Charlie's Holdings Inc.

05/29/2025 | Press release | Distributed by Public on 05/29/2025 14:16

Annual Report for Fiscal Year Ending 12-31, 2024 (Form 10-K)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in conjunction with our financial statements, including the notes thereto contained in this Annual Report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of certain factors, including those set forth under "Risk Factors Associated with Our Business" and elsewhere in this Annual Report.

Overview

The Company's objective is to become a leader in two broad product categories: (i) non-combustible nicotine-related products and (ii) alternative alkaloid vapor products. Through our Charlie's subsidiary, we formulate, market, and distribute premium, nicotine-based and alternative alkaloid vapor products. Charlie's products are produced through contract manufacturers for sale through select distributors, specialty retailers, and third-party online resellers throughout the United States and select international markets.

Operational Plan

In today's economic landscape, particularly within the vapor products industry, seeking and securing competitive advantage is paramount. Unlike many competitors in our industry, Charlie's has focused on achieving full compliance with FDA regulations - while also establishing a regulatory "hedge" through the development of alternative "zero-nicotine" product lines that are not currently subject to FDA review. Simultaneous to undertaking these initiatives, in 2024 management took aggressive steps to "right size" the business, preserve working capital, and achieve profitability in 2025. Our key initiatives include:

1.

Product Innovation: In late 2023 Charlie's initiated a plan to dramatically expand its business from nicotine products only, to a portfolio of products that includes nicotine substitute products. This strategic hedge, and the market testing that the shift entailed, significantly reduced Company revenue in 2024. However, the Company believes that its nicotine substitute, Metatine™, in the SBX™ product line, will position the Company to capture very significant future sales and market share in the vapor products marketplace.

2.

PMTA Assets: At this date, Charlie's has received FDA Acceptance Filings for more than 650 PMTAs. By investing an additional $1.2 million in Q4 2024 to amend and enhance certain of our 2022 PMTA submissions, we maintained our commitment to full regulatory compliance, and we enhanced the strategic value of our PMTA portfolio. The Company believes Charlie's 650+ PMTAs, as a stand-alone asset, have a monetary value that far exceeds Charlie's current market cap. (See Note 16 - Subsequent Events)

3.

Age-Gating Technology: We have continued to develop intellectual property around, and to seek strategic partnerships for, technologies designed to prevent youth access to nicotine vapor products. We believe this is both a responsible business practice as well as a potential future competitive advantage in the marketplace.

4.

Cost Structure Optimization: In order to right-size the Company during a time of significantly reduced revenue, we continue to reduce our overall cost structure while improving margins. Company executives voluntarily reduced their salaries by 20-50%.

5.

Headcount Reduction: We have significantly reduced our headcount and associated salary expenses, focusing on maintaining a core group of key employees as we collectively right-size the business.

6.

Sales Team Improvement: We have upgraded, and will continue to upgrade, our sales team from a solely account management-centric team to a skilled and driven sales team to acquire new customers while maintaining excellent service with our existing customers.

7.

Uplist to a National Securities Exchange: As the business returns to growth, and as soon as we are able to meet listing requirements, we plan to uplist from the OTCQB exchange to a national securities exchange. An uplist will increase Charlie's market visibility, liquidity, and access to capital. Such a shift could lead to new strategic opportunities and, potentially, to a substantially higher market cap.

Management believes that these initiatives will enhance Charlie's competitive position in the marketplace, significantly reduce costs, help accelerate the Company's path to profitability, support business growth, and, ultimately, allow the Company to achieve greater liquidity and visibility through an uplist to a national securities exchange.

Considering industry-specific hurdles, as well as the potential for future regulatory changes, management has prioritized several principal initiatives as opportunities for growth:

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

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In 2024, to test consumer acceptance of nicotine substitute vapor products in the marketplace, we launched the SPREE BAR disposable flavor pod system (with Metatine inside) in select markets across the US. This initiative demonstrated that adult consumers: (i) overwhelmingly prefer "flavored" vapor products over plain tobacco products; (ii) are highly receptive to nicotine substitute products that offer the same vaping experience as that provided by conventional nicotine vapor products; and, surprisingly (iii) are not particularly interested in the cost savings that SPREE BAR flavor pods (with reusable batteries) represent vs. conventional disposable vapes (with single use batteries).

Applying these findings to our ongoing product development initiatives, by the end of 2024 Charlie's unveiled the Company's second-generation Metatine product line: SBX Disposables. SBX Disposables feature: (i) the modern disposable product format (with digital display) that consumers overwhelmingly prefer over pod system vapes; (ii) award-winning flavors (preferred over plain tobacco vapor by more than 80% of adult consumers); and, most significantly, for regional and national convenience store chains that are our largest potential customers, (iii) Charlie's proprietary nicotine substitute that makes SBX legal across most of the United States (without FDA PMTA review).

In a Company-sponsored focus group survey of adult consumers who vape, Charlie's SBX Disposables were overwhelming preferred over Juul tobacco-flavored vapes. Of 306 survey participants, 287 preferred SBX over Juul. In Company marketing materials, SBX advantages are highlighted: "Compared to mass-market vapes offered by Big Tobacco ̶ namely Juul ̶ SBX provides many MORE FLAVOR options, UNBEATABLE TAX ADVANTAGES, and THOUSANDS MORE PUFFS!"

Following up on these encouraging early results, we are currently test marketing SBX in mass market convenience chains. If one or more of these tests prove successful, regional and national rollouts could prove transformational for Charlie's.

Further, we have recently begun test-marketing Metatine-based e-liquids under the PACHAMAMA PLUS+ trademark. In response to the rapidly emerging new "pouch products" category in the nicotine products industry, we are also developing a Metatine-based pouch line that could be ready for market in late 2025. We do, however, recognize the challenges in marketing non-nicotine-based alternative alkaloid products in a market that is saturated with traditional nicotine products; accordingly, we are committed to continuous improvement of our Metatine-based products in order to satisfy the ever-evolving demands of US adult consumers.

Priority 2: Since our founding in 2014, Charlie's has created literally hundreds of products that provide adult smokers with a viable means of abandoning cigarettes. Not coincidentally, over the last 10-15 years e-cigarette usage in the United States has grown significantly, and cigarette smoking rates have dropped. Accordingly, tobacco and synthetically derived nicotine vapor products continue to provide significant growth opportunities for Charlie's. In 2021, we launched our synthetic nicotine (not derived from tobacco) Pacha (formerly Pachamama Disposable) product line, which provides access to additional sales channels and broadens our customer base. These innovative product formats continue to represent an extremely important product category for Charlie's and we intend to develop new distribution partnerships in order to grow our nicotine disposable business in 2025.

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We believe that our substantial investments in FDA regulatory compliance make Charlie's an attractive partner in this space. Charlie's has received FDA Acceptance Filings for more than 650 PMTAs. By investing an additional $1.2 million in Q4 2024 to amend and enhance certain of our 2022 PMTA submissions, we maintained our commitment to full regulatory compliance and we enhanced the strategic value of our PMTA portfolio. The Company believes Charlie's 650+ PMTAs, as a stand-alone asset, have a monetary value that far exceeds Charlie's current market cap. (See Note 16 - Subsequent Events)

In total, Charlie's has invested more than $6.5 million on the submission of Premarket Tobacco Applications ("PMTAs") and subsequent amendments to these applications to the FDA. We engaged a team of more than 200 professionals, including doctors, scientists, biostatisticians, data analysts, and numerous contract research organizations to create Charlie's comprehensive PMTA submissions. Notwithstanding Charlie's meaningful and costly regulatory initiatives - and even though hundreds of other companies across the United States invested hundreds of millions of dollars to submit more than 26 million PMTAs - to date, the FDA has authorized only 34 tobacco-flavored (and a handful of menthol) e-cigarette products and devices. Accordingly, even though former FDA Commissioner Dr. Scott Gottlieb described e-cigarettes as far lower on the "continuum of risk" than combustible cigarettes, fewer than 1% of the PMTA's for e-cigarette products and devices have survived FDA's regulatory gauntlet.

Nonetheless, we are continuing to seek FDA marketing authorization for certain of both our nicotine vapor products and our synthetic nicotine vapor products. Obtaining one or more marketing orders from the FDA could, we believe, help to remediate perceived health issues related to vaping, and further position the Company as a trusted industry leader. While we continue in the FDA review process, we are also beginning to seek out strategic partners to monetize our PMTAs; given that Charlie's 650+ PMTAs (primarily for flavored vapor products) remain among the fraction of 1% that are still under active review with the FDA, and given that more than 80% of adults in the United States prefer flavored vapor products over plain tobacco vapor products, we believe that Charlie's PMTA portfolio represents an important competitive advantage - of significant monetary value.

Priority 3: The Company continues to develop intellectual property around, and to seek strategic partnerships for, technologies designed to prevent youth access to nicotine vapor products. Edward Carmines, Ph.D., a member of Charlie's Board of Directors and an accomplished scientist and regulatory affairs expert, is spearheading Charlie's development of patented "age-gating technology" for both Charlie's and potential licensees of the Company. Currently, there is a need for age-gated product technologies that can satisfy or accommodate concerns the FDA has related to under-age youth access in the ENDS market. We believe age-gating is both a responsible business practice as well as a potential future competitive advantage for Charlie's. If our age-gated e-cigarettes-in-development are recognized as "products of merit" by the FDA, Charlie's e-cigarettes could emerge among the select minority of flavored nicotine disposables able to be sold legally in the $8 billion U.S. vapor products market.

Underlining the importance of Charlie's work with age-gating technology are initiatives taken by JUUL Labs, Altria, and R.J. Reynolds, three of the largest competitors in our industry. In July 2023 JUUL announced that it had submitted a PMTA with the FDA for a new e-cigarette device that also included information on novel, data-driven technologies to restrict underage access. JUUL's chief product officer explained, "With our next-generation platform, we have designed a technological solution for two public-health problems: improving adult-smoker switching from combustible cigarettes and restricting underage access to vapor products..." In the second quarter of 2024, Altria and R.J. Reynolds announced news of their own PMTA submissions to the FDA for mobile applications that verify consumers' ages through third-party age verification providers. Similar to the age-gating technology under development at Charlie's, the Big Tobacco company devices include mobile and web-based apps that enable age-verification technology, including device-locking, and real-time product information and usage insights for age-verified consumers with industry-leading data-privacy protections.

Priority 4: In order to mitigate FDA regulatory risk in the domestic market and to capture what management continues to believe is a significant commercial opportunity, we have dedicated additional resources to efforts focused on growing our market share internationally. Presently, approximately 10% of our vapor product sales come from the international market and we are well positioned to increase sales in countries where we already have presence and, in additional overseas markets, as we have already built an international distribution platform.

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Risks and Uncertainties and Ability to Continue as a Going Concern

The Company operates in an environment that is subject to rapid changes and developments in laws and regulations that could have a significant impact on the Company's ability to sell its products. Beginning in September 2019, certain states temporarily banned the sale of flavored e-cigarettes, and several states and municipalities are considering implementing similar restrictions. Federal, state, and local governmental bodies across the United States have indicated that flavored e-cigarette liquid, vaporization products and certain other consumption accessories may become subject to new laws and regulations at the federal, state, and local levels. In addition, in June 2022, the FDA announced a plan to reduce nicotine levels in cigarettes to minimally or non-addictive levels. The application of any new laws or regulations that may be adopted in the future, at a federal, state, or local level, directly or indirectly implicating nicotine, flavored e-cigarette liquid, and other electronic nicotine delivery system ("ENDS") products, could significantly limit the Company's ability to sell such products, result in additional compliance expenses, and/or require the Company to change its labeling and/or methods of distribution. Any ban of the sale of flavored e-cigarettes directly limits the markets in which the Company may sell its products. In the event the prevalence of such bans and/or changes in laws and regulations increase across the United States, or internationally, the Company's business, results of operations, and financial condition could be adversely impacted. In addition, the Company is presently seeking to obtain marketing authorization for certain of its tobacco-derived nicotine e-liquid products. The Company's applications were submitted in September 2020 on a timely basis, which if approved, will allow the Company to continue to sell its approved products in the United States. Beginning in August 2021, the FDA began issuing Marketing Denial Orders ("MDO") for ENDS products that lack evidence to demonstrate that permitting the marketing of such products would be appropriate for the protection of the public health. The Company has not received an MDO for any of its 2020 PMTA submissions; however, there is no assurance that regulatory approval to sell our products will be granted or that we would be able to raise additional financing if required, which could have a significant impact on our sales. On March 15, 2022, a new rider to the Federal Food, Drug and Cosmetic Act was passed granting the FDA authority over synthetic nicotine. These regulations make the Company's synthetic nicotine products subject to the same FDA rules as tobacco-derived nicotine products. As such, the Company was required to file a PMTA for its existing synthetic nicotine products marketed under the Pacha brands by May 14, 2022 or be subject to FDA enforcement. The Company filed new PMTAs, for its synthetic Pacha products on May 13, 2022, prior to the May 14, 2022 deadline. On November 3, 2022, FDA accepted for scientific review certain of our PMTAs for synthetic nicotine products and, on November 4, 2022, FDA refused to accept certain other PMTAs for these products, rendering the latter products subject to FDA enforcement. The Company submitted an administrative appeal with FDA regarding its refusal to accept certain of the PMTAs. The administrative appeal was granted on October 30, 2023 and the products were accepted to move forward in the PMTA review process. The Company continues to sell the affected synthetic nicotine products while the PMTA review process continues. The FDA may bring an enforcement action against our synthetic nicotine products for lack of premarket authorization and/or issue an MDO to our pending applications at any time. More generally, FDA's regulatory initiatives and enforcement priorities regarding ENDS products are unpredictable and continue to evolve, and we cannot predict whether FDA's priorities and review of our premarket submissions will impact our products to a greater degree than our competitors in the industry. In the event the FDA denies our PMTAs, we would be required to remove products and cease selling them.

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

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As discussed below, our financial statements and working capital raise substantial doubt about the Company's ability to continue as a going concern. Our financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. See Liquidity and Capital Resources below for additional information.

Recent Developments

Expiration of Warrants

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

January 2024 Note Financing

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

On May 31, 2024, as part of the May 2024 capital raise (see Note 11), the holder of the Red Beard Note (the "Holder") converted the principal amount of $500,000 in lieu of cash payment for the subscription agreement. Separately, the Holder was paid $52,500 in interest on the maturity date of July 24, 2024.

May 2024 Capital Raise

On May 31, 2024, the Company entered into subscription agreements with investors for the sale of an aggregate of 20,375,000 shares of its common stock, par value $0.001 per share, at a purchase price per share of $0.08 (the "May Offering"). The May Offering generated gross proceeds of approximately $1.6 million, which will be used for working capital purposes. The May Offering was undertaken in reliance on Section 4(a)(2) under the Securities Act of 1933, as amended, as a transaction not involving a public offering.

September 2024 Pinnacle Receivables Financing

On September 6, 2024, the Company entered into a future receivables sale agreement ("Pinnacle Receivables Financing Agreement") with Pinnacle Business Funding ("Pinnacle") by which Pinnacle purchases from the Company its future accounts receivable and contract rights arising from the sale of goods or services to the Company's customers. The purchase price, as defined by the Pinnacle Receivables Financing Agreement, was $750,000 which was paid to the Company on September 12, 2024, net of a 1% origination fee. The Pinnacle Receivables Financing Agreement requires forty equal payments of $25,687.50 to be paid weekly for a total repayment of $1,027,500 over the term of the agreement.

November 2024 Capital Raise

On November 22, 2024, the Company entered into subscription agreements with investors for the sale of an aggregate of 6,875,000 shares of its common stock, par value $0.001 per share, at a purchase price per share of $0.08 (the "November Offering"). The November Offering generated gross proceeds to the Company of approximately $550,000, which will be used for working capital purposes. The November Offering was undertaken in reliance on Section 4(a)(2) under the Securities Act of 1933, as amended, as a transaction not involving a public offering.

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Basis of Presentation

The consolidated financial statements contained within this Annual Report and the disclosure in this Management's Discussion and Analysis of Financial Condition and Results of Operations with respect to the years ended December 31, 2024 and 2023 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). In the opinion of the Company, all adjustments, including normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows of the Company for the interim period have been included.

Results of Operations for the Year Ended December 31, 2024 Compared to the Year Ended December 31, 2023

For the years ended

December 31,

Change

2024

2023

Amount

Percentage

($ in thousands)

Revenues:

Product revenue, net

$ 8,494 $ 16,250 $ (7,756 ) -47.7 %

Total revenues

8,494 16,250 (7,756 ) -47.7 %

Operating costs and expenses:

Cost of goods sold - product revenue

5,603 10,206 (4,603 ) -45.1 %

General and administrative

5,718 6,970 (1,252 ) -18.0 %

Sales and marketing

693 1,107 (414 ) -37.4 %

Research and development

(68 ) 169 (237 ) -140.5 %

Total operating costs and expenses

11,946 18,452 (6,506 ) -35.3 %

Loss from operations

(3,452 ) (2,202 ) (1,250 ) 56.7 %

Other income (expense):

Interest expense

(711 ) (477 ) (234 ) 49.0 %

Debt extinguishment (loss) gain

(75 ) 36 (111 ) -308.3 %

Change in fair value of derivative liabilities

79 550 (471 ) -85.7 %

Total other (loss) income

(707 ) 109 (816 ) -748.6 %

Net loss

$ (4,159 ) $ (2,093 ) $ (2,066 ) 98.7 %
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Revenue

Revenue for the year ended December 31, 2024, decreased approximately $7,756,000, or 47.7%, to approximately $8,494,000, as compared to approximately $16,250,000 for the year ended December 31, 2023, due to a $6,481,000 decrease in our nicotine-based product sales, and a $1,275,000 decrease in sales of our hemp-derived products. The decrease in our nicotine-based vapor product sales was primarily driven by decreased sales of our Pacha Disposable line as well as reduced demand for our e-liquid products. The launch of the Company's SPREE BAR nicotine substitute vapor products did not meet performance expectations, resulting in further development efforts and ultimately the release our Metatine-based, SBX line of disposable vapor products.

Cost of Revenue

Cost of revenue, which consists of direct costs of materials, direct labor, third party subcontractor services, and other overhead costs decreased approximately $4,603,000 or 45.1%, to approximately $5,603,000, or 66.0% of revenue, for the year ended December 31, 2024, as compared to approximately $10,206,000, or 62.8% of revenue, for the year ended December 31, 2023. This cost, as a percent of revenue, increased compared to last year due a combination of lower fixed cost absorption resulting from reduced sales performance as well as overall margin compression across most product categories.

General and Administrative Expense

For the year ended December 31, 2024, total general and administrative expense decreased approximately $1,252,000 to approximately $5,718,000, or 67.3% of revenue, as compared to approximately $6,970,000, or 42.9% of revenue, for the year ended December 31, 2023. This decrease was primarily comprised of reductions of approximately $762,000 of non-commission wages and benefits, $60,000 of professional fees, $139,000 of information systems costs, as well as $291,000 in other general and administrative expenses. The decrease in payroll and benefits costs was primarily driven by elective salary reductions for executives and reduced headcount. The decrease in professional fees is largely due to reduced legal and consulting costs. Decreased information systems costs were the result of a company-wide cost-cutting effort during the period. The reduction in other general and administrative expenses largely consisted of decreases in bad debt, insurance costs and merchant processing costs.

Sales and Marketing Expense

For the year ended December 31, 2024, total sales and marketing expense decreased to approximately $693,000 as compared to approximately $1,107,000 for the year ended December 31, 2023, which was primarily due to lower sales commissions paid as well as a significant reduction in tradeshow and customer event related costs. Commissions decreased due to reduced sales activity during the year.

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Research and Development Expense

For the year ended December 31, 2024, we had income from research and development of approximately $68,000 as compared to approximately $169,000 expense for the year ended December 31, 2023. The decrease of approximately $237,000 was primarily due to reduced costs associated with the development of new technologies and product formats as well as a vendor refund of approximately $136,000.

Loss from Operations

We incurred a loss from operations of approximately $3,452,000 for the year ended December 31, 2024, as compared to loss from operations of approximately $2,202,000 for the year ended December 31, 2023, due primarily to lower sales and gross profit. Net loss is determined by adjusting loss from operations by the following items:

Change in fair value of derivative liabilities. For the years ended December 31, 2024 and 2023, the gain in fair value of derivative liabilities was approximately $79,000 and $550,000, respectively. The derivative liability is associated with the Investor Warrants and the Placement Agent Warrants (as defined in Note 3 of this Report) in connection with the Share Exchange. The gain for the year ended December 31, 2024 was due to the expiration of the warrants in April 2024, which resulted in the warrant liability being written off.

Interest Expense. For the years ended December 31, 2024 and 2023, we recorded interest expense related to notes payable of $711,000 and $477,000, respectively. The increase was primarily due to an increase of outstanding notes payable.

Debt Extinguishment (Loss) Gain. For the years ended December 31, 2024 and 2023, we recorded approximately $75,000 of loss from debt extinguishment, which was related to our May 2024 Capital Raise (see Note 11). The gain of approximately $36,000 in 2023 resulted from a modification to the promissory note issued to Michael King, a significant shareholder and member of the Company's Board of Directors, which extended the maturity date to March 2025.

Income Taxes (Benefit)

The Company did not record income tax for the years ended December 31, 2024 and 2023.

Net Loss

For the years ended December 31, 2024, and 2023, we had a net loss of $4,159,000 and $2,093,000, respectively.

Effects of Inflation

Inflation has not had a material impact on our business.

Liquidity and Capital Resources

As of December 31, 2024, we had working capital deficit of approximately $1,855,000, which consisted of current assets of approximately $3,720,000 and current liabilities of approximately $5,575,000, as compared to working capital of approximately $332,000 at December 31, 2023. The current liabilities include approximately $3,396,000 of accounts payable and accrued expenses, notes payable of $520,000, note payable from related parties of $1,488,000, approximately $98,000 of deferred revenue associated with product shipped but not yet received by customers, approximately $73,000 of current lease liabilities.

Our cash and cash equivalents balance at December 31, 2024 was approximately $211,000. As of December 31, 2024, we had the following notes outstanding:

July 2023 Note Financing. Between July 17, 2023 and August 1, 2023, the Company issued unsecured promissory notes (the "Notes") to several of its executives and employees, Ryan Stump, Henry Sicignano III, Keith Stump, and Jessica Greenwald, and to three of its largest stockholders, Brandon Stump, Red Beard Holdings LLC, and Michael King (the "Lenders"), in the cumulative principal amount of $1,400,000. Notes bear interest at twenty-one percent (21%) per annum and have maturity dates ranging from November 17, 2023 to December 10, 2023. As of December 31, 2024, $400,000, plus accrued interest, remained outstanding and the maturity dates of the outstanding notes had been extended to December 31, 2024. On April 28, 2025 Ryan Stump and Henry Sicignano III were each paid approximately $75,000 of accrued interest and have agreed to modify the Notes to include a 10% interest rate, with monthly payments of principal and interest of approximately $18,000. The maturity date has been extended to April 28, 2026.

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April 2022 Note Financing. On April 6, 2022, the Company issued a secured promissory note (the "Note") to one of its individual stockholders, and a member of the Company's Board of Directors since June 13, 2023, Michael King (the "Lender"), in the principal amount of $1,000,000, which Note is secured by accounts receivable of the Company pursuant to the terms of a Security Agreement entered into by and between the Company and the Lender (the "Note Financing"). The Note initially required the payment of principal in full and guaranteed interest in an amount the greater of 18% per annum, or $90,000, on or before the earlier date of (i) a Liquidity Event, as defined under the terms of the Note; or (ii) September 28, 2022. On September 28, 2022, the Company and the Lender entered into a modification to the Note to extend the maturity date to March 28, 2023 and the Company paid all accrued interest under the Note through such date.

On March 28, 2023, the Company entered into a second modification to the Note to extend the maturity date to April 28, 2024, contingent upon the payment of all interest accrued under the Note through March 28, 2023 and certain other modifications to the Note. Principal shall be payable on the 28th day of each month in installments of $25,000, commencing April 28, 2023, continuing up to and including April 28, 2024 whereby a balloon payment for the remaining principal balance will be paid. Immediately following the second modification, the Company entered into a third modification agreement to further extend the maturity date to March 28, 2025. The third modification agreement was effective on March 28, 2023 and superseded the second modification. Interest shall accrue on the aggregate outstanding principal amount at a rate equal to 20% simple interest per annum and shall be payable on the same day as installments of principal are payable. The Company may prepay all or any portion of the principal amount, together with all accrued but unpaid interest thereon, at any time without premium or penalty. All outstanding principal and interest are due earlier of March 28, 2025, or a liquidity event. The third modification was recognized as a debt extinguishment, resulting in a gain on debt extinguishment of approximately $35,000. The Company used the proceeds from the Note for general corporate purposes, and its working capital requirements, pending the availability of alternative debt financing. As of December 31, 2024, approximately $793,000 of principal remained outstanding.

On May 31, 2024, as part of the May 2024 capital raise (see Note 11), the Lender converted his next four debt repayments for the period from June to September 2024 for a total amount of $100,000 in lieu of cash payment for the subscription agreement.

On April 28, 2025 the Lender agreed to accept a payment of approximately $420,000 and entered into a further modification for the remaining balance that includes monthly payments of approximately $37,000 and a maturity date of April 28, 2026.

August 2022 Note Financing. On August 17, 2022, the Company and its Chief Operating Officer and Director, Ryan Stump (the "Stump Lender") entered into a loan agreement (the "Loan") in the principal amount of $300,000. The Loan will be due in full in 120 days or sooner if, before the end of term, the Company secures (i) new debt financing or (ii) sufficient PMTA strategic partnership funds. The Loan bears an annual interest rate of 10%. The Company also incurred an additional $3,000 issuance cost resulting from the payment of the Stump Lender's legal fees. On April 15, 2024 the Company and Stump Lender entered into a fifth modification to the Loan to extend the maturity date to August 21, 2024. On August 21, 2024 the Company and Stump Lender entered into a sixth modification to the Loan to extend the maturity date to December 31, 2024. On April 28, 2025, the Company paid to Ryan Stump approximately $308,000 to satisfy all outstanding principal and interest due on the Loan entered into August 17, 2022.

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September 2024 Pinnacle Receivables Financing. On September 6, 2024, the Company entered into a future receivables sale agreement ("Pinnacle Receivables Financing Agreement") with Pinnacle Business Funding ("Pinnacle") by which Pinnacle purchases from the Company its future accounts receivable and contract rights arising from the sale of goods or services to the Company's customers. The purchase price, as defined by the Pinnacle Receivables Financing Agreement, was $750,000 which was paid to the Company on September 12, 2024, net of a 1% origination fee. The Pinnacle Receivables Financing Agreement requires forty equal payments of $25,687.50 to be paid weekly for a total repayment of $1,027,500 over the term of the agreement. As of December 31, 2024, the outstanding balance was approximately $642,000.

On April 16th, 2025 the Company issued a payment of approximately $1,250,000 to satisfy all outstanding principal and interest owed to Pinnacle.

January 2024 Note Financing. On January 24, 2024, the Company issued an unsecured promissory note (the "Red Beard Note") to one of its largest stockholders Red Beard Holdings LLC (the "Red Beard Lender"), in the principal amount of $500,000. Red Beard Note shall bear interest at twenty-one percent (21%) per annum and have maturity through July 24, 2024. On May 31, 2024, as part of the May 2024 capital raise (see Note 10), the holder of the Red Beard Note (the "Holder") converted the principal amount of $500,000 in lieu of cash payment for the subscription agreement. Separately, the Holder was paid $52,500 in interest on the maturity date of July 24, 2024.

For the year ended December 31, 2024, net cash used in operating activities was approximately $1,621,000, resulting from a net loss of $4,159,000, offset by a change in operating assets and liabilities of $1,427,000 and a net non-cash activity of $1,111,000. For the year ended December 31, 2023, net cash used in operating activities was approximately $783,000, resulting from a net loss of $2,093,000 and a change in operating assets and liabilities of $811,000, offset by net non-cash activity of $499,000.

For the year ended December 31, 2024 and 2023, we did not incur any expenditures for investment activities.

For the year ended December 31, 2024, we generated approximately $1,465,000 in cash from financing activities which was comprised of the issuance of common shares of $1,580,000, notes payable of $742,000, and notes payable to a related party of $500,000 as well as the repayment of $1,357,000 in notes payable, including $85,000 to a related party. For the year ended December 31, 2023, we generated approximately $893,000 cash from financing activities, resulting from the issuance of $2,769,000 notes payable and offset by repayment $1,876,000 of certain notes.

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

Our consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company operates in a rapidly changing legal and regulatory environment; new laws and regulations or changes to existing laws and regulations could significantly limit the Company's ability to sell its products, and/or result in additional costs. Additionally, the Company was required to apply for FDA approval to continue selling and marketing its products used for the vaporization of nicotine in the United States. Currently, a substantial portion of the Company's sales are derived from products that are subject to approval by the FDA. There was a significant cost associated with the application process and there can be no assurance the FDA will approve previous and/or future applications. For the year ended December 31, 2024, the Company's revenue declined, the Company generated a loss from operations of approximately $3,452,000, and a consolidated net loss of approximately $4,159,000 and used cash from operations of approximately $1,621,000. The Company had a stockholders' deficit of $1,780,000 at December 31, 2024. During the year ended December 31, 2024, the Company's working capital position decreased to a deficit of $1,855,000 from $332,000, as of December 31, 2023. Considering these facts, the issuance of one or several Marketing Denial Orders ("MDOs") from the FDA would increase the potential for inventory obsolescence and uncollectable accounts receivables and the removal of certain products for sale. These regulatory risks, as well as other industry-specific challenges and our low working capital and cash position, remain factors that raise substantial doubt about the Company's ability to continue as a going concern.

Our plans and growth depend on our ability to increase revenues, procure cost-effective financing, and continue our business development efforts, including cumulative expenditures of approximately $6,500,000 as of December 31, 2024, to support our PMTA process for the Company's submissions to the FDA. The Company has undergone cost-cutting measures including salary reductions of up to 50% for officers and certain managers and a reduction in headcount for certain departments. During the fourth quarter of 2024, the Company launched SBX, a non-nicotine, disposable vapor product which is not subject to FDA review. The Company may require additional financing in the future to support the development of new product categories as well as subsequent PMTA filings, and/or in the event the FDA requests additional testing for one, or several, of the Company's prior PMTA submissions. There can be no assurance that additional financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and, in the Company's best interests. The financial statements do not include any adjustments to the carrying amount and classification of recorded assets and liabilities should the Company be unable to continue operations. If we do not have sufficient funds to continue operations, we could be required to seek bankruptcy protection or other alternatives that would likely result in our stockholders losing some or all their investment in us.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements other than operating lease commitments.

Critical Accounting Policies

Included below is a discussion of critical accounting policies used in the preparation of our financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates.

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We believe that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.

The accounting policies identified as critical are as follows:

Revenue Recognition

The Company recognizes revenues in accordance with Accounting Standards Codification ("ASC") 606 - Contracts with Customers. Revenues are generated from contracts with customers that consist of sales to retailers and distributors. Contracts with customers are generally short term in nature with the delivery of product as a single performance obligation. Revenue from the sale of product is recognized at the point in time when the single performance obligation has been satisfied and control of the product has transferred to the customer. In evaluating the timing of the transfer of control of products to customers, The Company considers several indicators, including significant risks and rewards of products, the right to payment, and the legal title of the products. Based on the assessment of control indicators, sales are generally recognized when products are received by customers. Shipping generally occurs prior to the transfer of control to the customer and is therefore accounted for as a fulfillment expense. In circumstances where shipping and handling activities occur after the customer has obtained control of the product, the Company has elected to account for shipping and handling activities as a fulfillment cost rather than an additional promised service. Contract durations are generally less than one year, and therefore costs paid to obtain contracts, which generally consist of sales commissions, are recognized as expense in the period incurred. Revenue is measured by the transaction price, which is defined as the amount of consideration expected to be received in exchange for providing goods to customers. The transaction price is adjusted for estimates of known or expected variable consideration, which includes refunds and returns as well as incentive offers, volume rebates, and promotional discounts on current orders. Our volume rebates are short-term in nature and reset on a quarterly basis. Sales returns are generally not material to the financial statements, and do not comprise a significant portion of variable consideration. Estimates for sales returns are based on, among other things, an assessment of historical trends, information from customers, and anticipated returns related to current sales activity. These estimates are established in the period of sale and reduce revenue in the period of the sale. Variable consideration related to incentive offers and promotional programs are recorded as a reduction to revenue based on amounts the Company expects to collect. Estimates are regularly updated and the impact of any adjustments are recognized in the period the adjustments are identified. In many cases, key sales terms such as pricing and quantities ordered are established at the time an order is placed and incentives have very short-term durations.

Amounts billed and due from customers are short term in nature and are classified as receivables since payments are unconditional and only the passage of time related to credit terms is required before payments are due. The Company does not grant payment financing terms greater than one year. Payments received in advance of revenue recognition are recorded as deferred revenue.

Accounts receivable is recorded at the invoiced amount and does not bear interest. We determine the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer's financial condition, credit history and current economic conditions and set up an allowance for doubtful accounts when collection is uncertain. Customers' accounts are written off against the allowance when all attempts to collect have been exhausted. Recoveries of accounts receivable previously written off are recorded as income when received. As of December 31, 2024, and 2023, the allowance for bad debt totaled $88,000 and $24,000, respectively.

Inventories

Inventories primarily consist of finished goods and are stated at the lower of cost (determined by the average cost method) or net realizable value. We calculate estimates of excess and obsolete inventories determined primarily by reviewing inventory on hand, historical sales activity, industry trends and expected net realizable value. As of December 31, 2024, and 2023, the reserve for excess and obsolete inventories totaled $999,000 and $1,100,000, respectively.

Stock-Based Compensation

We account for all stock-based compensation using a fair value-based method. The fair value of equity-classified awards granted to employees is estimated on the date of the grant using the Black-Scholes option-pricing model, or it is based on valuation observed from publicly traded companies in a similar industry, often with a discount for lack of marketability applied. The related stock-based compensation expense is recognized over the vesting period during which an employee is required to provide service in exchange for the award.

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Income Taxes

Income taxes are computed under the liability method. This method requires the recognition of deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and are reflected in the consolidated financial statements in the period of enactment. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized.

Financial statement effects of a tax position are initially recognized when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that meets the more-likely-than-not threshold of being realized upon ultimate settlement with a taxing authority. We recognize potential accrued interest and penalties related to unrecognized tax benefits as income tax expense.

Charlie's Holdings Inc. published this content on May 29, 2025, and is solely responsible for the information contained herein. Distributed via SEC EDGAR on May 29, 2025 at 20:16 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at support@pubt.io