Charlie's Holdings, Inc. 10-Q

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   The following discussion of the financial condition and results of operations of Charlie ’ s Holdings, Inc. should be read in conjunction with the financial statements and the notes to those statements appearing elsewhere in this Quarterly Report on Form 10-Q (this “ Report ” ) and without audited financial statements and other information presented in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “ 2021 Annual Report ”) . Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Report, and in our other filings with the Securities and Exchange Commission ( “ SEC ” ), including particularly matters set forth under Part I, Item 1A (Risk Factors) of the 2021 Annual Report. Furthermore, such forward-looking statements speak only as of the date of this Report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.   As used in this Report, unless otherwise stated or the context otherwise requires, references to the “ Company ” , “ we ” , “ us ” , “ our ” , or similar references mean Charlie ’ s Holdings, Inc. (formerly True Drinks Holdings, Inc.), its subsidiaries and consolidated variable interest entity on a consolidated basis. References to “ Charlie ’ s ” and “ CCD ” refer to Charlie ’ s Chalk Dust, LLC, a California limited liability company and wholly-owned subsidiary of the Company, and “ Don Polly ” refers to Don Polly, LLC, a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, the Company ’ s former Chief Executive Officer and current Chief Operating Officer, respectively, and a consolidated variable interest ( “ VIE ” ) for which the Company is the primary beneficiary.   Overview   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 by the Company's 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 ”). In the future we intend to develop and launch additional products containing other compounds derived from hemp.   Operational Plan   Considering industry-specific hurdles, as well as the potential for future regulatory changes, management has targeted several 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 believe 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 that are 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.   Second, we continue to see a significant opportunity for sales growth in international markets for our e-liquid and other vapor products. Presently, approximately 15% of our vapor product sales come from international markets. We are well positioned to increase sales in countries where we already have a presence, and leveraging our existing distribution platform, we intend to exploit new overseas markets. 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 the Company’s award-winning products in target markets where more than 20% of the population consumes nicotine in some format.   Finally, we believe 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 Disposable product line (formerly Pachamama Disposables), which will provide access to additional sales channels and broaden our customer base. These innovative product formats currently represent Charlie’s fastest-growing product category. We are continuing with our plan to obtain marketing authorization for certain of our nicotine-based vapor products through the submission of our September 2020 Premarket Tobacco Applications (" PMTAs "). We’ve allocated further resources and new personnel to support our research and development initiatives in order to submit additional PMTAs, including our May 13, 2022 submissions pertaining to the Company’s synthetically derived nicotine Pacha Syn product line. Obtaining a marketing order from the United States Food and Drug Administration (“ FDA ”) would, we believe, advance the Company’s position as a trusted, industry leader committed to full regulatory compliance. We believe 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, Charlie’s will benefit significantly by emerging as one of a select group of companies able to continue operating in the nicotine vapor products space.   -17- Table of Contents     Recent Developments   April 2022 Note Financing   On April 6, 2022, the Company, Charlie's, and its VIE, Don Polly, issued a secured promissory note (the " Note ") to one of the Company's largest individual stockholders, Michael King (the " Lender ") in the principal amount of $1,000,000, which the Note is secured by certain assets of the Company pursuant to the terms of a Security Agreement entered into by and between the Company and the Lender (the " Note Financing ").   The Note requires the payment of principal and guaranteed interest in the amount of at least $90,000 on or before the earlier date of (i) a Liquidity Event, as defined under the terms of the Note; or (ii) September 28, 2022. The Company intends to use the proceeds from the Note Financing for general corporate purposes, and its working capital requirements, pending the availability of alternative debt financing.   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; (ii) pay Mr. 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. All share and per share amounts in this Report have been retroactively adjusted to account for the Reverse 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" ), and required a guaranteed minimum interest amount of $75,000 (“ Minimum Interest ”). The Red Beard Note was 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.     -18- Table of Contents     PMTA   During the quarter ended September 30, 2020, the FDA's Center for Tobacco Products informed us that our PMTA received a valid submission tracking number, passed the FDA’s filing review phase, and recently entered the substantive review phase. To date, the Company has invested more than $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, 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.   On March 15, 2022, a new rider to the Federal Food, Drug and Cosmetic Act was passed granting the FDA authority over synthetic nicotine.  These regulations make synthetic nicotine products subject to the same FDA rules as tobacco-derived nicotine products.  As such, the Company was required to file a PMTA for its existing synthetic nicotine products marketed under the Pacha Syn brands by May 14, 2022 or be subject to FDA enforcement.  The Company filed new PMTAs for its synthetic Pacha Syn products, on May 13, 2022, prior to the May 14, 2022, deadline.    As of March 31, 2022, Charlie’s 2020 PMTA remains among the select minority of applications submitted to the FDA that has not received an MDO or Refuse-to-File designation. This fact highlights our progress toward achieving full regulatory compliance and demonstrates the emphasis our Company places on providing customers with a trusted product portfolio.   Impact of COVID-19   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 quarter ended March 31, 2022, 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.   Risks and Uncertainties   The Company operates in an environment that is subject to rapid changes and developments in laws and regulations that could have a significant impact on the Company’s ability to sell its products. 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. Further, the Company filed new PMTAs, for its synthetic Pacha Syn products, on May 13, 2022. It is not a certainty that the Company will receive marketing orders for one or more of its products on any of its PMTAs.  Though the Company’s 2020 PMTA is currently in substantive review with the FDA and though we believe that each of our PMTA’s are of the highest quality, there is no guarantee that we will receive an “acceptance filing” from the FDA for our May 2022 submission. 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.   -19- Table of Contents     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.   Basis of Presentation   The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“ U.S. GAAP ”) have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented in this Report not misleading.   Amounts related to disclosure of December 31, 2021 balances within the interim condensed consolidated financial statements were derived from audited financial statements and notes thereto included in the 2021 Annual Report, filed with the SEC on April 12, 2022. The operating results of Don Polly are also included.   Current Operating Trends and Financial Highlights   Management currently considers the following events, trends and uncertainties to be important in understanding the Company’s results of operations and financial condition for the most recent calendar quarter and full year:   Regarding results from operations for the quarter ended March 31, 2022, we generated revenue of approximately $8,074,000, as compared to revenue of $4,361,000 for the three months ended March 31, 2021. This $3,713,000 increase in revenue was due primarily to a $2,807,000 increase in sales of our nicotine-based vapor products, as well as a $906,000 increase in sales of our hemp-derived products.   We generated net income for the three months ended March 31, 2022, of approximately $706,000, as compared to net loss of approximately $20,137,000 for the three months ended March 31, 2021. The net income for the three months ended March 31, 2022, includes a non-cash gain in fair value of derivative liabilities of $340,000.   A review of the three-month period ended March 31, 2022, follows:       For the three months ended                       March 31,     Change       2022     2021     Amount     Percentage   ($ in thousands)                                 Revenues:                                 Product revenue, net   $ 8,074     $ 4,361     $ 3,713       85.1 % Total revenues     8,074       4,361       3,713       85.1 % Operating costs and expenses:                                 Cost of goods sold - product revenue     4,434       1,943       2,491       128.2 % General and administrative     2,559       2,218       341       15.4 % Sales and marketing     703       420       283       67.4 % Research and development     11       9       2       22.2 % Total operating costs and expenses     7,707       4,590       3,117       67.9 % Income (loss) from operations     367       (229 )     596       -260.3 % Other income (expense):                                 Interest expense     (1 )     (28 )     27       -96.4 % Change in fair value of derivative liabilities     340       (20,102 )     20,442       -101.7 % Gain on debt extinguishment     -       217       (217 )     -100.0 % Other income     -       5       (5 )     -100.0 % Total other income (loss)     339       (19,908 )     20,247       -101.7 % Net income (loss)   $ 706     $ (20,137 )   $ 20,843       -103.5 %     -20- Table of Contents     Results of Operations for the Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021   Revenue   Revenue for the three months ended March 31, 2022, increased by approximately $3,713,000 or 85.1%, to approximately $8,074,000, as compared to approximately $4,361,000 for same period in 2021 due to a $2,807,000 increase in sales of our nicotine-based vapor products and a $906,000 increase in sales of our hemp-derived products. The increase in our nicotine-based vapor product sales was driven by our new 8ml Pacha Syn Disposable line, which launched in December 2021, as well as incremental market penetration of our existing Pacha Syn Disposable products. 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. However, regulatory challenges including the recently announced requirement for synthetic nicotine products to obtain approval from the FDA as well as continued uncertainty surrounding the FDA’s issuance of MDO’s and Refuse-to-File designations, tempered buying patterns in the domestic market as customers reduced inventories of related products. The increase in sales for our hemp-derived business was directly related to strong performance in our alternative cannabinoid category, which includes products containing synthetically derived cannabinoids, including Delta-8-THC and other synthetic THC compounds. We view this market segment as having higher growth potential, as well as better alignment with our existing sales channels in comparison to our CBD “wellness” products.   Cost of Revenue   Cost of revenue, which consists of direct costs of materials, direct labor, third party subcontractor services, and other overhead costs increased by approximately $2,491,000, or 128.2%, to approximately $4,434,000, or 54.9% of revenue, for the three months ended March 31, 2022, as compared to approximately $1,943,000, or 44.6% of revenue, for the same period in 2021. 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 products, as well as higher comparative freight and delivery expense and reserve for inventory obsolescence. Cost of revenue was partially offset by a favorable inventory quantity adjustment.   General and Administrative Expenses   For the three months ended March 31, 2022, total general and administrative expense increased by approximately $341,000 to $2,559,000 as compared to approximately $2,218,000 for the same period in 2021. Notably, this change was primarily comprised of increases of approximately $284,000 in payroll and benefits, $181,000 in professional fees as well as $217,000 in other general and administrative expenses. The increase in payroll and benefits expense was primarily due to taxes paid on behalf of employees and directors in relation to restricted stock awards issued on March 2, 2022 (see Note 11). The increase in professional fees during the quarter ended March 31, 2022, was directly related to higher audit and director fees. Other general and administrative expenses, including merchant processing fees and provision for bad debt, increased due to higher net sales relative to the quarter ended March 31, 2021. These increases were offset by a reduction in non-cash stock-based compensation of approximately $341,000. The reduction in non-cash, stock-based compensation was primarily due to the conclusion of the vesting period for shares of Common Stock previously awarded to certain employees as a result of the Share Exchange (See Note 3).   Sales and Marketing Expense   For the three months ended March 31, 2022, total sales and marketing expense increased by approximately $283,000, or 67.4%, to approximately $703,000 as compared to approximately $420,000 for the same period in 2021, which was primarily due to a return to normalized trade-show activity during the quarter. Sales commissions increased due to revenue growth across our businesses, however the increase was mitigated by further restructuring of our sales team and compensation program at the beginning of 2022.     -21- Table of Contents   Research and Development Expense   For the three months ended March 31, 2022, total research and development costs increased by approximately $2,000, or 22.2%, to approximately $11,000 as compared to approximately $9,000 for the same period in 2021, which was primarily due to costs associated with previous PMTA submissions.   Income from Operations   We had operating income of approximately $367,000 for the three months ended March 31, 2022, due primarily to an increase in sales across both Charlie’s and Don Polly. We also incurred certain non-cash, general and administrative expenses during the period including a $18,000 expense related to stock-based compensation. Net income is determined by adjusting income from operations by the following items:     ● Change in Fair Value of Derivative Liabilities. For the three months ended March 31, 2022, the gain in fair value of derivative liabilities was $340,000, compared to a loss of $ 20,102,000 for the three months ended March 31, 2021. The derivative liability is associated with the issuance of the Investor Warrants and the Placement Agent Warrants (as defined in Note 3 of this Report) in connection with the Share Exchange. The gain for the quarter ended March 31, 2022, reflects the effect of the decrease in stock price as of March 31, 2022, compared to December 31, 2021. Due to the limited supply of shares currently freely trading, our stock price may experience volatility and therefore, considerable fluctuations in the value of our warrant derivative liability in the future. We had 40,337,693 warrants outstanding as of March 31, 2022.     ● Interest Expense. For the three months ended March 31, 2022, and 2021, we recorded interest expense related to notes payable of $1,000 and $28,000, respectively.     ● Other Income. For the three months ended March 31, 2022, and 2021, we recorded other income of $0 and $222, respectively.   Net Income (Loss)   For the three months ended March 31, 2022, we had net income of $706,000 as compared to a net loss of $20,137,000 for the same period in 2021.   Liquidity and Capital Resources   As of March 31, 2022, we had working capital of approximately $3,224,000, which consisted of current assets of approximately $8,048,000 and current liabilities of approximately $4,824,000, as compared to working capital of approximately $2,460,000 at December 31, 2021. The current liabilities, as presented in the condensed consolidated balance sheet at March 31, 2022 included elsewhere in this Report primarily include approximately $3,684,000 of accounts payable and accrued expenses, approximately $316,000 of deferred revenue associated with product shipped but not yet received by customers, approximately $265,000 of lease liabilities, and $559,000 of derivative liability associated with the Investor Warrants and Placement Agent Warrants (the derivative liability of $559,000 is included in determining the working capital of $3,224,000 but is not expected to use any cash to ultimately satisfy the liability).   Our cash and cash equivalents balance at March 31, 2022 was approximately $409,000.   For the three months ended March 31, 2022, net cash used in operating activities was approximately $372,000, resulting from a net income of $706,000, offset by a $340,000 of change in fair value of derivative liabilities and $1,037,000 of changes in our operating assets and liabilities. For the three months ended March 31, 2021, net cash provided by operating activities was approximately $268,000, resulting from a net loss of $20,137,000, offset by $359,000 of share-based compensation, $20,102,000 of change in fair value of derivative liabilities and $10,000 of change in our operating assets and liabilities.   For the three months ended March 31, 2022, we used cash for investment activities of approximately $85,000 as compared to $19,000 for the same period in 2021. The cash used for investment activities is primarily for the on-going development and configuration of enterprise resource planning software during the three months ended March 31, 2022.   For the three months ended March 31, 2021 we generated approximately $1,784,000 cash from financing activities. In the 2021 period, we generated cash from financing activities from the Polly PPP Loan 2 (See Note 10) and the Private Placement.   -22- Table of Contents     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 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 Company’s supply chain and sales. For the three months ended March 31, 2022, the Company generated income from operations of approximately $0.4 million, and a consolidated net income of approximately $0.7 million, but used cash in operations of approximately $0.4 million. The Company had stockholders’ equity of $3.9 million at March 31, 2022. During the three months ended March 31, 2022, the Company’s working capital requirements continued to evolve as current assets, excluding cash, increased to $7.6 million from $7.1 million as of December 31, 2021, and cash on hand decreased to $0.4 million from $0.9 million as of December 31, 2021. Considering these facts, the issuance of one or several MDOs from the FDA would increase the potential for inventory obsolescence and uncollectable accounts receivables. 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.   Our plans and growth depend on our ability to increase revenues, raise additional capital, and continue our business development efforts, including the expenditure of approximately $4,400,000 to date, to complete our PMTA process for the Company’s 2020 submissions to the FDA. In 2022 the Company intends to allocate further resources and new personnel to support research and development initiatives in order to submit one or more additional PMTAs. The Company may require additional financing in the future to support subsequent PMTA filings, and/or in the event the FDA requests additional testing for one, or several, of the Company’s prior PMTA submissions. There can be no assurance that additional financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and, in the Company’s best interests. The financial statements do not include any adjustments to the carrying amount and classification of recorded assets and liabilities should the Company be unable to continue operations.   Off-Balance Sheet Arrangements   The Company has no off-balance sheet arrangements other than operating lease commitments.   Critical Accounting Policies   The condensed consolidated financial statements are prepared in conformity with U.S. GAAP, which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of expense in the periods presented. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, due to inherent uncertainties in making estimates, actual results could differ from the original estimates, requiring adjustments to these balances in future periods. The critical accounting estimates that affect the consolidated financial statements and the judgments and assumptions used are consistent with those described under Part II, Item 7 of our Annual Report on the 2021 Annual Report.   ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   Not applicable.     -23- Table of Contents   ITEM 4 – CONTROLS AND PROCEDURES   (a) Evaluation of disclosure controls and procedures   Our management, with the participation of our President and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”) as of the end of the period covered by this Report. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.   Based on our evaluation, our President, the principal executive officer, and Chief Financial Officer concluded that, as of March 31, 2022, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.   (b) Changes in internal control over financial reporting   There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15 of the Exchange Act that occurred during the quarter ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Although we have modified our workplace practices due to the COVID-19 pandemic, resulting in many of our employees working remotely since March 2020, this has not materially affected our internal controls over financial reporting. We continue to monitor and assess the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.   PART II – OTHER INFORMATION