What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-11-18 compared with 2022-08-12 · 310 added, 298 removed, 707 unchanged (46% of the section changed)

20 unchanged sentences

$ 4,068  

Note payable, net - related party

Derivative liability

11 unchanged sentences

1,800,000 shares authorized

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

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

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

Common stock ($ 0.001 par value);

500,000,000 shares authorized;

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

217,597,053 and 210,890,930 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively

Additional paid-in capital

11 unchanged sentences

For the three months ended

For the six months ended

For the nine months ended

September 30,

Product revenue, net

5 unchanged sentences

21,898  

15,013  

Operating costs and expenses:

Cost of goods sold - product revenue

12,663  

General and administrative

4 unchanged sentences

15,032  

Loss from operations

( 562 )  

( 168 )  

Income (loss) from operations

( 136 )  

2 unchanged sentences

( 99 )  

( 92 )  

Change in fair value of derivative liabilities

19,274  

Gain on debt extinguishment

Total other income (loss)

( 74 )  

Loss on disposal of fixed assets  

( 13 )  

Net income (loss)

Total other income

Income before income taxes

Provision for income taxes

$ 3,107  

7 unchanged sentences

$ 0.00  

$ ( 0.00 )  

$ 0.01  

Weighted average number of common shares outstanding

13 unchanged sentences

(in thousands)

For the Three Months Ended June 30, 2022

For the Three Months Ended September 30, 2022

Series A Convertible Preferred Stock

1 unchanged sentence

Paid-in Capital

 Equity  

Balance at April 1, 2022

216,840  

$ 7,787  

$ ( 4,149 )  

$ 3,855  

Conversion of Series A convertible preferred stock

Balance at July 1, 2022

Stock compensation

( 636 )  

Balance at June 30, 2022

217,725  

$ 7,824  

$ ( 4,785 )  

$ 3,257  

For the Three Months Ended June 30, 2021

Balance at September 30, 2022

For the Three Months Ended September 30, 2021

Series A Convertible Preferred Stock

2 unchanged sentences

Deficit 

Balance at April 1, 2021

199,296  

$ 6,917  

$ ( 29,800 )  

Balance at July 1, 2021

Conversion of Series A convertible preferred stock

Issuance of common stock for dividend payment

Accrue dividends payable on Series A convertible preferred stock

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

Balance at September 30, 2021

For the Nine Months Ended September 30, 2022

Convertible Preferred Stock

Total Stockholders'

Paid-in Capital

Equity  

Balance at January 1, 2022

210,890  

$ 7,775  

$ ( 4,855 )  

$ 3,131  

Conversion of Series A convertible preferred stock

Stock compensation

Balance at June 30, 2022

217,725  

$ 7,824  

$ ( 4,785 )  

$ 3,257  

For the Six Months Ended June 30, 2021

Balance at September 30, 2022

For the Nine Months Ended September 30, 2021

Series A Convertible Preferred Stock

3 unchanged sentences

Balance at January 1, 2021

189,907  

$ 3,477  

$ ( 9,663 )  

Issuance of common stock to related parties for cash

Conversion of Series A convertible preferred stock

( 29 )  

Issuance of common stock for dividend payment

Accrue dividends payable on Series A convertible preferred stock

Stock compensation

Fraction shares adjustment due to reverse split

( 373 )  

Balance at June 30, 2021

203,165  

$ 7,758  

$ ( 10,036 )  

Balance at September 30, 2021

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

3 unchanged sentences

(in thousands)

For the six months ended

For the nine months ended

September 30,

Cash Flows from Operating Activities:

Net income (loss)

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

$ 2,734  

Reconciliation of net income to net cash used in operating activities:

Allowance for doubtful accounts

Depreciation and amortization

Accretion of debt discount

Loss on disposal of fixed assets

15 unchanged sentences

Deferred revenue

( 35 )  

Lease liabilities

10 unchanged sentences

Proceeds from issuance of notes payable

Proceeds from issuance of note payable to related party

Repayment of notes payable

1 unchanged sentence

Net cash provided by financing activities

Net (decrease) increase in cash

Net decrease in cash

( 400 )  

4 unchanged sentences

Cash paid for interest

$ ( 90 )  

Cash paid for interest to related party

$ ( 3 )  

Cash paid for income taxes

Supplemental disclosure of cash flow information

Supplemental disclosure of non-cash financing activities

Conversion of Series A convertible preferred stock

Issuance of common stock for dividend payment

Dividends paid on Series A convertible preferred stock

Accrued interest on notes payable

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

12 unchanged sentences

Don Polly ”).

Our hemp-based products are produced, marketed and sold through Don Polly, and the Company intends to develop and launch additional products containing hemp-derived cannabinoids in the future.

Our hemp-based products are produced, marketed and sold through Don Polly, and the Company intends to continue developing and launching additional products containing hemp-derived cannabinoids in the future.

In addition to Don Polly, we also wholly-own Charlie’s Chalk Dust, LLC (“

19 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 COVID- 19 (“

In addition, the outbreak of 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.

For the nine months ended September 30, 2022, the Company generated a loss from operations of approximately $ 136,000 , and a consolidated net income of approximately $ 311,000 , but used cash in operations of approximately $ 1,522,000 .

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.

equity of $ 3,529,000 at September 30, 2022.

During the three months ended September 30, 2022, the Company’s working capital requirements continued to evolve as current assets decreased to $ 8.1 million from $ 8.8 million as of June 30, 2022 and current liabilities decreased to $ 5.3 million from $ 6.0 million as of June 30, 2022.

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

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

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

Management's plans depend on its ability to increase revenues, raise additional capital, and continue its business development efforts, including the expenditure of approximately $ 4,400,000 to date, to complete the Pre-Market Tobacco Application (“

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

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. 

Management's plans depend on its ability to increase revenues, raise additional capital, and continue its business development efforts, including the expenditure of approximately $5.1 million to date, to support the Pre-Market Tobacco Application (“

PMTA ”) process for the Company’s 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 filed new PMTAs, for its synthetic Pacha Syn products on May 13, 2022, prior to the May 14, 2022 deadline.

These regulations make the Company’s synthetic nicotine products subject to the same FDA rules as tobacco-derived nicotine products, including the need to seek and obtain an order from FDA authorizing the continued marketing of these products. 

As such, the Company filed new PMTAs, for its synthetic Pacha 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.

19 unchanged sentences

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.

As such, the Company was required to file a PMTA for its existing synthetic nicotine products marketed under the Pacha brands by May 14, 2022 or be subject to FDA enforcement. 

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

On November 3, 2022, FDA accepted for scientific review certain of our PMTAs for synthetic nicotine products and, on November 4, 2022, FDA refused to accept certain other PMTAs for these products, rendering the latter products subject to FDA enforcement.

The Company intends to pursue an administrative appeal with FDA regarding its refusal to accept certain of the PMTAs we submitted for our synthetic nicotine products, and in parallel we intend to resubmit PMTAs for, and to continue to sell, the affected products while the administrative appeal process is pending. 

There can be no guarantee that FDA will grant our administrative appeal, and the FDA may bring an enforcement action against our synthetic nicotine products for lack of premarket authorization and/or issue an MDO to our pending applications at any time. 

More generally, FDA’s regulatory initiatives and enforcement priorities regarding ENDS products are unpredictable and continue to evolve, and we cannot predict whether FDA’s priorities and review of our premarket submissions will impact our products to a greater degree than our competitors in the industry.

In 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.

72 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 June 30, 2022, and December 31, 2021 ( amounts in thousands):

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

Fair Value at September 30, 2022

Derivative liability - Warrants

Total liabilities

Fair Value at December 31, 2021

1 unchanged sentence

Total liabilities

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.

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

The following table presents changes in Level 3 liabilities measured at fair value for the nine -month period ended September 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 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:

Balance at September 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 September 30, 2022, and December 31, 2021, is as follows:

September 30,

Exercise price

$ 0.4431  

Contractual term (years)

Volatility (annual)

100.0 %  

Risk-free rate

20 unchanged sentences

NOTE 4 - PROPERTY AND EQUIPMENT

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

Estimated Useful Life (Years)

Depreciation and amortization expense totaled $ 55,000 and $ 53,000 respectively, during the three months ended September 30, 2022 and 2021.

Depreciation and amortization expense totaled $ 244,000 and $ 155,000 , respectively, during the nine months ended September 30, 2022 and 2021.

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

September 30,

Estimated Useful Life

Machinery and equipment

4 unchanged sentences

Accumulated depreciation

( 618 )  

( 673 )  

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

The Company’s concentration of purchases is as follows:

The Company’s concentration of inventory purchases is as follows:

For the three months ended

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.

For the nine months ended

September 30,

During the three months ended September 30, 2022 and 2021, purchases from four and two vendors, respectively, represented 89 % and 86 %, respectively, of total inventory purchases.

During the nine months ended September 30, 2022 and 2021, purchases from two vendors represented 73 % and 80 %, respectively, of total inventory purchases.

As of September 30, 2022, and December 31, 2021, amounts owed to these vendors totaled $ 2,542,000 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 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 $ 169,000 , representing 9 % of net receivables, at June 30, 2022.

September 30,

One customer made up more than 10 % of net accounts receivable at September 30, 2022 and 2021.

Customer A owed the Company a total of $ 275,000 , representing 15 % of net receivables at September 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 six -month periods ended June 30, 2022 and 2021.

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

NOTE 6 –

15 unchanged sentences

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

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

September 30,

Accounts payable

$ 2,439  

$ 2,476  

Accrued compensation

Accrued income taxes

342.00  

Other accrued expenses

$ 4,042  

$ 4,068  

NOTE 8 –

36 unchanged sentences

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 ").

On September 28, 2022, the Company and the Lender entered into a modification to the Note to extend the maturity date to March 28, 2023 and the Company paid $ 90,000 accrued interest under the Note through such date.

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.

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

or (ii) March 28, 2023.

The Company used the proceeds from the Note Financing for general corporate purposes, and its working capital requirements.

August 2022 Note Financing –

Related Party

On August 17, 2022, the Company and its Chief Operating Officer and Director, Ryan Stump (the " Stump Lender ") entered into a loan agreement (the “

Loan ”) in the principal amount of $ 300,000 .

The Loan will be due in full in 120 days or sooner if, before the end of term, the Company secures (i) new debt financing or (ii) sufficient PMTA strategic partnership funds.

The Loan bears an annual interest rate of 10 %.

The Company also incurred additional issuance of $ 3,000 resulting from the payment of the Stump Lender’s legal fees.

The following summarizes the Company’s notes payable maturities as of September 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 –

EARNINGS (LOSS) PER SHARE APPLICABLE TO COMMON STOCKHOLDERS

Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the reporting period.

Basic earnings (loss) per common share is computed by dividing net income by the weighted average number of common shares outstanding during the reporting period.

Diluted earnings (loss) per common share is computed similar to basic earnings (loss) per common share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock.

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

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.

For the three  and nine months ended September 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  

For the nine months ended

September 30,

Net income - basic

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

212,051,322  

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

212,051,322  

278,405,524  

242,800,475  

198,606,970  

Basic earnings (loss) per share

$ ( 0.00 )  

$ 0.10  

$ 0.00  

Basic earnings per share

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 six months ended

Series A convertible preferred shares

39,492  

40,338  

46,548  

87,333  

For the nine months ended

September 30,

NOTE 10 –

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

As of September 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 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.

During the nine months ended September 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

16 unchanged sentences

Non-Qualified Stock Options

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

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

Stock Options

3 unchanged sentences

Outstanding at January 1, 2022

$ 0.54  

Options forfeited/expired

( 913 )  

Outstanding at June 30, 2022

$ 0.56  

Options vested and exercisable at June 30, 2022

$ 0.55  

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.

Outstanding at September 30, 2022

Options vested and exercisable at September 30, 2022

As of September 30, 2022, there was approximately $ 500 of total unrecognized compensation expense related to non-vested stock option compensation arrangements granted under the 2019 Plan, as amended.

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

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.

For the three and nine months ended September 30, 2022, the Company recorded compensation expense of approximately $ 200 and $ 11,000 , respectively, related to the granting of stock options.

Restricted Stock Awards  

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

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

Number of Shares

1 unchanged sentence

Nonvested at January 1, 2022

$ 0.044  

Restricted stock granted

( 750 )  

( 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 (“

Nonvested at September 30, 2022

During the nine months ended September 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 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.

As of September 30, 2022, there was approximately $ 201,000 of total unrecognized compensation expense related to non-vested restricted share-based compensation arrangements granted under the 2019 Plan, as amended.

That cost is expected to be recognized over a weighted average period of 2.8 years.

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.

The Company recorded total stock-based compensation of approximately $ 30,000 and $ 76,000 during the three and nine months ended September 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 expired in May 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 was renewed in May 2022 and expires May 2025, its office and warehouse in Denver, Colorado, which expired in May 2022, and its warehouse space in Huntington Beach, California, which 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 (“

15 unchanged sentences

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):

The total rent paid to related parties for the nine months ended September 30, 2022 and 2021 was $ 206,920 and $ 208,530 , respectively.

Effective June 1, 2022, the Company’s lease at 5331 Production Drive, Huntington Beach, CA was renewed for an additional three -year term, concluding May 31, 2025.

The renewal was not reflected in the Company’s June 30, 2022 interim financial statements, but was corrected during the quarter ended September 30, 2022.

Had it been properly recorded during the quarter ended June 30, 2022, the effect on the Company’s financial statements would have included an additional $ 429,000 in right-of-use assets, $ 430,000 in lease liabilities as well as an additional $ 1,000 in rent expense.

The Company performed a thorough assessment to determine the significance of the prior period error and concluded that it was neither quantitatively or qualitatively material to the Company’s financial position, results of operations or cash flows for the quarters ended June 30, 2022 and September 30, 2022.

At September 30, 2022, the Company had operating lease liabilities of approximately $ 887,000 and right of use assets of approximately $ 886,000 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 nine months ended September 30, 2022 and 2021 (amounts in thousands):

For the three months ended

For the six months ended

For the nine months ended

September 30,

Operating leases

4 unchanged sentences

Total rent expense

For the six months ended

For the nine months ended

September 30,

Operating cash flows from operating leases

Right-of-use assets exchanged for operating lease liabilities

Weighted-average remaining lease term –

3 unchanged sentences

12.0 %  

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

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

Three Months Ending December 31, 2022

Year Ending December 31, 2023

Year Ending December 31, 2024

Year Ending December 31, 2025  

Less present value discount

Operating lease liabilities as of June 30, 2022

Operating lease liabilities as of September 30, 2022

Legal Proceedings

4 unchanged sentences

NOTE 13 –

Income taxes for the three and nine months ended September 30, 2022 and 2021 have been calculated based on an estimated annual effective tax rate.

For the three and nine months ended September 30, 2022, the Company recorded a tax expense of approximately $ 45,000 and $ 45,000 , respectively.

The Company’s income tax expense for the three and nine months ended September 30, 2022 was related to current year projected income that is not eligible to be offset with prior year tax attribute carryovers.

The Company’s income tax expense for the three and nine months ended September 30, 2021 was related to federal and state income not eligible to be offset with prior year net operating loss carryovers.

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.

1 unchanged sentence

However, due to the full valuation allowance on our deferred tax assets, the net impact to our overall income tax expense is limited.

Under Sections 382 and 383 of the Internal Revenue Code (the “

Code ”), if a corporation undergoes an “ownership change”

Under Sections 382 and 383 of the Code, if a corporation undergoes an “ownership change”

(generally defined as a greater than 50 percentage points (by value) in the ownership of its equity over a three -year period), the corporation’s ability to use its pre-change tax attributes to offset its post change income may be limited.

We may have experienced such ownership changes in the past, and we may experience ownership changes in the future or subsequent shifts in our stock ownership, many of which are outside our control.

As of December 31, 2021, we had state net operating losses (“

NOLs ”) of approximately $ 6.1 million and federal NOLs of $ 4.2 million.

As of December 31, 2021, we had state NOLs of approximately $ 6.1 million and federal NOLs of approximately $ 4.3 million.

The federal NOLs do not expire but the state NOLs expire if not utilized before 2041.

Our ability to utilize these NOLs and tax credit carryforwards may be limited by any “ownership changes”

as described above that have occurred in prior years or that may occur in the future.

If we undergo future ownership changes, many of which may be outside of our control, our ability to utilize our NOLs and tax credit carryforwards could be further limited by Sections 382 and 383 of the Code.

2 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 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 –

35 unchanged sentences

CBD ”).

In the future we intend to develop and launch additional products containing other compounds derived from hemp.

In the future we intend to continue developing and launching 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 (“

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

We believe there is a significant growth potential in the hemp-derived products space, and we have shifted 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.

Also referred to as “alternative cannabis products,”

hemp-derived products mitigate the current PMTA regulatory risk that is related to the Company’s nicotine products.

Because our alternative cannabis products contain only cannabinoids that are derived from the hemp plant, they are not subject to the Controlled Substances Act and are legal throughout most of the United States. 

Further, alternative cannabis products are not currently subject to FDA review.

Accordingly, the category represents a unique opportunity for our Company to (i) market to adult consumers, and (ii) sell directly to adult consumers. 

For these reasons, the Company’s alternative cannabis products enable us to pursue what we believe is a significant commercial opportunity in a category that has 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.

1 unchanged sentence

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.

Specifically, the Company intends to launch proprietary new disposables, along with e-liquids, both of which 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.

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

Ever-changing nicotine vapor products continue to represent one of Charlie’s principal product categories.

We are continuing with our plan to seek and obtain marketing authorization for certain of our nicotine-based vapor products through the submission of our September 2020 Premarket Tobacco Applications (" PMTAs ”).

Obtaining a marketing order from the United States Food and Drug Administration (“

1 unchanged sentence

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.

In order to facilitate the Company’s primary objectives of increasing sales and profits across all our product lines –

in addition to our ambition of meeting the listing criteria necessary to up-list Charlie’s Holdings, Inc.

shares to a major national exchange –

management is expanding and refining the Company’s sales team to prioritize:

(i) alternative cannabis products (over nicotine products), (ii) direct-to-retail sales (as opposed to purely distributor sales), and (iii) the independent convenience store channel. 

In these pursuits, we plan to increase the number of Company Account Executives and Brand Advocates;

ensure that no Account Executive manages a book of business that represents greater than 25% of the Company’s domestic sales;

and focus the sales team on direct-to-retail sales.

Recent Developments

3 unchanged sentences

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 September 28, 2022, the Company and the Lender entered into a modification to the Note to extend the maturity date to March 28, 2023 and the Company paid all accrued interest under the Note through such date.

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.

or (ii) March 28, 2023.

The Company used the proceeds from the Note Financing for general corporate purposes, and its working capital requirements, pending the availability of alternative debt financing.

August 2022 Note Financing –

Related Party

On August 17, 2022, the Company and its Chief Operating Officer and Director, Ryan Stump (the " Stump Lender ") entered into a loan agreement (the “

Loan ”) in the principal amount of $300,000.

The Loan will be due in full in 120 days or sooner if, before the end of term, the Company secures (i) new debt financing or (ii) sufficient PMTA strategic partnership funds.

The Loan bears an annual interest rate of 10%.

The Company also incurred additional $3,000 issuance cost resulting from the payment of the Stump Lender’s legal fees.

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.

To date, the Company has invested more than $5.1 million for our PMTA submissions.

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.

4 unchanged sentences

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.

As such, the Company was required to file a PMTA for its existing synthetic nicotine products marketed under the Pacha brands by May 14, 2022 or be subject to FDA enforcement. 

The Company filed new PMTAs for its synthetic Pacha products, on May 13, 2022, prior to the May 14, 2022, deadline. On November 3, 2022, FDA accepted for scientific review certain of our PMTAs for synthetic nicotine products and, on November 4, 2022, FDA refused to accept certain other PMTAs for these products, rendering the latter products subject to FDA enforcement. 

As of September 30, 2022, Charlie’s 2020 PMTA remains among the select minority of applications submitted to the FDA for a tobacco-derived nicotine ENDS product 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.

5 unchanged sentences

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.

During the nine months ended September 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.

12 unchanged sentences

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.

Our PMTA applications were submitted in September 2020 on a timely basis, which if authorized by FDA, 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 for tobacco-derived nicotine products.

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.

Further, the Company filed new PMTAs, for its synthetic Pacha products, on May 13, 2022.

On November 3, 2022, FDA accepted for scientific review certain of these PMTAs and, on November 4, 2022, FDA refused to accept others. 

The Company intends to pursue an administrative appeal with FDA regarding its refusal to accept certain of the PMTAs, and in parallel we intend to resubmit PMTAs for, and to continue to sell, the affected synthetic nicotine products while the administrative appeal process is pending.

Further, it is not a certainty that the Company will ultimately receive marketing orders for one or more of its products on any of its PMTAs.

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

There is no assurance that regulatory authorization 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:

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

Regarding results from operations for the quarter ended September 30, 2022, we generated revenue of approximately $6.4 million, as compared to revenue of $5.2 million for the three months ended September 30, 2021.

This $1.2 million increase in revenue was due primarily to a $1.2 million increase in sales of our nicotine-based vapor products.

We generated net income for the three months ended September 30, 2022, of approximately $241,000 as compared to net income of approximately $3,107,000 for the three months ended September 30, 2021.

The net income for the three months ended September 30, 2022 includes a non-cash gain in fair value of derivative liabilities of $246,000 compared to a non-cash gain in fair value of derivative liabilities of $2,729,000 during the three months ended September 30, 2021.

The net income for the three months ended September 30, 2021 also includes non-cash stock-based compensation expense of approximately $39,000.

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

For the three months ended

September 30,

($ in thousands)

7 unchanged sentences

Total operating costs and expenses

Loss from operations

Income (loss) from operations

Other income (expense):

1 unchanged sentence

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.

Total other income

Income before income taxes

Provision for income taxes

Revenue for the three months ended September 30, 2022, increased by approximately $1,208,000 or 23.1%, to approximately $6,427,000, as compared to approximately $5,219,000 for same period in 2021 due to a $1,209,000 increase in sales of our nicotine-based vapor products, but was offset by a $1,000 decrease in sales of hemp-derived products.

The increase in our nicotine-based vapor product sales was driven by sales of our new 12ml Pacha Disposable line and our refreshed Pacha e-liquid line, both of which launched in the second quarter of 2022, as well as incremental market penetration of our existing Pacha Disposable products.

Pacha 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, increased competition from low-priced Chinese products and brands, regulatory challenges including the recently announced requirement for synthetic nicotine products to obtain marketing authorization 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 slight 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 in the fourth quarter.

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.

however, we continue to believe that this category offers significant short- and medium-term growth potential for our Company and will place enhanced focus on growing this segment as a portion of overall sales.

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.

Cost of revenue, which consists of direct costs of materials, direct labor, third party subcontractor services, and other overhead costs increased by approximately $1,361,000 or 58.9%, to approximately $3,671,000 or 57.1% of revenue, for the three months ended September 30, 2022, as compared to approximately $2,310,000, or 44.3% 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 Disposable product line, which carries a lower margin per unit relative to our other products.

Pricing pressure in certain channels due to enhanced competition has also contributed to higher cost of goods relative to sales.

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.

For the three months ended September 30, 2022, total general and administrative expense decreased by approximately $18,000 to $2,065,000 as compared to approximately $2,084,000 for the same period in 2021.

This change was primarily comprised of decreases of approximately $40,000 in our bad debt provision, $37,000 in rent and maintenance costs and $24,000 in other general and administrative expenses.

The decrease in bad debt expense was primarily due to an improved workflow for managing and collecting on aged receivables resulting in fewer delinquent invoices.

The decrease in rent and maintenance costs during the quarter ended September 30, 2022 was primarily due to the centralizing of certain administrative and shipping functions related to Don Polly, which resulted from the permanent closure of our Denver, Colorado office and warehouse location.

The decrease in other general and administrative costs was due to a reduction in certain state filing fees and property taxes.

This decrease in overall general and administrative expenses was offset by increases of $36,000 in payroll and benefits, $28,000 in professional fees, and $19,000 of other general and administrative expenses.

The increase in payroll and benefits was the result of employees added to our supply chain and procurement team during the quarter ended September 30, 2022.

The increased professional fees were directly related to tax analysis and tax return preparation as well as the addition of Dr.

Edward Carmines to the Board of Directors on March 2, 2022.

The increase in other general and administrative costs was primarily comprised of higher merchant processing fees associated with higher sales during the quarter ended September 30, 2022.

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.

For the three months ended September 30, 2022, total sales and marketing expense increased by approximately $193,000, 43.7%, to approximately $635,000 as compared to approximately $442,000 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.

For the three months ended September 30, 2022, total research and development costs increased to approximately $9,000 as compared to approximately $5,000 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 had operating income of approximately $46,000 for the three months ended September 30, 2022, compared with $378,000 for the three months ended September 30, 2021, due primarily to an increase in sales and marketing expenses and lower margin sales mix.

We also incurred certain non-cash, general and administrative expenses during the period including a $31,000 expense related to stock-based compensation.

1 unchanged sentence

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.

For the three months ended September 30, 2022, the gain in fair value of derivative liabilities was $246,000, compared to a gain in fair value of derivative liabilities of $2,084,000 for the three months ended September 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.

The gain for the quarter ended September 30, 2022, reflects the effect of the decrease in stock price as of September 30, 2022, compared to June 30, 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.

We had 40,337,693 warrants outstanding as of September 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.

For the three months ended September 30, 2022, and 2021, we recorded interest expense related to notes payable of $7,000 and $2,000, respectively.

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

For the three months ended September 30, 2022, and 2021, we recorded other income of $1,000 and $2,000, respectively.

Income Tax Provision

For the three months ended September 30, 2022, we recorded a $45,000 provision for income taxes, or 15.7% of income before income taxes.

No provision for income taxes was recognized for the three months ended September 30, 2021.

For the three months ended September 30, 2022, we had net income of $241,000 as compared to a net income of $3,107,000 for the same period in 2021, which decrease was primarily the result of the change in fair value of derivative liabilities.

Results of Operations for the Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021

A review of the nine-month period ended September 30, 2022, follows:

For the nine months ended

September 30,

($ in thousands)

12 unchanged sentences

Gain on debt extinguishment

Loss on disposal of fixed assets

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.

Income before income taxes

Provision for income taxes

Revenue for the nine months ended September 30, 2022 increased approximately $6,885,000 or 45.9%, to approximately $21,898,000, as compared to approximately $15,013,000 for same period in 2021 due to a $5,993,000 increase in sales of our nicotine-based vapor products, as well as a $892,000 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 Disposable line, which launched in December 2021, as well as our 12ml Pacha Disposable and refreshed Pacha e-liquid lines, which launched in the second quarter of 2022.

However, competition from low-priced Chinese products and brands, regulatory challenges including the recently announced requirement for synthetic nicotine products to obtain marketing authorization 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 increase in sales for our hemp-derived business was directly related to strong performance in our alternative cannabis 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.

Cost of revenue, which consists of direct costs of materials, direct labor, third party subcontractor services, and other overhead costs increased approximately $5,616,000, or 79.7%, to approximately $12,663,000, or 57.8% of revenue, for the nine months ended September 30, 2022, as compared to approximately $7,047,000, or 46.9% 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 Disposable product line, which carries a lower margin per unit relative to our other products.

Pricing pressure in certain channels, due to enhanced competition, has contributed to higher cost of goods relative to sales.

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.

For the nine months ended September 30, 2022, total general and administrative expense decreased approximately $277,000, or 4.1%, to $6,482,000 as compared to approximately $6,759,000 for the same period in 2021.

Notably, this decrease is comprised of reductions of approximately $476,000 of non-cash, stock-based compensation, $225,000 of payroll and benefits costs, and $41,000 in rent and maintenance costs.

The decrease in non-cash stock-based compensation is primarily 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 payroll and benefits expense during the nine months ended September 30, 2022, 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 rent and maintenance costs during the nine months ended September 30, 2022 was primarily due to the centralizing of certain administrative and shipping functions related to Don Polly, which resulted from the permanent closure of our Denver, Colorado office and warehouse location.

The decreases were primarily offset by increases of $126,000 in provision for bad debt, $100,000 in merchant processing fees as well as $239,000 of other general and administrative expenses.

The increases in provision for bad debt and merchant processing fees were directly related to higher sales achieved during the nine-month period ended September 30, 2022.

The increase in other general and administrative expenses was primarily comprised of 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 as well as higher than anticipated costs related to our annual audit and costs related to the calculation of our 2021 income taxes.

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.

For the nine months ended September 30, 2022, total sales and marketing expense increased approximately $913,000, or 75.3%, to approximately $2,125,000 as compared to approximately $1,212,000 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.

For the nine months ended September 30, 2022, total research and development expense increased approximately $750,000 to approximately $764,000 as compared to $14,000 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 had operating losses of approximately $136,000 for the nine months ended September 30, 2022, compared with operating losses of $19,000 for the nine months ended September 30, 2022, due primarily to an increase of $750,000 in research and development expense.

We also incurred certain general and administrative expenses that contributed to the loss from operations including a $87,000 expense related to non-cash, stock-based compensation.

1 unchanged sentence

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.

For the nine months ended September 30, 2022, the gain in fair value of derivative liabilities was $598,000 as compared to $1,901,000 during the nine months ended September 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.

The gain for both nine months ended September 30, 2022 and 2021 reflects the effect of the decrease in stock price as of September 30, 2022, compared to December 31, 2021, as well as a decrease in stock price as of September 30, 2021, compared to December 31, 2020.

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

We had 40,337,693 warrants outstanding as of September 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.

For the nine months ended September 30, 2022, and 2021, we recorded interest expense related to notes payable of $99,000 and $33,000, respectively.

We entered into additional debt financing arrangements during the nine months ended September 30, 2022.

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.

For the nine months ended September 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.

Loss on disposal of fixed assets.

For the nine months ended September 30, 2022, and 2021, we recorded a loss on disposal of fixed assets of $13,000 and $0, respectively.

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.

For the nine months ended September 30, 2022 and 2021, we recorded other income of $6,000 and $10,000, respectively.

Income Tax Provision

For the nine months ended September 30, 2022, we recorded a $45,000 provision for income taxes, or 12.6% of income before income taxes.

No provision for income taxes was recognized for the nine months ended September 30, 2021.

For the nine months ended September 30, 2022, we had a net income of $311,000 as compared to a net income of $2,734,000 for the same period in 2021, which decrease was primarily the result of the change in fair value of derivative liabilities.

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.

As of September 30, 2022, we had working capital of approximately $2,879,000, which consisted of current assets of approximately $8,145,000 and current liabilities of approximately $5,266,000, as compared to working capital of approximately $2,460,000 at December 31, 2021.

The current liabilities include approximately $3,061,000 of accounts payable and accrued expenses, notes payable of $1,298,000, approximately $245,000 of deferred revenue associated with product shipped but not yet received by customers, approximately $361,000 of lease liabilities, and $301,000 of derivative liability associated with the Investor Warrants and Placement Agent Warrants (the derivative liability of $301,000 is included in determining the working capital of $2,879,000 but is not expected to use any cash to ultimately satisfy the liability).

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

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

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) March 28, 2023.

The Company used the proceeds from the Note Financing for general corporate purposes, and its working capital requirements, pending the availability of alternative debt financing.

On August 17, 2022, the Company and its Chief Operating Officer and Director, Ryan Stump (the " Stump Lender ") entered into a loan agreement (the “

Loan ”) in the principal amount of $300,000.

The Loan will be due in full in 120 days or sooner if, before the end of term, the Company secures (i) new debt financing or (ii) sufficient PMTA strategic partnership funds.

The Loan bears an annual interest rate of 10%.

The Company also incurred additional $3,000 issuance cost resulting from the payment of the Stump Lender’s legal fees.

Our cash and cash equivalents balance at September 30, 2022 was approximately $466,000.

For the nine months ended September 30, 2022, net cash used in operating activities was approximately $1,522,000, resulting from a net income of $311,000, offset by a $598,000 of change in fair value of derivative liabilities and $2,108,000 of changes in our operating assets and liabilities.

For the nine months ended September 30, 2021, net cash used in operating activities was approximately $980,000, resulting from a net income of $2,734,000, offset by a $1,901,000 of change in fair value of derivative liabilities, $563,000 of share-based compensation, and $2,080,000 changes in our operating assets and liabilities.

For the nine months ended September 30, 2022, we used cash for investment activities of approximately $178,000 as compared to $73,000 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 as well as the disposal of fixed assets related to the permanent closure of our Denver, Colorado location.

For the nine months ended September 30, 2022 we generated approximately $1,300,000 cash from financing activities related to the issuance of a promissory note to a large shareholder and a short-term loan from our chief operating officer and director, Ryan Stump, each as discussed above.

For the nine months ended September 30, 2021 we generated approximately $901,000 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 nine months ended September 30, 2021.

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

7 unchanged sentences

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.

For the nine months ended September 30, 2022, the Company generated loss from operations of approximately $136,000, and a consolidated net income of approximately $311,000 but used cash in operations of approximately $1,522,000.

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.

equity of $3.5 million at September 30, 2022.

During the three months ended September 30, 2022, the Company’s working capital requirements continued to evolve as current assets decreased to $8.1 million from $8.8 million as of June 30, 2022 and currently liabilities decreased to $5.3 million from $6.0 million as of June 30, 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.

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 $5,100,000 to date, to support our PMTA process for the Company’s 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.

As such, the Company was required to file a PMTA for its existing synthetic nicotine products marketed under the Pacha brands by May 14, 2022 or be subject to FDA enforcement. 

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

On November 3, 2022, FDA accepted for scientific review certain of these PMTAs and, on November 4, 2022, FDA refused to accept others. 

In the fourth quarter of 2022 and during 2023, 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.

19 unchanged sentences

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.

Based on our evaluation, our President, the principal executive officer, and Chief Financial Officer concluded that, as of September 30, 2022, certain of our disclosure controls and procedures are not designed at a reasonable assurance level and are not 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.

In connection with the evaluation required by Rule 13a-15 of the Exchange Act that occurred during the quarter ended September 30, 2022, we determined a material weakness existed in our process for recording and reviewing lease transactions.

Specifically, we determined design deficiencies existed in the reconciliation and review processes for leases, as well as within the configuration of the financial close-management software used in the review process.

Management is in the process of instituting appropriate levels of review in the reconciliation process and modifying the configuration of corresponding controls in our close-management software system.

The Company will monitor these controls and continue to test their effectiveness during the fourth quarter of 2022.

PART II –

1 unchanged sentence

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