UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
For the transition period from _________ to _________
Commission file number
| CHARLIE’S HOLDINGS, INC. |
| (Exact Name of Registrant as Specified in Its Charter) |
| | | |
| (State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) |
(Address of Principal Executive Offices)
(
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| | Smaller reporting company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-12 of the Exchange Act). Yes
Securities registered pursuant to Section 12(b) of the Act: None
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
The number of shares of the registrant’s Common Stock, par value $0.001 per share, issued and outstanding on November 18, 2022 was
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2022
INDEX
| PART I. FINANCIAL INFORMATION |
Page |
||||
| ITEM 1. |
Financial Statements |
||||
| Condensed Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021 |
1 | ||||
| Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021 (unaudited) |
2 | ||||
| Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the three and nine months ended September 30, 2022 and 2021 (unaudited) |
3 | ||||
| Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (unaudited) |
4 | ||||
| Notes to Condensed Consolidated Financial Statements (unaudited) |
5 | ||||
| ITEM 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
17 | |||
| ITEM 3. |
Quantitative and Qualitative Disclosures About Market Risk |
25 | |||
| ITEM 4. |
Controls and Procedures |
25 | |||
| PART II. OTHER INFORMATION |
|||||
| ITEM 1. |
Legal Proceedings |
25 | |||
| ITEM 1A. |
Risk Factors |
25 | |||
| ITEM 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
25 | |||
| ITEM 3. |
Defaults Upon Senior Securities |
25 | |||
| ITEM 4. |
Mine Safety Disclosures |
25 | |||
| ITEM 5. |
Other Information |
25 | |||
| ITEM 6. |
Exhibits |
26 | |||
| SIGNATURES |
27 | ||||
ITEM 1. FINANCIAL STATEMENTS
CHARLIE’S HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
| September 30 | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets: | ||||||||
| Property, plant and equipment, net | ||||||||
| Right-of-use asset, net | ||||||||
| Other assets | ||||||||
| Total non-current assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Note payable | ||||||||
| Note payable, net - related party | ||||||||
| Derivative liability | ||||||||
| Lease liabilities | ||||||||
| Deferred revenue | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Notes payable, net of current portion | ||||||||
| Lease liabilities, net of current portion | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES (see Note 12) | ||||||||
| Stockholders' equity: | ||||||||
| Convertible preferred stock ($ par value); shares authorized | ||||||||
| Series A, shares designated, and shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | ||||||||
| Series B, shares designated, shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | ||||||||
| Common stock ($ par value); shares authorized; and shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders' equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(Unaudited)
| For the three months ended | For the nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues: | ||||||||||||||||
| Product revenue, net | $ | $ | $ | $ | ||||||||||||
| Total revenues | ||||||||||||||||
| Operating costs and expenses: | ||||||||||||||||
| Cost of goods sold - product revenue | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| Research and development | ||||||||||||||||
| Total operating costs and expenses | ||||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of derivative liabilities | ||||||||||||||||
| Gain on debt extinguishment | ||||||||||||||||
| Loss on disposal of fixed assets | ( | ) | ||||||||||||||
| Other income | ||||||||||||||||
| Total other income | ||||||||||||||||
| Income before income taxes | ||||||||||||||||
| Provision for income taxes | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Net earnings (loss) per share | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Weighted average number of common shares outstanding | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands)
(Unaudited)
| For the Three Months Ended September 30, 2022 |
||||||||||||||||||||||||||||
| Series A Convertible Preferred Stock |
Common Stock |
Additional |
Accumulated |
Total Stockholders' |
||||||||||||||||||||||||
| Shares |
Par value |
Shares |
Par value |
Paid-in Capital |
Deficit |
Equity | ||||||||||||||||||||||
| Balance at July 1, 2022 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||
| Stock compensation |
( |
) | ||||||||||||||||||||||||||
| Net income |
- | - | ||||||||||||||||||||||||||
| Balance at September 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||
| For the Three Months Ended September 30, 2021 |
||||||||||||||||||||||||||||
| Series A Convertible Preferred Stock |
Common Stock |
Additional |
Accumulated |
Total Stockholders' |
||||||||||||||||||||||||
| Shares |
Par value |
Shares |
Par value |
Paid-in Capital |
Deficit |
Deficit | ||||||||||||||||||||||
| Balance at July 1, 2021 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||
| Conversion of Series A convertible preferred stock |
( |
) | ( |
) | ||||||||||||||||||||||||
| Accrue dividends payable on Series A convertible preferred stock |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Stock compensation |
||||||||||||||||||||||||||||
| Net income |
- | - | ||||||||||||||||||||||||||
| Balance at September 30, 2021 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||
| For the Nine Months Ended September 30, 2022 |
||||||||||||||||||||||||||||
| Series A Convertible Preferred Stock |
Common Stock |
Additional |
Accumulated |
Total Stockholders' |
||||||||||||||||||||||||
| Shares |
Par value |
Shares |
Par value |
Paid-in Capital |
Deficit |
Equity | ||||||||||||||||||||||
| Balance at January 1, 2022 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||
| Conversion of Series A convertible preferred stock |
( |
) | ( |
) | ||||||||||||||||||||||||
| Stock compensation |
||||||||||||||||||||||||||||
| Net income |
- | - | ||||||||||||||||||||||||||
| Balance at September 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||
| For the Nine Months Ended September 30, 2021 |
||||||||||||||||||||||||||||
| Series A Convertible Preferred Stock |
Common Stock |
Additional |
Accumulated |
Total Stockholders' |
||||||||||||||||||||||||
| Shares |
Par value |
Shares |
Par value |
Paid-in Capital |
Deficit |
Deficit | ||||||||||||||||||||||
| Balance at January 1, 2021 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||
| Issuance of common stock to related parties for cash |
||||||||||||||||||||||||||||
| 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 |
- | - | - | - | - | |||||||||||||||||||||||
| Net income |
- | - | ||||||||||||||||||||||||||
| Balance at September 30, 2021 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| For the nine months ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income | $ | $ | ||||||
| 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 | ||||||||
| Change in fair value of derivative liabilities | ( | ) | ( | ) | ||||
| Amortization of operating lease right-of-use asset | ||||||||
| Stock based compensation | ||||||||
| Gain from debt extinguishment | ( | ) | ||||||
| Subtotal of non-cash charges | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Other assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ||||||
| Lease liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Purchase of property, plant and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from issuance of common stock to related parties | ||||||||
| Proceeds from issuance of notes payable | ||||||||
| Proceeds from issuance of note payable to related party | ||||||||
| Repayment of notes payable | ( | ) | ||||||
| Dividend payment | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net decrease in cash | ( | ) | ( | ) | ||||
| Cash, beginning of the period | ||||||||
| Cash, end of the period | $ | $ | ||||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest | $ | ( | ) | $ | ||||
| Cash paid for interest to related party | $ | ( | ) | $ | ||||
| Cash paid for income taxes | $ | $ | ||||||
| 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Description of the Business
Charlie’s Holdings, Inc., (formerly True Drinks Holdings, Inc.) a Nevada corporation, together with its wholly-owned subsidiaries and consolidated variable interest entity (collectively, the “Company”, “we”), currently formulates, markets, and distributes premium, nicotine-based vapor products. The Company’s products are produced domestically by contract manufacturers for sale by select distributors, specialty retailers and third-party online resellers throughout the United States, as well as in more than 80 countries worldwide. The Company’s primary international markets include the United Kingdom, Italy, Spain, New Zealand, Australia, and Canada. In June 2019, The Company launched distribution of certain premium vapor, ingestible and topical products containing hemp-derived cannabidiol (“CBD”) and other compounds derived from hemp through Don Polly, a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, the Company's former Chief Executive Officer and current Chief Operating Officer, respectively, and a consolidated variable interest for which the Company is the primary beneficiary (“Don Polly”). 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 (“Charlie’s” or “CCD”), which also produces and sells our premium, nicotine-based vapor products.
The Company's common stock, par value $
Reverse Stock Split
The Company’s Board of Directors approved a reverse stock split of the Company’s authorized, issued and outstanding shares of Common Stock, at a ratio of 1-for-
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 United States Food and Drug Administration (“FDA”). 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 COVID-19 (“Coronavirus”) has had a negative impact on the Company’s supply chain and sales. For the nine months ended September 30, 2022, the Company generated a loss from operations of approximately $
Management's plans depend on its ability to increase revenues, raise additional capital, and continue its business development efforts, including the expenditure of approximately 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, 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. 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.
Risks and Uncertainties
The Company operates in an environment that is subject to rapid changes and developments in laws and regulations that could have a significant impact on the Company’s ability to sell its products. Beginning in September 2019, certain states temporarily banned the sale of flavored e-cigarettes, and 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 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.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) have been omitted pursuant to SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented in this Report not misleading.
Amounts related to disclosure of December 31, 2021 balances within the interim condensed consolidated financial statements were derived from audited financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”).
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Significant Accounting Policies
There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2021 Annual Report.
Recent Accounting Standards
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13"), which supersedes current guidance requiring recognition of credit losses when it is probable that a loss has been incurred. ASU 2016-13 requires the establishment of an allowance for estimated credit losses on financial assets, including trade and other receivables, at each reporting date. ASU 2016-13 will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted. The Company does not believe the impact of adopting this standard will be material to its condensed consolidated financial statements and related disclosures.
In August 2020, the FASB issued ASU No. 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity” (“ASU 2020-06”). ASU 2020-06 eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, ASU 2020-06 modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings per share (“EPS”) computation. The amendments in ASU 2020-06 are effective for smaller reporting companies as defined by the SEC for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of ASU 2020-06 on its condensed consolidated financial statements.
In May 2021, the FASB issued ASU No. 2021-04, “Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40)” (“ASU 2021-04”). ASU 2021-04 reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. ASU 2021-04 provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. ASU 2021-04 was adopted for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. The Company does not believe the impact of adopting this standard was material to its condensed consolidated financial statements and related disclosures.
In June 2022, the FASB issued ASU 2022-03, ASC Subtopic 820 “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. The FASB is issuing this Update (1) to clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The Company is currently evaluating the impact of ASU 2022-03 on its condensed consolidated financial statements.
NOTE 3 – FAIR VALUE MEASUREMENTS
In accordance with Accounting Standards Codification (“ASC”) Topic 820 “Fair Value Measurements and Disclosures” (“ASC 820”), the Company uses various inputs to measure the outstanding warrants on a recurring basis to determine the fair value of the liability. ASC 820 also establishes a hierarchy categorizing inputs into three levels used to measure and disclose fair value. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to unobservable inputs. An explanation of each level in the hierarchy is described below:
Level 1 - Unadjusted quoted prices in active markets for identical instruments that are accessible by the Company on the measurement date.
Level 2 - Quoted prices in markets that are not active or inputs which are either directly or indirectly observable.
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 September 30, 2022, and December 31, 2021 (amounts in thousands):
| Fair Value at September 30, 2022 |
||||||||||||||||
| Total |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
| Liabilities: |
||||||||||||||||
| Derivative liability - Warrants |
||||||||||||||||
| Total liabilities |
$ | $ | $ | $ | ||||||||||||
| Fair Value at December 31, 2021 |
||||||||||||||||
| Total |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
| Liabilities: |
||||||||||||||||
| Derivative liability - Warrants |
||||||||||||||||
| Total liabilities |
$ | $ | $ | $ | ||||||||||||
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. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs (amounts in thousands).
| Derivative liability - Warrants |
||||
| Balance at January 1, 2022 |
$ | |||
| Change in fair value |
( |
) | ||
| 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, |
December 31, |
|||||||
| 2022 |
2021 |
|||||||
| Exercise price |
$ | $ | ||||||
| Contractual term (years) |
||||||||
| Volatility (annual) |
% | % | ||||||
| Risk-free rate |
% | % | ||||||
| Dividend yield (per share) |
% | % | ||||||
On April 26, 2019 (the “Closing Date”), the Company entered into a Securities Exchange Agreement (“Share Exchange”) with each of the former members (“Members”) of Charlie’s, and certain direct investors in the Company (“Direct Investors”), pursuant to which the Company acquired all outstanding membership interests of Charlie’s beneficially owned by the Members in exchange for the issuance by the Company of units. Immediately prior to, and in connection with, the Share Exchange, Charlie’s consummated a private offering of membership interests that resulted in net proceeds to Charlie’s of approximately $
NOTE 4 - PROPERTY AND EQUIPMENT
Depreciation and amortization expense totaled $
| September 30, |
December 31, |
||||||||
| 2022 |
2021 |
Estimated Useful Life |
|||||||
| Machinery and equipment |
$ | $ |
|
||||||
| Trade show booth |
|
||||||||
| Office equipment |
|
||||||||
| Leasehold improvements |
Lesser of lease term or estimated useful life |
||||||||
| Accumulated depreciation |
( |
) | ( |
) | |||||
| $ | $ | ||||||||
NOTE 5 - CONCENTRATIONS
Vendors
The Company’s concentration of inventory purchases is as follows:
| For the three months ended | For the nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Vendor A | % | % | % | % | ||||||||||||
| Vendor B | % | % | % | % | ||||||||||||
| Vendor C | % | % | % | % | ||||||||||||
| Vendor D | % | % | % | % | ||||||||||||
During the three months ended September 30, 2022 and 2021, purchases from and vendors, respectively, represented
As of September 30, 2022, and December 31, 2021, amounts owed to these vendors totaled $
Accounts Receivable
The Company’s concentration of accounts receivable is as follows:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Customer A | % | % | ||||||
One customer made up more than
NOTE 6 – DON POLLY, LLC
Don Polly is a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, a former and current executive officer of the Company, respectively, and a consolidated variable interest for which the Company is the primary beneficiary. Don Polly formulates, sells and distributes the Company’s hemp-derived product lines.
Don Polly is classified as a variable interest entity (“VIE”) for which the Company is the primary beneficiary. Under ASC 810-10-15, Variable Interest Entities, a VIE is an entity that: (1) has an insufficient amount of equity investment at risk to permit the entity to finance its activities without additional subordinated financial support by other parties; (2) the equity investors are unable to make significant decisions about the entity’s activities through voting rights or similar rights; or (3) the equity investors do not have the obligation to absorb expected losses or the right to receive residual returns of the entity. The Company is required to consolidate a VIE if it is determined to be the primary beneficiary, that is, the enterprise has both (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the VIE. The Company evaluates its relationships with VIE to determine whether it is the primary beneficiary of a VIE at the time it becomes involved with the entity and it re-evaluates that conclusion each reporting period. Effective April 25, 2019, we began consolidating the financial statements of Don Polly and it is still considered a VIE of the Company.
Don Polly operates under exclusive licensing and service contracts with the Company whereby the Company receives
NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of September 30, 2022, and December 31, 2021, are as follows (amounts in thousands):
| September 30, |
December 31, |
|||||||
| 2022 |
2021 |
|||||||
| Accounts payable |
$ | $ | ||||||
| Accrued compensation |
||||||||
| Accrued income taxes |
||||||||
| Other accrued expenses |
||||||||
| $ | $ | |||||||
NOTE 8 – NOTES PAYABLE
Red Beard Holdings, LLC Note Payable
On April 1, 2020, the Company, Charlie's and its VIE, Don Polly, issued a secured promissory note (the "Red Beard Note") to one of the Company's largest stockholders, Red Beard Holdings, LLC ("Red Beard"), in the principal amount of $
On March 24, 2021, the Company and Red Beard entered into a Satisfaction and Release (the "Red Beard Release"), pursuant to which the Company made a payment to Red Beard in the amount of $
Small Business Administration Loan Programs
On April 30, 2020, Charlie's received approval to enter into a U.S. Small Business Administration ("SBA") Promissory Note (the "PPP Loan Agreement") with TBK Bank, SSB (the "SBA Lender"), pursuant to the Paycheck Protection Program ("PPP") of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") as administered by the SBA (the "Charlie's PPP Loan").
The Charlie's PPP Loan provided for working capital to Charlie’s in the amount of $
During the year ended December 31, 2021, Charlie’s received notice from SBA Lender that the Charlie’s PPP Loan was forgiven, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the SBA. There is no further action required on the part of Charlie’s to satisfy this liability. During the year ended December 31, 2021, the Company recorded a debt extinguishment gain of approximately $
On April 14, 2020, Don Polly also obtained a loan pursuant to the PPP enacted under the CARES Act (the "Polly PPP Loan" and together with the Charlie's PPP Loan, the "PPP Loans") from Community Banks of Colorado, a division of NBH Bank (the "Polly Lender"). The Polly PPP Loan provided for working capital to Don Polly in the amount of $
On February 19, 2021, Don Polly received notice from the Polly Lender, that the Polly PPP Loan was forgiven, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the SBA. There is no further action required on the part of Don Polly to satisfy this liability. For the period ended March 31, 2021, the Company recorded a debt extinguishment gain of approximately $
On March 17, 2021, Don Polly obtained a second draw PPP loan (“Polly PPP Loan 2”) under the CARES Act from Polly Lender. The Polly PPP Loan 2 obtained by Don Polly provided general working capital in the amount of $
During the year ended December 31, 2021, Don Polly received notice from the Polly Lender that the Polly PPP Loan 2 was forgiven, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the SBA. There is no further action required on the part of Don Polly to satisfy this liability.
On June 24, 2020, SBA authorized (under Section 7(b) of the Small Business Act, as amended) an Economic Injury Disaster Loan (“EID Loan”) to Don Polly in the amount of $
April 2022 Note Financing
On April 6, 2022, the Company issued a secured promissory note ("Note") to one of its largest stockholders, Michael King (the "Lender") in the principal amount of $
The Note requires the payment of principal and guaranteed interest in the amount of at least $
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 $
The following summarizes the Company’s notes payable maturities as of September 30, 2022 (amounts in thousands):
| Remaining months Ending December 31, 2022 |
$ | |||
| Year Ending December 31, 2023 |
||||
| Year Ending December 31, 2024 |
||||
| Year Ending December 31, 2025 |
||||
| Thereafter |
||||
| Total |
$ |
NOTE 9 – EARNINGS (LOSS) PER SHARE APPLICABLE TO COMMON STOCKHOLDERS
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 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 nine months ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Net income - basic |
$ | $ | $ | $ | ||||||||||||
| Reversal of gain due to change in fair value of warrant liability |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Net income (loss) - diluted |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Weighted average shares outstanding - basic |
||||||||||||||||
| Diluted stock options |
||||||||||||||||
| Diluted warrants |
||||||||||||||||
| Diluted preferred shares |
||||||||||||||||
| Weighted average shares outstanding - diluted |
||||||||||||||||
| Basic earnings per share |
$ | $ | $ | $ | ||||||||||||
| Diluted earnings (loss) per share |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
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 nine months ended |
||||||||
| September 30, |
||||||||
| 2022 |
2021 |
|||||||
| Options |
||||||||
| Warrants |
||||||||
| Total |
||||||||
NOTE 10 – STOCKHOLDERS’ EQUITY
Series A Preferred Share Dividend & Share Waiver
On April 21, 2021, the Company issued a waiver and exchange agreement (“Waiver Agreement”) to shareholders of its Series A Preferred shares (“Stock Payees”) requesting such Stock Payee's respective amount of the dividend payment (each individual Stock Payee's respective amount the “Stock Payee Indebtedness”) to be paid in the form of shares of Common Stock (the “Stock Payment”) and agreeing to consummate an exchange of such Stock Payee's right to the Stock Payee Indebtedness in cash for shares of Common Stock (the “Exchange”), pursuant to which the entire Stock Payee Indebtedness shall be exchanged for that number of shares of Common Stock equal to the total Stock Payee Indebtedness divided by $
On May 25, 2021, the Company entered into a Dividend Waiver and Exchange Agreement (the “Exchange Agreement”), between the Company and the holders (the “Series A Holders”) of its Series A Preferred, pursuant to which the Company paid to the Series A Holders total consideration of approximately $
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 nine months ended September 30, 2022, the Company issued approximately
March 2021 Private Placement
On March 19, 2021, the Company entered into Securities Purchase Agreements by and between the Company and certain family trusts in which Mr. Brandon Stump and Mr. Ryan Stump, the Company's former Chief Executive Officer and Chief Operating Officer, respectfully, are trustees and beneficiaries (the "Purchase Agreements"), for the private placement of an aggregate of
NOTE 11 – STOCK-BASED COMPENSATION
On May 8, 2019, our Board of Directors approved the Charlie’s Holdings, Inc. 2019 Omnibus Incentive Plan (the “2019 Plan”), and the 2019 Plan was subsequently approved by holders of a majority of our outstanding voting securities on the same date. Up to
On December 22, 2021, our Board of Directors unanimously adopted resolutions by written consent approving an amendment to increase the number of shares of Common Stock available for issuance under the 2019 Plan by
Non-Qualified Stock Options
The following table summarizes stock option activities during the nine months ended September 30, 2022 (all option amounts are in thousands):
| Stock Options |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life (in years) |
Aggregate Intrinsic Value |
|||||||||||||
| Outstanding at January 1, 2022 |
$ | $ | ||||||||||||||
| Options forfeited/expired |
( |
) | - | - | ||||||||||||
| Outstanding at September 30, 2022 |
$ | $ | ||||||||||||||
| Options vested and exercisable at September 30, 2022 |
$ | $ | ||||||||||||||
As of September 30, 2022, there was approximately $
Restricted Stock Awards
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 |
Weighted Average Grant Date Fair Value per Share |
|||||||
| Nonvested at January 1, 2022 |
$ | |||||||
| Restricted stock granted |
||||||||
| Vested |
( |
) | - | |||||
| Forfeited |
( |
) | - | |||||
| Nonvested at September 30, 2022 |
$ | |||||||
During the nine months ended September 30, 2022, the Company granted approximately
As of September 30, 2022, there was approximately $
NOTE 12 – COMMITMENTS AND CONTINGENCIES
Leases
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 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 (“Williamsville Lease”) with Henry Sicignano Jr., a relative of the Company’s President, Henry Sicignano III. The Williamsville Lease, which became effective on May 1, 2022, has a term of one year and a base rent of $
Such leases do not require any contingent rental payments, impose any financial restrictions, or contain any residual value guarantees. Certain of the Company’s leases include renewal options and escalation clauses; renewal options have not been included in the calculation of the lease liabilities and right of use assets as the Company is not reasonably certain to exercise the options. Variable expenses generally represent the Company’s share of the landlord’s operating expenses. The Company does not act as a lessor or have any leases classified as financing leases.
The Company excludes short-term leases having initial terms of 12 months or less from ASC Topic 842, “Leases”, as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term. The Company entered into a commercial lease for the Company’s corporate headquarters (the “Lease”) in Costa Mesa, California with Brandon Stump, the Company’s former Chief Executive Officer, Ryan Stump, the Company’s Chief Operating Officer, and Keith Stump, a former member of the Company’s Board of Directors. The Stumps purchased the property that is the subject of the Lease in July 2019. The Lease, which was effective as of September 1, 2019, on a month-to-month basis, was then formalized on November 1, 2019 to have a term of years and a base rent rate of $
Effective June 1, 2022, the Company’s lease at 5331 Production Drive, Huntington Beach, CA was renewed for an additional -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 $
At September 30, 2022, the Company had operating lease liabilities of approximately $
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 nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Operating leases | ||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||
| Variable lease cost | ||||||||||||||||
| Operating lease expense | ||||||||||||||||
| Short-term lease rent expense | ||||||||||||||||
| Total rent expense | $ | $ | $ | $ | ||||||||||||
| For the nine months ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Operating cash flows from operating leases | $ | $ | ||||||
| Right-of-use assets exchanged for operating lease liabilities | $ | $ | ||||||
| Weighted-average remaining lease term – operating leases (in years) | ||||||||
| Weighted-average discount rate – operating leases | % | % | ||||||
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 | ||||
| Total | ||||
| Less present value discount | ( | ) | ||
| Operating lease liabilities as of September 30, 2022 | $ |
Legal Proceedings
As of the date hereof, we are not a party to any material legal or administrative proceedings. There are no proceedings in which any of our directors, executive officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our interest. From time to time, the Company may be involved in various claims and counterclaims and legal actions arising in the ordinary course of business. Litigation or any other legal or administrative proceeding, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our management’s time and attention.
NOTE 13 – INCOME TAXES
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 $
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. Our income tax provision may be significantly affected by changes to our estimates. 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 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 NOLs of approximately $
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. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise become unavailable to offset future income tax liabilities. Additionally, our NOLs and tax credit carryforwards could be limited under state law. For these reasons, even if we attain profitability, we may be unable to use a material portion of our NOLs and other tax attributes.
NOTE 14 – SUBSEQUENT EVENTS
The Company evaluated subsequent events for their potential impact on the consolidated condensed financial statements and disclosures through the date the consolidated condensed financial statements were available to be issued and determined that no subsequent events occurred that were reasonably expected to impact the consolidated condensed financial statements presented herein.
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of Charlie’s Holdings, Inc. should be read in conjunction with the financial statements and the notes to those statements appearing elsewhere in this Quarterly Report on Form 10-Q (this “Report”) and without audited financial statements and other information presented in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”). Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Report, and in our other filings with the Securities and Exchange Commission (“SEC”), including particularly matters set forth under Part I, Item 1A (Risk Factors) of the 2021 Annual Report. Furthermore, such forward-looking statements speak only as of the date of this Report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
As used in this Report, unless otherwise stated or the context otherwise requires, references to the “Company”, “we”, “us”, “our”, or similar references mean Charlie’s Holdings, Inc. (formerly True Drinks Holdings, Inc.), its subsidiaries and consolidated variable interest entity on a consolidated basis. References to “Charlie’s” and “CCD” refer to Charlie’s Chalk Dust, LLC, a California limited liability company and wholly-owned subsidiary of the Company, and “Don Polly” refers to Don Polly, LLC, a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, the Company’s former Chief Executive Officer and current Chief Operating Officer, respectively, and a consolidated variable interest (“VIE”) for which the Company is the primary beneficiary.
Overview
Our objective is to become a significant leader in the rapidly growing, global e-cigarette and e-liquid segments of the broader nicotine related products industry. Through Charlie’s, we formulate, market and distribute premium, nicotine-based vapor products. Charlie’s products are produced by the Company’s contract manufacturers for sale through select distributors, specialty retailers and third-party online resellers throughout the United States, and in more than 80 countries worldwide. Charlie’s primary international markets include the United Kingdom, Italy, Spain, New Zealand, Australia, and Canada. In June 2019, we launched distribution, through Don Polly, of certain premium vapor, tincture and topical wellness products containing hemp-derived cannabidiol (“CBD”). In the future we intend to 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, 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. 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. Presently, approximately 15% of our vapor product sales come from international markets. We are well positioned to increase sales in countries where we already have a presence and, leveraging our existing distribution platform, we intend to exploit new overseas markets. Specifically, the Company intends to launch proprietary new disposables, 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 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”). 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 product line. Obtaining a marketing order from the United States Food and Drug Administration (“FDA”) would, we believe, advance the Company’s position as a trusted, industry leader committed to full regulatory compliance. We believe that a significant number of our competitors will not have the necessary resources and/or expertise to complete the extensive and costly PMTA process and that, once authorized by the FDA, Charlie’s will benefit significantly by emerging as one of a select group of companies able to continue operating in the nicotine vapor products space.
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
April 2022 Note Financing
On April 6, 2022, the Company issued a secured promissory note (the “Note”) to one of its largest individual stockholders, Michael King (the “Lender") in the principal amount of $1,000,000, which Note is secured by certain assets of the Company pursuant to the terms of a Security Agreement entered into by and between the Company and the Lender (the "Note Financing"). 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) 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.
PMTA
During the quarter ended September 30, 2020, the FDA's Center for Tobacco Products informed us that our PMTA received a valid submission tracking number, passed the FDA’s filing review phase, and recently entered the substantive review phase. To date, the Company has invested more than $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. During the quarter ended September 30, 2021, the FDA began issuing Marketing Denial Orders (“MDOs”) for electronic nicotine delivery system (“ENDS”) products that lack evidence to demonstrate that permitting the marketing of such products would be appropriate for the protection of the public health.
On March 15, 2022, a new rider to the Federal Food, Drug and Cosmetic Act was passed granting the FDA authority over synthetic nicotine. These regulations make synthetic nicotine products subject to the same FDA rules as tobacco-derived nicotine products. As such, the Company was required to file a PMTA for its existing synthetic nicotine products marketed under the Pacha 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.
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.
Impact of COVID-19
The outbreak of a novel strain of coronavirus (“COVID-19”, or, “Coronavirus”) has had, and continues to have, a negative impact on the global economy and the markets in which we operate. Beginning in March 2020, the Company transitioned nearly all employees to a remote working environment for their safety and to protect the integrity of Company operations. We have updated certain sales, accounting and administrative processes, and corresponding information technology platforms, in an effort to help facilitate the virtual work environment which still persists for some employees. During the 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. Our Huntington Beach, CA warehouse location has returned fully to “on premise” status, while our corporate headquarters in Costa Mesa, CA remains remote for some employees. We will continue to monitor the COVID-19 situation in all regions in which we operate and will maintain strict adherence to local health guidelines and mandates. We may need to take further actions that we determine are in the best interests of our employees or are required by federal, state, or local authorities.
Risks and Uncertainties
The Company operates in an environment that is subject to rapid changes and developments in laws and regulations that could have a significant impact on the Company’s ability to sell its products. Federal, state, and local governmental bodies across the United States have indicated that flavored e-cigarette liquid, vaporization products and certain other consumption accessories may become subject to new laws and regulations at the federal, state and local levels. Beginning in September 2019, certain states temporarily banned the sale of flavored e-cigarettes, and on January 2, 2020, the FDA issued an enforcement policy effectively banning the sale of flavored cartridge-based e-cigarettes marketed primarily by large manufacturers without prior authorization from the FDA. The application of any new laws or regulations that may be adopted in the future, at a federal, state, or local level, directly or indirectly implicating flavored e-cigarette liquid and products used for the vaporization of nicotine could significantly limit the Company’s ability to sell such products, result in additional compliance expenses, and/or require the Company to change its labeling and/or methods of distribution. Any ban of the sale of flavored e-cigarettes directly limits the markets in which the Company may sell its products. In addition, in June 2022, the FDA announced a plan to reduce nicotine levels in cigarettes to minimally or non-addictive levels. In the event the prevalence of such bans and/or changes in laws and regulations increase across the United States, or internationally, the Company’s business, results of operations and financial condition could be adversely impacted. In addition, the Company is presently seeking to obtain marketing authorization for certain of its nicotine-based vapor products. Our PMTA applications were submitted in September 2020 on a timely basis, which if 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 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.
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. 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 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 $39,000.
A review of the three-month period ended September 30, 2022, follows:
| For the three months ended |
||||||||||||||||
| September 30, |
Change |
|||||||||||||||
| 2022 |
2021 |
Amount |
Percentage |
|||||||||||||
| ($ in thousands) |
||||||||||||||||
| Revenues: |
||||||||||||||||
| Product revenue, net |
$ | 6,427 | $ | 5,219 | $ | 1,208 | 23.1 | % | ||||||||
| Total revenues |
6,427 | 5,219 | 1,208 | 23.1 | % | |||||||||||
| Operating costs and expenses: |
||||||||||||||||
| Cost of goods sold - product revenue |
3,671 | 2,310 | 1,361 | 58.9 | % | |||||||||||
| General and administrative |
2,066 | 2,084 | (18 | ) | -0.9 | % | ||||||||||
| Sales and marketing |
635 | 442 | 193 | 43.7 | % | |||||||||||
| Research and development |
9 | 5 | 4 | 80.0 | % | |||||||||||
| Total operating costs and expenses |
6,381 | 4,841 | 1,540 | 31.8 | % | |||||||||||
| Income (loss) from operations |
46 | 378 | (332 | ) | -87.8 | % | ||||||||||
| Other income (expense): |
||||||||||||||||
| Interest expense |
(7 | ) | (2 | ) | (5 | ) | 250.0 | % | ||||||||
| Change in fair value of derivative liabilities |
246 | 2,729 | (2,483 | ) | -91.0 | % | ||||||||||
| Other income |
1 | 2 | (1 | ) | -50.0 | % | ||||||||||
| Total other income |
240 | 2,729 | (2,489 | ) | -91.2 | % | ||||||||||
| Income before income taxes |
286 | 3,107 | (2,821 | ) | -90.8 | % | ||||||||||
| Provision for income taxes |
45 | - | 45 | 100 | % | |||||||||||
| Net income |
$ | 241 | $ | 3,107 | $ | (2,866 | ) | -92.2 | % | |||||||
Revenue
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 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 $1,361,000 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 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 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 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 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. 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 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 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 September 30, 2022. |
| ● |
Interest Expense. 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 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.
Net Income
For the three months ended September 30, 2022, we had net income of $241,000 as compared to a net income of $3,107,000 for the same period in 2021, which decrease was primarily the result of the change in fair value of derivative liabilities.
Results of Operations for the Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021
A review of the nine-month period ended September 30, 2022, follows:
| For the nine months ended |
||||||||||||||||
| September 30, |
Change |
|||||||||||||||
| 2022 |
2021 | Amount |
Percentage |
|||||||||||||
| ($ in thousands) |
||||||||||||||||
| Revenues: |
||||||||||||||||
| Product revenue, net |
$ | 21,898 | $ | 15,013 | $ | 6,885 | 45.9 | % |
||||||||
| Total revenues |
21,898 | 15,013 | 6,885 | 45.9 | % |
|||||||||||
| Operating costs and expenses: |
||||||||||||||||
| Cost of goods sold - product revenue |
12,663 | 7,047 | 5,616 | 79.7 | % |
|||||||||||
| General and administrative |
6,482 | 6,759 | (277 | ) |
-4.1 | % |
||||||||||
| Sales and marketing |
2,125 | 1,212 | 913 | 75.3 | % |
|||||||||||
| Research and development |
764 | 14 | 750 | 5357.1 | % |
|||||||||||
| Total operating costs and expenses |
22,034 | 15,032 | 7,002 | 46.6 | % |
|||||||||||
| Loss from operations |
(136 | ) |
(19 | ) |
(117 | ) |
615.8 | % |
||||||||
| Other income (expense): |
||||||||||||||||
| Interest expense |
(99 | ) |
(33 | ) |
(66 | ) |
200.0 | % |
||||||||
| Change in fair value of derivative liabilities |
598 | 1,901 | (1,303 | ) |
-68.5 | % |
||||||||||
| Gain on debt extinguishment |
- | 875 | (875 | ) |
-100.0 | % |
||||||||||
| Loss on disposal of fixed assets | (13 | ) | - | (13 | ) | 100.0 | % | |||||||||
| Other income |
6 | 10 | (4 | ) |
-40.0 | % |
||||||||||
| Total other income |
492 | 2,753 | (2,261 | ) |
-82.1 | % |
||||||||||
| Income before income taxes |
356 | 2,734 | (2,378 | ) |
-87.0 | % |
||||||||||
| Provision for income taxes |
45 | - | 45 | 100 | % |
|||||||||||
| Net income |
$ | 311 | $ | 2,734 | $ | (2,423 | ) |
-88.6 | % |
|||||||
Revenue
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. 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, 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 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 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 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 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 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 $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. Net income is determined by adjusting loss from operations by the following items:
| ● |
Change in Fair Value of Derivative Liabilities. 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 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. 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 September 30, 2022. |
| ● |
Interest Expense. 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 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 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.
Net Income
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 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 “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) 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’s Plan of Operation
Our financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company operates in a rapidly changing legal and regulatory environment; new laws and regulations or changes to existing laws and regulations could significantly limit the Company’s ability to sell its products, and/or result in additional costs. Additionally, the Company was required to apply for FDA approval to continue selling and marketing its products used for the vaporization of nicotine in the United States. Currently, a substantial portion of the Company’s sales are derived from products that are subject to approval by the FDA. There was significant cost associated with the application process and there can be no assurance the FDA will approve previous and/or future application. In addition, the outbreak of COVID-19 has had a negative impact on the Company’s supply chain and sales. For the 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 $3.5 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 $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 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. 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. 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. There can be no assurance that additional financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and, in the Company’s best interests. The financial statements do not include any adjustments to the carrying amount and classification of recorded assets and liabilities should the Company be unable to continue operations.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements other than operating lease commitments.
Critical Accounting Policies
The condensed consolidated financial statements are prepared in conformity with U.S. GAAP, which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of expense in the periods presented. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, due to inherent uncertainties in making estimates, actual results could differ from the original estimates, requiring adjustments to these balances in future periods. The critical accounting estimates that affect the consolidated financial statements and the judgments and assumptions used are consistent with those described under Part II, Item 7 of our Annual Report on the 2021 Annual Report.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4 – CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Our management, with the participation of our President and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Report. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on our evaluation, our President, the principal executive officer, and Chief Financial Officer concluded that, as of 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
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.
ITEM 1. LEGAL PROCEEDINGS
As of the date hereof, we are not a party to any material legal or administrative proceedings. There are no proceedings in which any of our directors, executive officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our interest. From time to time, the Company may be involved in various claims and counterclaims and legal actions arising in the ordinary course of business. Litigation or any other legal or administrative proceeding, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our management’s time and attention.
ITEM 1A. RISK FACTORS
Our results of operations and financial condition are subject to numerous risks and uncertainties described in the 2021 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 2021 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 2021 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
| (a) |
Exhibits |
|
| 10.1 |
Promissory Note in favor of Michael King (filed herewith). |
|
| 10.2 |
Amendment No. 1 to Promissory Note in favor of Michael King (filed herewith). |
|
| 10.3 |
Loan Agreement between the Company and Ryan Stump (filed herewith). |
|
| Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a). |
||
| Certification of the Principal Financial and Accounting Officer pursuant to Rule 13a-14(a) and 15d-14(a). |
||
| Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
||
| Certification by the Principal Financial and Accounting Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS |
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
|
| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
|
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
| 104 |
Cover Page Interactive Data File (embedded within the Inline XBRL Document and include in Exhibit 101) |
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: November 18, 2022 |
CHARLIE’S HOLDINGS, INC. |
||
| By: |
/s/ Henry Sicignano, III |
||
| Henry Sicignano, III President (Principal Executive Officer) |
|||
| /s/ Matthew P. Montesano |
|||
| Matthew P. Montesano Chief Financial Officer (Principal Financial and Accounting Officer) |
|||
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Henry Sicignano, III, certify that:
|
1. |
I have reviewed this quarterly report on Form 10-Q of Charlie’s Holdings, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report. |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles |
|
c. |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
d. |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
/s/ Henry Sicignano, III |
||
|
Date: November 18, 2022 |
Henry Sicignano, III |
|
|
President (Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Matthew P. Montesano, certify that:
|
1. |
I have reviewed this quarterly report on Form 10-Q of Charlie’s Holdings, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report. |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles |
|
c. |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
d. |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
/s/ Matthew P. Montesano |
||
|
Date: November 18, 2022 |
Matthew P. Montesano |
|
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
EXHIBIT 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Charlie’s Holdings, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Henry Sicignano, III, President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
|
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
/s/ Henry Sicignano, III |
||
|
Henry Sicignano, III |
||
|
President (Principal Executive Officer) |
||
|
Date: November 18, 2022 |
EXHIBIT 32.2
CERTIFICATION OF PRINCIPAL ACCOUNTING OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Charlie’s Holdings, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Matthew P. Montesano, Principal Accounting Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
|
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
/s/ Matthew P. Montesano |
||
|
Matthew P. Montesano |
||
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
||
|
Date: November 18, 2022 |
Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - $ / shares |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Preferred stock, par value (in dollars per share) | $ 0.001 | $ 0.001 |
| Preferred stock, shares authorized (in shares) | 1,800,000 | 1,800,000 |
| Common stock, par value (in dollars per share) | $ 0.001 | $ 0.001 |
| Common stock, shares authorized (in shares) | 500,000,000 | 500,000,000 |
| Common stock, shares issued (in shares) | 217,597,053 | 210,890,930 |
| Common stock, shares outstanding (in shares) | 217,597,053 | 210,890,930 |
| Series A Preferred Stock [Member] | ||
| Preferred stock, shares authorized (in shares) | 300,000 | 300,000 |
| Preferred stock, shares issued (in shares) | 138,557 | 141,873 |
| Preferred stock, shares outstanding (in shares) | 138,557 | 141,873 |
| Series B Preferred Stock [Member] | ||
| Preferred stock, shares authorized (in shares) | 1,500,000 | 1,500,000 |
| Preferred stock, shares issued (in shares) | 0 | 0 |
| Preferred stock, shares outstanding (in shares) | 0 | 0 |
Condensed Consolidated Statements of Operations (Unaudited) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Revenues: | ||||
| Revenues | $ 6,427,000 | $ 5,219,000 | $ 21,898,000 | $ 15,013,000 |
| Operating costs and expenses: | ||||
| Cost of goods sold - product revenue | 3,671,000 | 2,310,000 | 12,663,000 | 7,047,000 |
| General and administrative | 2,066,000 | 2,084,000 | 6,482,000 | 6,759,000 |
| Sales and marketing | 635,000 | 442,000 | 2,125,000 | 1,212,000 |
| Research and development | 9,000 | 5,000 | 764,000 | 14,000 |
| Total operating costs and expenses | 6,381,000 | 4,841,000 | 22,034,000 | 15,032,000 |
| Income (loss) from operations | 46,000 | 378,000 | (136,000) | (19,000) |
| Other income (expense): | ||||
| Interest expense | (7,000) | (2,000) | (99,000) | (33,000) |
| Change in fair value of derivative liabilities | 246,000 | 2,729,000 | 598,000 | 1,901,000 |
| Gain on debt extinguishment | 0 | 0 | 0 | 875,000 |
| Loss on disposal of fixed assets | 0 | 0 | (13,000) | 0 |
| Other income | 1,000 | 2,000 | 6,000 | 10,000 |
| Total other income | 240,000 | 2,729,000 | 492,000 | 2,753,000 |
| Income before income taxes | 286,000 | 3,107,000 | 356,000 | 2,734,000 |
| Provision for income taxes | 45,000 | 0 | 45,000 | 0 |
| Net income | $ 241,000 | $ 3,107,000 | $ 311,000 | $ 2,734,000 |
| Net earnings (loss) per share | ||||
| Basic (in dollars per share) | $ 0.00 | $ 0.02 | $ 0.00 | $ 0.01 |
| Diluted (in dollars per share) | $ (0.00) | $ 0.00 | $ (0.00) | $ 0.01 |
| Weighted average number of common shares outstanding | ||||
| Basic (in shares) | 212,823,575 | 206,321,051 | 211,967,458 | 201,206,587 |
| Diluted (in shares) | 244,091,744 | 238,550,798 | 243,235,628 | 243,674,985 |
| Product [Member] | ||||
| Revenues: | ||||
| Revenues | $ 6,427,000 | $ 5,219,000 | $ 21,898,000 | $ 15,013,000 |
Condensed Consolidated Statements of Stockholders' Equity (Unaudited) - USD ($) shares in Thousands |
Conversion of Series A Convertible Preferred Stock [Member]
Preferred Stock [Member]
Series A Preferred Stock [Member]
|
Conversion of Series A Convertible Preferred Stock [Member]
Common Stock [Member]
|
Conversion of Series A Convertible Preferred Stock [Member]
Additional Paid-in Capital [Member]
|
Conversion of Series A Convertible Preferred Stock [Member]
Retained Earnings [Member]
|
Conversion of Series A Convertible Preferred Stock [Member] |
Preferred Stock [Member]
Series A Preferred Stock [Member]
|
Common Stock [Member] |
Additional Paid-in Capital [Member] |
Retained Earnings [Member] |
Total |
|---|---|---|---|---|---|---|---|---|---|---|
| Balance (in shares) at Dec. 31, 2020 | 204 | 189,907 | ||||||||
| Balance at Dec. 31, 2020 | $ 0 | $ 190,000 | $ 3,477,000 | $ (9,663,000) | $ (5,996,000) | |||||
| Stock compensation (in shares) | 0 | 1,500 | ||||||||
| Stock compensation | $ 0 | $ 1,000 | 562,000 | 0 | 563,000 | |||||
| Net income | 0 | 0 | 0 | 2,734,000 | 2,734,000 | |||||
| Conversion of convertible preferred stock (in shares) | (61) | 13,764 | ||||||||
| Conversion of convertible preferred stock | $ 0 | $ 14,000 | $ (14,000) | $ 0 | $ 0 | |||||
| Accrue dividends payable on Series A convertible preferred stock | $ 0 | $ 0 | (3,000) | 0 | (3,000) | |||||
| Issuance of common stock to related parties for cash (in shares) | 0 | 3,517 | ||||||||
| Issuance of common stock to related parties for cash | $ 0 | $ 3,000 | 2,997,000 | 0 | 3,000,000 | |||||
| Issuance of common stock for dividend payment (in shares) | 0 | 1,736 | ||||||||
| Issuance of common stock for dividend payment | $ 0 | $ 2,000 | 768,000 | 0 | 770,000 | |||||
| Fraction shares adjustment due to reverse split (in shares) | 0 | 3 | ||||||||
| Balance (in shares) at Sep. 30, 2021 | 143 | 210,427 | ||||||||
| Balance at Sep. 30, 2021 | $ 0 | $ 210,000 | 7,787,000 | (6,929,000) | 1,068,000 | |||||
| Balance (in shares) at Jun. 30, 2021 | 175 | 203,165 | ||||||||
| Balance at Jun. 30, 2021 | $ 0 | $ 203,000 | 7,758,000 | (10,036,000) | (2,075,000) | |||||
| Stock compensation (in shares) | 0 | 0 | ||||||||
| Stock compensation | $ 0 | $ 0 | 39,000 | 0 | 39,000 | |||||
| Net income | 0 | 0 | 0 | 3,107,000 | 3,107,000 | |||||
| Conversion of convertible preferred stock (in shares) | (32) | 7,262 | ||||||||
| Conversion of convertible preferred stock | $ 0 | $ 7,000 | (7,000) | 0 | 0 | |||||
| Accrue dividends payable on Series A convertible preferred stock | $ 0 | $ 0 | (3,000) | 0 | (3,000) | |||||
| Balance (in shares) at Sep. 30, 2021 | 143 | 210,427 | ||||||||
| Balance at Sep. 30, 2021 | $ 0 | $ 210,000 | 7,787,000 | (6,929,000) | 1,068,000 | |||||
| Balance (in shares) at Dec. 31, 2021 | 142 | 210,890 | ||||||||
| Balance at Dec. 31, 2021 | $ 0 | $ 211,000 | 7,775,000 | (4,855,000) | 3,131,000 | |||||
| Stock compensation (in shares) | 0 | 5,958 | ||||||||
| Stock compensation | $ 0 | $ 6,000 | 81,000 | 0 | 87,000 | |||||
| Net income | $ 0 | $ 0 | 0 | 311,000 | 311,000 | |||||
| Conversion of convertible preferred stock (in shares) | (4) | 748 | ||||||||
| Conversion of convertible preferred stock | $ 0 | $ 1,000 | $ (1,000) | $ 0 | $ 0 | |||||
| Balance (in shares) at Sep. 30, 2022 | 138 | 217,596 | ||||||||
| Balance at Sep. 30, 2022 | $ 0 | $ 218,000 | 7,855,000 | (4,544,000) | 3,529,000 | |||||
| Balance (in shares) at Mar. 31, 2022 | 138 | 217,725 | ||||||||
| Balance at Mar. 31, 2022 | $ 0 | $ 218,000 | 7,824,000 | (4,785,000) | 3,257,000 | |||||
| Stock compensation (in shares) | 0 | (129) | ||||||||
| Stock compensation | $ 0 | $ 0 | 31,000 | 0 | 31,000 | |||||
| Net income | $ 0 | $ 0 | 0 | 241,000 | 241,000 | |||||
| Balance (in shares) at Jun. 30, 2022 | 138 | 217,596 | ||||||||
| Balance at Jun. 30, 2022 | $ 0 | $ 218,000 | 7,855,000 | (4,544,000) | 3,529,000 | |||||
| Net income | 241,000 | |||||||||
| Balance (in shares) at Sep. 30, 2022 | 138 | 217,596 | ||||||||
| Balance at Sep. 30, 2022 | $ 0 | $ 218,000 | $ 7,855,000 | $ (4,544,000) | $ 3,529,000 |
Note 1 - Description of the Business and Basis of Presentation |
9 Months Ended |
|---|---|
Sep. 30, 2022 | |
| Notes to Financial Statements | |
| Business Description and Basis of Presentation [Text Block] |
NOTE 1 – DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Description of the Business
Charlie’s Holdings, Inc., (formerly True Drinks Holdings, Inc.) a Nevada corporation, together with its wholly-owned subsidiaries and consolidated variable interest entity (collectively, the “Company”, “we”), currently formulates, markets, and distributes premium, nicotine-based vapor products. The Company’s products are produced domestically by contract manufacturers for sale by select distributors, specialty retailers and third-party online resellers throughout the United States, as well as in more than 80 countries worldwide. The Company’s primary international markets include the United Kingdom, Italy, Spain, New Zealand, Australia, and Canada. In June 2019, The Company launched distribution of certain premium vapor, ingestible and topical products containing hemp-derived cannabidiol (“CBD”) and other compounds derived from hemp through Don Polly, a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, the Company's former Chief Executive Officer and current Chief Operating Officer, respectively, and a consolidated variable interest for which the Company is the primary beneficiary (“Don Polly”). 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 (“Charlie’s” or “CCD”), which also produces and sells our premium, nicotine-based vapor products.
The Company's common stock, par value $0.001 per share (the “Common Stock”), trades under the symbol "CHUC" on the OTCQB Venture Market.
Reverse Stock Split
The Company’s Board of Directors approved a reverse stock split of the Company’s authorized, issued and outstanding shares of Common Stock, at a ratio of 1-for-100 (the “Reverse Split”). The Reverse Split was effective as of June 16, 2021 (the “Effective Date”). All share and per share amounts in this quarterly report on Form 10-Q (this “Report”) have been retroactively adjusted to account for the Reverse Split.
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 United States Food and Drug Administration (“FDA”). 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 COVID-19 (“Coronavirus”) has had a negative impact on the Company’s supply chain and sales. 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 $3,529,000 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 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 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, 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. 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.
Risks and Uncertainties
The Company operates in an environment that is subject to rapid changes and developments in laws and regulations that could have a significant impact on the Company’s ability to sell its products. Beginning in September 2019, certain states temporarily banned the sale of flavored e-cigarettes, and 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 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. |
Note 2 - Summary of Significant Accounting Policies |
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| Notes to Financial Statements | |
| Significant Accounting Policies [Text Block] |
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) have been omitted pursuant to SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented in this Report not misleading.
Amounts related to disclosure of December 31, 2021 balances within the interim condensed consolidated financial statements were derived from audited financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”).
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Significant Accounting Policies
There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2021 Annual Report.
Recent Accounting Standards
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13"), which supersedes current guidance requiring recognition of credit losses when it is probable that a loss has been incurred. ASU 2016-13 requires the establishment of an allowance for estimated credit losses on financial assets, including trade and other receivables, at each reporting date. ASU 2016-13 will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted. The Company does not believe the impact of adopting this standard will be material to its condensed consolidated financial statements and related disclosures.
In August 2020, the FASB issued ASU No. 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity” (“ASU 2020-06”). ASU 2020-06 eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, ASU 2020-06 modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings per share (“EPS”) computation. The amendments in ASU 2020-06 are effective for smaller reporting companies as defined by the SEC for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of ASU 2020-06 on its condensed consolidated financial statements.
In May 2021, the FASB issued ASU No. 2021-04, “Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40)” (“ASU 2021-04”). ASU 2021-04 reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. ASU 2021-04 provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. ASU 2021-04 was adopted for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. The Company does not believe the impact of adopting this standard was material to its condensed consolidated financial statements and related disclosures.
In June 2022, the FASB issued ASU 2022-03, ASC Subtopic 820 “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. The FASB is issuing this Update (1) to clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The Company is currently evaluating the impact of ASU 2022-03 on its condensed consolidated financial statements. |
Note 3 - Fair Value Measurements |
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NOTE 3 – FAIR VALUE MEASUREMENTS
In accordance with Accounting Standards Codification (“ASC”) Topic 820 “Fair Value Measurements and Disclosures” (“ASC 820”), the Company uses various inputs to measure the outstanding warrants on a recurring basis to determine the fair value of the liability. ASC 820 also establishes a hierarchy categorizing inputs into three levels used to measure and disclose fair value. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to unobservable inputs. An explanation of each level in the hierarchy is described below:
Level 1 - Unadjusted quoted prices in active markets for identical instruments that are accessible by the Company on the measurement date.
Level 2 - Quoted prices in markets that are not active or inputs which are either directly or indirectly observable.
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 September 30, 2022, and December 31, 2021 (amounts in thousands):
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. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs (amounts in thousands).
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:
On April 26, 2019 (the “Closing Date”), the Company entered into a Securities Exchange Agreement (“Share Exchange”) with each of the former members (“Members”) of Charlie’s, and certain direct investors in the Company (“Direct Investors”), pursuant to which the Company acquired all outstanding membership interests of Charlie’s beneficially owned by the Members in exchange for the issuance by the Company of units. Immediately prior to, and in connection with, the Share Exchange, Charlie’s consummated a private offering of membership interests that resulted in net proceeds to Charlie’s of approximately $27.5 million (the “Charlie’s Financing”). In conjunction with the Share Exchange, the Company issued to holders of its Series A Convertible Preferred Stock, par value $0.001 per share (“Series A Preferred”), warrants to purchase an aggregate of 31,028,996 shares of Common Stock (the “Investor Warrants”) and to its placement agent, Katalyst Securities LLC, warrants to purchase an aggregate of 9,308,699 shares of Common Stock (the “Placement Agent Warrants”). Both the Investor Warrants and Placement Agent Warrants have a -year term and a strike price of $0.44313 per share. Due to the exercise features of these warrants, they are not considered to be indexed to the Company’s own stock and are therefore not afforded equity treatment in accordance with ASC Topic 815, “Derivatives and Hedging” (“ASC 815”). In accordance with ASC 815, the Company has recorded the Investor Warrants and Placement Agent Warrants as derivative instruments on its consolidated balance sheet. ASC 815 requires derivatives to be recorded on the balance sheet as an asset or liability and to be measured at fair value. Changes in fair value are reflected in the Company’s earnings for each reporting period.
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Note 4 - Property and Equipment |
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| Property, Plant and Equipment Disclosure [Text Block] |
NOTE 4 - PROPERTY AND EQUIPMENT
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):
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Note 5 - Concentrations |
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| Concentration Risk Disclosure [Text Block] |
NOTE 5 - CONCENTRATIONS
Vendors
The Company’s concentration of inventory purchases is as follows:
During the three months ended September 30, 2022 and 2021, purchases from and vendors, respectively, represented 89% and 86%, respectively, of total inventory purchases. During the nine months ended September 30, 2022 and 2021, purchases from 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 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 nine-month periods ended September 30, 2022 and 2021.
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Note 6 - Don Polly, LLC |
9 Months Ended |
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| Notes to Financial Statements | |
| Variable Interest Entity Disclosure [Text Block] |
NOTE 6 – DON POLLY, LLC
Don Polly is a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, a former and current executive officer of the Company, respectively, and a consolidated variable interest for which the Company is the primary beneficiary. Don Polly formulates, sells and distributes the Company’s hemp-derived product lines.
Don Polly is classified as a variable interest entity (“VIE”) for which the Company is the primary beneficiary. Under ASC 810-10-15, Variable Interest Entities, a VIE is an entity that: (1) has an insufficient amount of equity investment at risk to permit the entity to finance its activities without additional subordinated financial support by other parties; (2) the equity investors are unable to make significant decisions about the entity’s activities through voting rights or similar rights; or (3) the equity investors do not have the obligation to absorb expected losses or the right to receive residual returns of the entity. The Company is required to consolidate a VIE if it is determined to be the primary beneficiary, that is, the enterprise has both (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the VIE. The Company evaluates its relationships with VIE to determine whether it is the primary beneficiary of a VIE at the time it becomes involved with the entity and it re-evaluates that conclusion each reporting period. Effective April 25, 2019, we began consolidating the financial statements of Don Polly and it is still considered a VIE of the Company.
Don Polly operates under exclusive licensing and service contracts with the Company whereby the Company receives 100% of net income, or incurs 100% of the net loss of the VIE. There are no non-controlling interests recorded. |
Note 7 - Accounts Payable and Accrued Expenses |
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| Accounts Payable, Accrued Liabilities, and Other Liabilities Disclosure, Current [Text Block] |
NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of September 30, 2022, and December 31, 2021, are as follows (amounts in thousands):
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Note 8 - Notes Payable |
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NOTE 8 – NOTES PAYABLE
Red Beard Holdings, LLC Note Payable
On April 1, 2020, the Company, Charlie's and its VIE, Don Polly, issued a secured promissory note (the "Red Beard Note") to one of the Company's largest stockholders, Red Beard Holdings, LLC ("Red Beard"), in the principal amount of $750,000 (the "Principal Amount"), and required a guaranteed minimum interest amount of $75,000 (“Minimum Interest”). The Red Beard Note was secured by all assets of the Company pursuant to the terms of a Security Agreement entered into by and between the Company and Red Beard (the "Red Beard Note Financing"). The Red Beard Note was subsequently amended on August 27, 2020, September 30, 2020, October 29, 2020, December 1, 2020, and January 19, 2021, ultimately increasing Principal Amount to $1,400,000 and Minimum Interest to $150,000.
On March 24, 2021, the Company and Red Beard entered into a Satisfaction and Release (the "Red Beard Release"), pursuant to which the Company made a payment to Red Beard in the amount of $1,550,000 in exchange for an acknowledgment of satisfaction and full release of the Company by Red Beard from liability and obligations arising under the Red Beard Note.
Small Business Administration Loan Programs
On April 30, 2020, Charlie's received approval to enter into a U.S. Small Business Administration ("SBA") Promissory Note (the "PPP Loan Agreement") with TBK Bank, SSB (the "SBA Lender"), pursuant to the Paycheck Protection Program ("PPP") of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") as administered by the SBA (the "Charlie's PPP Loan").
The Charlie's PPP Loan provided for working capital to Charlie’s in the amount of $650,761. The Charlie's PPP Loan was set to mature on April 30, 2022 and accrued interest at a rate of 1.00% per annum. Per the PPP Loan Agreement, payments of principal and interest were deferred for six months from the date of the Charlie's PPP Loan, or until November 30, 2020.
During the year ended December 31, 2021, Charlie’s received notice from SBA Lender that the Charlie’s PPP Loan was forgiven, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the SBA. There is no further action required on the part of Charlie’s to satisfy this liability. During the year ended December 31, 2021, the Company recorded a debt extinguishment gain of approximately $1,060,000, including principal and accrued interest, which is reflected in the other income section of the Company’s consolidated statements of operations.
On April 14, 2020, Don Polly also obtained a loan pursuant to the PPP enacted under the CARES Act (the "Polly PPP Loan" and together with the Charlie's PPP Loan, the "PPP Loans") from Community Banks of Colorado, a division of NBH Bank (the "Polly Lender"). The Polly PPP Loan provided for working capital to Don Polly in the amount of $215,600. The Polly PPP Loan was set to mature on April 14, 2022 and accrued interest at a rate of 1.00% per annum. Payments of principal and interest were deferred for six months from the date of the Polly PPP Loan, or until November 14, 2020. Interest, however, continued to accrue during that time.
On February 19, 2021, Don Polly received notice from the Polly Lender, that the Polly PPP Loan was forgiven, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the SBA. There is no further action required on the part of Don Polly to satisfy this liability. For the period ended March 31, 2021, the Company recorded a debt extinguishment gain of approximately $217,000, including principal and accrued interest, which is reflected in the other income section of the Company’s consolidated statements of operations.
On March 17, 2021, Don Polly obtained a second draw PPP loan (“Polly PPP Loan 2”) under the CARES Act from Polly Lender. The Polly PPP Loan 2 obtained by Don Polly provided general working capital in the amount of $184,200. The Polly PPP Loan 2 was set to mature on March 17, 2026, and accrued interest at a rate of 1.00% per annum. Payments of principal and interest were deferred, however interest continued to accrue during that time.
During the year ended December 31, 2021, Don Polly received notice from the Polly Lender that the Polly PPP Loan 2 was forgiven, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the SBA. There is no further action required on the part of Don Polly to satisfy this liability.
On June 24, 2020, SBA authorized (under Section 7(b) of the Small Business Act, as amended) an Economic Injury Disaster Loan (“EID Loan”) to Don Polly in the amount of $150,000. Installment payments, including principal and interest of $731 monthly, will begin thirty months from the date of the EID Loan. The balance of principal and interest is payable thirty years from the date of the EID Loan and interest accrues at the rate of 3.75% per annum.
April 2022 Note Financing
On April 6, 2022, 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) 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):
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Note 9 - Earnings (Loss) Per Share Applicable to Common Stockholders |
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| Earnings Per Share [Text Block] |
NOTE 9 – EARNINGS (LOSS) PER SHARE APPLICABLE TO COMMON STOCKHOLDERS
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 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):
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):
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Note 10 - Stockholders' Equity |
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Sep. 30, 2022 | |
| Notes to Financial Statements | |
| Stockholders' Equity Note Disclosure [Text Block] |
NOTE 10 – STOCKHOLDERS’ EQUITY
Series A Preferred Share Dividend & Share Waiver
On April 21, 2021, the Company issued a waiver and exchange agreement (“Waiver Agreement”) to shareholders of its Series A Preferred shares (“Stock Payees”) requesting such Stock Payee's respective amount of the dividend payment (each individual Stock Payee's respective amount the “Stock Payee Indebtedness”) to be paid in the form of shares of Common Stock (the “Stock Payment”) and agreeing to consummate an exchange of such Stock Payee's right to the Stock Payee Indebtedness in cash for shares of Common Stock (the “Exchange”), pursuant to which the entire Stock Payee Indebtedness shall be exchanged for that number of shares of Common Stock equal to the total Stock Payee Indebtedness divided by $0.44313.
On May 25, 2021, the Company entered into a Dividend Waiver and Exchange Agreement (the “Exchange Agreement”), between the Company and the holders (the “Series A Holders”) of its Series A Preferred, pursuant to which the Company paid to the Series A Holders total consideration of approximately $1,650,000 (the “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 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 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
On March 19, 2021, the Company entered into Securities Purchase Agreements by and between the Company and certain family trusts in which Mr. Brandon Stump and Mr. Ryan Stump, the Company's former Chief Executive Officer and Chief Operating Officer, respectfully, are trustees and beneficiaries (the "Purchase Agreements"), for the private placement of an aggregate of 3,517,000 shares of its Common Stock, at a purchase price per share of $0.853 (the "Private Placement"), which Private Placement was consummated on March 22, 2021. The Private Placement resulted in gross proceeds to the Company of approximately $3.0 million. The Private Placement was undertaken pursuant to Rule 506 promulgated under the Securities Act of 1933, as amended, and was consummated in a transaction approved by the Company's independent directors in accordance with Rule 16b-3(d)(1) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). |
Note 11 - Stock-based Compensation |
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| Share-Based Payment Arrangement [Text Block] |
NOTE 11 – STOCK-BASED COMPENSATION
On May 8, 2019, our Board of Directors approved the Charlie’s Holdings, Inc. 2019 Omnibus Incentive Plan (the “2019 Plan”), and the 2019 Plan was subsequently approved by holders of a majority of our outstanding voting securities on the same date. Up to 11,072,542 stock options were originally grantable under the 2019 Plan.
On December 22, 2021, our Board of Directors unanimously adopted resolutions by written consent approving an amendment to increase the number of shares of Common Stock available for issuance under the 2019 Plan by 15.0 million shares, from 11,072,542 to 26,072,542 shares (the “2019 Plan Amendment”). Furthermore, the Company received written consents approving the 2019 Plan Amendment from holders of approximately 50.3% of our outstanding voting securities. In accordance with Rule 14c of the Exchange Act, our Board of Directors’ authority to implement the 2019 Plan Amendment became effective February 28, 2022, twenty calendar days after notification of our shareholders.
Non-Qualified Stock Options
The following table summarizes stock option activities during the nine months ended September 30, 2022 (all option amounts are in thousands):
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 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 nine months ended September 30, 2022 (all share amounts are in thousands):
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 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 $30,000 and $76,000 during the three and nine months ended September 30, 2022 related to the RSAs, respectively. |
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Note 12 - Commitments and Contingencies |
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| Commitments and Contingencies Disclosure [Text Block] |
NOTE 12 – COMMITMENTS AND CONTINGENCIES
Leases
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 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 (“Williamsville Lease”) with Henry Sicignano Jr., a relative of the Company’s President, Henry Sicignano III. The Williamsville Lease, which became effective on May 1, 2022, has a term of one year and a base rent of $1,650 per month. The Williamsville Lease is considered a modified gross lease and therefore the Company will also be responsible for additional monthly expenses including gas, electricity, and internet. The Williamsville Lease was evaluated and approved by the Company’s Board of Directors.
Such leases do not require any contingent rental payments, impose any financial restrictions, or contain any residual value guarantees. Certain of the Company’s leases include renewal options and escalation clauses; renewal options have not been included in the calculation of the lease liabilities and right of use assets as the Company is not reasonably certain to exercise the options. Variable expenses generally represent the Company’s share of the landlord’s operating expenses. The Company does not act as a lessor or have any leases classified as financing leases.
The Company excludes short-term leases having initial terms of 12 months or less from ASC Topic 842, “Leases”, as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term. The Company entered into a commercial lease for the Company’s corporate headquarters (the “Lease”) in Costa Mesa, California with Brandon Stump, the Company’s former Chief Executive Officer, Ryan Stump, the Company’s Chief Operating Officer, and Keith Stump, a former member of the Company’s Board of Directors. The Stumps purchased the property that is the subject of the Lease in July 2019. The Lease, which was effective as of September 1, 2019, on a month-to-month basis, was then formalized on November 1, 2019 to have a term of years and a base rent rate of $22,940 per month, which rate is subject to annual adjustments based on the consumer price index, as may be mutually agreed upon by the parties to the Lease. The terms of the Lease were negotiated and approved by the independent members of the Board of Directors, after reviewing a detailed analysis of comparable properties and rent rates compiled by an independent, third-party consultant. 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 -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):
Maturities of our operating leases as of September 30, 2022, excluding short-term leases, are as follows (amounts in thousands):
Legal Proceedings
As of the date hereof, we are not a party to any material legal or administrative proceedings. There are no proceedings in which any of our directors, executive officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our interest. From time to time, the Company may be involved in various claims and counterclaims and legal actions arising in the ordinary course of business. Litigation or any other legal or administrative proceeding, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our management’s time and attention.
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Note 13 - Income Taxes |
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| Notes to Financial Statements | |
| Income Tax Disclosure [Text Block] |
NOTE 13 – INCOME TAXES
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. Our income tax provision may be significantly affected by changes to our estimates. 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 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 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. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise become unavailable to offset future income tax liabilities. Additionally, our NOLs and tax credit carryforwards could be limited under state law. For these reasons, even if we attain profitability, we may be unable to use a material portion of our NOLs and other tax attributes. |
Note 14 - Subsequent Events |
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Sep. 30, 2022 | |
| Notes to Financial Statements | |
| Subsequent Events [Text Block] |
NOTE 14 – SUBSEQUENT EVENTS
The Company evaluated subsequent events for their potential impact on the consolidated condensed financial statements and disclosures through the date the consolidated condensed financial statements were available to be issued and determined that no subsequent events occurred that were reasonably expected to impact the consolidated condensed financial statements presented herein.
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Significant Accounting Policies (Policies) |
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| Accounting Policies [Abstract] | |
| Basis of Accounting, Policy [Policy Text Block] | Basis of Presentation
The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) have been omitted pursuant to SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented in this Report not misleading.
Amounts related to disclosure of December 31, 2021 balances within the interim condensed consolidated financial statements were derived from audited financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”). |
| Use of Estimates, Policy [Policy Text Block] | Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. |
| New Accounting Pronouncements, Policy [Policy Text Block] | Recent Accounting Standards
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13"), which supersedes current guidance requiring recognition of credit losses when it is probable that a loss has been incurred. ASU 2016-13 requires the establishment of an allowance for estimated credit losses on financial assets, including trade and other receivables, at each reporting date. ASU 2016-13 will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted. The Company does not believe the impact of adopting this standard will be material to its condensed consolidated financial statements and related disclosures.
In August 2020, the FASB issued ASU No. 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity” (“ASU 2020-06”). ASU 2020-06 eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, ASU 2020-06 modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings per share (“EPS”) computation. The amendments in ASU 2020-06 are effective for smaller reporting companies as defined by the SEC for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of ASU 2020-06 on its condensed consolidated financial statements.
In May 2021, the FASB issued ASU No. 2021-04, “Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40)” (“ASU 2021-04”). ASU 2021-04 reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. ASU 2021-04 provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. ASU 2021-04 was adopted for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. The Company does not believe the impact of adopting this standard was material to its condensed consolidated financial statements and related disclosures.
In June 2022, the FASB issued ASU 2022-03, ASC Subtopic 820 “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. The FASB is issuing this Update (1) to clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The Company is currently evaluating the impact of ASU 2022-03 on its condensed consolidated financial statements. |
Note 3 - Fair Value Measurements (Tables) |
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Note 4 - Property and Equipment (Tables) |
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Note 5 - Concentrations (Tables) |
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Sep. 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Schedules of Concentration of Risk, by Risk Factor [Table Text Block] |
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Note 7 - Accounts Payable and Accrued Expenses (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Schedule of Accounts Payable and Accrued Liabilities [Table Text Block] |
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Note 8 - Notes Payable (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||
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Sep. 30, 2022 | |||||||||||||||||||||||||||||||
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| Schedule of Maturities of Long-Term Debt [Table Text Block] |
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Note 9 - Earnings (Loss) Per Share Applicable to Common Stockholders (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes Tables | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Earnings Per Share, Basic and Diluted [Table Text Block] |
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| Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share [Table Text Block] |
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Note 11 - Stock-based Compensation (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Share-Based Payment Arrangement, Option, Activity [Table Text Block] |
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| Schedule of Unvested Restricted Stock Units Roll Forward [Table Text Block] |
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Note 12 - Commitments and Contingencies (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Lease, Cost [Table Text Block] |
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| Lessee, Operating Lease, Liability, Maturity [Table Text Block] |
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Note 1 - Description of the Business and Basis of Presentation (Details Textual) |
3 Months Ended | 9 Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
Jun. 16, 2021 |
Sep. 30, 2022
USD ($)
$ / shares
|
Jun. 30, 2022
USD ($)
|
Mar. 31, 2022
USD ($)
$ / shares
|
Sep. 30, 2021
USD ($)
|
Sep. 30, 2022
USD ($)
$ / shares
|
Sep. 30, 2021
USD ($)
|
Dec. 31, 2021
USD ($)
$ / shares
|
Jun. 30, 2021
USD ($)
|
Dec. 31, 2020
USD ($)
|
|
| Common Stock, Par or Stated Value Per Share (in dollars per share) | $ / shares | $ 0.001 | $ 0.001 | $ 0.001 | $ 0.001 | ||||||
| Operating Income (Loss), Total | $ 46,000 | $ 378,000 | $ (136,000) | $ (19,000) | ||||||
| Net Income (Loss) Attributable to Parent, Total | 241,000 | $ 241,000 | 3,107,000 | 311,000 | 2,734,000 | |||||
| Net Cash Provided by (Used in) Operating Activities, Total | (1,522,000) | (980,000) | ||||||||
| Stockholders' Equity Attributable to Parent, Ending Balance | 3,529,000 | 3,529,000 | $ 3,257,000 | $ 1,068,000 | 3,529,000 | $ 1,068,000 | $ 3,131,000 | $ (2,075,000) | $ (5,996,000) | |
| Assets, Current, Total | 8,145,000 | 8,800,000 | 8,145,000 | 7,994,000 | ||||||
| Liabilities, Current, Total | $ 5,266,000 | $ 6,000,000.0 | $ 5,266,000 | $ 5,534,000 | ||||||
| Premarket Tobacco Application Registration [Member] | ||||||||||
| Cost of Revenue, Total | $ 5,100,000 | |||||||||
| Reverse Stock Split [Member] | ||||||||||
| Stockholders' Equity Note, Stock Split, Conversion Ratio | 100 | |||||||||
Note 3 - Fair Value Measurements (Details Textual) - USD ($) $ / shares in Units, $ in Millions |
Mar. 22, 2021 |
Apr. 26, 2019 |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|---|---|
| Proceeds from Issuance of Private Placement | $ 3.0 | $ 27.5 | ||
| Preferred Stock, Par or Stated Value Per Share (in dollars per share) | $ 0.001 | $ 0.001 | ||
| Warrants and Rights Outstanding, Term (Year) | 5 years | |||
| Class of Warrant or Right, Exercise Price of Warrants or Rights (in dollars per share) | $ 0.44313 | |||
| Investor Warrants [Member] | ||||
| Class of Warrant or Right, Number of Securities Called by Warrants or Rights (in shares) | 31,028,996 | |||
| Placement Agent Warrants [Member] | ||||
| Class of Warrant or Right, Number of Securities Called by Warrants or Rights (in shares) | 9,308,699 | |||
| Series A Preferred Stock [Member] | ||||
| Preferred Stock, Par or Stated Value Per Share (in dollars per share) | $ 0.001 |
Note 3 - Fair Value Measurements - Fair Value Hierarchy on a Recurring Basis (Details) - USD ($) $ in Thousands |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Derivative liability - Warrants | $ 301 | $ 899 |
| Fair Value, Recurring [Member] | ||
| Derivative liability - Warrants | 301 | 899 |
| Total liabilities | 301 | 899 |
| Fair Value, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | ||
| Derivative liability - Warrants | 0 | 0 |
| Total liabilities | 0 | 0 |
| Fair Value, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | ||
| Derivative liability - Warrants | 0 | 0 |
| Total liabilities | 0 | 0 |
| Fair Value, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | ||
| Derivative liability - Warrants | 301 | 899 |
| Total liabilities | $ 301 | $ 899 |
Note 3 - Fair Value Measurements - Changes in Level 3 Liabilities (Details) $ in Thousands |
9 Months Ended |
|---|---|
|
Sep. 30, 2022
USD ($)
| |
| Balance | $ 899 |
| Change in fair value | (598) |
| Balance | $ 301 |
Note 3 - Fair Value Measurements - Unobservable Inputs Assumptions (Details) |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Measurement Input, Exercise Price [Member] | ||
| Derivative measurement input | 0.4431 | 0.4431 |
| Measurement Input, Expected Term [Member] | ||
| Derivative measurement input | 1.57 | 2.32 |
| Measurement Input, Price Volatility [Member] | ||
| Derivative measurement input | 0.950 | 0.900 |
| Measurement Input, Risk Free Interest Rate [Member] | ||
| Derivative measurement input | 0.042 | 0.008 |
| Measurement Input, Expected Dividend Rate [Member] | ||
| Derivative measurement input | 0 | 0 |
Note 4 - Property and Equipment (Details Textual) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Depreciation, Depletion and Amortization, Nonproduction, Total | $ 55,000 | $ 53,000 | $ 244,000 | $ 155,000 |
Note 4 - Property and Equipment - Property and Equipment (Details) - USD ($) $ in Thousands |
9 Months Ended | |
|---|---|---|
Sep. 30, 2022 |
Dec. 31, 2021 |
|
| Property and equipment, gross | $ 1,025 | $ 1,104 |
| Accumulated depreciation | (673) | (673) |
| Property and equipment, net | 352 | 431 |
| Machinery and Equipment [Member] | ||
| Property and equipment, gross | $ 41 | 42 |
| Estimated useful life (Year) | 5 years | |
| Trade Show Booth [Member] | ||
| Property and equipment, gross | $ 202 | 171 |
| Estimated useful life (Year) | 5 years | |
| Office Equipment [Member] | ||
| Property and equipment, gross | $ 535 | 511 |
| Estimated useful life (Year) | 5 years | |
| Leasehold Improvements [Member] | ||
| Property and equipment, gross | $ 247 | $ 380 |
Note 5 - Concentrations - Concentration Risk (Details) |
3 Months Ended | 9 Months Ended | 12 Months Ended | ||
|---|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
Dec. 31, 2021 |
|
| Supplier Concentration Risk [Member] | Vendor A [Member] | Inventory Purchases [Member] | |||||
| Concentration risk | 40.00% | 0.00% | 31.00% | 0.00% | |
| Supplier Concentration Risk [Member] | Vendor B [Member] | Inventory Purchases [Member] | |||||
| Concentration risk | 24.00% | 70.00% | 42.00% | 65.00% | |
| Supplier Concentration Risk [Member] | Vendor C [Member] | Inventory Purchases [Member] | |||||
| Concentration risk | 14.00% | 0.00% | 0.00% | 0.00% | |
| Supplier Concentration Risk [Member] | Vendor D [Member] | Inventory Purchases [Member] | |||||
| Concentration risk | 11.00% | 16.00% | 0.00% | 15.00% | |
| Customer Concentration Risk [Member] | Accounts Receivable [Member] | Customer A [Member] | |||||
| Concentration risk | 15.00% | 27.00% | |||
Note 6 - Don Polly, LLC (Details Textual) |
9 Months Ended |
|---|---|
Sep. 30, 2022 | |
| Don Polly, LLC [Member] | |
| Percent of Net Income Received, Variable Interest Entity | 100.00% |
Note 7 - Accounts Payable and Accrued Expenses - Accounts Payable (Details) - USD ($) $ in Thousands |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Accounts payable | $ 1,506 | $ 2,476 |
| Accrued compensation | 935 | 902 |
| Accrued income taxes | 280 | 342 |
| Other accrued expenses | 340 | 348 |
| Accounts Payable and Accrued Liabilities, Current, Total | $ 3,061 | $ 4,068 |
Note 8 - Notes Payable - Notes Payable Maturities (Details) $ in Thousands |
Sep. 30, 2022
USD ($)
|
|---|---|
| Remaining months Ending December 31, 2022 | $ 298 |
| Year Ending December 31, 2023 | 1,000 |
| Year Ending December 31, 2024 | 0 |
| Year Ending December 31, 2025 | 0 |
| Thereafter | 150 |
| Total | $ 1,448 |
Note 9 - Earnings (Loss) Per Share Applicable to Common Stockholders - Earnings (Loss) Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Net income - basic | $ 241 | $ 3,107 | $ 311 | $ 2,734 |
| Reversal of gain due to change in fair value of warrant liability | (246) | (2,729) | (598) | (1,901) |
| Net income (loss) - diluted | $ (5) | $ 378 | $ (287) | $ 833 |
| Weighted average shares outstanding - basic (in shares) | 212,823,575 | 206,321,051 | 211,967,458 | 201,206,587 |
| Diluted stock options (in shares) | 0 | 0 | 0 | 1,351,628 |
| Diluted warrants (in shares) | 0 | 0 | 0 | 8,887,023 |
| Diluted preferred shares (in shares) | 31,268,169 | 32,229,747 | 31,268,169 | 32,229,747 |
| Weighted average shares outstanding - diluted (in shares) | 244,091,744 | 238,550,798 | 243,235,628 | 243,674,985 |
| Basic earnings per share (in dollars per share) | $ 0.00 | $ 0.02 | $ 0.00 | $ 0.01 |
| Diluted earnings (loss) per share (in dollars per share) | $ (0.00) | $ 0.00 | $ (0.00) | $ 0.01 |
Note 9 - Earnings (Loss) Per Share Applicable to Common Stockholders - Antidilutive Securities (Details) - shares shares in Thousands |
9 Months Ended | |
|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Anti-dilutive securities (in shares) | 46,381 | 37,682 |
| Share-Based Payment Arrangement, Option [Member] | ||
| Anti-dilutive securities (in shares) | 6,043 | 6,231 |
| Warrant [Member] | ||
| Anti-dilutive securities (in shares) | 40,338 | 31,451 |
Note 10 - Stockholders' Equity (Details Textual) - USD ($) |
9 Months Ended | ||||
|---|---|---|---|---|---|
May 25, 2021 |
Mar. 22, 2021 |
Apr. 26, 2019 |
Sep. 30, 2022 |
Apr. 21, 2020 |
|
| Share Exchange, Value Per Share (in dollars per share) | $ 0.44313 | ||||
| Common Stock Dividends, Shares (in shares) | 1,736,501 | ||||
| Shares Issued, Price Per Share (in dollars per share) | $ 0.44313 | $ 0.853 | |||
| Proceeds from Issuance of Private Placement | $ 3,000,000.0 | $ 27,500,000 | |||
| Private Placement [Member] | |||||
| Stock Issued During Period, Shares, New Issues (in shares) | 3,517,000 | ||||
| Conversion of Series A Preferred Stock to Common Stock [Member] | |||||
| Conversion of Stock, Shares Issued (in shares) | 748,000 | ||||
| Conversion of Stock, Shares Converted (in shares) | 3,316 | ||||
| Series A Preferred Stock [Member] | |||||
| Dividends, Total | $ 1,650,000 | ||||
| Dividends, Cash, Total | $ 880,000 |
Note 11 - Stock-based Compensation - Restricted Stock Awards Activities (Details) - Restricted Stock [Member] shares in Thousands |
9 Months Ended |
|---|---|
|
Sep. 30, 2022
$ / shares
shares
| |
| Nonvested, number of shares (in shares) | 1,750 |
| Nonvested, weighted average grant date fair value per share (in dollars per share) | $ / shares | $ 44.000 |
| Restricted stock granted, number of shares (in shares) | 6,317 |
| Restricted stock granted, weighted average grant date fair value per share (in dollars per share) | $ / shares | $ 37.000 |
| Vested (in shares) | (750) |
| Forfeited (in shares) | (359) |
| Nonvested, number of shares (in shares) | 6,958 |
| Nonvested, weighted average grant date fair value per share (in dollars per share) | $ / shares | $ 37.000 |
Note 12 - Commitments and Contingencies - Operating Lease Information (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Operating lease cost | $ 127 | $ 139 | $ 382 | $ 427 |
| Variable lease cost | 0 | 0 | 0 | 0 |
| Operating lease expense | 127 | 139 | 382 | 427 |
| Short-term lease rent expense | 5 | 0 | 8 | 0 |
| Total rent expense | $ 132 | $ 139 | 390 | 427 |
| Operating cash flows from operating leases | 387 | 331 | ||
| Right-of-use assets exchanged for operating lease liabilities | $ 440 | $ 0 | ||
| Weighted-average remaining lease term – operating leases (in years) (Year) | 2 years 3 months 18 days | 2 years 6 months | 2 years 3 months 18 days | 2 years 6 months |
| Weighted-average discount rate – operating leases | 12.00% | 12.00% | 12.00% | 12.00% |
Note 12 - Commitments and Contingencies - Maturities of Operating Leases (Details) |
Sep. 30, 2022
USD ($)
|
|---|---|
| Three Months Ending December 31, 2022 | $ 112,000 |
| Year Ending December 31, 2023 | 449,000 |
| Year Ending December 31, 2024 | 385,000 |
| Year Ending December 31, 2025 | 75,000 |
| Total | 1,021,000 |
| Less present value discount | (134) |
| Operating lease liabilities as of September 30, 2022 | $ 887,000 |
Note 13 - Income Taxes (Details Textual) - USD ($) |
3 Months Ended | 9 Months Ended | |||
|---|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
Dec. 31, 2021 |
|
| Income Tax Expense (Benefit), Total | $ 45,000 | $ 0 | $ 45,000 | $ 0 | |
| State and Local Jurisdiction [Member] | |||||
| Operating Loss Carryforwards | $ 6,100,000 | ||||
| Domestic Tax Authority [Member] | |||||
| Operating Loss Carryforwards | $ 4,300,000 | ||||