What changed in this filing

/stocks — the workspaceLOADING

Item 5. Market for Registrant’s Common Equity

2022-04-12 compared with 2021-04-05 · 324 added, 1017 removed, 28 unchanged (98% of the section changed)

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER

Our common stock is traded on the OTC Pink Marketplace under the

symbol “CHUC”.

Prior to July 3, 2019, our common stock

was traded on the OTC Pink Marketplace under the symbol

“TRUU”.

The following table sets forth high and low sales

prices for our common stock for

the calendar quarters indicated as reported by the OTC Pink

These prices represent quotations between dealers

without adjustment for retail markup, markdown, or commission and

may not represent actual transactions.

Quarter ended March 31, 2020

$ 0.0025  

$ 0.0017  

Quarter ended June 30, 2020

$ 0.0023  

$ 0.0016  

Quarter ended September 30, 2020

$ 0.0045  

$ 0.0018  

Quarter ended December 31, 2020

$ 0.0041  

$ 0.0025  

Quarter ended March 31, 2019

$ 0.01  

$ 0.002  

Quarter ended June 30, 2019

$ 0.08  

$ 0.004  

Quarter ended September 30, 2019

$ 0.04  

$ 0.0042  

Quarter ended December 31, 2019

$ 0.01  

$ 0.0014  

Quarter ended March 31, 2018

$ 0.03  

$ 0.01  

Quarter ended June 30, 2018

$ 0.03  

$ 0.01  

Quarter ended September 30, 2018

$ 0.01  

Quarter ended December 31, 2018

$ 0.01  

At March 23, 2021,

there were 19,638,493,279 shares of our common

stock outstanding, and approximately 437 stockholders of record.

At March 23, 2021, there were 190,690 shares of our

Series A Preferred outstanding held by 107 stockholders of

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is traded on the OTCQB Venture Marketplace under the symbol “CHUC”.

Prior to August 3, 2021, our common stock was traded on the OTC Pink Marketplace under the symbol "CHUC", and prior to July 3, 2019, our common stock was traded on the OTC Pink Marketplace under the symbol “TRUU”.

The following table sets forth high and low sales prices for our common stock for the calendar quarters indicated as reported by the OTCQB Venture Marketplace.

These prices represent quotations between dealers without adjustment for retail markup, markdown, or commission and may not represent actual transactions.

First Quarter ended March 31, 2021

Second Quarter ended June 30, 2021

Third Quarter ended September 30, 2021

Fourth Quarter ended December 31, 2021

First Quarter ended March 31, 2020

Second Quarter ended June 30, 2020

Third Quarter ended September 30, 2020

Fourth Quarter ended December 31, 2020

First Quarter ended March 31, 2019

Second Quarter ended June 30, 2019

Third Quarter ended September 30, 2019

Fourth Quarter ended December 31, 2019

As of April 12, 2022, there were 216,840,987 shares of our common stock outstanding, and approximately 4,200 stockholders of record.

As of April 12, 2022, there were 141,123 shares of our Series A Preferred outstanding held by 95 stockholders of record.

Transfer Agent

Our Transfer Agent and Registrar for our

common stock is Equiniti Stock

Transfer located in Denver, Colorado.

SEL E CTED FINANCIAL DATA

a “smaller reporting company”, as defined by the rules

and regulations of the SEC, we are not required to provide this

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

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 Associated with Our Business”

elsewhere in this Annual Report.

Our objective is to become a significant leader in

the rapidly growing, global e-cigarette segment of the broader

nicotine related products industry.

Through Charlie’s, we

formulate, market and distribute branded e-cigarette liquid for use

in both open and closed e-cigarette and vaping systems.

Charlie’s products are mostly produced domestically through

contract manufacturers for sale through select distributors,

specialty retailers and third-party online resellers throughout the

United States, as well as more than 80 countries worldwide.

Charlie’s primary international markets include the United

Kingdom, Italy, Spain, Belgium, Australia, Sweden and Canada.

June 2019, we launched distribution, through Don Polly, of certain

premium vapor, tincture and topical wellness products containing

hemp-derived cannabidiol (“

CBD ”) and we currently intend to develop and

launch additional products containing hemp-derived CBD in the

Industry Specific Challenges

Beginning in late

2019, our industry experienced significant news stories and health

alerts related to flavored nicotine vaping, leading to some states

banning the sale of flavored nicotine products and causing the Food

and Drug Administration (“

FDA ”) to review its policies on

controlling the sale of these products.

Initial research indicated

that a vitamin E acetate related compound could be causing the

health-related issues.

On November 8, 2019, officials at the

Centers for Disease Control and Prevention (“

CDC ”) reported a breakthrough in

the investigation into the outbreak of vaping-related lung

principal deputy director, Dr.

Anne Schuchat, in fact stated that

"vitamin E acetate is a known additive used to dilute liquid in

e-cigarettes or vaping products that contain THC”,

s uggesting the possible culprit for the series of lung

injuries across the U.S.

A ll of Charlie's e-liquid products are

tested by third party laboratories which have confirmed that none

of our products contain any vitamin E acetate or

Tetrahydrocannabinol

THC ”).

these developments have had a negative effect on our sales since

mid-September 2019 (see further discussion below) and therefore, in

response to these developments and while government regulators are

formulating future polices, management has adopted the following

plan of operation.

First, we plan to increase the sales of our CBD

related products, including topicals and ingestibles.

We feel there

is a significant upside in the CBD space, and we have begun to

focus on numerous vertical markets for the sale of our isolate,

full and broad-spectrum products.

These vertical markets include,

but aren't limited to the medical and wellness markets.

We have also dedicated an

internal team as well as additional financial resources to increase

direct-to-consumer e-commerce sales of CBD

we continue to see a significant opportunity for sales growth in

international markets for our e-liquid and other vapor products.

Presently, approximately 20% of our vapor product sales come from

the international market and we are well positioned to increase

those sales in the countries that we presently sell, and in

additional overseas markets, as we have already built an

international distribution platform.

importantly, we feel that the e-liquid and other vapor products

will continue to be a significant growth opportunity, once all the

rightful regulatory changes have been made.

We are continuing with

our plan to obtain marketing authorization for certain of our

products through the completion of a Premarket Tobacco Application

(" PMTA "), which we

submitted in September 2020.

Obtaining a marketing order from the

United States Food and Drug Administration ( “FDA ”

) would, in our opinion, help to

remediate the disruption caused by any perceived health issues

related to vaping, and further position the Company as a trusted,

industry leader.

We feel that a significant amount of our

competitors will not have the resources and/or expertise to

complete the extensive and costly PMTA process and that once

complete, we will be able to benefit from being one of only a

select group of companies operating in the flavored vapor products

Our Transfer Agent and Registrar for our common stock is Continental Stock Transfer and Trust located in New York, New York.

SELECTED FINANCIAL DATA

As a “smaller reporting company”, as defined by the rules and regulations of the SEC, we are not required to provide this information.

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 Associated with Our Business ”

and elsewhere in this Annual Report.

Our objective is to become a significant leader in the rapidly growing, global e-cigarette and e-liquid segments of the broader nicotine related products industry.

Through Charlie’s, we formulate, market and distribute premium, nicotine-based vapor products.

Charlie’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 more than 80 countries worldwide.

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

In June 2019, we launched distribution, through Don Polly, of certain premium vapor, tincture and topical wellness products containing hemp-derived cannabidiol (“

CBD ”) and we currently intend to develop and launch additional products containing other compounds derived from hemp in the future.

Operational Plan

Considering industry-specific hurdles, as well as the potential for future regulatory changes, management has targeted opportunities for growth and has adopted the following operational plan.

First, we plan to increase the sales of our hemp-derived products, including topicals, ingestibles and disposable vapor devices.

We feel there is a significant upside in the hemp-derived products space, and we have begun to shift our focus in this business to the burgeoning market for products containing compounds synthetically derived from hemp, including Delta-8-Tetrahydrocannabinol ( "Delta-8-THC" ) and other synthetic tetrahydrocannabinol ( "Synthetic THC" ) compounds.

These product categories have grown rapidly, as they offer consumers a range of benefits across varying potencies and product formats.

We have also recently allocated additional financial resources to increase e-commerce sales of certain of our hemp-derived products.

Secondly, we continue to see a significant opportunity for sales growth in international markets for our e-liquid and other vapor products.

Presently, approximately 17% of our vapor product sales come from the international market and we are well positioned to increase sales in countries where we already have presence, and in additional overseas markets, as we have already built an international distribution platform.

We have recently hired an Account Executive who will be dedicated to driving our efforts in international expansion.

More specifically, the Company intends to launch proprietary new disposables, containing synthetically derived nicotine, that have been specially formulated for the European and Middle East markets.

In partnership with our international distributors, Charlie’s will sell award winning products in markets where more than 20% of the population currently consumes nicotine in some format.

Most importantly, we feel that tobacco and synthetically derived nicotine vapor products will continue to provide a significant growth opportunity domestically.

During the quarter ended March 31, 2021, we launched our synthetic nicotine (not derived from tobacco) Pacha Syn (formerly Pachamama Disposable) product line, which will provide access to additional sales channels and broaden our customer base.

These innovative product formats currently represent Charlie’s most important, fastest-growing product category.

We are continuing with our plan to obtain marketing authorization for certain of our nicotine vapor products through the completion of a Premarket Tobacco Application (“

PMTA ”), which we submitted in September 2020.

Obtaining a marketing order from the FDA would, we believe, help to remediate perceived health issues related to vaping, and further position the Company as a trusted, industry leader.

We feel that a significant number of our competitors will not have the necessary resources and/or expertise to complete the extensive and costly PMTA process and that, once authorized by the FDA, we will benefit significantly by emerging as one of a select group of companies able to continue operating in the flavored vapor products space.

Impact of COVID-19

The outbreak of a novel strain of COVID-19

Coronavirus ”) which was identified in Wuhan, China

around December 2019, has had a negative impact on the global

economy and the markets in which we operate.

Beginning in March

2020, the Company transitioned nearly all employees to a remote

working environment for their safety and to protect the integrity

of Company operations.

We have updated certain sales, accounting

and administrative processes, and corresponding information

technology platforms, in an effort to help facilitate the virtual

work environment in which we now operate.

During 2020, we engaged

in periodic, informal testing of our business operations, and we do

not believe that our financial position, work efficiency and

overall operational integrity have been materially affected.

However, we recognize that a certain degree of employee enthusiasm,

teamwork, creativity, and support is normally generated by being

present at a physical location, and we believe that prolonged

remote working may have a negative impact over time on our

business, and on employee productivity.

Our Denver, CO office and

Huntington Beach, CA warehouse locations have fully returned to on

premise status, while our corporate headquarters in Costa Mesa, CA

remains remote for most employees.

We will continue to monitor the

COVID-19 situation in all regions we operate and will maintain

strict adherence to local health guidelines and mandates.

have to take further actions that we determine are in the best

interests of our employees or as required by federal, state, or

local authorities.

ability to manufacture products is dependent on the availability of

certain raw materials and components that our contract

manufacturers purchase from Europe and China.

In February 2020, we

started to experience disruptions across several key areas of our

global supply chain.

Our domestic and international contract

manufacturers source many of our high-quality flavorings from

suppliers located in Italy, a region that was severely affected by

COVID-19-related restrictions throughout most of 2020.

stay-at-home orders in this region ultimately caused increased

manufacturing lead times and delayed customer order deliveries for

certain of our products, resulting in revenue

have been successful in mitigating some of the supply chain risks

though bulk purchases of certain flavorings and components and

adjusting the production allocation amongst our contract

manufacturers.

Shifting production to contract manufacturers in

regions with fewer restrictions and/or an enhanced ability to

procure larger supplies of raw materials has helped alleviate

disruptions in our supply chain.

resurgence of COVID-19 and associated shutdowns were to occur in

Europe or China, this would likely have an adverse effect on our

ability to manufacture and sell our products due to related

shortages of materials and components.

Depending on the severity of

any such future shutdowns, we could experience a materially

diminished ability to produce products and be exposed to

significantly longer lead times.

This would result in delayed or

reduced revenue from the affected products in production and

potentially higher operating costs.

The outbreak of a novel strain of coronavirus (“

COVID-19 ”, or, “

Coronavirus ”) has had, and continues to have, a negative impact on the global economy and the markets in which we operate.

Beginning in March 2020, the Company transitioned nearly all employees to a remote working environment for their safety and to protect the integrity of Company operations.

We have updated certain sales, accounting and administrative processes, and corresponding information technology platforms, in an effort to help facilitate the virtual work environment which still persists for some employees.

During the year ended December 31, 2021, we engaged in periodic, informal testing of our business operations, and we do not believe that our financial position, work efficiency and overall operational integrity have been materially affected.

However, we recognize that a certain degree of employee enthusiasm, teamwork, creativity, and support is normally generated by being present at a physical location, and we believe that prolonged remote working may have a negative impact over time on our business, and on employee productivity.

Our Denver, CO office and Huntington Beach, CA warehouse locations have returned fully to on “premise status”, while our corporate headquarters in Costa Mesa, CA remains remote for some employees.

We will continue to monitor the COVID-19 situation in all regions in which we operate and will maintain strict adherence to local health guidelines and mandates.

We may need to take further actions that we determine are in the best interests of our employees or are required by federal, state, or local authorities.

Our ability to manufacture products is dependent on the availability of certain raw materials and components that our contract manufacturers purchase from Europe and China.

In February 2020, we started to experience disruptions across several key areas of our global supply chain.

Our domestic and international contract manufacturers source many of our high-quality flavorings from suppliers located in Italy, a region that was severely affected by COVID-19-related restrictions throughout most of 2020.

Mandated stay-at-home orders in this region ultimately caused increased manufacturing lead times and delayed customer order deliveries for certain of our products, resulting in revenue declines.

We have been successful in mitigating some of the supply chain risks through bulk purchases of certain flavorings and components and adjusting the production allocation amongst our contract manufacturers.

Shifting production to contract manufacturers in regions with fewer restrictions and/or an enhanced ability to procure larger supplies of raw materials has helped alleviate disruptions in our supply chain.

Certain of our products are sourced from China and require delivery to our warehouse locations in the United States prior to shipment to customers.

Although we currently use air freight for Chinese shipments, ongoing disruptions in the global supply chain could continue to affect the costs associated with such shipments and could put additional pressure on our sales and margins.

If a resurgence of COVID-19 and associated shutdowns were to occur in Europe or China, this would likely have an adverse effect on our ability to manufacture and sell our products due to related shortages of materials and components.

Depending on the severity of any such future shutdowns, we could experience a materially diminished ability to produce products and be exposed to significantly longer lead times.

This would result in delayed or reduced revenue from the affected products in production and potentially higher operating costs.

Sales and Marketing

sales and marketing efforts have also been affected by COVID-19.

Most of our sales through Charlie’s and Don Polly are to

resellers of our products, typically distributors or brick and

mortar retail locations.

Our sales and marketing efforts have also been directly and indirectly affected by COVID-19.

Most of our sales through Charlie’s and Don Polly are to resellers of our products, typically distributors or brick and mortar retail locations.

Stay-at-home mandates across the U.S.

internationally created a significant challenge for these customers

to maintain continuity in their businesses, and therefore we

experienced lower sales volumes as a result.

However, customers for

our vapor products have proven to be more resilient during these

challenging times and have been able to maintain more consistent

The Company did experience increased order volume for

CBD wellness products through its ecommerce platform because of

consumers seeking alternative means to purchase our

Historically, most

of our business-to-business sales and marketing efforts have been

generated through industry events in both the vapor products and

hemp-derived products spaces.

Beginning in 2019, we also initiated

a program of in-store marketing events to help facilitate

relationship building and sell-through for our retail partners.

With the suspension of all trade shows and most business travel,

our new customer pipeline has been negatively impacted, which has

negatively affected and may continue to negatively affect our sales

in the coming quarters.

In response, we have shifted our focus to

digital marketing campaigns aimed at customer engagement and

We also continue to allocate additional resources

towards certain key distributors and retail partners that are

better positioned to interact directly with our consumers and

continue growing our brands.

and internationally created a challenge for these customers to maintain continuity in their businesses, and therefore we experienced lower sales volumes in some regions.

Periodic labor shortages, indirectly related to COVID-19, have also influenced our customers’

ability to operate their businesses effectively.

We’ve since seen activity approach pre-pandemic levels, however a resurgence of COVID-19, causing subsequent shutdowns and labor shortages, could have a significant effect on our business.

Historically, most of our business-to-business sales and marketing efforts have been generated through industry events in both the vapor products and hemp-derived products spaces.

During 2019, we also initiated a program of in-store marketing events to help facilitate relationship building and sell-through for our retail partners.

Beginning in 2020, the suspension of certain trade shows and disruption of business travel weakened our new customer pipeline, which negatively affected our sales during the years ended December 31, 2021 and 2020.

Though trade show activity has since rebounded, it remains uncertain how the effects of COVID-19 will persist and what effect they will have on our sales and marketing efforts.

In response, we have shifted some of our focus to digital marketing campaigns aimed at customer engagement and education.

We also continue to allocate additional resources towards certain key distributors and retail partners that are better positioned to interact directly with our consumers and to continue growing our brands.

Risks and Uncertainties

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

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.

Beginning in September 2019, certain states

temporarily banned the sale of flavored e-cigarettes, and on

January 2, 2020, the FDA issued an enforcement policy effectively

banning the sale of flavored cartridge-based e-cigarettes marketed

primarily by large manufacturers without prior authorization from

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 flavored e-cigarette liquid and

products used for the vaporization of nicotine 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 nicotine-based e-liquid products.

applications were submitted in September 2020 on a timely basis,

which if approved, will allow the Company to continue to sell its

products in the United States.

The Company is also seeking

additional financing to support potential future PMTA related

expenses and general working capital.

There is no assurance that

regulatory approval to sell our products will be granted or that we

can raise the additional financing required, and if not, this could

have a significant impact on our sales.

March 11, 2020, the World Health Organization designated the

ongoing and evolving COVID-19 outbreak as a pandemic.

has caused substantial disruption in international and U.S.

economies and markets as it continues to spread.

The outbreak is

having a temporary adverse impact on our industry as well as our

business, with regards to certain supply chain disruptions and

sales volume.

While the disruption from COVID-19 is currently

expected to be temporary, there is uncertainty around the

duration. 

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.

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.

Beginning in September 2019, certain states temporarily banned the sale of flavored e-cigarettes, and on January 2, 2020, the FDA issued an enforcement policy effectively banning the sale of flavored cartridge-based e-cigarettes marketed primarily by large manufacturers without prior authorization from the FDA.

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 flavored e-cigarette liquid and products used for the vaporization of nicotine 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 nicotine based vapor products.

Our PMTA applications were submitted in September 2020 on a timely basis, which if approved, will allow the Company to continue to sell certain of its products in the United States.

At this date, Charlie’s PMTA remains among the select minority of applications submitted to the FDA that has not received an MDO or Refuse-to-File designation.

However, it is possible that the FDA will request additional information or that the Company will need to amend its PMTA at some point in the future.

The Company may also require additional financing in the future to support potential PMTA related expenses and general working capital.

There is no assurance that regulatory approval to sell our products will be granted or that we can raise the additional financing required, and if not, this could have a significant impact on our sales.

On March 11, 2020, the World Health Organization designated the ongoing and evolving COVID-19 outbreak as a pandemic.

The outbreak has caused substantial disruption in international and U.S.

economies and markets as it continues to evolve.

The outbreak is having a temporary adverse impact on our industry as well as our business, with regards to certain supply chain disruptions and sales volume.

While the disruption from COVID-19 is currently expected to be temporary, there is uncertainty around the duration.

Recent Developments

Share Exchange

On April 26, 2019 (the “

Date ”), we entered into a

Securities Exchange Agreement with each of the former members

Members ”) of Charlie’s, and certain direct

investors in the Company (“

Investors ”), pursuant to

which we acquired all outstanding membership interests of

Charlie’s beneficially owned by the Members in exchange for

the issuance by the Company of units, with such units consisting of

an aggregate of (i) 15,655,538,349 shares of common stock on an

as-converted basis (which includes the issuance of an aggregate of

1,396,305 shares of a newly created class of Series B Convertible

Preferred Stock, par value $0.001 per share

Preferred ”), convertible

into an aggregate of 13,963,047,716 shares of common stock, issued

to certain individuals in lieu of common stock);

shares of a newly created class of Series A Convertible Preferred

Stock, par value $0.001 per share (“

Preferred ”), convertible

into an aggregate of 4,654,349,239 shares of common stock;

(iii) warrants to purchase an aggregate of 3,102,899,493 shares of

common stock (the “

Warrants ”) (the

Exchange ”).

As a result of the Share Exchange,

Charlie’s became a wholly owned subsidiary of the

Immediately prior to, and in connection with, the

Share Exchange, Charlie’s consummated a private offering of

membership interests that resulted in gross proceeds to

Charlie’s of approximately $27.5 million (the

Charlie’s

Financing ”).

Securities LLC (“

Katalyst ”) acted as the sole placement agent in

connection with the Charlie’s Financing pursuant to an

Engagement Letter entered into by and between Katalyst,

Charlie’s and the Company on February 15, 2019, which was

amended on April 16, 2019 (“

Amended Engagement

Letter ”).

consideration for its services in connection with the

Charlie’s Financing and Share Exchange, the Company issued to

Katalyst and its designees five-year warrants to purchase an

aggregate of 930,869,848 shares of common stock at a price of

$0.0044313 per share (the “

Placement Agent

Warrants ”).

The Placement

Agent Warrants have substantially the same terms as those set forth

in the Investor Warrants.

As additional consideration for advisory services

provided in connection with the Charlie’s Financing and the

Share Exchange, the Company issued an aggregate of 902.7 million

shares of Common Stock (the “

Shares ”), including to a

member of the Company’s Board of Directors, pursuant to a

subscription agreement.

The fair value of a share of common stock

was $0.0032 which is based upon a valuation prepared by the Company

on the date of the Share Exchange.

The Share Exchange resulted in a change of control of the Company,

with the Members and Direct Investors owning approximately 86.1% of

the Company’s outstanding voting securities immediately after

the Share Exchange, and the Company’s current stockholders

beneficially owning approximately 13.9% of the issued and

outstanding voting securities, which includes the Advisory Shares.

Following the Share Exchange, Ryan Stump and Brandon Stump, the

founders of Charlie’s and the Company’s Chief Executive

Officer and Chief Operating Officer, respectively, held in excess

of 50% of the Company’s issued and outstanding voting

the consummation of the Share Exchange, the business operations of

the Company consist of those of Charlie’s, which is

principally engaged in formulating, marketing and distributing

branded e-cigarette liquid and other products for use in

nicotine-only e-cigarette and vaping systems.

Launch of CBD Products

June 2019, we introduced, through Don Polly, full-spectrum hemp

extract and CBD isolate wellness products across a variety of

formats and with different strengths.

Our initial launch consisted

of six vapor, eight tincture and two topical product variations.

The newly released products were launched under the

Pachamama™

brand by way of a licensing agreement between Don

Polly and Charlie’s, entered on April 25, 2019.

term, we expect to expand the hemp-derived CBD-based products line

to include additional CBD isolate products and THC-free, broad

spectrum hemp extract products currently in

Pachamama™

CBD products are currently available in the U.S., Mexico, U.K.,

Switzerland and Australia, and we expect to continue expanding both

our domestic and international distribution efforts.

Filing of Amended and Restated Charter;

Automatic Conversion of

Series B Preferred

On June 28, 2019, we amended and restated our

Articles of Incorporation (the “

Amended and Restated

Charter ”) to (i) change

our corporate name to Charlie’s Holdings, Inc.

increase the number of shares authorized as common stock from 7.0

billion to 50.0 billion shares.

The Amended and Restated Charter

was approved by our Board of Directors and holders of a majority of

our outstanding voting securities on May 8, 2019, and the Amended

and Restated Charter was filed with the State of Nevada on June 28,

a result of the filing of the Amended and Restated Charter and the

increase of our authorized common stock to 50.0 billion shares,

all 1,396,305 outstanding shares of Series B Preferred

automatically converted into a total of 13,963,047,716 shares of

common stock in accordance with the Certificate of

Designations, Preferences and Rights of the Series B Convertible

Preferred Stock.

Default on Payment of Dividend

Company was required to pay a one-time dividend equal to eight

percent (8%) of the stated value of its Series A Preferred, equal

to $1,650,000 (“

Amount ”), which Dividend Amount was required to be

paid in cash on or before April 25, 2020.

The Company failed to pay

the required dividend and has requested that holders of more than

50% of the Series A Preferred issued and outstanding

Holders ”) consent to an amendment to the Series A

Preferred to allow the Company to pay such Dividend Amount in

shares of the Company’s Common Stock.

To date, the Company

has not obtained such consent from the Required Holders.

event the Company is unable to obtain consents from the Required

Holders to pay the Dividend Amount in shares of Common Stock in

lieu of cash, or does not otherwise pay such Dividend Amount in

cash or obtain a waiver, any claims asserted by the holders of the

Series A Preferred could have a material adverse effect on the

Company’s financial condition.

August 13, 2020, the Company received a formal notice of default

from a holder of its Series A Preferred requesting full payment of

dividends due and payable with respect to the Series A Preferred

held by such holder on or before August 23, 2020

Default ”).

As disclosed, the aggregate amount of

dividends due and payable to holders of the Series A Preferred is

Resignation of Brandon Stump

On October 29, 2021, Brandon Stump resigned from his position as:

(i) Chief Executive Officer and Chairman of the Board of Directors;

and (ii) all positions held for each direct and indirect subsidiary of the Company (each, a " Subsidiary "), including as a member of the Board of Directors of the Company and each Subsidiary.

In connection with Mr.

Stump's resignation, the Company and Mr.

Stump entered into an agreement regarding Mr.

Stump's resignation (the " Termination Agreement "), which Termination Agreement is dated October 29, 2021.

Pursuant to the Termination Agreement, in consideration for Mr.

Stump agreeing to terminate his employment agreement with the Company, as amended and restated on February 12, 2020 (the " Employment Agreement "), and agreeing to certain restrictions and covenants, the Company will:

(i) continue to pay Mr.

Stump his base salary (as defined in the Employment Agreement), through April 22, 2022;

Stump certain bonus compensation owed to Mr.

Stump in an amount equal to $300,000, payable in installments of $75,000 on each of November 1, 2021, December 1, 2021, January 1, 2022, and February 1, 2022;

and (iii) continue to make available to Mr.

Stump certain employee benefits offered by the Company until April 22, 2022.

Reverse Stock Split

Our Board of Directors approved a reverse stock split of our authorized, issued, and outstanding shares of common stock, par value $0.001 per share (the “

Common Stock ”), at a ratio of 1-for-100 (the “

Reverse Split ”).

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

Effective Date ”).

All share and per share amounts in this Report have been retroactively adjusted to account for the reverse stock split.

March 2021 Private Placement

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

Brandon Stump, the Company's former Chief Executive Officer and significant shareholder of the Company, and Mr.

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

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

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

Red Beard Holdings, LLC Note Payable

On April 1, 2020, the Company, Charlie's and its VIE, Don Polly, issued a secured promissory note (the "Red Beard Note" ) to one of the Company's largest stockholders, Red Beard Holdings, LLC ( "Red Beard" ) in the principal amount of $750,000 (the "Principal Amount" ), requiring a guaranteed minimum interest amount of $75,000 (“

Minimum Interest ”).

The Red Beard Note is secured by all assets of the Company pursuant to the terms of a Security Agreement entered into by and between the Company and Red Beard (the "Red Beard Note Financing" ).

The Red Beard Note was subsequently amended on August 27, 2020, September 30, 2020, October 29, 2020, December 1, 2020, and January 19, 2021, ultimately increasing Principal Amount to $1.4 million and Minimum Interest to $150,000.

On March 24, 2021, the Company and Red Beard entered into a Satisfaction and Release (the " Red Beard Release "), pursuant to which the Company made a payment to Red Beard in the amount of $1.55 million in exchange for an acknowledgment of satisfaction and full release of the Company by Red Beard from liability and obligations arising under the Red Beard Note.

Small Business Administration Loan Programs

On April 30, 2020,

Charlie's, a wholly owned subsidiary of the Company, received

approval to enter into a U.S.

On April 30, 2020, Charlie's, a wholly owned subsidiary of the Company, received approval to enter into a U.S.

Small Business Administration (" SBA ") Promissory Note (the " Charlie's PPP Loan ") with TBK Bank, SSB (the " SBA Lender "), pursuant to the Paycheck Protection Program (" PPP ") of the Coronavirus Aid, Relief, and Economic Security Act (the " CARES Act ") as administered by the SBA (the " PPP Loan Agreement ").

The Charlie's PPP Loan provided for working capital to CCD in the amount of $650,761.

The Charlie's PPP Loan was set to mature on April 30, 2022 and accrued interest at a rate of 1.00% per annum.

Payments of principal and interest were deferred for six months from the date of the Charlie's PPP Loan, or until November 30, 2020.

Interest, however, continued to accrue during that time.

On April 14, 2020, Don Polly also obtained a loan pursuant to the PPP enacted under the CARES Act (the " Polly PPP Loan " and together with the Charlie's PPP Loan, the " PPP Loans ") from Community Banks of Colorado, a division of NBH Bank (the " Polly Lender ").

The Polly PPP Loan obtained by Don Polly provided for working capital to Don Polly in the amount of $215,600.

The Polly PPP Loan was set to mature on April 14, 2022 and accrued interest at a rate of 1.00% per annum.

Payments of principal and interest were deferred for six months from the date of the Polly PPP Loan, or until November 14, 2020.

Interest continued to accrue during that time.

The aforementioned PPP Loans were made under the PPP enacted by Congress under the CARES Act.

The CARES Act (including the guidance issued by SBA and U.S.

Department of the Treasury) provides that all or a portion of the PPP Loans may be forgiven upon request from the respective borrower to the SBA Lender or the Polly Lender, as the case may be, subject to requirements in the PPP Loans and under the CARES Act.

On February 19, 2021, Don Polly received notice from the Polly Lender, that the Polly PPP Loan was fully repaid, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the U.S.

Small Business Administration.

Promissory Note (the " Charlie's

PPP Loan ") with TBK Bank, SSB

Lender "), pursuant to the

Paycheck Protection Program (" PPP ")

of the Coronavirus Aid, Relief, and Economic Security Act (the

Act ") as administered by

the SBA (the " PPP

Loan Agreement ").

The Charlie's PPP Loan provides for working capital to CCD in the

amount of $650,761.

The Charlie's PPP Loan will mature on April 30,

2022 and will accrue interest at a rate of 1.00% per annum.

Payments of principal and interest will be deferred for six months

from the date of the Charlie's PPP Loan, or until November 30,

Interest, however, will continue to accrue during this

On April 14, 2020, Don

Polly also obtained a loan pursuant to the PPP enacted under the

CARES Act (the " Polly

PPP Loan " and together with the

Charlie's PPP Loan, the " PPP

Loans ")) from Community

Banks of Colorado, a division of NBH Bank (the " Polly

The Polly PPP Loan

obtained by Don Polly provides for working capital to Don Polly in

the amount of $215,600.

The Polly PPP Loan will mature on April 14,

2022 and will accrue interest at a rate of 1.00% per annum.

Payments of principal and interest will be deferred for six months

from the date of the Polly PPP Loan, or until November 14, 2020.

Interest, however, will continue to accrue during this

The aforementioned PPP Loans were made under the PPP enacted by

Congress under the CARES Act.

The CARES Act (including the guidance

issued by SBA and U.S.

Department of the Treasury) provides that

all or a portion of the PPP Loans may be forgiven upon request from

the respective borrower to the SBA Lender or the Polly Lender, as

the case may be, subject to requirements in the PPP Loans and under

the CARES Act.

February 19, 2021 Don Polly received notice from the Polly Lender,

that its PPP Loan was fully repaid, and its promissory note was

cancelled as a result of the loan forgiveness process set forth by

There is no further action required on the part of Don Polly to satisfy this liability.

On March 17, 2021, Don Polly obtained a second draw PPP loan (“

Polly PPP Loan 2 ”) under the CARES Act from Polly Lender.

The Polly PPP Loan 2 obtained by Don Polly provided general working capital in the amount of $184,200.

The Polly PPP Loan 2 was set to mature on March 17, 2026 and accrued interest at a rate of 1.00% per annum.

Payments of principal and interest were deferred, however interest continued to accrue during that time.

On April 28, 2021, Charlie’s received notice from SBA Lender that the Charlie’s PPP Loan was fully repaid, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the U.S.

Small Business Administration.

There is no further action

required on the part of Don Polly to satisfy this

On June 24, 2020, SBA

authorized (under Section 7(b) of the Small Business Act, as

amended) an Economic Injury Disaster Loan

Loan ”) to Don Polly

in the amount of $150,000.

Installment payments, including

principal and interest of $731 monthly will begin twelve months

from date of the EID Loan.

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

PMTA Submission

the quarter ended September 30, 2020, the United States Food and

Drug Administration's (" FDA ") Center for Tobacco Products

informed us that our PMTA has received a valid submission tracking

number, passed the FDA’s filing review phase, and recently

entered the substantive review phase.

To date, Charlie’s has

invested over $4.4 million for our initial PMTA submission.

engaged a team of more than 200 professionals, including doctors,

scientists, biostatisticians, data analysts, and numerous contract

research organizations to create our comprehensive PMTA submission.

This news highlights our progress toward achieving full regulatory

compliance and our goal of providing customers with a trusted

product portfolio.

We are confident that during the substantive

review phase of the PMTA process, the FDA will recognize that our

submission is both distinguished and suitable for

Red Beard Holdings, LLC Note Payable

April 1, 2020, the Company, Charlie's and its VIE, Don Polly,

issued a secured promissory note (the " Red Beard Note ") to one of the

Company's largest stockholders, Red Beard Holdings, LLC

(" Red Beard ") in the

principal amount of $750,000 (the " Principal Amount "), which Note is

secured by all assets of the Company pursuant to the terms of a

Security Agreement entered into by and between the Company and Red

Beard (the " Red Beard Note

Financing ").

Beard Note required the payment of the Principal Amount and

guaranteed minimum interest in the amount of $75,000 on or before

the earlier date of (i) a Liquidity Event, as defined under the

terms of the Red Beard Note;

or (ii) October 1, 2020.

In addition, if there

was an occurrence of an event of default, then, in addition to the

guaranteed minimum interest, the Principal Amount and unpaid

interest and unpaid other amounts under the Red Beard Note shall,

at the election of the Red Beard in its sole and absolute

discretion, bear interest at the lesser of a rate equal to 20% per

annum or the maximum default rate.

Such interest would accrue daily

commencing on occurrence of such event of default until payment in

full of the Principal Amount, together with all accrued and unpaid

interest and other amounts which may become due hereunder, has been

August 27, 2020, the Company’s Board of Directors, entered

into Amendment No.

1 to Secured Promissory Note and Security

Agreement (“

Beard Note ”), by and between the Company and Red

Pursuant to the Amended Red Beard Note, the terms of the Red

Beard Note held by Red Beard were amended as follows (i) the

Principal Amount under the Red Beard Note was increased from

$750,000 to $1,400,000 and (ii) the guaranteed minimum interest due

upon maturity of the Red Beard Note was increased from $75,000 to

All other terms of the respective Red Beard Note remain

in full force and effect.

September 30, 2020, the Company’s Board of Directors entered

into Amendment No.

2 to Secured Promissory Note and Security

Agreement ( “Second Amended

Red Beard Note”

), by and between the Company and Red

The Red Beard Note, as amended by Amendment 1, was further

amended by the Second Amended Red Beard Note to amend the

definition of the “Maturity Date”

in the Red Beard Note

to mean November 1, 2020.

October 29, 2020, the Company entered into Amendment No.

(" Third Amended Red Beard

Note "), by and between the Company and Red Beard.

of the Second Amended Red Beard Note held by Red Beard have been

amended to revise the maturity date from November 1, 2020 to

December 1, 2020.

Furthermore, Red Beard has agreed to waive

certain rights upon the occurrence of an Event of Default, as

defined in the Amended Red Beard Note, which was triggered by the

Company’s receipt of that certain notice of default, dated

August 13, 2020, from certain holders of the Company’s Series

December 1, 2020, the Company entered into Amendment No.

Secured Promissory Note and Security Agreement (“

Fourth Amended Red Beard Note ”),

by and between the Company and Red Beard.

The Fourth Amended Red

Beard Note was retroactively effective as of December 1, 2020,

therefore avoiding an event of default.

The terms of the Third

Amended Red Beard Note have been amended to revise the maturity

date from December 1, 2020 to January 1, 2021, and the guaranteed

minimum interest has been increased from $100,000 to

January 19, 2021, the Company entered into Amendment No.

Secured Promissory Note and Security Agreement ( “Fifth Amended Red Beard

), by and between the Company and Red Beard.

Fifth Amended Note is retroactively effective as of January 1,

The terms of the Amended Note held by Red Beard have been

amended to revise the maturity date from January 1, 2021 to

February 15, 2021, and the guaranteed minimum interest has been

increased from $125,000 to $150,000.

Pursuant to the Fifth Amended

Red Beard Note, Red Beard agreed to waive its rights to declare a

default under the Red Beard Note due to the Dividend

March 24, 2021, the Company and Red Beard entered into a

Satisfaction and Release (the " Red

Beard Release "), pursuant to which the Company made a

payment to Red Beard in the amount of $1.55 million in exchange for

an acknowledgment of satisfaction and full release of the Company

by Red Beard from liability and obligations arising under the Red

There is no further action required on the part of Charlie’s to satisfy this liability.

On November 9, 2021, Don Polly received notice from the Polly Lender, that the Polly PPP Loan 2 was fully repaid, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the U.S.

Small Business Administration.

There is no further action required on the part of Don Polly to satisfy this liability.

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.

Installment payments, including principal and interest of $731 monthly will begin twelve months from date of the EID Loan.

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.

During the quarter ended September 30, 2020, the FDA's Center for Tobacco Products informed us that our PMTA has received a valid submission tracking number, passed the FDA’s filing review phase, and recently entered the substantive review phase.

To date, Charlie’s has invested over $4.4 million for our initial PMTA submission.

We engaged a team of more than 200 professionals, including doctors, scientists, biostatisticians, data analysts, and numerous contract research organizations to create our comprehensive PMTA submission.

During the quarter ended September 30, 2021, the FDA began issuing Marketing Denial Orders (“

MDO ”) for electronic nicotine delivery system (“

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

As of December 31, 2021, the Company had not received an MDO for any of its submissions.

This news highlights our progress toward achieving full regulatory compliance and our objective of providing customers with a trusted product portfolio.

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, 2020 and 2019 have been prepared pursuant to the rules and

regulations of the Securities and Exchange Commission (the

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, 2021 and 2020 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

Share Exchange is accounted for as a reverse recapitalization under

GAAP because the primary assets of the Company were nominal

following the close of the Share Exchange.

Charlie’s was

determined to be the accounting acquirer based upon the terms of

the Share Exchange and other factors including:

(i) Charlie’s

stockholders and other persons holding securities convertible,

exercisable or exchangeable directly or indirectly for

Charlie’s membership units now own approximately 32%, on a

fully diluted basis, of the Company’s outstanding securities

immediately following the effective time of the Share Exchange,

(ii) individuals associated with Charlie’s now hold a

majority of the seats on the Company’s Board of Directors and

(iii) Charlie’s management holds all key positions in the

management of the combined Company.

disclosures in this Annual Report with respect to the years ended

December 31, 2020 and 2019, including the consolidated financial

statements contained herein, are based on Charlie’s

historical financial statements and the Company’s financial

activity beginning April 26, 2019, as adjusted, to give effect to

Charlie’s reverse recapitalization of the Company and the

Charlie’s Financing.

In addition, from the period April 26,

2019 until December 2020, there were minimal costs and revenue

associated with the Bazi product line which are included in the

consolidated financial statements.

We do not intend to continue to

produce and sell the Bazi product line, and these costs and

expenses are nominal and will continue to be so in the future.

operating results of Don Polly for the year ended December 31, 2020

are also included.

financial information presented prior to April 26, 2019 is that of

Charlie’s only, while financial information presented after

April 26, 2019 includes Charlie’s, Don Polly, Bazi Drinks and

the Company, which includes the transactions associated with the

Share Exchange and Charlie’s Financing completed prior to the

Share Exchange, along with ongoing corporate costs.

Results of Operations for the Year Ended December 31, 2020 Compared

to the Year Ended December 31, 2019

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.

Results of Operations for the Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020

For the years ended

($ in thousands)

$ 16,692  

$ 22,740  

16,692  

22,740  

Operating costs and expenses:

of goods sold - product revenue

10,071  

and administrative

10,873  

15,017  

and marketing

and development

Product revenue, net

Total revenues

Operating costs and expenses:

23,462  

28,504  

from operations

Other income (expense):

in fair value of derivative liabilities

Cost of goods sold - product revenue

General and administrative

Sales and marketing

Research and development

Total operating costs and expenses

Income (loss) from operations

Other income (expense):

Revenue for the year ended December 31, 2020

decreased approximately $6,048,000, or 26.6%, to approximately

$16,692,000, as compared to approximately $22,740,000 for the year

ended December 31, 2019 due to a $5,604,000 decrease in our

nicotine-based product sales, and a $422,000 decrease in sales of

our CBD wellness products.

Sales discounts, key accounts

participating in volume-based rebate programs, and a relatively

larger provision for returns generally contributed to a decrease in

Specifically, the decrease in our nicotine-based

e-liquid flavor sales is directly related to the current regulatory

and health related news stories surrounding the vaping

The nicotine based

e-liquid sales decline began late in the quarter ended September

30, 2019 and we expect sales in future quarters to be affected

until the regulatory environment becomes clear.

surrounding the FDA’s application review timeline, following

the PMTA submission deadline, has continued to affect buying

patterns in the domestic vape market as customers reduce

inventories of non-PMTA submitted products.

In addition, in late

February 2020, sales of our vapor products and CBD wellness

products began to experience a decrease as the effects of the

global COVID-19 pandemic caused disruptions in the global economy,

including mandatory closures of and restrictions placed on retail

locations carrying our products.

Interest expense

Change in fair value of derivative liabilities

Gain on debt extinguishment

Total other income (loss)

Income (loss) before income taxes

Income tax expense

Net income (loss)

Revenue for the year ended December 31, 2021, increased approximately $4,804,000, or 28.8%, to approximately $21,496,000, as compared to approximately $16,692,000 for the year ended December 31, 2020, due to a $4,420,000 increase in our nicotine-based product sales, and a $384,000 increase in sales of our hemp-derived products.

The increase in our nicotine-based vapor product sales is directly related to the launch of our Pacha Syn (formerly Pachamama Disposable) product line, which currently represents Charlie’s most important, fastest-growing product category.

Pacha Syn Disposables became Charlie’s first-ever entrant into the rapidly expanding, disposable e-cigarette market and offer users a variety of premium flavors containing synthetic nicotine (not derived from tobacco) in a compact, discrete format.

Uncertainty surrounding the FDA’s application review timeline, following the PMTA submission deadline, affected buying patterns of tobacco-derived nicotine products in the domestic vape market as customers reduced inventories of non-PMTA submitted products.

In December 2020, the Prevent All Cigarette Tracking Act (“

PACT Act ”) was signed into law which requires that the United States Postal Service (" USPS ") promulgate regulations clarifying the applicability of the prohibition on delivery sales of cigarettes to ENDS products.

The resulting shipping and logistical challenges that ensued, affected industry-wide sales to consumers and smaller, single-location resellers.

During the quarter ended March 31, 2021, we began to streamline our existing hemp-derived wellness product offering and pursue the developing market for products containing synthetically-derived cannabinoids, including Delta-8-THC and other Synthetic THC compounds.

The addition of these new product categories, coupled with a narrowed focus in our existing portfolio, resulted in higher sales velocity and overall growth compared to the year ended December 31, 2020.

We view this market segment as having higher growth potential and better alignment with our existing sales channels, and therefore, we will continue to develop and launch additional products in this category.

Cost of Revenue

revenue, which consists of direct costs of materials, direct labor,

third party subcontractor services, and other overhead costs

decreased approximately $2,593,000, or 25.7%, to approximately

$7,478,000, or 44.8% of revenue, for the year ended December 31,

2020, as compared to approximately $10,071,000, or 44.3% of

revenue, for the year ended December 31, 2019.

This cost, as a percent of revenue, remained

relatively unchanged due to a favorable mix of higher margin sales

for both Charlie’s and Don Polly, but was marginally offset

by a higher provision for obsolescence.

Cost of revenue, which consists of direct costs of materials, direct labor, third party subcontractor services, and other overhead costs increased approximately $2,945,000 or 39.4%, to approximately $10,423,000, or 48.5% of revenue, for the year ended December 31, 2021, as compared to approximately $7,478,000, or 44.8% of revenue, for the year ended December 31, 2020.

This cost, as a percent of revenue, increased due to a higher sales mix consisting of our Pacha Syn Disposable product line, which carries a lower margin per unit relative to our other vapor products.

Cost of revenue was also negatively affected by a larger than normal provision for inventory obsolescence during the period related to certain of our hemp-derived wellness products, as well as higher per unit shipping costs due to implications of the Pact Act.

General and Administrative Expense

For the year ended

December 31, 2020, total general and administrative expense

decreased approximately $4,144,000 to approximately $10,873,000, or

65.1% of revenue, as compared to approximately $15,017,000, or

66.0% of revenue, for the year ended December 31, 2019.

decrease is comprised of reductions of approximately $3,906,000 of

non-cash stock-based compensation, employee bonuses and certain other transaction

related costs, as well as $946,000 of other general and

administrative expenses.

The reduction in transaction related costs

includes $2,437,000 of employee bonuses, $1,063,000 in non-cash,

stock-based compensation, and $406,000 of other costs, including

legal and consulting fees, most of which were linked to the Share

Exchange in April 2019.

Other fluctuations in general and

administrative costs netted out to a reduction of approximately

$946,000, largely consisting of a reduced provision for bad debt,

product testing fees and general travel expenses.

The decrease was

offset by an increase of approximately $708,000 in salary costs,

primarily due to a higher average headcount year over year, as well

as the addition of salaries for our CEO and COO who, prior to the

Share Exchange, did not receive annual salaries from

Charlie’s.

the year ended December 31, 2020, we routinely evaluated our

business forecast on a quarterly basis, and periodically made

necessary changes in order to align our cost structure with revenue

Mid-year headcount adjustments across several

departments and intermittent salary reductions for highly

compensated employees accounted for the majority of intentional

We believe with our current staff, business processes

and system infrastructure, we can achieve our operational plan in

the coming quarters as well as retain the ability to swiftly adjust

our cost structure to accommodate any further changes in Company

For the year ended December 31, 2021, total general and administrative expense decreased approximately $2,123,000 to approximately $8,750,000, or 40.7% of revenue, as compared to approximately $10,873,000, or 65.1% of revenue, for the year ended December 31, 2020.

This decrease is primarily comprised of reductions of approximately $2,519,000 of non-cash stock-based compensation as well as $418,000 of salary and benefits expenses.

The reduction in non-cash stock-based compensation is primarily due to the forfeiture of stock awards by Brandon Stump and Ryan Stump pursuant to the adoption of the Amended Employment Agreements entered February 12, 2020, as well as the conclusion of the vesting period for shares of Common Stock awarded to several employees in conjunction with the Share Exchange in April 2019.

The decrease in salary and benefits costs is the result of lower overall salary expenses, Paid-Time-Off benefits and employee bonuses.

This overall decrease in total general and administrative expense was offset by increases of $442,000 in professional fees as well as $372,000 of other general administrative expenses.

The increase in professional fees was largely the result of several internal projects largely focused on the creation of a solution “network”

necessary to effectively meet the requirements of both the Consolidated Appropriations Act of 2021 and the PACT Act as well as costs associated with certain corporate actions including our Reverse Split, completed June 16, 2021, and the private sale of 3,517,000 shares of our common stock to the Company’s founders Brandon Stump and Ryan Stump, completed March 23, 2021.

Other general administrative expenses including, merchant account fees and bad debt provision, increased due to an increase in sales activity during the period.

Sales and Marketing Expense

the year ended December 31, 2020, total sales and marketing expense

decreased approximately $581,000, or 25.1%, to approximately

$1,733,000 as compared to approximately $2,314,000 for the year

ended December 31, 2019, which was primarily due to lower

commissions paid for reduced sales, curtailed spending on key

marketing programs, and a decrease in trade show travel due to

uncertainty in the global economy resulting from effects of

For the year ended December 31, 2021, total sales and marketing expense increased to approximately $1,734,000 as compared to approximately $1,733,000 for the year ended December 31, 2020, which was primarily due to a shift in spending on product sales support materials and other marketing activities in favor of increased trade show attendance, as activity returned to pre-pandemic levels.

Research and Development Expense

the year ended December 31, 2020, total research and development

expense increased approximately $2,276,000, or 206.5%, to

approximately $3,378,000 as compared to approximately $1,102,000

for the year ended December 31, 2019, which was primarily due to

costs incurred with the PMTA registration process.

Loss from Operations

had a net loss from operations of approximately $6,770,000 for the

year ended December 31, 2020 as compared to net loss from

operations of approximately $5,764,000 for the year ended December

Net loss is determined by adjusting income from

operations by the following items:

in fair value of derivative liabilities.

For the year ended

December 31, 2020 and 2019, the (loss)/gain in fair value of

derivative liabilities was ($300,000) and $3,618,000, respectively.

The derivative liability is associated with the issuance of the

Investor Warrants and the Placement Agent Warrants in connection

with the Share Exchange.

The loss for the year ended December 31,

2020 reflects the effect of the increase in stock price as of

December 31, 2020 compared to December 31, 2019.

We had warrants to

purchase approximately 4,034 million shares of common stock

outstanding as of December 31, 2020.

For the year ended

December 31, 2020 and 2019, we recorded interest expense related to

notes payable of $134,000 and $0, respectively.

For the year ended

December 31, 2020 and 2019, we recorded other income related to

interest and sublease income of $17,000 and $0,

respectively.

the years ended December 31, 2020 and 2019, we had a net loss of

$7,187,000 and $2,146,000, respectively.

For the year ended December 31, 2021, total research and development expense decreased approximately $3,354,000, or 99.3%, to approximately $24,000 as compared to approximately $3,378,000 for the year ended December 31, 2020.

During the year ended December 31, 2021, we incurred significantly less expense related to our PMTA submission, which resulted in lower overall research and development costs.

Income (Loss) from Operations

We generated income from operations of approximately $565,000 for the year ended December 31, 2021, as compared to loss from operations of approximately $6,770,000 for the year ended December 31, 2020.

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

Change in fair value of derivative liabilities.

For the years ended December 31, 2021 and 2020, the gain (loss) in fair value of derivative liabilities was approximately $3,545,000 and ($300,000), respectively.

The derivative liability is associated with the issuance of the Investor Warrants and the Placement Agent Warrants (see Note 3) in connection with the Share Exchange.

The gain for the year ended December 31, 2021, reflects the effect of the decrease in stock price as of December 31, 2021 compared to December 31, 2020.

During the year ended December 31, 2021, we experienced a substantial variation in trading volume for our stock, which may persist in the future.

Due to the limited supply of shares currently freely trading, our stock price may experience volatility and therefore, considerable fluctuations in the value of our warrant derivative liability may occur in the future.

We had warrants to purchase approximately 40,424,000 shares of common stock outstanding as of December 31, 2021.

Interest Expense.

For the years ended December 31, 2021 and 2020, we recorded interest expense related to notes payable of $34,000 and $134,000, respectively.

Gain on debt extinguishment.

For the years ended December 31, 2021, and 2020 we recorded a gain on debt extinguishment of $1,060,000 and $0, respectively, related to forgiveness of Paycheck Protection Program loans extended to Charlie’s and Don Polly.

Other Income.

For the years ended December 31, 2021 and 2020, we recorded other income related to interest and sublease income of $14,000 and $17,000, respectively.

Income Tax Expense

The Company’s income tax expense was $342,000, or 6.6% of income before income taxes, for the year ended December 31, 2021.

The Company’s income tax expense was $0 for the year ended December 31, 2020.

Net Income (Loss)

For the years ended December 31, 2021, and 2020, we had a net income of $4,808,000 and net loss of $7,187,000, respectively.

Effects of Inflation

has not had a material impact on our business.

Inflation has not had a material impact on our business.

Liquidity and Capital Resources

of December 31, 2020, we had negative working capital of

approximately $6,020,000, which consisted of current assets of

approximately $4,723,000 and current liabilities of approximately

This compares to negative working capital of

approximately $1,566,000 at December 31, 2019.

liabilities, as presented in the condensed consolidated balance

sheet at December 31, 2020 included elsewhere in this Report

primarily include approximately $2,525,000 of accounts payable and

accrued expenses, approximately $268,000 of deferred revenue

associated with product shipped but not yet received by customers,

approximately $456,000 of lease liabilities, notes payable of

$1,400,000, dividends payable of $1,650,000 and $4,444,000 of

derivative liability associated with the Investor and Placement

Agent Warrants (the derivative liability of $4,444,000 is included

in determining the negative working capital of $6,020,000 but is

not expected to use any cash to ultimately satisfy the

cash and cash equivalents balance at December 31, 2020 was

approximately $1,422,000.

For the year ended December 31, 2020 we used cash

from operations of $3,273,000, as compared to $2,036,000 for the year ended December 31, 2019.

This increase in the cash used by operations is due primarily to a

net loss in 2020 of $7,187,000 compared to net loss of $2,146,000

in 2019 along with an increase in accounts

For the year ended December 31, 2020 we used cash

for investment activities of $169,000 as compared to

$571,000 for the year ended December

For the year ended December 31, 2020, the cash used for

investment activities was primarily for the ongoing development and

configuration of enterprise resource planning software.

year ended December 31, 2019, the cash used for investment

activities was primarily used for the purchase of fixed assets and

certain leasehold improvements for the buildout of our Don Polly

the year ended December 31, 2020 we generated cash from financing

activities of $2,416,000 as compared to generated cash from

financing activities of $4,751,000 for the year ended December 31,

In the 2020 period, we generated cash from financing

activities from the Red Beard Note, PPP Loans and EID Loan (as

defined in Note 8 of Item 1, Part 1 of this Report).

period, we generated cash from financing activities from the

Charlie’s Financing, which was offset by Member distributions

(as defined in Note 1 of Item 1, Part 1 of this Report) to the

former Members of Charlie’s.

The Charlie’s Member

distributions were all prior to or part of the Share Exchange and

no further distributions will be made as Charlie’s is now a

wholly-owned subsidiary of the Company.

Going Concern Uncertainty Regarding the Legal and Regulatory

Environment, Liquidity and Management’s plan of

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 is required to apply

for FDA approval to continue selling and marketing its products

used for the vaporization of nicotine in the United States.

is significant cost associated with the application process and

there can be no assurance the FDA will approve the application(s).

In addition, the recent outbreak of Coronavirus in March 2020 has

had a negative impact on the global economy and markets which could

impact the Company’s supply chain and/or sales.

ended December 31, 2020, the Company has incurred losses from

operations of $6,770,000 and a consolidated net loss of

approximately $7,187,000 and the Company has negative

stockholders’

As of December 31, 2021, we had working capital of approximately $2,460,000, which consisted of current assets of approximately $7,994,000 and current liabilities of approximately $5,534,000.

This compares to negative working capital of approximately $6,020,000 at December 31, 2020.

The current liabilities, as presented in the consolidated balance sheet at December 31, 2021 included elsewhere in this Report, primarily include approximately $4,068,000 of accounts payable and accrued expenses, approximately $238,000 of deferred revenue associated with product shipped but not yet received by customers, approximately $329,000 of lease liabilities, and $899,000 of derivative liability associated with the Investor and Placement Agent Warrants (the derivative liability of $899,000 is included in determining the working capital of $2,460,000 but is not expected to use any cash to ultimately satisfy the liability).

Our cash and cash equivalents balance at December 31, 2021 was approximately $866,000.

For the year ended December 31, 2021, we used cash from operations of $1,347,000, as compared to $3,273,000 for the year ended December 31, 2020.

This decrease in the cash used by operations is due primarily to increased net income and accounts payables, but was offset by an increase in inventory.

For the year ended December 31, 2021, we used cash for investment activities of $110,000 as compared to $169,000 for the year ended December 31, 2020.

For the year ended December 31, 2021, the cash used for investment activities was primarily for the ongoing development and configuration of enterprise resource planning software.

For the year ended December 31, 2020, the cash used for investment activities was primarily for the ongoing development and configuration of enterprise resource planning software.

For the year ended December 31, 2021, we generated cash from financing activities of $901,000 as compared to generated cash from financing activities of $2,416,000 for the year ended December 31, 2020.

In the 2021 period, we generated cash from financing activities from the Polly PPP Loan 2 and the Private Placement.

We paid cash dividends of $883,000 and notes payable of $1,400,000 during the year ended December 31, 2021.

In the 2020 period, we generated cash from financing activities from the Red Beard Note, PPP Loans and EID Loan (as defined in Note 8 of Item 1, Part 1 of this Report).

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

s plan of operation

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

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 apply for FDA approval to continue selling and marketing its products used for the vaporization of nicotine in the United States.

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

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

In addition, the recent outbreak of Coronavirus in March 2020 has had a negative impact on the global economy and markets which could impact the Company’s supply chain and/or sales.

For the year ended December 31, 2021, the Company generated income from operations of $565,000 and a consolidated net income of approximately $4,808,000 and the Company has stockholders’

equity of $3,131,000.

These factors raise

substantial doubt about the Company’s ability to continue as

a going concern.

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

plans and growth depend on our ability to increase revenues and

continue our business development efforts, including costs beyond

the approximately $4,400,000 already expensed to complete our PMTA

registration process.

We currently do not anticipate that our

current cash position will be sufficient to meet our working

capital requirements, to continue our sales and marketing efforts

and complete the PMTA registration process.

We are currently

seeking term debt or other sources of financing in order to ensure

that we have sufficient cash to operate for the next 12 months

(refer to Note 14 –

Subsequent Events).

If in the future our

plans or assumptions change or prove to be inaccurate, or there is

a significant change in the regulatory environment or the recent

outbreak of COVID-19 continues to impact the global economy, we

will need to raise additional funds through public or private debt

or equity offerings, financings, corporate collaborations, or other

There can be no assurance that such 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 our best interests.

During the year ended December 31, 2021, the Company’s working capital requirements changed significantly as inventory increased to $5.0 million, from $1.6 million as of December 31, 2020, and cash on hand decreased to approximately $0.9 million, from $1.4 million as of December 31, 2020.

Though the Company’s balance sheet and overall performance generally improved during 2021, the issuance of one or several Marketing Denial Orders (“

MDO ”) from the FDA would increase the potential for inventory obsolescence and uncollectable accounts receivables.

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

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.

Management's plans depend on its ability to increase revenues and continue its business development efforts, including the expenditure of approximately $4,400,000 to date, to complete the PMTA registration process.

On March 23, 2021, The Company closed a $3,000,000 capital raise through the private sale of 3,517,000 shares of its common stock to the Company’s founders Brandon Stump and Ryan Stump.

The Company used the proceeds to fund future growth, increase working capital, retire outstanding debt, and for other general corporate purposes.

However, the Company may require additional financing in the future should the FDA require additional testing for one, or several, of the Company’s PMTA submissions.

There can be no assurance that such 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.

Off-Balance Sheet Arrangements

Company has no off-balance sheet arrangements other than operating

lease commitments.

The Company has no off-balance sheet arrangements other than operating lease commitments.

Critical Accounting Policies

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

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

Actual results may differ from those

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.

accounting policies identified as critical are as

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.

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 (“

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

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.

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

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

Estimates are regularly updated and the impact of any

adjustments are recognized in the period the adjustments are

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.

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.  

receivable is recorded at the invoiced amount and does not bear

We determine the allowance for doubtful accounts 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.

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 allowance for doubtful accounts 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.

December 31, 2020, and 2019, the allowance for bad debt totaled

$355,000 and $639,000, respectively

primarily consist of finished goods and are stated at the lower of

cost (determined by the average cost method) or net realizable

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, 2020, and 2019, the reserve for excess and

obsolete inventories totaled $179,000 and $83,000,

respectively.

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, 2021, and 2020, the allowance for bad debt totaled $109,000 and $355,000, respectively.

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, 2021, and 2020, the reserve for excess and obsolete inventories totaled $156,000 and $179,000, 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 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.

We measure the fair value of

liability-classified awards using a Monte Carlo valuation model.

Compensation cost is recognized over the service period and is

remeasured at each reporting period through

               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

                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.

QU A NTITATIVE

AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.

We measure the fair value of liability-classified awards using a Monte Carlo valuation model.

Compensation cost is recognized over the service period and is remeasured at each reporting period through settlement.

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.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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

What changed 10-K

Item 5. Market for Registrant’s Common Equity