IKE Tech will supply proprietary Bluetooth Low Energy (“ BLE ”) chips designed to be embedded in the Company’s devices and enable wireless communication with a cloud-based software platform that supports device authentication, age-gating, and age-verification functionality prior to device activation. The agreement also provides for access to a subscription-based software platform and related development services, including the potential creation of a customized, white-labeled application. The Company believes the technologies contemplated by the agreement may support its efforts to enhance product-level age verification and compliance capabilities as regulatory requirements for nicotine products continue to evolve. Discontinued Operations During the year ended December 31, 2025, in preparation for an uplist to a national securities exchange, Charlie's Board of Directors unanimously approved a resolution to discontinue sales of all hemp/CBD-related products and to wind down and close permanently its Don Polly division. Accordingly, in 2025, the Company discontinued the operations of Don Polly LLC and no longer sells any of Don Polly’s CBD/hemp branded products. The disposal represented a strategic shift that had a material effect on the Company’s operations and financial results and therefore met the criteria for discontinued operations under ASC 205-20. Accordingly, the operating results of Don Polly LLC have been classified as income (loss) from discontinued operations and more than $3MM in top-top line revenue is not reported, as such, in the accompanying consolidated financial statements. Private Placement – February 13, 2026 On February 13, 2026, the Company completed a private placement of 3,550,000 shares of its common stock at a purchase price of $0.20 per share, resulting in aggregate consideration of $710,000. Of the total consideration, $510,000 was received in cash and $200,000 was satisfied through the forgiveness of certain outstanding indebtedness owed by the Company. The issuance of shares increased the Company’s liquidity and reduced a portion of its outstanding debt obligations. Charlie’s management and directors purchased 1,350,000 shares of the 3,550,000 total shares that were sold, as follows: ● Michael King, Independent Director: 500,000 shares ● Dr. Ed Carmines, Independent Director: 250,000 shares ● Ryan Stump, Director and Chief Operating Officer: 250,000 shares ● Henry Sicignano III, President: 250,000 shares ● Matthew Montesano, Chief Financial Officer: 100,000 shares -25- Basis of Presentation The consolidated financial statements contained within this Annual Report and the disclosure in this Management’s Discussion and Analysis of Financial Condition and Results of Operations with respect to the years ended December 31, 2025 and 2024 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “ SEC ”). In the opinion of the Company, all adjustments, including normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows of the Company for the interim period have been included. On October 7, 2025, the Company’s Board of Directors unanimously approved a resolution to wind down and close permanently the Don Polly division, the Company’s variable interest entity. On December 31, 2025, Don Polly entered into a Bill of Sale And Assignment Agreement (the “ Assignment Agreement ”) with Charlie’s. Pursuant to the Assignment Agreement, Don Polly transferred ownership of all of its right, title, and interest in, as well as custody and control of, its assets to Charlie’s. The results of operations of Don Polly are reported as discontinued operations for the years ended December 31, 2025 and 2024. Certain reclassifications have been made to the prior period financial information to reflect discontinued operations presentation. Unless otherwise noted, amounts and disclosures throughout these Notes to Consolidated Financial Statements relate solely to continuing operations and exclude all discontinued operations. Results of Operations for the Year Ended December 31, 2025 Compared to the Year Ended December 31, 2024 For the years ended December 31, Change 2025 2024 Amount Percentage ($ in thousands) Product revenue, net $ 20,916 $ 7,765 $ 13,151 169.4 % Cost of goods sold - product revenue 15,261 4,888 10,373 212.2 % Gross profit 5,655 2,877 2,778 96.6 % Operating costs and expenses: General and administrative 6,374 5,611 763 13.6 % Sales and marketing 1,327 638 689 108.0 % Research and development 119 (68 ) 187 -275.0 % Total operating costs and expenses 7,820 6,181 1,639 26.5 % Loss from operations (2,165 ) (3,304 ) 1,139 -34.5 % Other income (expense): Interest expense (692 ) (703 ) 11 -1.6 % Debt extinguishment loss (50 ) (75 ) 25 -33.3 % Change in fair value of derivative liabilities - 79 (79 ) -100.0 % Gain on sale of intellectual property 7,500 - 7,500 100 % Total other income (loss) 6,758 (699 ) 7,457 -1066.8 % Income (loss) before provision for income taxes 4,593 (4,003 ) 8,596 -214.7 % Income tax provision (275 ) - (275 ) 100 % Income (loss) from continuing operations after income taxes 4,318 (4,003 ) 8,321 -207.9 % Discontinued operations: Income (loss) from discontinued operations, net of tax 181 (156 ) 337 -216.0 % Net income (loss) $ 4,499 $ (4,159 ) $ 8,658 -208.2 % -26- Revenue Revenue for the year ended December 31, 2025, increased approximately $13,151,000, or 169.4%, to approximately $20,916,000, as compared to approximately $7,765,000 for the year ended December 31, 2024, which is all due to the increase in our nicotine-based product and nicotine alternative products sales. Sales of SBX, a non-nicotine, disposable vapor product which is not subject to FDA review, experienced a significant increase during the year ended December 31, 2025. Revenue does not include $3MM in Don Polly sales as the Don Polly LLC division was closed permanently in 2026. The operating results of Don Polly LLC have been classified as income (loss) from discontinued operations. Cost of Revenue Cost of revenue, which consists of direct costs of materials, direct labor, third party subcontractor services, and other overhead costs increased by approximately $10,373,000 or 212.2%, to approximately $15,261,000, or 73% of revenue, for the year ended December 31, 2025, as compared to approximately $4,888,000, or 62.9% of revenue, for the same period in 2024. This cost increased compared to last year due primarily to an increase in the volume of products sold during the period. General and Administrative Expense For the year ended December 31, 2025, total general and administrative expenses increased by approximately $763,000 to $6,374,000 as compared to approximately $5,611,000 for the same period in 2024. This change was primarily due to decreases of approximately $88,000 in certain professional fees and $59,000 of bad debt expense, and offset by an increase of $748,000 in non-commission wages and benefits and $162,000 of other general and administrative costs. The decrease in professional fees was primarily the result of reductions in legal and audit costs as well as fees paid to members of our Board of Directors. The increase in payroll and benefits costs was primarily driven by bonuses awarded to certain key employees during the period. Sales and Marketing Expense For the year ended December 31, 2025, total sales and marketing expense increased by approximately $689,000 to approximately $1,327,000 as compared to approximately $638,000 for the same period in 2024. The increase was primarily due to increased sales commissions paid and display costs for “first-order” sales of the Company’s SBX product as roll-out continued during the year ended December 31, 2025. The Company continues to evaluate its spending on advertising, promotional and tradeshow related expenses as it aims to increase sales of its new SBX Disposable vapor products. -27- Research and Development Expense For the year ended December 31, 2025, research and development expense was approximately $119,000 as compared to approximately $68,000 of income for the year ended December 31, 2024. The increase of approximately $187,000 was primarily due to costs associated with the Company’s ongoing development and testing related to active PMTA filings with the FDA. Loss from Operations We incurred a loss from operations of approximately $2,165,000 for the year ended December 31, 2025, as compared to loss from operations of approximately $3,304,000 for the year ended December 31, 2024. The decreased in loss from operations is due primarily to increased sales and gross profit. Net loss from continuing operations is determined by adjusting loss from operations by the following items: ● Gain on sale of PMTA assets. For the year ended December 31, 2025, we recorded a $7,500,000 gain related to the sales agreement entered with a global tobacco company. ● Interest Expense. For the years ended December 31, 2025 and 2024, we recorded interest expense related to notes payable of $692,000 and $703,000, respectively. The decrease was primarily due to an increase of outstanding notes payable. ● Debt Extinguishment (Loss) Gain. For the years ended December 31, 2025 and 2024, we recorded approximately $50,000 and $75,000 debt extinguishment related to various debt amendments, respectively. ● Change in fair value of derivative liabilities. For the years ended December 31, 2024, the gain in fair value of derivative liabilities was approximately $79,000 The gain for the year ended December 31, 2024 was due to the expiration of the warrants in April 2024 which resulted the warrant liability being written off. Income Taxes Provision For the year ended December 31, 2025, the Company recorded an income tax provision of approximately $275,000. The Company did not record income tax for the year ended December 31, 2024. Net Income (Loss) from Continuing Operations For the years ended December 31, 2025, and 2024, we had a net income from continuing operations of $4,318,000 and net loss of $4,003,000, respectively. Effects of Inflation Inflation has not had a material impact on our business. Liquidity and Capital Resources As of December 31, 2025, we had working capital of approximately $3,137,000, which consisted of current assets of approximately $10,767,000 and current liabilities of approximately $7,630,000, as compared to working capital deficit of approximately $1,855,000 at December 31, 2024. The current liabilities include approximately $5,037,000 of accounts payable and accrued expenses, notes payable from related parties of $2,280,000, $275,000 of lease liabilities and approximately $38,000 of deferred revenue associated with product shipped but not yet received by customers. Our cash and cash equivalents balance at December 31, 2025 was approximately $1,320,000. The Company believes its balances of cash and cash equivalents as of December 31, 2025, along with cash generated by ongoing operations and continued access to debt markets, will be sufficient to satisfy its cash requirements over the next 12 months and beyond. As of December 31, 2025, we had the following notes outstanding: ● August 2025 Notes. As of December 31, 2025, $2,000,000 notes payable plus accrued interest held by Michael King remained outstanding. ● July 2023 Notes. As of December 31, 2025, $138,000 notes payable plus accrued interest held by Ryan Stump and Henry Sicignano III remained outstanding and the maturity dates of the outstanding notes had been extended to April 28, 2026. ● April 2022 Note. As of December 31, 2025, approximately $143,000 of principal plus accrued interest held by Michael King remained outstanding and the maturity dates of the outstanding notes had been extended to April 28, 2026. -28- For the year ended December 31, 2025, net cash used in continuing operating activities was approximately $6,314,000, resulting from a net income from continuing operations of $4,499,000, offset by a change in operating assets and liabilities of $4,034,000 and a net non-cash activity of $6,598,000. For the year ended December 31, 2024, net cash used in continuing operating activities was approximately $1,982,000, resulting from a net loss from continuing operations of $4,003,000 and offset by a change in operating assets and liabilities of $913,000 and net non-cash activity of $1,108,000. For the year ended December 31, 2025, cash provided by investing activities included $7,500,000 in proceeds from the sale of intellectual property related to certain of our PMTA products. For the year ended December 31, 2025, we used approximately $590,000 cash in financing activities related to the issuance of notes payable of $546,000, notes payable to related parties of $2,100,000 and the repayment of $3,237,000 in notes payable, including $1,312,000 to related parties. For the year ended December 31, 2024, we generated approximately $1,465,000 in cash from financing activities related to the issuance of common shares of $1,580,000, notes payable of $742,000, notes payable to a related party of $500,000 and the repayment of $1,357,000 in notes payable, including $85,000 to a related party. Going Concern Regarding the Legal and Regulatory Environment, Liquidity and Management ’ s Plan of Operation Our consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the year ended December 31, 2025, the Company’s revenue increased, the Company incurred a loss from operations of approximately $2,165,000, and a net income from continuing operations of approximately $4,318,000. Net cash used in continuing operating activities was approximately $6,314,000. The Company had a stockholders’ equity of $3,423,000 at December 31, 2025. During the year ended December 31, 2025, the Company’s working capital was increased to $3,137,000 from a deficit of $1,855,000 as of December 31, 2024. Management evaluated whether these conditions could raise a substantial doubt about the Company’s ability to continue as a going concern. During the year ended December 31, 2025, the Company entered into and closed an Asset Purchase Agreement (the “ Agreement ”) and subsequent amendment with one of the world’s largest tobacco companies (the “ Buyer ”) pursuant to which the Buyer purchased 16 of the Company’s PACHA synthetic products and related assets (the “ Assets ”) that are covered by a premarket tobacco application (“ PMTA ”) first submitted by the Company in 2022. The combined purchase price for the Assets was $6.5 million paid at closings in April and May 2025, and an additional $1.0 million paid at closings in August 2025, plus a contingent one-time payment of up to $4.2 million based on product sold by the Buyer during the one year following the first day of commercialization of the Assets. The proceeds from these transactions have significantly improved the Company’s liquidity position, reduced outstanding obligations, and strengthened working capital. In addition, management has implemented and continues to execute on initiatives designed to enhance operating performance and liquidity, including (i) focusing on growth in the Company’s non-combustible, alternative alkaloid (non-nicotine) products, (ii) advancing regulatory approval efforts for the Company’s nicotine product portfolio, and (iii) the continued development of intellectual property related to product access and compliance. The Company is also pursuing additional strategic transactions, including potential PMTA-related asset sales, which may provide incremental liquidity. Based on these factors, management believes the Company is adequately capitalized to support its operations and meet its obligations as they come due for at least the next twelve months. Off-Balance Sheet Arrangements The Company has no off-balance sheet arrangements other than operating lease commitments. Critical Accounting Policies Included below is a discussion of critical accounting policies used in the preparation of our financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. -29- We believe that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report. The accounting policies identified as critical are as follows: 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 expense 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. Sales returns are generally not material to the financial statements, and do not comprise a significant portion of variable consideration. 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. Accounts receivable is recorded at the invoiced amount and does not bear interest. We determine the credit losses by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions and set up 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, 2025 and 2024, the allowance for bad debt totaled $105,000 and $88,000, respectively. 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, 2025 and 2024, the reserve for excess and obsolete inventories totaled $514,000 and $531,000, respectively. Stock-Based Compensation We account 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, or it is based on valuation observed from publicly traded companies in a similar industry, often with a discount for lack of marketability applied. 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. -30- Income Taxes Income taxes are computed under the 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 of the deferred tax assets will not be realized. 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. We recognize potential accrued interest and penalties related to unrecognized tax benefits as income tax expense. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required for smaller reporting companies.