CHARLIE'S HOLDINGS, INC. The following discussion of the financial condition and results of operations ofCharlie'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 endedDecember 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 theSecurities 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 meanCharlie's Holdings, Inc. (formerlyTrue Drinks Holdings, Inc. ), its subsidiaries and consolidated variable interest entity on a consolidated basis. References to "Charlie's" and "CCD" refer to Charlie'sChalk Dust, LLC , aCalifornia limited liability company and wholly-owned subsidiary of the Company, and "Don Polly" refers toDon Polly, LLC , aNevada limited liability company that is owned by entities controlled by Brandon andRyan 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 throughoutthe United States , and in more than 80 countries worldwide. Charlie's primary international markets include theUnited Kingdom ,Italy ,Spain ,New Zealand ,Australia , andCanada . InJune 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 develop and launch additional products containing other compounds derived from hemp. Operational Plan
Considering industry-specific hurdles, as well as the potential for future regulatory changes, management has targeted several opportunities for growth and has adopted the following operational plan.
First, we plan to increase the sales of our hemp-derived products, including
topicals, ingestibles and disposable vapor devices. We believe there is a
significant growth potential in the hemp-derived products space, and we have
begun to shift our focus in this business to the market for products containing
compounds that are synthetically derived from hemp, including
Delta-8-Tetrahydrocannabinol ("Delta-8-THC") and other synthetic
tetrahydrocannabinol ("Synthetic THC") compounds. As they offer consumers a
range of benefits across varying potencies and product formats, these product
categories have grown rapidly in recent years.
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, containing synthetically derived nicotine, that
have been specially formulated for the European and Middle East markets. In
partnership with our international distributors, Charlie's will sell the
Company's products in target markets where more than 20% of the population
consumes nicotine in some format.
Finally, we believe that tobacco and synthetically derived nicotine vapor
products will continue to provide a significant growth opportunity domestically.
During the quarter ended March 31, 2021 , we launched our synthetic nicotine (not
derived from tobacco) Pacha Syn Disposable product line (formerly Pachamama
Disposables), which we expect to provide access to additional sales channels and
broaden our customer base. These innovative product formats currently represent
Charlie's fastest-growing product category. We are continuing with our plan to
obtain marketing authorization for certain of our nicotine-based vapor products
through the submission of our September 2020 Premarket Tobacco Applications
("PMTAs"). We have allocated further resources and new personnel to support our
research and development initiatives in order to submit additional PMTAs,
including our May 13, 2022 submissions pertaining to the Company's synthetically
derived nicotine Pacha Syn product line. 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.
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Table of Contents Recent DevelopmentsApril 2022 Note Financing OnApril 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"). The Note requires the payment of principal and guaranteed interest in the amount of at least$90,000 on or before the earlier date of (i) a Liquidity Event, as defined under the terms of the Note; or (ii)September 28, 2022 . The Company intends to use the proceeds from the Note Financing for general corporate purposes, and its working capital requirements, pending the availability of alternative debt financing. PMTA During the quarter endedSeptember 30, 2020 , theFDA's Center for Tobacco Products informed us that our PMTA received a valid submission tracking number, passed theFDA's filing review phase, and recently entered the substantive review phase. To date, the Company has invested more than$4.4 million for our initial PMTA submission. 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 endedSeptember 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. OnMarch 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 Syn brands byMay 14, 2022 or be subject to FDA enforcement. The Company filed new PMTAs for its synthetic Pacha Syn products, onMay 13, 2022 , prior to theMay 14, 2022 , deadline. As ofJune 30, 2022 , Charlie's 2020 PMTA remains among the select minority of applications submitted to the FDA that has not received an MDO or Refuse-to-File designation. 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. -18-
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Table of Contents
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 six months ended
June 30, 2022 , we engaged in periodic, informal testing of our business
operations, and we do not believe that our financial position, work efficiency
and overall operational integrity have been materially affected. 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 approved, will allow the Company to
continue to sell certain of its products in the United States . At this date,
Charlie's PMTA remains among the select minority of applications submitted to
the FDA that has not received an MDO or Refuse-to-File designation. However, it
is possible that the FDA will request additional information or that the Company
will need to amend its PMTA at some point in the future. Further, the Company
filed new PMTAs, for its synthetic Pacha Syn products, on May 13, 2022 . It is
not a certainty that the Company will receive marketing orders for one or more
of its products on any of its PMTAs. Though the Company's 2020 PMTA is
currently in substantive review with the FDA, and though we believe that each of
our PMTA's are of the highest quality, there is no guarantee that we will
receive an "acceptance filing" from the FDA for our May 2022 submission. The
Company may also require additional financing in the future to support potential
PMTA related expenses and general working capital. There is no assurance that
regulatory approval to sell our products will be granted or that we can raise
the additional financing required and, if not, this could have a significant
impact on our sales.
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
Regarding results from operations for the quarter ended
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Table of Contents We generated net loss for the three months endedJune 30, 2022 , of approximately$636,000 as compared to net income of approximately$19,764,000 for the three months endedJune 30, 2021 . The net loss for the three months endedJune 30, 2022 includes research and development expense of$744,000 and non-cash stock-based compensation expense of$38,000 . The net income for the three months endedJune 30, 2021 includes non-cash stock-based compensation expense of approximately$165,000 and a non-cash gain in fair value of derivative liabilities of$19,274,000 .
A review of the three-month period ended
For the three months ended
June 30, Change
2022 2021 Amount Percentage($ in thousands) Revenues: Product revenue, net$ 7,397 $ 5,433 $ 1,964 36.1 % Total revenues 7,397 5,433 1,964 36.1 % Operating costs and expenses: Cost of goods sold - product revenue 4,558 2,794 1,764 63.1 % General and administrative 1,870 2,457 (587 ) -23.9 % Sales and marketing 787 350 437 124.9 % Research and development 744 - 744 100 % Total operating costs and expenses 7,959 5,601 2,358 42.1 % Loss from operations (562 ) (168 ) (394 ) 234.5 % Other income (expense): Interest expense (91 ) (3 ) (88 ) 2933.3 % Change in fair value of derivative liabilities 12 19,274 (19,262 ) -99.9 % Gain on debt extinguishment - 658 (658 ) -100.0 % Other income 5 3 2 66.7 % Total other income (loss) (74 ) 19,932 (20,006 ) -100.4 % Net income (loss)$ (636 ) $ 19,764 $ (20,400 ) -103.2 % Revenue Revenue for the three months endedJune 30, 2022 , increased by approximately$1,964,000 or 36.1%, to approximately$7,397,000 , as compared to approximately$5,433,000 for same period in 2021 due to a$1,977,000 increase in sales of our nicotine-based vapor products, offset by a$13,000 decrease in sales of our hemp-derived products. The increase in our nicotine-based vapor product sales was driven by sales of our new 12ml Pacha Syn Disposable line and our refreshed Pacha Syn e-liquid line, both of which launched in the second quarter of 2022, as well as incremental market penetration of our existing Pacha Syn Disposable products. Pacha Syn Disposables became Charlie's first-ever entrant into the rapidly expanding, disposable e-cigarette market and offer adult users a variety of premium flavors containing synthetic nicotine (not derived from tobacco) in a compact, discrete format. However, regulatory challenges including the recently announced requirement for synthetic nicotine products to obtain approval from the FDA, as well as continued uncertainty surrounding theFDA's issuance of MDO's and Refuse-to-File designations, tempered buying patterns in the domestic market as customers scrutinized inventories of related products. The decrease in sales for our hemp-derived business was directly related to an intentional sunsetting of certain SKUs as the Company prepares to rebrand and launch new, innovative product formats into this market. 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. Cost of Revenue Cost of revenue, which consists of direct costs of materials, direct labor, third party subcontractor services, and other overhead costs increased by approximately$1,764,000 or 63.1%, to approximately$4,558,000 or 61.6% of revenue, for the three months endedJune 30, 2022 , as compared to approximately$2,794,000 , or 51.4% of revenue, for the same period in 2021. This cost, as a percent of revenue, increased due to a higher sales mix consisting of our Pacha Syn Disposable product line, which carries a lower margin per unit relative to our other products, as well as higher comparative freight and delivery expense and inventory value adjustments. -20-
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Table of Contents
General and Administrative Expenses
For the three months endedJune 30, 2022 , total general and administrative expense decreased by approximately$587,000 to$1,870,000 as compared to approximately$2,457,000 for the same period in 2021. This change was primarily comprised of decreases of approximately$574,000 in payroll and benefits,$153,000 in professional fees and$128,000 in non-cash stock based compensation. The decrease in payroll and benefits expense was primarily due to Employee Retention Credits received in conjunction with theInfrastructure Investment and Jobs Act which was enacted inNovember 2021 . The decrease in professional fees during the quarter endedJune 30, 2022 , was primarily due to advisory services that occurred as a result of theMarch 2021 Private Placement. The decrease in non-cash stock-based compensation in 2022 is related to the conclusion of the vesting period for shares of Common Stock awarded to several employees in conjunction with the Share Exchange completed inApril 2019 (See Note 3). This decrease in overall general and administrative expenses was offset by increases of$56,000 in provision for bad debt,$54,000 in travel expenses related to business development, and$158,000 of other general and administrative expenses. The increase in provision for bad debt was the result of higher sales achieved during the quarter endedJune 30, 2022 . Increased insurance premiums, merchant processing fees and costs related to the closure of ourDenver office location comprised the changes in other general and administrative expenses. Sales and Marketing Expense For the three months endedJune 30, 2022 , total sales and marketing expense increased by approximately$437,000 , 124.9%, to approximately$787,000 as compared to approximately$350,000 for the same period in 2021, which was primarily due to enhanced trade-show activity during the quarter in furtherance of our plan to grow market share across the nicotine and hemp-derived product categories. 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 endedJune 30, 2022 , total research and development costs increased to approximately$744,000 as compared to no research of development costs for the same period in 2021, which was primarily due to costs associated with our 2022 PMTA submissions. Income from Operations We had operating loss of approximately$562,000 for the three months endedJune 30, 2022 , due primarily to an increase in research and development expense related to our 2022 PMTA submissions. We also incurred certain non-cash, general and administrative expenses during the period including a$38,000 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
compared to a gain in fair value of derivative liabilities of
the three months ended
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
decrease in stock price as of
to the limited supply of shares currently freely trading, our stock price may
experience volatility and therefore, considerable fluctuations in the value of
our warrant derivative liability in the future. We had 40,337,693 warrants
outstanding as of June 30, 2022 .
? Interest Expense. For the three months ended
recorded interest expense related to notes payable of
respectively.
? Gain on debt extinguishment. For the three months ended
2021, we recorded a debt extinguishment gain of
The amounts in 2021 related to the forgiveness of the Charlie's PPP Loan.
? Other Income. For the three months ended
other income of $5,000 and $3,000 , respectively.
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Table of Contents Net Income (Loss)
For the three months ended
Results of Operations for the Six Months Ended
A review of the six-month period ended
For the six months ended
June 30, Change
2022 2021 Amount Percentage
($ in thousands)
Revenues:
Product revenue, net $ 15,471 $ 9,794 $ 5,677 58.0 %
Total revenues 15,471 9,794 5,677 58.0 %
Operating costs and expenses:
Cost of goods sold - product revenue 8,992 4,737 4,255 89.8 %
General and administrative 4,429 4,675 (246 ) -5.3 %
Sales and marketing 1,490 770 720 93.5 %
Research and development 755 9 746 8288.9 %
Total operating costs and expenses 15,666 10,191 5,475 53.7 %
Loss from operations (195 ) (397 ) 202 -50.9 %
Other income (expense):
Interest expense (92 ) (31 ) (61 ) 196.8 %
Change in fair value of derivative
liabilities 352 (828 ) 1,180 -142.5 %
Gain on debt extinguishment - 875 (875 ) -100.0 %
Other income 5 8 (3 ) -37.5 %
Total other income 265 24 241 1004.2 %
Net income (loss) $ 70 $ (373 ) $ 443 -118.8 %
Revenue
Revenue for the six months ended June 30, 2022 increased approximately
$5,677,000 or 58.0%, to approximately $15,471,000 , as compared to approximately
$9,794,000 for same period in 2021 due to a $4,784,000 increase in sales of our
nicotine-based vapor products, as well as a $893,000 increase in sales of our
hemp-derived products. The increase in our nicotine-based vapor product sales
was driven by sales of our new 8ml Pacha Syn Disposable line, which launched in
December 2021 , as well as our 12ml Pacha Syn Disposable and refreshed Pacha Syn
e-liquid lines, which launched in the second quarter of 2022. Pacha Syn
Disposables became Charlie's first-ever entrant into the rapidly expanding,
disposable e-cigarette market and offer adult users a variety of premium flavors
containing synthetic nicotine (not derived from tobacco) in a compact, discrete
format. However, regulatory challenges including the recently announced
requirement for synthetic nicotine products to obtain approval from the FDA, as
well as continued uncertainty surrounding the FDA's issuance of MDO's and
Refuse-to-File designations, tempered buying patterns in the domestic market as
customers scrutinized inventories of related products. The increase in sales for
our hemp-derived business was directly related to strong performance in our
alternative cannabinoid category, which includes products containing
synthetically derived cannabinoids, including Delta-8-THC and other synthetic
THC compounds. The hemp-derived products market is currently experiencing a
condensed and rapidly evolving product development cycle which requires
corporate agility and swift market penetration; however, we continue to believe
that this category offers significant short- and medium-term growth potential
for our Company. We are actively pursuing new and innovative brands and product
formats to offer our broad customer base.
Cost of Revenue
Cost of revenue, which consists of direct costs of materials, direct labor,
third party subcontractor services, and other overhead costs increased
approximately $4,255,000 , or 89.8%, to approximately $8,992,000 , or 58.1% of
revenue, for the six months ended June 30, 2022 , as compared to approximately
$4,737,000 , or 48.4% of revenue, for the same period in 2021. This cost, as a
percent of revenue, increased due to a higher sales mix consisting of our Pacha
Syn Disposable product line, which carries a lower margin per unit relative to
our other products, as well as higher comparative freight and delivery expense
and a larger reserve for inventory obsolescence related to certain of our
retired hemp-derived wellness products.
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Table of Contents
General and Administrative Expenses
For the six months endedJune 30, 2022 , total general and administrative expense decreased approximately$246,000 , or 5.3%, to$4,429,000 as compared to approximately$4,675,000 for the same period in 2021. Notably, this decrease is comprised of reductions of approximately$468,000 of non-cash, stock-based compensation and$205,000 of professional fees. The decrease in non-cash stock-based compensation is related to the conclusion of the vesting period for shares of Common Stock awarded to several employees in conjunction with the Share Exchange completed inApril 2019 (See Note 3). The decrease in professional fees during the six months endedJune 30, 2022 , was primarily due to advisory services that occurred as a result of theMarch 2021 Private Placement as well as other consulting services related to an internal project focused on the creation of a solution "network" necessary to effectively meet the requirements of both the Consolidated Appropriations Act of 2021 and the PACT Act. The decrease was primarily offset by increases of$166,000 in provision for bad debt,$120,000 in audit and external accounting fees,$82,000 in merchant processing fees and$59,000 in other general and administrative expenses. The increase in provision for bad debt was related to higher sales achieved during the six month period endedJune 30, 2022 . The increase in audit and external accounting fees was primarily due to higher than anticipated costs related to our annual audit as well as costs related to the calculation of our 2021 income tax provision.
Sales and Marketing Expense
For the six months endedJune 30, 2022 , total sales and marketing expense increased approximately$720,000 , or 93.5%, to approximately$1,490,000 as compared to approximately$770,000 for the same period in 2021, which was primarily due to enhanced trade-show activity during the quarter in furtherance of our plan to grow market share across the nicotine and hemp-derived product categories. Sales commissions also increased due to revenue growth across our businesses, however the increase was mitigated by further restructuring of our sales team and compensation program at the beginning of 2022.
Research and Development Expense
For the six months endedJune 30, 2022 , total research and development expense increased approximately$746,000 to approximately$755,000 as compared to$9,000 for the same period in 2021, which was primarily due to costs associated with our 2022 PMTA submissions. Loss from Operations We had operating losses of approximately$195,000 for the six months endedJune 30, 2022 , due primarily to$755,000 in research and development expense as well as a$57,000 increase in the provision for inventory obsolescence. We also incurred certain general and administrative expenses that contributed to the loss from operations including a$56,000 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 six months ended
compared to a loss in fair value of derivative liability of
the six months ended
with the issuance of the Investor Warrants and the Placement Agent Warrants
(as defined in Note 3 of this Report) in connection with the Share Exchange.
The gain for the six months ended
decrease in stock price as of
Due to the limited supply of shares currently freely trading, our stock
price may experience volatility and therefore, considerable fluctuations in
the value of our warrant derivative liability in the future. We had
40,337,693 warrants outstanding as of June 30, 2022 .
? Interest Expense. For the six months ended June 30, 2022 , and 2021, we
recorded interest expense related to notes payable of
respectively.
? Gain on debt extinguishment. For the six months ended June 30, 2021 , we
recorded a debt extinguishment gain of
of the Don Polly PPP Loan and the Charlie's PPP Loan.
? Other Income. For the six months ended
other income of $5,000 and $8,000 , respectively.
Net Income (Loss)
For the six months ended
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Table of Contents
Liquidity and Capital Resources
As ofJune 30, 2022 , we had working capital of approximately$3,772,000 , which consisted of current assets of approximately$8,786,000 and current liabilities of approximately$6,014,000 , as compared to working capital of approximately$2,460,000 atDecember 31, 2021 . The current liabilities, as presented in the condensed consolidated balance sheet atJune 30, 2022 included elsewhere in this Report primarily include approximately$4,042,000 of accounts payable and accrued expenses, approximately$203,000 of deferred revenue associated with product shipped but not yet received by customers, approximately$222,000 of lease liabilities, and$547,000 of derivative liability associated with the Investor Warrants and Placement Agent Warrants (the derivative liability of$547,000 is included in determining the working capital of$3,772,000 but is not expected to use any cash to ultimately satisfy the liability).
Our cash and cash equivalents balance at
For the six months endedJune 30, 2022 , net cash used in operating activities was approximately$1,276,000 , resulting from a net income of$70,000 , offset by a$352,000 of change in fair value of derivative liabilities and$1,654,000 of changes in our operating assets and liabilities. For the six months endedJune 30, 2021 , net cash used in operating activities was approximately$325,000 , resulting from a net loss of$373,000 , which included a$875,000 gain from debt extinguishment, but was partially offset by$524,000 of share-based compensation,$828,000 of change in fair value of derivative liabilities and$773,000 changes in our operating assets and liabilities. For the six months endedJune 30, 2022 , we used cash for investment activities of approximately$102,000 as compared to$40,000 for the same period in 2021. The cash used for investment activities is primarily for the on-going development and configuration of enterprise resource planning software. For the six months endedJune 30, 2022 we generated approximately$1,000,000 cash from financing activities related to the issuance of a promissory note to a large shareholder. For the six months endedJune 30, 2021 we generated approximately$904,000 cash from financing activities from the Private Placement (as defined in Note 10 of Item 1, Part 1 of this Report) offset by the repayment of the Red Beard Note (as defined in Note 8 of Item 1, Part 1 of this Report). We also paid cash dividends of$880,000 during the six months endedJune 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 inthe 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 six months endedJune 30, 2022 , the Company generated loss from operations of approximately$195,000 , and a consolidated net income of approximately$70,000 but used cash in operations of approximately$1,276,000 . The Company had stockholders' equity of$3.3 million atJune 30, 2022 . During the three months endedJune 30, 2022 , the Company's working capital requirements continued to evolve as current assets increased to$8.8 million from$8.0 million as ofMarch 31, 2022 and currently liabilities increased to$6.0 million from$4.8 million as ofMarch 31, 2022 . Considering these facts, the issuance of one or several MDOs from the FDA would increase the potential for inventory obsolescence and uncollectable accounts receivables. 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. -24-
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Table of Contents Our plans and growth depend on our ability to increase revenues, raise additional capital, and continue our business development efforts, including the expenditure of approximately$4,400,000 to date, to complete our PMTA process for the Company's 2020 submissions to the FDA. OnMarch 15, 2022 , a new rider to the Federal Food, Drug and Cosmetic Act was passed granting the FDA authority over synthetic nicotine. These regulations make the Company's synthetic nicotine products subject to the same FDA rules as tobacco-derived nicotine products. As such, the Company was required to file a PMTA for its existing synthetic nicotine products marketed under the Pacha Syn brands byMay 14, 2022 or be subject to FDA enforcement. The Company filed new PMTAs, for its synthetic Pacha Syn products onMay 13, 2022 , prior to theMay 14, 2022 deadline. In 2022 the Company intends to allocate further resources and new personnel to support research and development initiatives in order to support existing, or subsequent PMTAs. 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 withU.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.
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