# Charlie's Holdings, Inc.: Form 10-Q for the period ended Mar 31, 2023

- Company: [Charlie's Holdings, Inc.](/companies/chuc.md) (CIK 1134765)
- Form: 10-Q
- Filed: 2023-05-19
- Accepted by EDGAR: May 19, 2023, 06:02 ET
- Period: 2023-03-31
- Accession: 0001437749-23-015181
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1134765/000143774923015181/chuc20230331_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1134765/000143774923015181/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-01 to 2023-03-31 | $4.0m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Research and development | 3 months, 2023-01-01 to 2023-03-31 | $52.0k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2023-01-01 to 2023-03-31 | −$1.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-01-01 to 2023-03-31 | $131.0k | us-gaap:InterestExpense |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | −$1.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | −$0.01 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | −$0.01 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 211,934,041 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | −$241.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-01-01 to 2023-03-31 | $0 | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-03-31 | $383.0k | us-gaap:Cash |
| Current assets | at 2023-03-31 | $4.9m | us-gaap:AssetsCurrent |
| Total assets | at 2023-03-31 | $6.0m | us-gaap:Assets |
| Current liabilities | at 2023-03-31 | $4.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-03-31 | $5.7m | us-gaap:Liabilities |
| Long-term debt | at 2023-03-31 | $1.9m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-03-31 | $355.0k | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 32,735 characters.

*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, 2022 (the “2022 Annual Report”). Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Report, and in our other filings with the Securities and Exchange Commission (“SEC”), including particularly matters set forth under Part I, Item 1A (Risk Factors) of the 2022 Annual Report. Furthermore, such forward-looking statements speak only as of the date of this Report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.*

*As used in this Report, unless otherwise stated or the context otherwise requires, references to the “Company”, “we”, “us”, “our”, or similar references mean Charlie’s Holdings, Inc., its subsidiaries and consolidated variable interest entity on a consolidated basis.*

### Overview

The Company’s objective is to become a leader in three broad product categories: (i) non-combustible nicotine-related products, (ii) alternative alkaloid vapor products, and (iii) hemp-derived vapor and edible products. Through our Charlie’s subsidiary, we formulate, market, and distribute premium, nicotine-based and alternative alkaloid vapor products. Charlie’s products are produced through contract manufacturers for sale through select distributors, specialty retailers, and third-party online resellers throughout the United States, as well as in more than 80 countries worldwide. Charlie’s primary international markets include the United Kingdom, Italy, Spain, New Zealand, Australia, and Canada. Through Don Polly, we develop, market and distribute products containing compounds derived from hemp.

### Operational Plan

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

Priority 1: In 2022, we initiated a plan and began to invest substantial time and resources to develop various proprietary products and new technologies in order to achieve competitive advantages in the vapor and alternative products marketplace. In conjunction with internal and external research and development resources, we have endeavored to identify a nicotine substitute (“*Metatine™”*) to be used in lieu of tobacco-based and synthetically derived nicotine. We believe adult consumers will enjoy Metatine vapor products in much the same way that they enjoy traditional vapor products. However, because Metatine is not made or derived from tobacco, and because Metatine does not consist of or contain nicotine from any source, the FDA's Center for Tobacco Products does not have jurisdiction to regulate Metatine. Accordingly, if the Company is successful utilizing Metatine in the development of a viable commercial product, such a product would allow us additional flexibility in offering both flavored and non-flavored vapor products to adult consumers looking to transition away from traditional combustible and smokeless tobacco products.

The Company has also begun to develop intellectual property around technologies designed to prevent youth access to nicotine vapor products. Edward Carmines, Ph.D., a member of Charlie’s Board of Directors and an accomplished scientist and regulatory affairs expert, is spearheading Charlie's development of patented "age-gating technology" for both Charlie's and potential licensees of the Company. Currently, there is a need for age-gated product technologies that can satisfy or accommodate concerns the FDA has related to under-age youth access in the ENDS market. If our age-gated e-cigarettes-in-development are recognized as "products of merit" by the FDA, Charlie's e-cigarettes could emerge among the select minority of flavored nicotine disposables able to be sold legally in the $7 billion U.S. vapor products market.

Rounding out the Company’s research and development initiatives are Charlie’s efforts to expand and enhance the PINWEEL product line. PINWEEL is Charlie’s alternative cannabis brand that contains only cannabinoids derived from the hemp plant. Since our PINWEEL product line contains only cannabinoids made from 100% hemp extract, we are able to legally manufacture, distribute and sell to consumers in the United States. As a result of the Agriculture Improvement Act (the “*Farm Bill”*), ratified and signed into law in December 2018, cannabis containing less than 0.3% Delta 9-THC is legally classified as hemp and is thus legal under federal law. Accordingly, with the objective of developing an array of new purpose-driven alternative cannabis products that offer adult consumers an enjoyable alternative to alcohol and traditional cannabis products, the Company continues to develop new PINWEEL vapor products, edibles, and other novel products.

Priority 2: In November 2022, we successfully launched our PINWEEL brand of alternative cannabis products. In 2023, we plan to increase sales and marketing efforts of our PINWEEL product line, including ingestibles and disposable vapor devices. We feel there is a significant upside in the hemp-derived products space, and we have begun to shift our focus in this business to the burgeoning “alternative cannabis” market for products containing live resin blends of hemp-derived cannabinoids. These product categories have grown rapidly, as they offer consumers a range of benefits across varying potencies and product formats. Alternative cannabis products contain only cannabinoids that are derived from the hemp plant, 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.

Priority 3: We will expand and refocus our sales team. Currently, we are increasing the number of independent contractor account executives, as well as refining the skill set of our existing sales team. An expanded sales team will more effectively manage key customer relationships across a larger number of reps, mitigating concentration risks and assuring adequate coverage. The sales team is organized into two groups, each with a specific mandate for targeting customers. One group will focus on direct-to-retail (smoke shops, chain stores, adult beverage/liquor stores, gas stations, and grocery stores) with the goal of acquiring 1,000 new customer accounts in 2023. The second group will focus on satisfying the requirements of mega-distributors (McLane, Coremark, HT Hackney, Eby-Brown) in order to sell into the nation’s largest chain store accounts. Additionally, to broaden our footprint with customers and to minimize order size variability, sales reps will rebalance their product sales mix, placing enhanced focus on alternative cannabis and legacy e-liquid products.

Priority 4: In order to mitigate FDA regulatory risk in the domestic market and to capture what management believes is a significant commercial opportunity, we have dedicated additional resources to efforts focused on growing our market share internationally. Presently, approximately 17% of our vapor product sales come from the international market and we are well positioned to increase sales in countries where we already have presence and, in additional overseas markets, as we have already built an international distribution platform. To facilitate this plan, we recently hired an Account Executive who will be dedicated to driving our efforts in international expansion. More specifically, we plan to build-out a dedicated international team, including country managers and marketing coordinators, to market and sell a suite of custom-made products to new and existing international customers.

### Recent Developments

#### Preferred Stock Amendment

The Board of Directors and the holders of a majority of the Series A Convertible Preferred Stock approved an amendment (the “*Amendment”*) to our Certificate of Designations, Preferences, and Rights of the outstanding shares of Series A Convertible Preferred Stock (the “Certificate of Designations”). The Amendment (i) adds the New York Stock Exchange and the NYSE American markets to the list of national security exchanges that would satisfy the condition in Section 4(b)(i) of the Certificate of Designations which, upon a listing on such exchanges, causes an automatic conversion of the Series A Convertible Preferred Stock into shares of common stock and (ii) increases the amount of Permitted Indebtedness (as defined in the Certificate of Designations) from $2.5 million to an amount not to exceed $6.0 million. The Amendment was effectuated through the filing of the Certificate of Amendment with the Secretary of the State of Nevada on March 31, 2023 and effective on such date.

#### January 2023 Receivables Financing

On January 19, 2023 the Company entered into a future receivables sale agreement (“*Receivables Financing”* or “*Receivables Financing Agreement”*) with Austin Business Finance (“*Austin Purchaser”*) by which Austin Purchaser purchases from the Company, its future accounts and contract rights arising from the sale of goods or rendition of services to the Company’s customers. The purchase price, as defined by the Receivables Financing Agreement, was $650,000 which was paid to the Company on January 19, 2023, net of a 3% origination fee. The Receivables Financing Agreement requires twenty-six equal payments of $29,500 to be paid weekly for a total repayment of $760,500 over the term of the agreement. The Company is eligible for an early repayment discount if the balance is paid prior to the July 21, 2023 termination date. During the three months ended March 31, 2022, the Company made approximately $263,000 cash payment. As of March 31, 2023, the outstanding principal under the Receivables Financing Agreement was approximately $497,000.

### Impact of COVID-19

The outbreak of a novel strain of coronavirus (“*COVID-19”*, or, “*Coronavirus”*) has had a negative impact on the global economy and the markets in which we operate. Beginning in March 2020, the Company transitioned nearly all employees to a remote working environment for their safety and to protect the integrity of Company operations, which have largely returned to the office. 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 and Ability to Continue as a Going Concern

The Company operates in an environment that is subject to rapid changes and developments in laws and regulations that could have a significant impact on the Company’s ability to sell its products. Beginning in *September 2019,* certain states temporarily banned the sale of flavored e-cigarettes, and several states and municipalities are considering implementing similar restrictions. Federal, state, and local governmental bodies across the United States have indicated that flavored e-cigarette liquid, vaporization products and certain other consumption accessories *may* become subject to new laws and regulations at the federal, state, and local levels. In addition, in *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. Any ban of the sale of flavored e-cigarettes directly limits the markets in which the Company *may* sell its products. In the event the prevalence of such bans and/or changes in laws and regulations increase across the United States, or internationally, the Company’s business, results of operations, and financial condition could be adversely impacted. In addition, the Company is presently seeking to obtain marketing authorization for certain of its tobacco-derived nicotine e-liquid products. The Company’s applications were submitted in *September 2020* on a timely basis, which if approved, will allow the Company to continue to sell its approved products in the United States. Beginning in *August 2021,* the FDA began issuing Marketing Denial Orders (“*MDO”*) for ENDS products that lack evidence to demonstrate that permitting the marketing of such products would be appropriate for the protection of the public health. The Company has *not* received an MDO for any of its submissions; however, there is *no* assurance that regulatory approval to sell our products will be granted or that we would be able to raise additional financing if required, which could have a significant impact on our sales. On *March 15, 2022,* a new rider to the Federal Food, Drug and Cosmetic Act was passed granting the FDA authority over synthetic nicotine. These regulations make the Company’s synthetic nicotine products subject to the same FDA rules as tobacco-derived nicotine products. As such, the Company was required to file a PMTA for its existing synthetic nicotine products marketed under the Pacha brands by *May 14, 2022* or be subject to FDA enforcement. The Company filed new PMTAs, for its synthetic Pacha products on *May 13, 2022,* prior to the *May 14, 2022* deadline. On *November 3, 2022,* FDA accepted for scientific review certain of our PMTAs for synthetic nicotine products and, on *November 4, 2022,* FDA refused to accept certain other PMTAs for these products, rendering the latter products subject to FDA enforcement. The Company submitted an administrative appeal with FDA regarding its refusal to accept certain of the PMTAs, and has resubmitted PMTAs for, and continues to sell, the affected synthetic nicotine 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 the event the FDA denies our PMTAs, we would be required to remove products and cease selling them.

As discussed below, our financial statements and working capital raise substantial doubt about the Company’s ability to continue as a going concern. 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. See Liquidity and Capital Resources below for additional information.

### Results of Operations for the Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022

Regarding results from operations for the quarter ended March 31, 2023, we generated revenue of approximately $4,030,000, as compared to revenue of $8,074,000 for the three months ended March 31, 2022. This $4,044,000 decrease in revenue was due primarily to a $3,085,000 in sales of our nicotine-based vapor products, as well as a $959,000 decrease in sales of our hemp-derived products.

We generated net loss for the three months ended March 31, 2023, of approximately $1,390,000 as compared to net income of approximately $706,000 for the three months ended March 31, 2022. The net loss for the three months ended March 31, 2023 includes a non-cash gain in fair value of derivative liabilities of $223,000 compared to a non-cash gain in fair value of derivative liabilities of $340,000 during the three months ended March 31, 2022.

A review of the three-month period ended March 31, 2023, follows:

*($ in thousands)*

| Revenues: | For the three months ended March 31, 2023 | 2022 | Change Amount | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Product revenue, net | $4,030 | $8,074 | $(4,044) | -50.1% |
| Total revenues | 4,030 | 8,074 | (4,044) | -50.1% |
| **Operating costs and expenses:** |  |  |  |  |
| Cost of goods sold - product revenue | 3,139 | 4,434 | (1,295) | -29.2% |
| General and administrative | 1,988 | 2,559 | (571) | -22.3% |
| Sales and marketing | 368 | 703 | (335) | -47.7% |
| Research and development | 52 | 11 | 41 | 372.7% |
| Total operating costs and expenses | 5,547 | 7,707 | (2,160) | -28.0% |
| (Loss) income from operations | (1,517) | 367 | (1,884) | -513.4% |
| **Other income (expense):** |  |  |  |  |
| Interest expense | (131) | (1) | (130) | 13000.0% |
| Debt extinguishment gain | 35 | - | 35 | 100% |
| Change in fair value of derivative liabilities | 223 | 340 | (117) | -34.4% |
| Total other income | 127 | 339 | (212) | -62.7% |
| **Net (loss) income** | **$(1,390)** | **$706** | **$(2,096)** | -296.8% |

### Revenue

Revenue for the three months ended March 31, 2023, decreased by approximately $4,044,000 or 50.1%, to approximately $4,030,000, as compared to approximately $8,074,000 for same period in 2022 due to a $3,085,000 decrease in sales of our nicotine-based vapor products, as well as a $959,000 decrease in sales of our hemp-derived products. The decrease in our nicotine-based vapor product sales was primarily driven by decreased sales of our Pacha Disposable line. 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. Despite a strong performance during its initial launch, this category has faced challenges including increased competition from low-priced Chinese products, the 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. The decrease in sales for our hemp-derived business was directly related to a weaker than expected launch of our new PINWEEL brand of hemp-derived cannabinoid products. The hemp-derived products market is currently experiencing a confluence of challenges including an influx of low-cost brands, as well as a rapid 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 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 decreased by approximately $1,295,000 or 29.2%, to approximately $3,139,000 or 77.9% of revenue, for the three months ended March 31, 2023, as compared to approximately $4,434,000, or 54.9% of revenue, for the same period in 2022. This cost, as a percent of revenue, increased significantly due to a large provision for inventory obsolescence related to certain of our nicotine and alternative cannabis disposable products. The increased provision for inventory obsolescence was mostly the result of compressed product lifecycles in both the nicotine disposable and alternative cannabis product categories.

### General and Administrative Expenses

For the three months ended March 31, 2023, total general and administrative expenses decreased by approximately $571,000 to $1,988,000 as compared to approximately $2,559,000 for the same period in 2022. This change was primarily due to decreases of $481,000 in payroll and benefits, $39,000 in professional fees and approximately $66,000 in other general and administrative expenses. The decrease in payroll and benefits was primarily the result of staff consolidation, elective executive salary reductions and a reduced bonus accrual for the period. During the three months ended March 23, 2023, professional fees decreased due to reduced tax preparation costs and other consulting fees. The decrease in other general and administrative expenses was primarily due to lower merchant account fees and a reduced bad debt provision resulting from softened sales activity during the period. The Company will continue to monitor its operating cost structure in the coming quarters and will continue evaluate the need to make further modifications.

### Sales and Marketing Expense

For the three months ended March 31, 2023, total sales and marketing expense decreased by approximately $335,000, 47.7%, to approximately $368,000 as compared to approximately $703,000 for the same period in 2022, which was primarily due to reduced marketing and commission costs during the period. Digital marketing, use of promotional materials and tradeshow costs were all adjusted for weaker anticipated sales activity during the quarter ended March 31, 2023. Our commission costs, included in sales and marketing expense, was also lower during the period due to lower sales during the period.

### Research and Development Expense

For the three months ended March 31, 2023, total research and development costs increased to approximately $41,000 as compared to approximately $11,000 for the same period in 2022, which was primarily due to costs associated with the development of new technologies and product formats.

### (Loss) Income from Operations

We had operating loss of approximately $1,517,000 for the three months ended March 31, 2023, compared with operating income of approximately $367,000 for the three months ended March 31, 2022, due primarily to a decrease in sales. We also incurred certain non-cash, general and administrative expenses during the period including a $41,000 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 March 31, 2023, the gain in fair value of derivative liabilities was $223,000, compared to a gain in fair value of derivative liabilities of $340,000 for the three months ended March 31, 2022. The derivative liability is associated with the issuance of the Investor Warrants and the Placement Agent Warrants (as defined in Note 3 of this Report) in connection with the Share Exchange. The gain for the quarter ended March 31, 2023, reflects the effect of the decrease in stock price as of March 31, 2023, compared to December 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 March 31, 2023.
- Interest Expense. For the three months ended March 31, 2023 and 2022, we recorded interest expense related to notes payable of $131,000 and $1,000, respectively. The increase was primarily due to amortization of debt discount associated with the future receivable sale financing, and contractual interest associated with April 2022 and August 2022 promissory notes.
- Debt extinguishment gain. For the three months ended March 31, 2023 and 2022, we recorded a debt extinguishment gain of $35,000 and $0, respectively. The gain resulted from a modification to the promissory note issued to Michael King, a significant shareholder, which extended the maturity date to March 2025.

### Net (Loss) Income

For the three months ended March 31, 2023, we had net loss of $1,390,000 as compared to a net income of $706,000 for the same period in 2022.

### Liquidity and Capital Resources

As of March 31, 2023, we had working capital of approximately $718,000, which consisted of current assets of approximately $4,935,000 and current liabilities of approximately $4,217,000, as compared to working capital of approximately $1,067,000 at December 31, 2022. The current liabilities include approximately $2,210,000 of accounts payable and accrued expenses, notes payable of $497,000 which was net of a $52,000 debt discount, note payable from a related party of $300,000, approximately $471,000 of deferred revenue associated with product shipped but not yet received by customers, approximately $385,000 of lease liabilities, and $406,000 of derivative liability associated with the Investor Warrants and Placement Agent Warrants (the derivative liability of $406,000 is included in determining working capital of $718,000 but is not expected to use any cash to ultimately satisfy the liability).

On January 19, 2023 the Company entered into a future receivables sale agreement (“*Receivables Financing” or “Receivables Financing Agreement”*) with Austin Business Finance (“*Austin Purchaser”*) by which Austin Purchaser purchases from the Company, its future accounts and contract rights arising from the sale of goods or rendition of services to the Company’s customers. The purchase price, as defined by the Receivables Financing Agreement, was $650,000 which was paid to the Company on January 19, 2023, net of a 3% origination fee. The Receivables Financing Agreement requires twenty-six equal payments of $29,500 to be paid weekly for a total repayment of $760,500 over the term of the agreement. The Company is eligible for an early repayment discount if the balance paid prior to the July 21, 2023 termination date. During the three months ended March 31, 2022, the Company made approximately $263,000 cash payment. As of March 31, 2023, the outstanding principal under the Receivables Financing Agreement was approximately $497,000.

Our cash and cash equivalents balance at March 31, 2023 was approximately $383,000.

For the three months ended March 31, 2023, net cash used in operating activities was approximately $241,000, resulting from a net loss of $1,390,000, offset by a change in operating assets and liabilities of $1,063,000 and net non-cash activity of $86,000. For the three months ended March 31, 2022, net cash used in operating activities was approximately $372,000, resulting from a net income of $706,000, offset by a $340,000 of change in fair value of derivative liabilities and $1,037,000 of changes in our operating assets and liabilities.

For the three months ended March 31, 2023, we generated approximately $630,000 cash from financing activities related to sale of future receivables and made repayment of $263,000 under the same agreement.

***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. For the three months ended March 31, 2023, the Company’s revenue declined sequentially, the Company generated a loss from operations of approximately $1,517,000, and a consolidated net loss of approximately $1,390,000 and used cash in operations of approximately $241,000. The Company had stockholders’ equity of $355,000 at March 31, 2023. During the three months ended March 31, 2023, the Company’s working capital requirements continued to evolve as current assets decreased to $4,935,000 from $5,850,000 as of December 31, 2022 and current liabilities increased to $4,217,000 from $4,783,000 as of December 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 and the removal of certain products for sale. These regulatory risks, as well as other industry-specific challenges and our low working capital and cash position, 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, procure cost-effective financing, 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. The Company has undergone cost-cutting measures including salary reductions of up to 25% for officers and certain managers and a reduction in headcount for certain departments. During 2023, we also plan to launch additional products that are not subject to FDA review or covered under the Agriculture Improvement Act (the “*Farm Bill”*). 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. 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. If we do not have sufficient funds to continue operations, we could be required to seek bankruptcy protection or other alternatives that would likely result in our stockholders losing some or all their investment in us.

### 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 2022 Annual Report.

## Controls and procedures

As filed, 1,994 characters.

#### (a) Evaluation of disclosure controls and procedures

Our management, with the participation of our President and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “*Exchange Act”*) as of the end of the period covered by this Report. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on our evaluation, our President, the principal executive officer, and Chief Financial Officer concluded that, as of March 31, 2023, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

#### (b) Changes in internal control over financial reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15 of the Exchange Act that occurred during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 1,024 characters.

Our results of operations and financial condition are subject to numerous risks and uncertainties described in the 2022 Annual Report. In addition to the other information set forth in this Report, you should carefully consider the risk factors discussed in Part 1, Item 1A, of the 2022 Annual Report and subsequent reports filed pursuant to the Exchange Act which could materially and adversely affect the Company’s business, financial condition, results of operations, and stock price. Any losses or damages we incur could have a material adverse effect on our financial results and our ability to conduct business as expected. The risks described in our 2022 Annual Report and in our subsequent reports filed pursuant to the Exchange Act are not the only risks facing the Company. Additional risks and uncertainties not presently known to management, or that management presently believes not to be material, may also result in material and adverse effects on our business, financial condition, and results of operations.

Filed May 19, 2023.
Source: SEC EDGAR, the filing index for accession 0001437749-23-015181. Last ingested by Listed: Oct 24, 2026, 15:05 ET. No prices; not investment advice.