# Charlie's Holdings, Inc.: Form 10-Q for the period ended Mar 31, 2024

- Company: [Charlie's Holdings, Inc.](/companies/chuc.md) (CIK 1134765)
- Form: 10-Q
- Filed: 2024-05-20
- Accepted by EDGAR: May 20, 2024, 16:30 ET
- Period: 2024-03-31
- Accession: 0001437749-24-017669
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1134765/000143774924017669/chuc20240331_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1134765/000143774924017669/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-01-01 to 2024-03-31 | $3.1m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Research and development | 3 months, 2024-01-01 to 2024-03-31 | $6.0k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2024-01-01 to 2024-03-31 | −$941.0k | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2024-01-01 to 2024-03-31 | $183.0k | us-gaap:InterestExpense |
| Net income | 3 months, 2024-01-01 to 2024-03-31 | −$1.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.00 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.00 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-01-01 to 2024-03-31 | 220,602,363 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2024-01-01 to 2024-03-31 | −$431.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2024-03-31 | $176.0k | us-gaap:Cash |
| Current assets | at 2024-03-31 | $4.2m | us-gaap:AssetsCurrent |
| Total assets | at 2024-03-31 | $4.7m | us-gaap:Assets |
| Current liabilities | at 2024-03-31 | $5.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-03-31 | $5.8m | us-gaap:Liabilities |
| Long-term debt | at 2024-03-31 | $2.8m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2024-03-31 | −$1.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 35,782 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, 2023 (the “2023 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 2023 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 two broad product categories: (i) non-combustible nicotine-related products, and (ii) alternative alkaloid vapor 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 and select international markets.

### 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 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 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.

With the advent of our nicotine substitute Metatine, we plan to continue developing product formats that offer adult consumers a satisfying alternative to traditional nicotine products. The SPREE BAR™ line of vapor products launched in late 2023 and is now offered for sale by twelve master distributors across the United States. We are currently working on a second-generation disposable device as well as Metatine-based e-liquids that are both slated for launch sometime during the summer of 2024. We recognize the challenges in marketing non-nicotine-based products in a market saturated with traditional nicotine disposable vapor products and we are committed to continuous improvement of the product in order to satisfy our consumers’ demands.

**Priority 2:** Since our founding in 2014, Charlie’s has created literally hundreds of products that provide adult smokers with a viable means of abandoning cigarettes. Not coincidentally, over the last 10-15 years e-cigarette usage in the United States has grown significantly, and cigarette smoking rates have dropped. Accordingly, tobacco and synthetically derived nicotine vapor products continue to provide significant growth opportunities for Charlie’s. In 2021, we launched our synthetic nicotine (not derived from tobacco) Pacha (formerly Pachamama Disposable) product line, which provides access to additional sales channels and broadens our customer base. These innovative product formats continue to represent an extremely important product category for Charlie’s and we intend to grow our nicotine disposable business in 2024.

To date, Charlie’s has invested more than $5 million on the submission of Premarket Tobacco Applications (“*PMTAs”*) and subsequent amendments to these applications to the FDA. We engaged a team of more than 200 professionals, including doctors, scientists, biostatisticians, data analysts, and numerous contract research organizations to create Charlie’s comprehensive PMTA submissions. Notwithstanding Charlie’s meaningful and costly regulatory initiatives – and despite the fact that hundreds of other companies across the United States invested hundreds of millions of dollars to submit more than 26 million PMTAs – to date, the FDA has only authorized 23 tobacco-flavored e-cigarette products and devices. Accordingly, even though former FDA Commissioner Dr. Scott Gottlieb described e-cigarettes as far lower on the “continuum of risk” than combustible cigarettes, fewer than 1% of the PMTA’s for e-cigarette products and devices have survived FDA’s regulatory gauntlet.

Nonetheless, we are continuing to seek FDA marketing authorization for certain of both our nicotine vapor products and our synthetic nicotine vapor products. Obtaining one or more marketing orders from the FDA could, we believe, could help to remediate perceived health issues related to vaping, and further position the Company as a trusted, industry leader.

**Priority 3:** The Company has 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.

Underlining the importance of Charlie’s work with age-gating technology is an initiative taken by JUUL Labs, one of the largest competitors in our industry. In July JUUL announced that it has submitted a PMTA with the FDA for a new e-cigarette device that also included information on novel, data-driven technologies to restrict underage access. JUUL’s chief product officer explained, “With our next-generation platform, we have designed a technological solution for two public-health problems: improving adult-smoker switching from combustible cigarettes and restricting underage access to vapor products...” Similar to the age-gating technology under development at Charlie’s, the JUUL device includes a mobile and web-based app that enables age-verification technology, including device-locking, and real-time product information and usage insights for age-verified consumers with industry-leading data-privacy protections.

**Priority 4**: In order to mitigate FDA regulatory risk in the domestic market and to capture what management continues to believe is a significant commercial opportunity, we have dedicated additional resources to efforts focused on growing our market share internationally. Presently, approximately 16% 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.

### 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. The administrative appeal was granted on October 30, 2023 and the products were accepted to move forward in the PMTA review process. The Company continues to sell the affected synthetic nicotine products while the PMTA review process continues. 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.

The Company recently launched new disposable vape products, under the “SPREE BAR™” brand, that the Company expects will (i) replace most of its legacy products and (ii) become the single largest, most important commercial opportunity in Charlie’s history. The Company and its attorneys believe SPREE BAR products are not subject to FDA review. Based on the information provided by the Company’s contracted chemical suppliers and its consultants, the proprietary Metatine™ (patented in the United States and in China by the Company’s chemical supplier) in the Company’s SPREE BAR products does not meet the definition of nicotine set forth in 21 U.S.C. § 387(12) and therefore its products containing Metatine, as their active ingredient, are not subject to regulation as “tobacco products” under 21 U.S.C. § 321(rr). Further, according to information provided by the Company’s chemists, the other ingredients in the Company’s SPREE BAR vape liquid are not made or derived from tobacco, nor do they contain nicotine from any source. The documentary support for these facts, including a Certificate of Analysis (COA) for the Metatine used in the Company’s SPREE BAR products, corroborates these conclusions. However, should any of these understandings be incorrect, the Company’s position on Metatine not qualifying as a “tobacco product” would need to be revisited. Further, should Congress bestow regulatory control over Metatine to the FDA, or should the FDA deem Metatine disposable vape devices “tobacco products” despite the facts that Metatine is not a salt or complex of nicotine, and is not itself derived from nicotine or tobacco, SPREE BAR products might then be subject to the FDA tobacco requirements, including, but not limited to, the requirement that all newly deemed tobacco products obtain premarket authorization before entering the U.S. market. If this were to happen, the FDA could bring an enforcement action against our Metatine products for lack of premarket authorization. More generally, FDA’s regulatory initiatives and enforcement authority regarding our products are unpredictable and continue to evolve and we cannot predict whether FDA’s priorities and/or potential jurisdiction over our products will require us to remove our products from the market and to 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.

### Recent Developments

#### Expiration of Warrants

On April 26, 2024, the Investor Warrants and Placement Agent Warrants expired without being exercised.

#### January 2024 Note Financing

On January 24, 2024, the Company issued an unsecured promissory note (the “*Red Beard Note”*) to one of its largest stockholders Red Beard Holdings LLC (the “*Red Beard Lender*"), in the principal amount of $500,000. Red Beard Note shall bear interest at twenty-one percent (21%) per annum and have maturity through July 24, 2024.

### Results of Operations for the Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023

Regarding results from operations for the quarter ended March 31, 2024, we generated revenue of approximately $3,051,000, as compared to revenue of $4,030,000 for the three months ended March 31, 2023. This $979,000 decrease in revenue was due primarily to a $657,000 decrease in sales of our nicotine-based vapor products, as well as a $322,000 decrease in sales of our hemp-derived products.

We generated a net loss for the three months ended March 31, 2024, of approximately $1,045,000 as compared to a net loss of $1,390,000 for the three months ended March 31, 2023. The net loss for the three months ended March 31, 2024 includes a non-cash gain in fair value of derivative liabilities of $79,000 compared to a non-cash gain in fair value of derivative liabilities of $223,000 during the three months ended March 31, 2023.

A review of the three-month period ended March 31, 2024, follows:

*($ in thousands)*

| Revenues: | For the three months ended March 31, 2024 | 2023 | Change Amount | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Product revenue, net | $3,051 | $4,030 | $(979) | -24.3% |
| Total revenues | 3,051 | 4,030 | (979) | -24.3% |
| **Operating costs and expenses:** |  |  |  |  |
| Cost of goods sold - product revenue | 2,107 | 3,139 | (1,032) | -32.9% |
| General and administrative | 1,545 | 1,988 | (443) | -22.3% |
| Sales and marketing | 334 | 368 | (34) | -9.1% |
| Research and development | 6 | 52 | (46) | -88.7% |
| Total operating costs and expenses | 3,992 | 5,547 | (1,555) | -28.0% |
| Loss from operations | (941) | (1,517) | 576 | -38.0% |
| **Other income (expense):** |  |  |  |  |
| Interest expense | (183) | (131) | (52) | 40.0% |
| Debt extinguishment gain | - | 35 | (35) | -100.0% |
| Change in fair value of derivative liabilities | 79 | 223 | (144) | -64.8% |
| Total other income | (104) | 127 | (231) | -181.8% |
| **Net loss** | **$(1,045)** | **$(1,390)** | **$345** | -24.9% |

18

### Revenue

Revenue for the three months ended March 31, 2024, decreased by approximately $979,000 or 24.3%, to approximately $3,051,000, as compared to approximately $4,030,000 for same period in 2023 due to a $657,000 decrease in sales of our nicotine-based vapor products, and a $322,000 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 as well as periodic, voluntary stockouts of our e-liquid products. Despite a strong performance during its initial launch, our Pacha Disposables line has faced challenges including increased competition from low-priced Chinese products, the requirement for synthetic nicotine products to obtain marketing authorization from the FDA, and continued uncertainty surrounding the FDA’s issuance of MDO’s and Refuse-to-File designations. The launch of the Company’s SPREE BAR line of nicotine substitute vapor products required enhanced focus and resource allocation in order to support sales and marketing efforts, which ultimately affected the sales performance of other product categories.

The decrease in sales for our hemp-derived business during the quarter was directly related to the diversion of working capital and other resources towards the ramp up of our SPREE BAR line of nicotine substitute vapor products. Despite achieving increased market share for our PINWEEL brand of hemp-derived products, we believe that the market for alternative alkaloid products, such as SPREE BAR, offers the Company the most significant opportunity for growth.

### 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 $1,032,000 or 32.9%, to approximately $2,107,000, or 69.0% of revenue, for the three months ended March 31, 2024, as compared to approximately $3,139,000, or 77.9% of revenue, for the same period in 2023. This cost, as a percent of revenue, decreased compared to last year due to a reduced inventory obsolescence expense related to both nicotine and hemp-derived products.

### General and Administrative Expenses

For the three months ended March 31, 2024, total general and administrative expenses decreased by approximately $443,000 to $1,545,000 as compared to approximately $1,988,000 for the same period in 2023. This change was primarily due to decreases of approximately $245,000 in non-commission payroll and benefits costs, $82,000 in provision for bad debt, $43,000 in certain professional fees, and approximately $73,000 in other general and administrative expenses. The decrease in payroll and benefits costs was primarily driven by elective salary reductions for executives and a reduced bonus accrual. The decrease in bad debt provision was largely the result of lower sales activity during the period. Decreased professional fees resulted from reduced legal and accounting services during the period. The reduction in other general and administrative expenses largely consisted of decreased information systems expenses and merchant service fees.

### Sales and Marketing Expense

For the three months ended March 31, 2024, total sales and marketing expense decreased by approximately $34,000 to approximately $334,000 as compared to approximately $368,000 for the same period in 2023, which was primarily due to reduced marketing and commission costs during the period but was offset by slightly higher tradeshow activity. During the quarter ended March 31, 2024, the Company enhanced its tradeshow presence to support the launch of SPREE BAR.

### Research and Development Expense

For the three months ended March 31, 2024, total research and development costs decreased by approximately $46,000 to approximately $6,000 as compared to approximately $52,000 for the same period in 2023, which was primarily due to reduced costs associated with the development of new technologies and product formats.

### Loss from Operations

We incurred a loss from operations of approximately $941,000 for the three months ended March 31, 2024, compared to loss of approximately $1,517,000 for the three months ended March 31, 2023, due primarily to a higher gross profit and significant decrease in general and administrative expenses. We also incurred certain non-cash, general and administrative expenses during the period including a $62,000 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, 2024, the gain in fair value of derivative liabilities was $79,000, compared to a gain in fair value of derivative liabilities of $223,000 for the three months ended March 31, 2023. The derivative liability is associated with 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 21, 2024, reflects the effect of the decrease in stock price as of March 31, 2024, compared to December 31, 2023. We had 40,337,693 warrants outstanding as of March 31, 2024, which expired without being exercised in April 2024.
- Interest Expense. For the three months ended March 31, 2024, and 2023, we recorded approximately $107,000 and $7,000 of related party interest expense. For the same periods, we recorded total interest expense related to notes payable of $183,000 and $131,000, respectively. The increase was primarily due to $700,000 of notes payable that were entered in July 2023, which bear interest at twenty-one percent (21%) per annum.

### Net Loss

For the three months ended March 31, 2024, we incurred a net loss of $1,045,000 as compared to net loss of $1,390,000 for the same period in 2023.

### Liquidity and Capital Resources

As of March 31, 2024, we had working capital deficit of approximately $1,454,000, which consisted of current assets of approximately $4,187,000 and current liabilities of approximately $5,641,000, as compared to working capital of approximately $332,000 at December 31, 2023. The current liabilities include approximately $2,520,000 of accounts payable and accrued expenses, notes payable of $559,000, notes payable from related parties of $2,072,000, approximately $192,000 of deferred revenue associated with product shipped but not yet received by customers, and approximately $298,000 of current lease liabilities.

Our cash and cash equivalents balance at March 31, 2024 was approximately $176,000. As of March 31, 2024, we have the following notes outstanding:

- *January 2024 Note Financing*. On January 24, 2024, the Company issued an unsecured promissory note (the “*Red Beard Note”*) to one of its largest stockholders Red Beard Holdings LLC (the “*Red Beard Lender*"), in the principal amount of $500,000. Red Beard Note shall bear interest at twenty-one percent (21%) per annum and have maturity through July 24, 2024.
- *July 2023 Note Financing*. Between July 17, 2023 and August 1, 2023, the Company issued unsecured promissory notes (the “*Notes”*) to several of its executives and employees, Ryan Stump, Henry Sicignano III, Keith Stump, and Jessica Greenwald, and to three of its largest stockholders, Brandon Stump, Red Beard Holdings LLC, and Michael King (the “*Lenders"*), in the cumulative principal amount of $1,400,000. Notes shall bear interest at twenty-one percent (21%) per annum and have maturity dates ranging from November 17, 2023 to December 10, 2023. As of March 31, 2024, $400,000 remained outstanding and the maturity dates of the outstanding notes have been extended to July 17, 2024.
- *April 2022 Note Financing*. On April 6, 2022, the Company issued a secured promissory note (the “*Note”*) to one of its individual stockholders, and a member of the Company’s Board of Directors since June 13, 2023, Michael King (the ”*Lender"*), in the principal amount of $1,000,000, which Note is secured by accounts receivable of the Company pursuant to the terms of a Security Agreement entered into by and between the Company and the Lender (the *"Note Financing"*). The Note initially required the payment of principal in full and guaranteed interest in an amount the greater of 18% per annum, or $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. 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. On March 28, 2023, the Company entered into a second modification to the Note to extend the maturity date to April 28, 2024, contingent upon the payment of all interest accrued under the Note through March 28, 2023 and certain other modifications to the Note. Principal shall be payable on the 28th day of each month in installments of $25,000, commencing April 28, 2023, continuing up to and including April 28, 2024 whereby a balloon payment for the remaining principal balance will be paid. Immediately following the second modification, the Company entered into a third modification agreement to further extend the maturity date to March 28, 2025. The third modification agreement was effective on March 28, 2023 and superseded the second modification. Interest shall accrue on the aggregate outstanding principal amount at a rate equal to 20% simple interest per annum and shall be payable on the same day as installments of principal are payable. The Company may prepay all or any portion of the principal amount, together with all accrued but unpaid interest thereon, at any time without premium or penalty. All outstanding principal and interest are due earlier of March 28, 2025, or a liquidity event. The third modification was recognized as a debt extinguishment, resulting in a gain on debt extinguishment of approximately $35,000. The Company used the proceeds from the Note for general corporate purposes, and its working capital requirements, pending the availability of alternative debt financing.
- *August 2022 Note 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 an additional $3,000 issuance cost resulting from the payment of the Stump Lender’s legal fees. On April 15, 2024 the Company and Stump Lender entered into a fifth modification to the Loan to extend the maturity date to August 21, 2024.
- *December 2023 Receivables Financing.* On December 13, 2023 the Company entered into a second future receivables sale agreement (“*Second 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 Second Receivables Financing Agreement, was $750,000 which was paid to the Company on December 13, 2023, net of a 3% origination fee. The Second Receivables Financing Agreement requires fifty-two equal payments of $17,740 to be paid weekly for a total repayment of $922,500 over the term of the agreement.

For the three months ended March 31, 2024, net cash used in operating activities was approximately $431,000, resulting from a net loss of $1,045,000, offset by a change in operating assets and liabilities of $412,000 and net non-cash activity of $202,000. 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, 2024, we generated approximately $240,000 in cash from financing activities related to the issuance of notes payable to a related party of $500,000 and the repayment of $260,000 in notes payable, including $30,000 to a related party.

***Substantial Doubt to Continue as a Going Concern Regarding the Legal and Regulatory Environment, Liquidity and Management’s Plan of Operation***

Our consolidated 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 a significant cost associated with the application process and there can be no assurance the FDA will approve previous and/or future applications. For the three months ended March 31, 2024, the Company’s revenue declined, the Company generated a loss from operations of approximately $941,000, and a consolidated net loss of approximately $1,045,000. Cash used in operations was approximately $431,000. The Company had a stockholders’ deficit of $1,090,000 at March 31, 2024. During the three months ended March 31, 2024, the Company’s working capital position decreased to a deficit of $1,454,000 from $332,000 as of December 31, 2023. Considering these facts, the issuance of one or several Marketing Denial Orders (*"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 cumulative expenditures of approximately $5,100,000 as of March 31, 2024, 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 the fourth quarter of 2023, the Company launched SPREE BAR, a non-nicotine, disposable vapor product which is not subject to FDA review or covered under the Agriculture Improvement Act (the “*Farm Bill”*). The Company may require additional financing in the future to support the development of new product categories as well as 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 2023 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, 2024, 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, 2024, 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 2023 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 2023 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 2023 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 20, 2024.
Source: SEC EDGAR, the filing index for accession 0001437749-24-017669. Last ingested by Listed: Oct 24, 2026, 15:05 ET. No prices; not investment advice.