What changed in this filing

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Item 1. Financial Statements

2022-08-12 compared with 2022-05-16 · 490 added, 110 removed, 515 unchanged (54% of the section changed)

33 unchanged sentences

1,800,000 shares authorized

Series A, 300,000 shares designated, 141,123 and 141,873 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively

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

Series A, 300,000 shares designated, 138,557 and 141,873 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively

Series B, 1,500,000 shares designated, 0 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively

Common stock ($ 0.001 par value);

500,000,000 shares authorized;

216,840,987 and 210,890,930 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively

217,726,053 and 210,890,930 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively

Additional paid-in capital

11 unchanged sentences

For the three months ended

For the six months ended

Product revenue, net

1 unchanged sentence

$ 5,433  

$ 15,471  

$ 9,794  

Total revenues

15,471  

Operating costs and expenses:

4 unchanged sentences

Total operating costs and expenses

Income (loss) from operations

15,666  

10,191  

Loss from operations

( 562 )  

( 168 )  

( 195 )  

Other income (expense):

Interest expense

( 91 )  

( 92 )  

Change in fair value of derivative liabilities

19,274  

Gain on debt extinguishment

Total other income (loss)

( 74 )  

19,932  

Net income (loss)

$ ( 636 )  

$ 19,764  

Net earnings (loss) per share

1 unchanged sentence

$ 0.10  

$ 0.00  

$ ( 0.00 )  

$ 0.00  

$ ( 0.00 )  

Weighted average number of common shares outstanding

3 unchanged sentences

198,606,970  

212,051,322  

278,405,524  

242,800,475  

198,606,970  

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

4 unchanged sentences

(in thousands)

For the Three Months Ended March 31, 2022

Preferred Stock

Total Stockholders ’

For the Three Months Ended June 30, 2022

Series A Convertible Preferred Stock

Total Stockholders'

Paid-in Capital

 Equity  

Balance at April 1, 2022

216,840  

$ 7,787  

$ ( 4,149 )  

$ 3,855  

Conversion of Series A convertible preferred stock

Stock compensation

( 636 )  

Balance at June 30, 2022

217,725  

$ 7,824  

$ ( 4,785 )  

$ 3,257  

For the Three Months Ended June 30, 2021

Series A Convertible Preferred Stock

Total Stockholders'

Paid-in Capital

Deficit  

Balance at April 1, 2021

199,296  

$ 6,917  

$ ( 29,800 )  

Conversion of Series A convertible preferred stock

Issuance of common stock for dividend payment

Stock compensation

Fraction shares adjustment due to reverse split

19,764  

Balance at June 30, 2021

203,165  

$ 7,758  

$ ( 10,036 )  

For the Six Months Ended June 30, 2022

Series A Convertible Preferred Stock

Total Stockholders'

Paid-in Capital

Equity  

6 unchanged sentences

Stock compensation

Balance at March 31, 2022

Balance at June 30, 2022

217,725  

2 unchanged sentences

$ 3,257  

For the Three Months Ended March 31, 2021

Preferred Stock

Total Stockholders ’

For the Six Months Ended June 30, 2021

Series A Convertible Preferred Stock

Total Stockholders'

Paid-in Capital

9 unchanged sentences

Stock compensation

Fraction shares adjustment due to reverse split

( 373 )  

Balance at March 31, 2021

Balance at June 30, 2021

203,165  

6 unchanged sentences

(in thousands)

For the three months ended

For the six months ended

Cash Flows from Operating Activities:

Net income (loss)

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

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

Allowance for doubtful accounts

Depreciation and amortization

Loss on disposal of fixed assets

Change in fair value of derivative liabilities

( 352 )  

20,102  

Amortization of operating lease right-of-use asset

2 unchanged sentences

Subtotal of non-cash charges

( 41 )  

20,395  

Changes in operating assets and liabilities:

1 unchanged sentence

( 587 )  

( 629 )  

Prepaid expenses and other current assets

( 141 )  

( 14 )  

Accounts payable and accrued expenses

1 unchanged sentence

Deferred revenue

( 35 )  

Lease liabilities

( 222 )  

Net cash (used in) provided by operating activities

Net cash used in operating activities

( 1,276 )  

8 unchanged sentences

Repayment of notes payable

Dividend payment

Net cash provided by financing activities

10 unchanged sentences

Issuance of common stock for dividend payment

Gain from debt extinguishment

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

34 unchanged sentences

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

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.

In addition, the outbreak of a COVID- 19 (“

Coronavirus ”) has had a negative impact on the Company’s supply chain and sales.

For the six months ended June 30, 2022, the Company generated a loss from operations of approximately $ 195,000 , and a consolidated net income of approximately $ 70,000 , but used cash in operations of approximately $ 1.3 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.

equity of $ 3.3 million at June 30, 2022.

During the three months ended June 30, 2022, the Company’s working capital requirements continued to evolve as current assets increased to $ 8.8 million from $ 8.0 million as of March 31, 2022 and currently liabilities increased to $ 6.0 million from $ 4.8 million as of March 31, 2022.

Considering these facts, the issuance of one or several Marketing Denial Orders (“

3 unchanged sentences

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.

On March 15, 2022, a new rider to the Federal Food, Drug and Cosmetic Act was passed granting the FDA authority over synthetic nicotine. 

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

As such, the Company filed new PMTAs, for its synthetic Pacha Syn products on May 13, 2022, prior to the May 14, 2022 deadline.

The Company intends to allocate further resources and new personnel to support research and development initiatives in order to support existing, or subsequent 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.

5 unchanged sentences

Federal, state, and local governmental bodies across the United States have indicated that flavored e-cigarette liquid, vaporization products and certain other consumption accessories may become subject to new laws and regulations at the federal, state, and local levels.

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

The application of any new laws or regulations that may be adopted in the future, at a federal, state, or local level, directly or indirectly implicating nicotine, flavored e-cigarette liquid and other electronic nicotine delivery system (“

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

11 unchanged sentences

The Company filed new PMTAs, for its synthetic Pacha Syn products on May 13, 2022, prior to the May 14, 2022 deadline.

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

The outbreak has caused and continues to cause periodic disruption in international and U.S.

economies and markets.

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 impact from COVID- 19 has affected our supply chain, and if disruptions from the COVID- 19 outbreak are prolonged, it will continue to have an adverse impact on our business.

In addition, the impact from COVID- 19 has affected our supply chain, and if disruptions from the COVID- 19 outbreak persist and are prolonged, it will continue to have an adverse impact on our business.

NOTE 2 –

4 unchanged sentences

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“

GAAP ”) have been omitted pursuant to such Securities and Exchange Commission (“

SEC ”) rules and regulations;

GAAP ”) have been omitted pursuant to SEC rules and regulations;

nevertheless, the Company believes that the disclosures are adequate to make the information presented in this Report not misleading.

42 unchanged sentences

and ( 3 ) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange.

ASU 2021 - 04 will be adopted for all entities for fiscal years beginning after December 15, 2021.

ASU 2021 - 04 was adopted for all entities for fiscal years beginning after December 15, 2021.

An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments.

Early adoption is permitted, including adoption in an interim period.

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

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

In June 2022, the FASB issued ASU 

2022 - 03,  ASC Subtopic 820  “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”.

The FASB is issuing this Update ( 1 ) to clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, ( 2 ) to amend a related illustrative example, and ( 3 ) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820.

For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years.

Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance.

The Company is currently evaluating the impact of ASU 2022 - 03 on its condensed consolidated financial statements.

NOTE 3 –

10 unchanged sentences

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

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

Fair Value at March 31, 2022

Derivative liability - Warrants

Total liabilities

The following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy as of June 30, 2022, and December 31, 2021 ( amounts in thousands):

Fair Value at December 31, 2021

1 unchanged sentence

Total liabilities

There were no transfers between Level 1, 2 or 3 during the three -month period ended March 31, 2022.

The following table presents changes in Level 3 liabilities measured at fair value for the three -month period ended March 31, 2022.

There were no transfers between Level 1, 2 or 3 during the six -month period ended June 30, 2022.

The following table presents changes in Level 3 liabilities measured at fair value for the six -month period ended June 30, 2022.

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

3 unchanged sentences

Change in fair value

Balance at March 31, 2022

A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in the Monte Carlo simulation measuring the Company’s derivative liabilities that are categorized within Level 3 of the fair value hierarchy as of March 31, 2022, and December 31, 2021, is as follows:

Balance at June 30, 2022

A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in the Monte Carlo simulation measuring the Company’s derivative liabilities that are categorized within Level 3 of the fair value hierarchy as of June 30, 2022, and December 31, 2021, is as follows:

Exercise price

26 unchanged sentences

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment as of March 31, 2022, and December 31, 2021, are as follows (amounts in thousands):

Estimated Useful Life (in Years)

Property and equipment as of June 30, 2022, and December 31, 2021, are as follows (dollar amounts in thousands):

Estimated Useful Life (Years)

Machinery and equipment

6 unchanged sentences

( 673 )  

Depreciation and amortization expense totaled $ 67,000 and $ 50,000 , respectively, during the three months ended March 31, 2022 and 2021.

Depreciation and amortization expense totaled $ 122,000 and $ 52,000 respectively, during the three months ended June 30, 2022 and 2021.

Depreciation and amortization expense totaled $ 189,000 and $ 102,000 , respectively, during the six months ended June 30, 2022 and 2021.

NOTE 5 - CONCENTRATIONS

1 unchanged sentence

For the three months ended

During the three months ended March 31, 2022 and 2021, purchases from three vendors represented 76 % and 51 %, respectively, of total inventory purchases.

As of March 31, 2022, and December 31, 2021, amounts owed to these vendors totaled $ 780,000 and $ 1,494,000 , respectively, which are included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.

For the six months ended

During the three months ended June 30, 2022 and 2021, purchases from three vendors represented 92 % and 87 %, respectively, of total inventory purchases.

During the six months ended June 30, 2022 and 2021, purchases from three vendors represented 88 % and 82 %, respectively, of total inventory purchases.

As of June 30, 2022, and December 31, 2021, amounts owed to these vendors totaled $ 1,804,000 and $ 1,565,000 , respectively, which are included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.

Accounts Receivable

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

One customer made up more than 22 % of net accounts receivable at March 31, 2022.

One customer made up more than 9 % of net accounts receivable at June 30, 2022.

The same customer made up more than 27 % of net accounts receivable at December 31, 2021.

Customer A owed the Company a total of $ 356,000 representing 22 % of net receivables at March 31, 2022.

Customer A owed the Company a total of $ 169,000 , representing 9 % of net receivables, at June 30, 2022.

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

No customer exceeded 10% of total net sales for the three -month periods ended March 31, 2022 and 2021.

No customer exceeded 10% of total net sales for the six -month periods ended June 30, 2022 and 2021.

NOTE 6 –

2 unchanged sentences

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

We evaluate our ownership, contractual and other interests in entities that are not wholly-owned to determine if these entities are variable interest entities (“

VIEs ”), and, if so, whether we are the primary beneficiary of the VIE.

In determining whether we are the primary beneficiary of a VIE and therefore required to consolidate the VIE, we apply a qualitative approach that determines whether we have both ( 1 ) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and ( 2 ) the obligation to absorb losses of, or the rights to receive benefits from, the VIE that could potentially be significant to that VIE.

We continuously perform this assessment, as changes to existing relationships or future transactions may result in the consolidation or deconsolidation of a VIE.

Don Polly is classified as a variable interest entity (“

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

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

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

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

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

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

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

Effective April 25, 2019, we began consolidating the financial statements of Don Polly and it is still considered a VIE of the Company.

Don Polly operates under exclusive licensing and service contracts with the Company whereby the Company receives 75 % of net income from the licensing agreement and 25 % of net income from the service agreement;

therefore, as the Company receives 100 % of the net income or incurs 100% of the net loss of the VIE, no non-controlling interests are recorded.

Don Polly operates under exclusive licensing and service contracts with the Company whereby the Company receives 100 % of net income, or incurs 100% of the net loss of the VIE.

There are no non-controlling interests recorded.

NOTE 7 –

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses as of March 31, 2022, and December 31, 2021, are as follows (amounts in thousands):

Accounts payable and accrued expenses as of June 30, 2022, and December 31, 2021, are as follows (amounts in thousands):

Accounts payable

3 unchanged sentences

Accrued income taxes

342.00  

Other accrued expenses

15 unchanged sentences

Per the PPP Loan Agreement, 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.

Charlie’s was notified by SBA Lender that all payments, including principal and interest, on all PPP loans issued by the bank have been deferred indefinitely in order to allow borrowers adequate time to apply for forgiveness.

During the year ended December 31, 2021, Charlie’s received notice from SBA Lender that the Charlie’s PPP Loan was forgiven, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the SBA.

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

During the year ended December 31, 2021, the Company recorded a debt extinguishment gain of approximately $ 1,060,000 , including principal and accrued interest, which is reflected in the other income section of the Company’s consolidated statements of operations.

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 ").

3 unchanged sentences

Interest, however, 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 SBA.

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

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

5 unchanged sentences

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

During the year ended December 31, 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 SBA.

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

During the year ended December 31, 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 SBA.

During the year ended December 31, 2021, Don Polly received notice from the Polly Lender that the Polly PPP Loan 2 was forgiven, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the SBA.

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 (“

1 unchanged sentence

Installment payments, including principal and interest of $ 731 monthly, will begin thirty months from the 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.

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

April 2022 Note Financing

On April 6, 2022, Charlie's Holding's, Inc., its wholly-owned subsidiary, Charlie's Chalk Dust, LLC and its variable interest entity, Don Polly LLC (collectively, the " Company "), issued a secured promissory note (" Note ") to one of the Company's largest stockholders, Michael King (the " Lender ") in the principal amount of $ 1,000,000 , which 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 ").

On April 6, 2022, the Company issued a secured promissory note (" Note ") to one of its largest stockholders, Michael King (the " Lender ") in the principal amount of $ 1,000,000 , which 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;

1 unchanged sentence

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.

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

The following summarizes the Company’s notes payable maturities as of June 30, 2022 ( amounts in thousands):

Remaining months Ending December 31, 2022

$ 1,000  

Year Ending December 31, 2023

1 unchanged sentence

Year Ending December 31, 2025

$ 1,150  

NOTE 9 –

3 unchanged sentences

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

For the three  months ended March 31, 2022, and 2021, net income (loss) is adjusted for gain from change in fair value of warrant liabilities.

For the three  and six months ended June 30, 2022 and 2021, net income (loss) is adjusted for gain from change in fair value of warrant liabilities.

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

For the three months ended

For the six months ended

Net income (loss) - basic

$ ( 636 )  

$ 19,764  

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

( 19,274 )  

( 352 )  

Net income (loss) - diluted

$ ( 636 )  

$ ( 282 )  

Weighted average shares outstanding - basic

1 unchanged sentence

202,033,912  

211,532,305  

198,606,970  

Diluted stock options

5,437,099  

Diluted warrants

31,442,211  

Diluted preferred shares

39,492,302  

31,268,169  

Weighted average shares outstanding - diluted

1 unchanged sentence

278,405,524  

242,800,475  

198,606,970  

Basic earnings (loss) per share

$ ( 0.00 )  

$ 0.10  

$ 0.00  

Diluted earnings (loss) per share

$ ( 0.00 )  

$ 0.00  

$ ( 0.00 )  

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

For the three months ended

For the six months ended

Series A convertible preferred shares

17 unchanged sentences

Dividend Amount ”), which Dividend Amount was paid in the form of 1,736,501 shares of the Company’s Common Stock valued at $ 0.44313 per share, and approximately $ 880,000 in cash.

As of March 31, 2022, all dividend liability has been satisfied which is reflected on the Company’s condensed consolidated balance sheet.

As of June 30, 2022, all dividend liability has been satisfied which is reflected on the Company’s condensed consolidated balance sheet.

Conversion of Series A Preferred Shares

During the three months ended March 31, 2022, the Company issued approximately 169,000 shares of Common Stock upon conversion of 750 shares of Series A Preferred.

During the six months ended June 30, 2022, the Company issued approximately 748,000 shares of Common Stock upon conversion of 3,316 shares of Series A Preferred.

March 2021 Private Placement

10 unchanged sentences

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

Up to 11,072,542 stock options may be granted under the 2019 Plan.

The shares of Common Stock issuable under the 2019 Plan will consist of authorized and unissued shares, treasury shares, and shares purchased on the open market or otherwise. 

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

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

2 unchanged sentences

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

The 2019 Plan Amendment will allow the Company to maintain a sufficient number of available shares for future grants under the 2019 Plan.

Non-Qualified Stock Options

The following table summarizes stock option activities during the three months ended March 31, 2022 ( all option amounts are in thousands):

The following table summarizes stock option activities during the six months ended June 30, 2022 ( all option amounts are in thousands):

Stock Options

6 unchanged sentences

( 913 )  

Outstanding at March 31, 2022

Outstanding at June 30, 2022

$ 0.56  

Options vested and exercisable at March 31, 2022

Options vested and exercisable at June 30, 2022

$ 0.55  

As of March 31, 2022, there was approximately $ 24,000 of total unrecognized compensation expense related to non-vested stock option compensation arrangements granted under the 2019 Plan.

As of June 30, 2022, there was approximately $ 1,000 of total unrecognized compensation expense related to non-vested stock option compensation arrangements granted under the 2019 Plan.

That cost is expected to be recognized over a weighted average period of 1.3 years.

For the three months ended March 31, 2022, and 2021, the Company recorded compensation expense of approximately $ 2,000 and $ 77,000 related to the granting of stock options, respectively.

For the three and six months ended June 30, 2022, the Company recorded compensation expense of approximately $ 8,000 and $ 11,000 , respectively, related to the granting of stock options.

Restricted Stock Awards  

The following table summarizes restricted stock awards activities during the three months ended March 31, 2022 ( all share amounts are in thousands):

The following table summarizes restricted stock awards activities during the six months ended June 30, 2022 ( all share amounts are in thousands):

Number of Shares

3 unchanged sentences

Restricted stock granted

Nonvested at March 31, 2022

( 750 )  

On March 2, 2022, the Company granted approximately 5.8 million restricted stock awards (“

( 230 )  

Nonvested at June 30, 2022

$ 0.037  

During the six months ended June 30, 2022, the Company granted approximately 6.3 million restricted stock awards (“

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

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

As of March 31, 2022, there was approximately $ 253,000 of total unrecognized compensation expense related to non-vested restricted share-based compensation arrangements granted under the 2019 Plan.

As of June 30, 2022, there was approximately $ 236,000 of total unrecognized compensation expense related to non-vested restricted share-based compensation arrangements granted under the 2019 Plan.

That cost is expected to be recognized over a weighted average period of 3.0 years.

The Company recorded total stock-based compensation of approximately $ 16,000 during the three months ended March 31, 2022, related to the RSAs.

The Company recorded total stock-based compensation of approximately $ 29,000 and $ 45,000 during the three and six months ended June 30, 2022 related to the RSAs, respectively.

NOTE 12 –

1 unchanged sentence

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

All of the Company’s lease liabilities result from the lease of its headquarters in Costa Mesa, California, which expires in 2024, its warehouse in Santa Ana, California, which expired in 2021, its office and warehouse in Denver, Colorado, which expires in 2022, and its warehouse space in Huntington Beach, California, which expires in 2022.

All of the Company’s lease liabilities result from the lease of its headquarters in Costa Mesa, California, which expires in 2024, its warehouse in Santa Ana, California, which expired in 2021, its office and warehouse in Denver, Colorado, which expired in May 2022, and its warehouse space in Huntington Beach, California, which expires in 2022.

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

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

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

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

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

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

9 unchanged sentences

The Lease, which was effective as of September 1, 2019, on a month-to-month basis, was then formalized on November 1, 2019 to have a term of five years and a base rent rate of $ 22,940 per month, which rate is subject to annual adjustments based on the consumer price index, as may be mutually agreed upon by the parties to the Lease.

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

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

The total amount paid to related parties for the three months ended March 31, 2022 and 2021 was $ 68,820 and $ 69,510 , respectively.

At March 31, 2022, the Company had operating lease liabilities of approximately $ 641,000 and right of use assets of approximately $ 638,000 , which were included in the condensed consolidated balance sheet.

The following table summarizes quantitative information about the Company’s operating leases for the three months ended March 31, 2022 and 2021 (amounts in thousands):

The terms of the Lease were negotiated and approved by the independent members of the Board of Directors, after reviewing a detailed analysis of comparable properties and rent rates compiled by an independent, third -party consultant.

The total amount paid to related parties for the six months ended June 30, 2022 and 2021 was $ 134,452 and $ 139,020 , respectively.

At June 30, 2022, the Company had operating lease liabilities of approximately $ 540,000 and right of use assets of approximately $ 540,000 which were included in the condensed consolidated balance sheet.

The following table summarizes quantitative information about the Company’s operating leases for the three and six months ended June 30, 2022 and 2021 (amounts in thousands):

For the three months ended

For the six months ended

Operating leases

4 unchanged sentences

Total rent expense

For the three months ended

For the six months ended

Operating cash flows from operating leases

4 unchanged sentences

12.0 %  

Maturities of our operating leases as of March 31, 2022, excluding short-term leases, are as follows (amounts in thousands):

Nine Months Ending December 31, 2022

Maturities of our operating leases as of June 30, 2022, excluding short-term leases, are as follows (amounts in thousands):

Six Months Ending December 31, 2022

Year Ending December 31, 2023

1 unchanged sentence

Less present value discount

Operating lease liabilities as of March 31, 2022

Operating lease liabilities as of June 30, 2022

Legal Proceedings

3 unchanged sentences

Litigation or any other legal or administrative proceeding, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our management’s time and attention.

NOTE 13 - INCOME TAXES

NOTE 13 –

Income tax expense is comprised of domestic (US federal and state) income taxes at the applicable tax rates, adjusted for non-deductible expenses, stock compensation expenses, and other permanent differences.

12 unchanged sentences

For these reasons, even if we attain profitability, we may be unable to use a material portion of our NOLs and other tax attributes.

For the three months ended March 31, 2022, the Company’s estimate for income taxes was not determined to be significant and therefore, is not reflected in the Company’s condensed consolidated financial statements and related disclosures.

NOTE 14 - SUBSEQUENT EVENTS

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

Williamsville, New York Lease

On April 29, 2022, Charlie’s Holdings, Inc.

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

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

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

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

The Williamsville Lease was evaluated and approved by the Company’s Board of Directors and was executed by Ryan Stump, the Company’s Chief Operating Officer and a member of the Company’s Board of Directors.

For the six months ended June 30, 2022, the Company’s estimate for income taxes was not determined to be significant and therefore, is not reflected in the Company’s condensed consolidated financial statements and related disclosures.

NOTE 14 –

SUBSEQUENT EVENTS

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

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 ( “

), 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 ”

, 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 ’

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 ( “

) for which the Company is the primary beneficiary.

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 growth potential in the hemp-derived products space, and we have begun to shift our focus in this business to the 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.

As they offer consumers a range of benefits across varying potencies and product formats, these product categories have grown rapidly in recent years.

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 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 we expect to 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 have 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.

Recent Developments

April 2022 Note Financing

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

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

Lender ") in the principal amount of $1,000,000, which 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.

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 30, 2021, the FDA began issuing Marketing Denial Orders (“

MDOs ”) 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 June 30, 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 six months ended June 30, 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 Huntington Beach, CA warehouse location has 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.

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

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.

In addition, the impact from COVID-19 has affected our supply chain, and if disruptions from the COVID-19 outbreak persist and are prolonged, it will continue to have an adverse impact on our business.

Results of Operations for the Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021

Regarding results from operations for the quarter ended June 30, 2022, we generated revenue of approximately $7,397,000, as compared to revenue of $5,433,000 for the three months ended June 30, 2021.

This $1,964,000 increase in revenue was due primarily to a $1,977,000 increase in sales of our nicotine-based vapor products, offset by a $13,000 decrease in sales of our hemp-derived products.

We generated net loss for the three months ended June 30, 2022, of approximately $636,000 as compared to net income of approximately $19,764,000 for the three months ended June 30, 2021.

The net loss for the three months ended June 30, 2022 includes research and development expense of $744,000 and non-cash stock-based compensation expense of $38,000.

The net income for the three months ended June 30, 2021 includes non-cash stock-based compensation expense of approximately $165,000 and a non-cash gain in fair value of derivative liabilities of $19,274,000.

A review of the three-month period ended June 30, 2022, follows:

For the three months ended

($ in thousands)

Product revenue, net

Total revenues

Operating costs and expenses:

Cost of goods sold - product revenue

General and administrative

Sales and marketing

Research and development

Total operating costs and expenses

Loss from operations

Other income (expense):

Interest expense

Change in fair value of derivative liabilities

Gain on debt extinguishment

Total other income (loss)

Net income (loss)

Revenue for the three months ended June 30, 2022, increased by approximately $1,964,000 or 36.1%, to approximately $7,397,000, as compared to approximately $5,433,000 for same period in 2021 due to a $1,977,000 increase in sales of our nicotine-based vapor products, offset by a $13,000 decrease in sales of our hemp-derived products.

The increase in our nicotine-based vapor product sales was driven by sales of our new 12ml Pacha Syn Disposable line and our refreshed Pacha Syn e-liquid line, both of which launched in the second quarter of 2022, 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 adult 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 scrutinized inventories of related products.

The decrease in sales for our hemp-derived business was directly related to an intentional sunsetting of certain SKUs as the Company prepares to rebrand and launch new, innovative product formats into this market.

The hemp-derived products market is currently experiencing a condensed and rapidly evolving product development cycle which requires corporate agility and swift market penetration;

however, we continue to believe that this category offers significant short- and medium-term growth potential for our Company.

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 $1,764,000 or 63.1%, to approximately $4,558,000 or 61.6% of revenue, for the three months ended June 30, 2022, as compared to approximately $2,794,000, or 51.4% 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 inventory value adjustments.

General and Administrative Expenses

For the three months ended June 30, 2022, total general and administrative expense decreased by approximately $587,000 to $1,870,000 as compared to approximately $2,457,000 for the same period in 2021.

This change was primarily comprised of decreases of approximately $574,000 in payroll and benefits, $153,000 in professional fees and $128,000 in non-cash stock based compensation.

The decrease in payroll and benefits expense was primarily due to Employee Retention Credits received in conjunction with the Infrastructure Investment and Jobs Act which was enacted in November 2021.

The decrease in professional fees during the quarter ended June 30, 2022, was primarily due to advisory services that occurred as a result of the March 2021 Private Placement.

The decrease in non-cash stock-based compensation in 2022 is related to the conclusion of the vesting period for shares of Common Stock awarded to several employees in conjunction with the Share Exchange completed in April 2019 (See Note 3).

This decrease in overall general and administrative expenses was offset by increases of $56,000 in provision for bad debt, $54,000 in travel expenses related to business development, and $158,000 of other general and administrative expenses.

The increase in provision for bad debt was the result of higher sales achieved during the quarter ended June 30, 2022.

Increased insurance premiums, merchant processing fees and costs related to the closure of our Denver office location comprised the changes in other general and administrative expenses.

Sales and Marketing Expense

For the three months ended June 30, 2022, total sales and marketing expense increased by approximately $437,000, 124.9%, to approximately $787,000 as compared to approximately $350,000 for the same period in 2021, which was primarily due to enhanced trade-show activity during the quarter in furtherance of our plan to grow market share across the nicotine and hemp-derived product categories.

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.

Research and Development Expense

For the three months ended June 30, 2022, total research and development costs increased to approximately $744,000 as compared to no research of development costs for the same period in 2021, which was primarily due to costs associated with our 2022 PMTA submissions.

Income from Operations

We had operating loss of approximately $562,000 for the three months ended June 30, 2022, due primarily to an increase in research and development expense related to our 2022 PMTA submissions.

We also incurred certain non-cash, general and administrative expenses during the period including a $38,000 expense related to stock-based compensation.

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

Change in Fair Value of Derivative Liabilities.

For the three months ended June 30, 2022, the gain in fair value of derivative liabilities was $12,000, compared to a gain in fair value of derivative liabilities of $19,274,000 for the three months ended June 30, 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 June 30, 2022, reflects the effect of the decrease in stock price as of June 30, 2022, compared to March 31, 2022.

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 June 30, 2022.

Interest Expense.

For the three months ended June 30, 2022, and 2021, we recorded interest expense related to notes payable of $91,000 and $3,000, respectively.

Gain on debt extinguishment.

For the three months ended June 30, 2022, and 2021, we recorded a debt extinguishment gain of $0 and $658,000, respectively.

The amounts in 2021 related to the forgiveness of the Charlie’s PPP Loan.

Other Income.

For the three months ended June 30, 2022, and 2021, we recorded other income of $5,000 and $3,000, respectively.

Net Income (Loss)

For the three months ended June 30, 2022, we had net loss of $636,000 as compared to a net income of $19,764,000 for the same period in 2021 (primarily as a result of the change in fair value of derivative liabilities).

Results of Operations for the Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021

A review of the six-month period ended June 30, 2022, follows:

For the six months ended

($ in thousands)

Product revenue, net

Total revenues

Operating costs and expenses:

Cost of goods sold - product revenue

General and administrative

Sales and marketing

Research and development

Total operating costs and expenses

Loss from operations

Other income (expense):

Interest expense

Change in fair value of derivative liabilities

Gain on debt extinguishment

Total other income

Net income (loss)

Revenue for the six months ended June 30, 2022 increased approximately $5,677,000 or 58.0%, to approximately $15,471,000, as compared to approximately $9,794,000 for same period in 2021 due to a $4,784,000 increase in sales of our nicotine-based vapor products, as well as a $893,000 increase in sales of our hemp-derived products.

The increase in our nicotine-based vapor product sales was driven by sales of our new 8ml Pacha Syn Disposable line, which launched in December 2021, as well as our 12ml Pacha Syn Disposable and refreshed Pacha Syn e-liquid lines, which launched in the second quarter of 2022.

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.

The hemp-derived products market is currently experiencing a condensed and rapidly evolving product development cycle which requires corporate agility and swift market penetration;

however, we continue to believe that this category offers significant short- and medium-term growth potential for our Company.

We are actively pursuing new and innovative brands and product formats to offer our broad customer base.

Cost of Revenue

Cost of revenue, which consists of direct costs of materials, direct labor, third party subcontractor services, and other overhead costs increased approximately $4,255,000, or 89.8%, to approximately $8,992,000, or 58.1% of revenue, for the six months ended June 30, 2022, as compared to approximately $4,737,000, or 48.4% of revenue, for the same period in 2021.

General and Administrative Expenses

For the six months ended June 30, 2022, total general and administrative expense decreased approximately $246,000, or 5.3%, to $4,429,000 as compared to approximately $4,675,000 for the same period in 2021.

Notably, this decrease is comprised of reductions of approximately $468,000 of non-cash, stock-based compensation and $205,000 of professional fees.

The decrease in non-cash stock-based compensation is related to the conclusion of the vesting period for shares of Common Stock awarded to several employees in conjunction with the Share Exchange completed in April 2019 (See Note 3).

The decrease in professional fees during the six months ended June 30, 2022, was primarily due to advisory services that occurred as a result of the March 2021 Private Placement as well as other consulting services related to an internal project 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.

The decrease was primarily offset by increases of $166,000 in provision for bad debt, $120,000 in audit and external accounting fees, $82,000 in merchant processing fees and $59,000 in other general and administrative expenses.

The increase in provision for bad debt was related to higher sales achieved during the six month period ended June 30, 2022.

The increase in audit and external accounting fees was primarily due to higher than anticipated costs related to our annual audit as well as costs related to the calculation of our 2021 income tax provision.

Sales and Marketing Expense

For the six months ended June 30, 2022, total sales and marketing expense increased approximately $720,000, or 93.5%, to approximately $1,490,000 as compared to approximately $770,000 for the same period in 2021, which was primarily due to enhanced trade-show activity during the quarter in furtherance of our plan to grow market share across the nicotine and hemp-derived product categories.

Sales commissions also 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.

Research and Development Expense

For the six months ended June 30, 2022, total research and development expense increased approximately $746,000 to approximately $755,000 as compared to $9,000 for the same period in 2021, which was primarily due to costs associated with our 2022 PMTA submissions.

Loss from Operations

We had operating losses of approximately $195,000 for the six months ended June 30, 2022, due primarily to $755,000 in research and development expense as well as a $57,000 increase in the provision for inventory obsolescence.

We also incurred certain general and administrative expenses that contributed to the loss from operations including a $56,000 expense related to non-cash, stock-based compensation.

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

Change in Fair Value of Derivative Liabilities.

For the six months ended June 30, 2022, the gain in fair value of derivative liabilities was $352,000 compared to a loss in fair value of derivative liability of $828,000 during the six months ended June 30, 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 six months ended June 30, 2022, reflects the effect of the decrease in stock price as of June 30, 2022, compared to December 31, 2021.

We had 40,337,693 warrants outstanding as of June 30, 2022.

Interest Expense.

For the six months ended June 30, 2022, and 2021, we recorded interest expense related to notes payable of $92,000 and $31,000, respectively.

Gain on debt extinguishment.

For the six months ended June 30, 2021, we recorded a debt extinguishment gain of $875,000 related to the forgiveness of the Don Polly PPP Loan and the Charlie’s PPP Loan.

Other Income.

For the six months ended June 30, 2022 and 2021, we recorded other income of $5,000 and $8,000, respectively.

Net Income (Loss)

For the six months ended June 30, 2022, we had a net income of $70,000 as compared to a net loss of $373,000 for the same period in 2021.

Liquidity and Capital Resources

As of June 30, 2022, we had working capital of approximately $3,772,000, which consisted of current assets of approximately $8,786,000 and current liabilities of approximately $6,014,000, 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 June 30, 2022 included elsewhere in this Report primarily include approximately $4,042,000 of accounts payable and accrued expenses, approximately $203,000 of deferred revenue associated with product shipped but not yet received by customers, approximately $222,000 of lease liabilities, and $547,000 of derivative liability associated with the Investor Warrants and Placement Agent Warrants (the derivative liability of $547,000 is included in determining the working capital of $3,772,000 but is not expected to use any cash to ultimately satisfy the liability).

Our cash and cash equivalents balance at June 30, 2022 was approximately $488,000.

For the six months ended June 30, 2022, net cash used in operating activities was approximately $1,276,000, resulting from a net income of $70,000, offset by a $352,000 of change in fair value of derivative liabilities and $1,654,000 of changes in our operating assets and liabilities.

For the six months ended June 30, 2021, net cash used in operating activities was approximately $325,000, resulting from a net loss of $373,000, which included a $875,000 gain from debt extinguishment, but was partially offset by $524,000 of share-based compensation, $828,000 of change in fair value of derivative liabilities and $773,000 changes in our operating assets and liabilities. 

For the six months ended June 30, 2022, we used cash for investment activities of approximately $102,000 as compared to $40,000 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.

For the six months ended June 30, 2022 we generated approximately $1,000,000 cash from financing activities related to the issuance of a promissory note to a large shareholder.

For the six months ended June 30, 2021 we generated approximately $904,000 cash from financing activities from the Private Placement (as defined in Note 10 of Item 1, Part 1 of this Report) offset by the repayment of the Red Beard Note (as defined in Note 8 of Item 1, Part 1 of this Report).

We also paid cash dividends of $880,000 during the six months ended June 30, 2021.

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 COVID-19 has had a negative impact on the Company’s supply chain and sales.

For the six months ended June 30, 2022, the Company generated loss from operations of approximately $195,000, and a consolidated net income of approximately $70,000 but used cash in operations of approximately $1,276,000.

The Company had stockholders’

equity of $3.3 million at June 30, 2022.

During the three months ended June 30, 2022, the Company’s working capital requirements continued to evolve as current assets increased to $8.8 million from $8.0 million as of March 31, 2022 and currently liabilities increased to $6.0 million from $4.8 million as of March 31, 2022.

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.

On March 15, 2022, a new rider to the Federal Food, Drug and Cosmetic Act was passed granting the FDA authority over synthetic nicotine. 

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

As such, the Company was required to file a PMTA for its existing synthetic nicotine products marketed under the Pacha 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.

In 2022 the Company intends to allocate further resources and new personnel to support research and development initiatives in order to support existing, or subsequent PMTAs.

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.

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 June 30, 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 June 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II –

OTHER INFORMATION

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-Q

Item 1. Financial Statements