Quarterly Report for Quarter Ending June 30, 2025 (Form 10-Q)

- 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, 2024 (the "2024 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 2024 Annual Report. Furthermore, such forward-looking statements speak only as of the date of this Report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

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

Overview

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

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.

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.

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.

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.

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

Entry into a Material Definitive Agreement for the Disposition of Assets

On April 16, 2025, the Company entered into and closed an Asset Purchase Agreement (the "Agreement") with R.J. Reynolds Vapor Company (the "Buyer") pursuant to which the Buyer purchased 12 of the Company's PACHA synthetic products and related assets (the "Assets") that are covered by a premarket tobacco application ("PMTA") first submitted by the Company in 2022. The purchase price for the Assets was $5.0 million paid at closing, plus a contingent one-time payment of up to $4.2 million based on product sold by the Buyer during the one year following the first day of commercialization of the Assets. The Agreement contains customary representations, warranties, and indemnities by each of the parties.

On May 29, 2025, the Company amended the Agreement (the "Amendment") with the Buyer pursuant to which the Buyer purchased three additional PACHA synthetic products and related assets (the "Additional Assets") that are covered by a PMTA first submitted by the Company in 2022, bringing the total purchased by the Buyer, to date, to 15 products. The purchase price for the Additional Assets was $1.5 million paid at closing.

Results of Operations for the Three Months Ended June 30, 2025 Compared to the Three Months Ended June 30, 2024

Regarding results from operations for the quarter ended June 30, 2025, we generated revenue of approximately $2,544,000, as compared to revenue of $2,043,000 for the three months ended June 30, 2024. This $501,000 increase in revenue was due primarily to an increase of $658,000 in sales of other alternative products distributed through Don Polly, but was offset by a $157,000 decrease in sales of nicotine and nicotine alternative products.

We generated a net income for the three months ended June 30, 2025, of approximately $4,961,000 as compared to a net loss of $967,000 for the three months ended June 30, 2024.

A review of the three-month period ended June 30, 2025, follows:

		For the three months ended
		June 30,								Change
		2025				2024				Amount				Percentage
($ in thousands)
Revenues:
Product revenue, net		$	2,544			$	2,043			$	501				24.5	%
Total revenues			2,544				2,043				501				24.5	%
Operating costs and expenses:
Cost of goods sold - product revenue			1,880				1,265				615				48.6	%
General and administrative			1,412				1,423				(11	)			-0.8	%
Sales and marketing			125				117				8				6.8	%
Research and development			4				(26	)			30				-115.4	%
Total operating costs and expenses			3,421				2,779				642				23.1	%
Loss from operations			(877	)			(736	)			(141	)			19.2	%
Other income (expense):
Interest expense			(335	)			(156	)			(179	)			114.7	%
Debt extinguishment gain (loss)			99				(75	)			174				-232.0	%
Gain on sale of PMTA assets			6,500				-				6,500				100	%
Total other income (loss)			6,264				(231	)			6,495				-2,811.7	%
Income (loss) before provision for income taxes			5,387				(967	)			6,354				-657.1	%
Income tax provision			(426	)			-				(426	)			100	%
Net income (loss)		$	4,961			$	(967	)		$	5,928				-613.0	%

Revenue

Revenue for the three months ended June 30, 2025, increased by approximately $501,000 or 24.5%, to approximately $2,544,000, as compared to approximately $2,043,000 for same period in 2024 due to an increase of $658,000 in sales of other alternative products distributed through Don Polly. The increase in alternative products primarily consisted of products distributed through Don Polly on behalf of other brands. These partnerships have allowed us to leverage existing customer relationships and sales infrastructure to generate incremental revenue, but are not a primary focus for the Company. Sales of existing nicotine and nicotine alternative based products decreased $157,000 when compared to the same period in 2024.

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 $615,000 or 48.6%, to approximately $1,880,000, or 73.9% of revenue, for the three months ended June 30, 2025, as compared to approximately $1,265,000, or 61.9% of revenue, for the same period in 2024. This cost increased compared to last year due primarily to an increase in the volume of products sold during the period. Sales of third-party brands carry a lower overall margin and therefore dilute the Company's margin overall.

General and Administrative Expenses

For the three months ended June 30, 2025, total general and administrative expenses were $1,412,000 as compared to approximately $1,423,000 for the same period in 2024, which were generally consistent compared to the same period in 2024. Professional fees decreased approximately $171,000 when compared to the previous period but largely offset by increases in wages and benefits and other general and administrative expenses.

Sales and Marketing Expense

For the three months ended June 30, 2025, total sales and marketing expense was approximately $125,000 as compared to approximately $117,000 for the same period in 2024, which were generally consistent compared to the same period in 2024. The Company continues to evaluate its spending on advertising, promotional and tradeshow related expenses as it aims to increase sales of its new SBX Disposable vapor products.

Research and Development Expense

For the three months ended June 30, 2025, total research and development expense was approximately $4,000 as compared to an income of $26,000 for the same period in 2024. The income in 2024 period was primarily due to a vendor refund of approximately $26,000.

Income (Loss) from Operations

We incurred a loss from operations of approximately $877,000 for the three months ended June 30, 2025, compared to a loss of approximately $736,000 for the three months ended June 30, 2024, due primarily to decreased sales and gross profit. Net income (loss) is determined by adjusting loss from operations by the following items:

●	Gain on sale of PMTA assets. For the three months ended June 30, 2025, we recorded a $6,500,000 gain related to the sales agreement entered with R.J. Reynolds Vapor Company.

●	Interest Expense. For the three months ended June 30, 2025, and 2024, we recorded interest expense related to notes payable of approximately $335,000 and $156,000, respectively. The increase was primarily due to an increase of outstanding notes payable.

●	Debt Extinguishment Gain (Loss). For the three months ended June 30, 2025, we recorded approximately $99,000 in gain from amendment to the Pinnacle Receivables Financing Agreement (see Note 9).

Income Taxes Provision

For the three months ended June 30, 2025, the Company recorded an income tax provision of approximately $426,000.

Net Income (Loss)

For the three months ended June 30, 2025, we incurred a net income of $4,961,000 as compared to a net loss of $967,000 for the same period in 2024.

Results of Operations for the Six Months Ended June 30, 2025 Compared to the Six Months Ended June 30, 2024

Regarding results from operations for the six months ended June 30, 2025, we generated revenue of approximately $4,850,000, as compared to revenue of $5,094,000 for the six months ended June 30, 2024. This $244,000 decrease in revenue was due primarily to a decrease of $1,453,000 in sales of our nicotine-based vapor products, and offset by an increase of $1,209,000 in sales of other alternative products distributed through Don Polly.

We generated a net income for the six months ended June 30, 2025, of approximately $3,744,000 as compared to a net loss of $2,012,000 for the six months ended June 30, 2024.

A review of the six months ended June 30, 2025, follows:

		For the six months ended
		June 30,								Change
		2025				2024				Amount				Percentage
($ in thousands)
Revenues:
Product revenue, net		$	4,850			$	5,094			$	(244	)			-4.8	%
Total revenues			11,350				5,094				(244	)			-4.8	%
Operating costs and expenses:
Cost of goods sold - product revenue			3,658				3,372				286				8.5	%
General and administrative			2,546				2,968				(422	)			-14.2	%
Sales and marketing			339				451				(112	)			-24.8	%
Research and development			10				(20	)			30				-150.0	%
Total operating costs and expenses			6,553				6,771				(218	)			-3.2	%
Loss from operations			(1,703	)			(1,677	)			(26	)			1.6	%
Other income (expense):
Interest expense			(577	)			(339	)			(238	)			70.2	%
Debt extinguishment loss			(50	)			(75	)			25				-33.3	%
Change in fair value of derivative liabilities			-				79				(79	)			-100.0	%
Gain on sale of PMTA assets			6,500				-				6,500				100.0	%
Total other income (loss)			5,873				(335	)			6,208				-1853.1	%
Income (loss) before provision for income taxes			4,170				(2,012	)			6,182				-307.3	%
Income tax provision			(426	)			-				(426	)			100	%
Net income (loss)		$	3,744			$	(2,012	)		$	5,756				-286.1	%

Revenue

Revenue for the six months ended June 30, 2025, decreased by approximately $244,000 or 4.8%, to approximately $4,850,000, as compared to approximately $5,094,000 for same period in 2024 due primarily to a decrease of $1,453,000 in sales of our nicotine-based vapor products, and offset by an increase of $1,209,000 in sales of other alternative products distributed through Don Polly. The increase in alternative products primarily consisted of products distributed through Don Polly on behalf of other brands. These partnerships have allowed us to leverage existing customer relationships and sales infrastructure to generate incremental revenue, but are not a primary focus for the 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 $286,000 or 8.5%, to approximately $3,658,000, or 75.4% of revenue, for the six months ended June 30, 2025, as compared to approximately $3,372,000, or 66.2% of revenue, for the same period in 2024. 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 Expenses

For the six months ended June 30, 2025, total general and administrative expenses decreased by approximately $422,000 to $2,546,000 as compared to approximately $2,968,000 for the same period in 2024. This change was primarily due to decreases of approximately $359,000 in certain professional fees and $85,000 of other general and administrative costs, and offset by an increase of $22,000 in non-sales related payroll and benefits costs. The decrease in professional fees was primarily the result of reductions in audit costs as well as fees paid to members of our Board of Directors. The decrease in other general and administrative costs was primarily due to lower insurance costs as well as bad debt expense. The increase in payroll and benefits costs was primarily driven by bonuses awarded to certain key employees during the period.

Sales and Marketing Expense

For the six months ended June 30, 2025, total sales and marketing expense decreased by approximately $112,000 to approximately $339,000 as compared to approximately $451,000 for the same period in 2024, which was primarily due to lower sales commissions paid as well as a significant reduction in tradeshow and customer event related costs.

Research and Development Expense

For the six months ended June 30, 2025, research and development expense was approximately $10,000 as compared to income of approximately $20,000 for the same period in 2024. The income in 2024 period was primarily due to a vendor refund of approximately $26,000.

Income (Loss) from Operations

We incurred loss from operations of approximately $1,703,000 for the six months ended June 30, 2025, compared to a loss of approximately $1,677,000 for the six months ended June 30, 2024, due primarily to decreased sales and gross profit. Net income (loss) is determined by adjusting loss from operations by the following items:

●	Gain on sale of PMTA assets. For the six months ended June 30, 2025, we recorded a $6,500,000 gain related to the sales agreement entered with R.J. Reynolds Vapor Company.

●	Interest Expense. For the six months ended June 30, 2025, and 2024, we recorded interest expense related to notes payable of approximately $577,000 and $339,000, respectively. The increase was primarily due to an increase of outstanding notes payable.
●	Debt Extinguishment Loss. For the six months ended June 30, 2025 and 2024, we recorded approximately $50,000 and $75,000 debt extinguishment loss related to various debt amendments, respectively.
●	Change in Fair Value of Derivative Liabilities. For the six months ended June 30, 2024, the gain in fair value of derivative liabilities was $79,000. The gain for the six months ended June 30, 2024 was due to the expiration of the warrants in April 2024 which resulted the warrant liability been written off.

Income Taxes Provision

For the six months ended June 30, 2025, the Company recorded an income tax provision of approximately $426,000.

Net Income (Loss)

For the six months ended June 30, 2025, we incurred a net income of $3,744,000 as compared to a net loss of $2,012,000 for the same period in 2024.

Effects of Inflation

Inflation has not had a material impact on our business.

Liquidity and Capital Resources

As of June 30, 2025, we had working capital of approximately $2,211,000, which consisted of current assets of approximately $5,846,000 and current liabilities of approximately $3,635,000, as compared to working capital deficit of approximately $1,855,000 at December 31, 2024. The current liabilities include approximately $2,591,000 of accounts payable and accrued expenses, notes payable notes payable from related parties of $675,000, and approximately $369,000 of deferred revenue associated with product shipped but not yet received by customers.

Our cash and cash equivalents balance at June 30, 2025 was approximately $1,453,000. As of June 30, 2025, we have the following notes outstanding:

	●	July 2023 Notes. As of June 30, 2025, $336,000 notes payable plus accrued interest held by Ryan Stump and Henry Sicignano III remained outstanding and the maturity dates of the outstanding notes had been extended to April 28, 2026.
	●	April 2022 Note. As of June 30, 2025, approximately $339,000 of principal plus accrued interest held by Michael King (the "Lender") remained outstanding and the maturity dates of the outstanding notes had been extended to April 28, 2026.

For the six months ended June 30, 2025, net cash used in operating activities was approximately $3,063,000, resulting from a net income of $3,744,000, and offset by a change in net non-cash activity of $5,870,000 and operating assets and liabilities of $937,000. For the six months ended June 30, 2024, net cash used in operating activities was approximately $300,000, resulting from a net loss of $2,012,000, offset by a change in operating assets and liabilities of $1,181,000 and net non-cash activity of $531,000.

For the six months ended June 30, 2025, cash provided by investing activities included $6,500,000 in proceeds from the sale of intellectual property related to certain of our PMTA products.

For the six months ended June 30, 2025, we used approximately $2,195,000 in cash from financing activities related to the issuance of notes payable of $546,000, notes payable to a related party of $100,000 and the repayment of $2,841,000 in notes payable, including $917,000 to a related party. For the six months ended June 30, 2024, we generated approximately $1,018,000 in cash from financing activities related to the issuance of common shares of $1,030,000, notes payable to a related party of $500,000 and the repayment of $512,000 in notes payable, including $50,000 to a related party.

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

Our consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company operates in a rapidly changing legal and regulatory environment; new laws and regulations or changes to existing laws and regulations could significantly limit the Company's ability to sell its products, and/or result in additional costs. Additionally, the Company was required to apply for FDA approval to continue selling and marketing its products used for the vaporization of nicotine in the United States. For the six months ended June 30, 2025, the Company's revenue declined, the Company generated loss from operations of approximately $1,703,000, and a consolidated net income of approximately $3,744,000. Net cash used in operating activities was approximately $3,063,000. The Company had a stockholders' equity of $2,190,000 at June 30, 2025. During the six months ended June 30, 2025, the Company's working capital was increased to $2,211,000 from deficit of $1,855,000 as of December 31, 2024. Regulatory risks, as well as other industry-specific challenges and a fluctuating working capital and cash position, remain factors that raise substantial doubt about the Company's ability to continue as a going concern. During the second quarter of 2025, the Company entered into and closed an Asset Purchase Agreement (the "Agreement") and a subsequent amendment with R.J. Reynolds Vapor Company (the "Buyer") pursuant to which the Buyer purchased 15 of the Company's PACHA synthetic products and related assets (the "Assets") that are covered by a premarket tobacco application ("PMTA") first submitted by the Company in 2022. The combined purchase price for the Assets was $6.5 million paid at closings in April and May 2025, plus a contingent one-time payment of up to $4.2 million based on product sold by the Buyer during the one year following the first day of commercialization of the Assets. These asset sales have substantially improved the Company's debt and working capital short-term concerns, and the Company's cash position.

Our plans and growth depend on our ability to increase revenues, procure cost-effective financing, and continue our business development efforts, including cumulative expenditures related to our PMTA process for obtaining FDA approval. 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

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 2024 Annual Report.