The following discussion of the financial condition and results of operations of
Charlie's Holdings, Inc. should be read in conjunction with the financial
statements and the notes to those statements appearing elsewhere in this
Quarterly Report on Form 10-Q (this "Report") and without audited financial
statements and other information presented in our Annual Report on Form 10-K for
the year ended December 31, 2021 (the "2021 Annual Report"). Some of the
information contained in this discussion and analysis or set forth elsewhere in
this Report, including information with respect to our plans and strategy for
our business, includes forward-looking statements that involve risks and
uncertainties. Such forward-looking statements are subject to a number of risks,
uncertainties, assumptions and other factors that could cause actual results and
the timing of certain events to differ materially from future results expressed
or implied by the forward-looking statements. Factors that could cause or
contribute to these differences include, but are not limited to, those discussed
below and elsewhere in this Report, and in our other filings with the Securities
and Exchange Commission ("SEC"), including particularly matters set forth under
Part I, Item 1A (Risk Factors) of the 2021 Annual Report. Furthermore, such
forward-looking statements speak only as of the date of this Report. Except as
required by law, we undertake no obligation to update any forward-looking
statements to reflect events or circumstances after the date of such statements.



As used in this Report, unless otherwise stated or the context otherwise
requires, references to the "Company", "we", "us", "our", or similar references
mean Charlie's Holdings, Inc. (formerly True Drinks Holdings, Inc.), its
subsidiaries and consolidated variable interest entity on a consolidated basis.
References to "Charlie's" and "CCD" refer to Charlie's Chalk Dust, LLC, a
California limited liability company and wholly-owned subsidiary of the Company,
and "Don Polly" refers to Don Polly, LLC, a Nevada limited liability company
that is owned by entities controlled by Brandon and Ryan Stump, the Company's
former Chief Executive Officer and current Chief Operating Officer,
respectively, and a consolidated variable interest ("VIE") for which the Company
is the primary beneficiary.



Overview



Our objective is to become a significant leader in the rapidly growing, global
e-cigarette and e-liquid segments of the broader nicotine related products
industry. Through Charlie's, we formulate, market and distribute premium,
nicotine-based vapor products. Charlie's products are produced by the Company's
contract manufacturers for sale through select distributors, specialty retailers
and third-party online resellers throughout the United States, and in more than
80 countries worldwide. Charlie's primary international markets include the
United Kingdom, Italy, Spain, New Zealand, Australia, and Canada. In June 2019,
we launched distribution, through Don Polly, of certain premium vapor, tincture
and topical wellness products containing hemp-derived cannabidiol ("CBD"). In
the future we intend to 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 upside in the hemp-derived products space, and we have begun to
shift our focus in this business to the burgeoning 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. These product categories have
grown rapidly, as they offer consumers a range of benefits across varying
potencies and product formats.



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 award-winning 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 will 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've 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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Recent Developments



April 2022 Note Financing



On April 6, 2022, the Company, Charlie's, and its VIE, Don Polly, issued a
secured promissory note (the "Note") to one of the Company's largest individual
stockholders, Michael King (the "Lender") in the principal amount of $1,000,000,
which the 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.



Resignation of Brandon Stump



On October 29, 2021, Brandon Stump resigned from his position as: (i) Chief
Executive Officer and Chairman of the Board of Directors; and (ii) all positions
held for each direct and indirect subsidiary of the Company (each, a
"Subsidiary"), including as a member of the Board of Directors of the Company
and each Subsidiary.



In connection with Mr. Stump's resignation, the Company and Mr. Stump entered
into an agreement regarding Mr. Stump's resignation (the "Termination
Agreement"), which Termination Agreement is dated October 29, 2021. Pursuant to
the Termination Agreement, in consideration for Mr. Stump agreeing to terminate
his employment agreement with the Company, as amended and restated on February
12, 2020 (the "Employment Agreement"), and agreeing to certain restrictions and
covenants, the Company will: (i) continue to pay Mr. Stump his base salary (as
defined in the Employment Agreement), through April 22, 2022; (ii) pay Mr. Stump
certain bonus compensation owed to Mr. Stump in an amount equal to $300,000,
payable in installments of $75,000 on each of November 1, 2021, December 1,
2021, January 1, 2022, and February 1, 2022; and (iii) continue to make
available to Mr. Stump certain employee benefits offered by the Company until
April 22, 2022.



Reverse Stock Split



Our Board of Directors approved a reverse stock split of our authorized, issued,
and outstanding shares of common stock, par value $0.001 per share (the "Common
Stock"), at a ratio of 1-for-100 (the "Reverse Split"). The Reverse Split was
effective as of June 16, 2021. All share and per share amounts in this Report
have been retroactively adjusted to account for the Reverse Split .



March 2021 Private Placement



On March 19, 2021, the Company entered into Securities Purchase Agreements by
and between the Company and certain family trusts in which Mr. Brandon Stump,
the Company's former Chief Executive Officer and significant shareholder of the
Company, and Mr. Ryan Stump, the Company's Chief Operating Officer, are trustees
and beneficiaries (the "Purchase Agreements"), for the private placement of an
aggregate of 3,517,000 shares of its Common Stock, at a purchase price per share
of $0.853 (the "Private Placement"), which Private Placement was consummated on
March 22, 2021. The Private Placement resulted in gross proceeds to the Company
of approximately $3.0 million. The Private Placement was undertaken pursuant to
Rule 506 promulgated under the Securities Act of 1933, as amended, and was
consummated in a transaction approved by the Company's independent directors in
accordance with Rule 16b-3(d)(1) of the Securities Exchange Act of 1934, as
amended.

Red Beard Holdings, LLC Note Payable





On April 1, 2020, the Company, Charlie's and its VIE, Don Polly, issued a
secured promissory note (the "Red Beard Note") to one of the Company's largest
stockholders, Red Beard Holdings, LLC ("Red Beard") in the principal amount of
$750,000 (the "Principal Amount"), and required a guaranteed minimum interest
amount of $75,000 ("Minimum Interest"). The Red Beard Note was secured by all
assets of the Company pursuant to the terms of a Security Agreement entered into
by and between the Company and Red Beard (the "Red Beard Note Financing"). The
Red Beard Note was subsequently amended on August 27, 2020, September 30, 2020,
October 29, 2020, December 1, 2020, and January 19, 2021, ultimately increasing
Principal Amount to $1.4 million and Minimum Interest to $150,000.



On March 24, 2021, the Company and Red Beard entered into a Satisfaction and
Release (the "Red Beard Release"), pursuant to which the Company made a payment
to Red Beard in the amount of $1.55 million in exchange for an acknowledgment of
satisfaction and full release of the Company by Red Beard from liability and
obligations arising under the Red Beard Note.





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PMTA



During the quarter ended September 30, 2020, the FDA's Center for Tobacco
Products informed us that our PMTA received a valid submission tracking number,
passed the FDA's filing review phase, and recently entered the substantive
review phase. To date, the Company has invested more than $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 ended September, 2021, the FDA began issuing Marketing Denial
Orders ("MDO") for electronic nicotine delivery system ("ENDS") products that
lack evidence to demonstrate that permitting the marketing of such products
would be appropriate for the protection of the public health.



On March 15, 2022, a new rider to the Federal Food, Drug and Cosmetic Act was
passed granting the FDA authority over synthetic nicotine.  These regulations
make synthetic nicotine products subject to the same FDA rules as
tobacco-derived nicotine products.  As such, the Company was required to file a
PMTA for its existing synthetic nicotine products marketed under the Pacha Syn
brands by May 14, 2022 or be subject to FDA enforcement.  The Company filed new
PMTAs for its synthetic Pacha Syn products, on May 13, 2022, prior to the May
14, 2022, deadline.



As of March 31, 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.



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 quarter ended
March 31, 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 Denver, CO office and Huntington
Beach, CA warehouse locations have 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 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.



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On March 11, 2020, the World Health Organization designated the ongoing and
evolving COVID-19 outbreak as a pandemic. The outbreak has caused substantial
disruption in international and U.S. economies and markets as it continues to
evolve. The outbreak is having a temporary adverse impact on our industry as
well as our business, with regards to certain supply chain disruptions and sales
volume. While the disruption from COVID-19 is currently expected to be
temporary, there is uncertainty around the duration.



Basis of Presentation



The unaudited interim condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the SEC. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles in the United States
("U.S. GAAP") have been omitted pursuant to such SEC rules and regulations;
nevertheless, the Company believes that the disclosures are adequate to make the
information presented in this Report not misleading.



Amounts related to disclosure of December 31, 2021 balances within the interim
condensed consolidated financial statements were derived from audited financial
statements and notes thereto included in the 2021 Annual Report, filed with the
SEC on April 12, 2022. The operating results of Don Polly are also included.

Current Operating Trends and Financial Highlights





Management currently considers the following events, trends and uncertainties to
be important in understanding the Company's results of operations and financial
condition for the most recent calendar quarter and full year:



Regarding results from operations for the quarter ended March 31, 2022, we
generated revenue of approximately $8,074,000, as compared to revenue of
$4,361,000 for the three months ended March 31, 2021. This $3,713,000 increase
in revenue was due primarily to a $2,807,000 increase in sales of our
nicotine-based vapor products, as well as a $906,000 increase in sales of our
hemp-derived products.



We generated net income for the three months ended March 31, 2022, of
approximately $706,000, as compared to net loss of approximately $20,137,000 for
the three months ended March 31, 2021. The net income for the three months ended
March 31, 2022, includes a non-cash gain in fair value of derivative liabilities
of $340,000.

A review of the three-month period ended March 31, 2022, follows:





                                               For the three months ended
                                                       March 31,                            Change
                                               2022                2021            Amount        Percentage

($ in thousands)
Revenues:
Product revenue, net                       $      8,074       $         4,361     $   3,713             85.1 %
Total revenues                                    8,074                 4,361         3,713             85.1 %
Operating costs and expenses:
Cost of goods sold - product revenue              4,434                 1,943         2,491            128.2 %
General and administrative                        2,559                 2,218           341             15.4 %
Sales and marketing                                 703                   420           283             67.4 %
Research and development                             11                     9             2             22.2 %
Total operating costs and expenses                7,707                 4,590         3,117             67.9 %
Income (loss) from operations                       367                  (229 )         596           -260.3 %
Other income (expense):
Interest expense                                     (1 )                 (28 )          27            -96.4 %
Change in fair value of derivative
liabilities                                         340               (20,102 )      20,442           -101.7 %
Gain on debt extinguishment                           -                   217          (217 )         -100.0 %
Other income                                          -                     5            (5 )         -100.0 %
Total other income (loss)                           339               (19,908 )      20,247           -101.7 %
Net income (loss)                          $        706       $       (20,137 )   $  20,843           -103.5 %






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Results of Operations for the Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021





Revenue



Revenue for the three months ended March 31, 2022, increased by approximately
$3,713,000 or 85.1%, to approximately $8,074,000, as compared to approximately
$4,361,000 for same period in 2021 due to a $2,807,000 increase in sales of our
nicotine-based vapor products and a $906,000 increase in sales of our
hemp-derived products. The increase in our nicotine-based vapor product sales
was driven by our new 8ml Pacha Syn Disposable line, which launched in December
2021, 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 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 reduced 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. We view this market segment as having higher growth
potential, as well as better alignment with our existing sales channels in
comparison to our CBD "wellness" products.



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 $2,491,000, or 128.2%, to approximately $4,434,000, or 54.9% of
revenue, for the three months ended March 31, 2022, as compared to approximately
$1,943,000, or 44.6% 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 reserve for inventory obsolescence. Cost of revenue was partially offset by
a favorable inventory quantity adjustment.

General and Administrative Expenses





For the three months ended March 31, 2022, total general and administrative
expense increased by approximately $341,000 to $2,559,000 as compared to
approximately $2,218,000 for the same period in 2021. Notably, this change was
primarily comprised of increases of approximately $284,000 in payroll and
benefits, $181,000 in professional fees as well as $217,000 in other general and
administrative expenses. The increase in payroll and benefits expense was
primarily due to taxes paid on behalf of employees and directors in relation to
restricted stock awards issued on March 2, 2022 (see Note 11). The increase in
professional fees during the quarter ended March 31, 2022, was directly related
to higher audit and director fees. Other general and administrative expenses,
including merchant processing fees and provision for bad debt, increased due to
higher net sales relative to the quarter ended March 31, 2021. These increases
were offset by a reduction in non-cash stock-based compensation of approximately
$341,000. The reduction in non-cash, stock-based compensation was primarily due
to the conclusion of the vesting period for shares of Common Stock previously
awarded to certain employees as a result of the Share Exchange (See Note 3).



Sales and Marketing Expense



For the three months ended March 31, 2022, total sales and marketing expense
increased by approximately $283,000, or 67.4%, to approximately $703,000 as
compared to approximately $420,000 for the same period in 2021, which was
primarily due to a return to normalized trade-show activity during the quarter.
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.





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Research and Development Expense

For the three months ended March 31, 2022, total research and development costs increased by approximately $2,000, or 22.2%, to approximately $11,000 as compared to approximately $9,000 for the same period in 2021, which was primarily due to costs associated with previous PMTA submissions.





Income from Operations



We had operating income of approximately $367,000 for the three months ended
March 31, 2022, due primarily to an increase in sales across both Charlie's and
Don Polly. We also incurred certain non-cash, general and administrative
expenses during the period including a $18,000 expense related to stock-based
compensation. Net income is determined by adjusting income from operations by
the following items:

? Change in Fair Value of Derivative Liabilities. For the three months ended

March 31, 2022, the gain in fair value of derivative liabilities was

$340,000, compared to a loss of $ 20,102,000 for the three months ended

March 31, 2021. The derivative liability is associated with the issuance of

the Investor Warrants and the Placement Agent Warrants (as defined in Note 3

of this Report) in connection with the Share Exchange. The gain for the

quarter ended March 31, 2022, reflects the effect of the decrease in stock

price as of March 31, 2022, compared to December 31, 2021. 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 March 31, 2022.

? Interest Expense. For the three months ended March 31, 2022, and 2021, we

recorded interest expense related to notes payable of $1,000 and $28,000,


      respectively.




   ?  Other Income. For the three months ended March 31, 2022, and 2021, we
      recorded other income of $0 and $222, respectively.




Net Income (Loss)

For the three months ended March 31, 2022, we had net income of $706,000 as compared to a net loss of $20,137,000 for the same period in 2021.

Liquidity and Capital Resources





As of March 31, 2022, we had working capital of approximately $3,224,000, which
consisted of current assets of approximately $8,048,000 and current liabilities
of approximately $4,824,000, as compared to working capital of approximately
$2,460,000 at December 31, 2021. The current liabilities, as presented in the
condensed consolidated balance sheet at March 31, 2022 included elsewhere in
this Report primarily include approximately $3,684,000 of accounts payable and
accrued expenses, approximately $316,000 of deferred revenue associated with
product shipped but not yet received by customers, approximately $265,000 of
lease liabilities, and $559,000 of derivative liability associated with the
Investor Warrants and Placement Agent Warrants (the derivative liability of
$559,000 is included in determining the working capital of $3,224,000 but is not
expected to use any cash to ultimately satisfy the liability).

Our cash and cash equivalents balance at March 31, 2022 was approximately $409,000.





For the three months ended March 31, 2022, net cash used in operating activities
was approximately $372,000, resulting from a net income of $706,000, offset by a
$340,000 of change in fair value of derivative liabilities and $1,037,000 of
changes in our operating assets and liabilities. For the three months ended
March 31, 2021, net cash provided by operating activities was approximately
$268,000, resulting from a net loss of $20,137,000, offset by $359,000 of
share-based compensation, $20,102,000 of change in fair value of derivative
liabilities and $10,000 of change in our operating assets and liabilities.



For the three months ended March 31, 2022, we used cash for investment
activities of approximately $85,000 as compared to $19,000 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 during
the three months ended March 31, 2022.



For the three months ended March 31, 2021 we generated approximately $1,784,000
cash from financing activities. In the 2021 period, we generated cash from
financing activities from the Polly PPP Loan 2 (See Note 10) and the Private
Placement.



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Going Concern Uncertainty Regarding the Legal and Regulatory Environment, Liquidity and Management's Plan of Operation





Our financial statements have been prepared assuming that the Company will
continue as a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company
operates in a rapidly changing legal and regulatory environment; new laws and
regulations or changes to existing laws and regulations could significantly
limit the Company's ability to sell its products, and/or result in additional
costs. Additionally, the Company was required to apply for FDA approval to
continue selling and marketing its products used for the vaporization of
nicotine in the United States. Currently, a substantial portion of the Company's
sales are derived from products that are subject to approval by the FDA. There
was significant cost associated with the application process and there can be no
assurance the FDA will approve previous and/or future application. In addition,
the outbreak of a novel strain of COVID-19 ("Coronavirus") which was identified
in Wuhan, China around December 2019, has had a negative impact on the global
economy and the Company's supply chain and sales. For the three months ended
March 31, 2022, the Company generated income from operations of approximately
$0.4 million, and a consolidated net income of approximately $0.7 million, but
used cash in operations of approximately $0.4 million. The Company had
stockholders' equity of $3.9 million at March 31, 2022. During the three months
ended March 31, 2022, the Company's working capital requirements continued to
evolve as current assets, excluding cash, increased to $7.6 million from $7.1
million as of December 31, 2021, and cash on hand decreased to $0.4 million from
$0.9 million as of December 31, 2021. Considering these facts, the issuance of
one or several MDOs from the FDA would increase the potential for inventory
obsolescence and uncollectable accounts receivables. These regulatory risks, as
well as other industry-specific challenges remain factors that raise substantial
doubt about the Company's ability to continue as a going concern.



Our plans and growth depend on our ability to increase revenues, raise
additional capital, and continue our business development efforts, including the
expenditure of approximately $4,400,000 to date, to complete our PMTA process
for the Company's 2020 submissions to the FDA. In 2022 the Company intends to
allocate further resources and new personnel to support research and development
initiatives in order to submit one or more additional PMTAs. The Company may
require additional financing in the future to support subsequent PMTA filings,
and/or in the event the FDA requests additional testing for one, or several, of
the Company's prior PMTA submissions. There can be no assurance that additional
financing will be available on acceptable terms, or at all, and there can be no
assurance that any such arrangement, if required or otherwise sought, would be
available on terms deemed to be commercially acceptable and, in the Company's
best interests. The financial statements do not include any adjustments to the
carrying amount and classification of recorded assets and liabilities should the
Company be unable to continue operations.

Off-Balance Sheet Arrangements

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





Critical Accounting Policies



The condensed consolidated financial statements are prepared in conformity with
U.S. GAAP, which require the use of estimates, judgments and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent liabilities at the date of the financial statements, and the reported
amounts of expense in the periods presented. We believe that the accounting
estimates employed are appropriate and resulting balances are reasonable;
however, due to inherent uncertainties in making estimates, actual results could
differ from the original estimates, requiring adjustments to these balances in
future periods. The critical accounting estimates that affect the consolidated
financial statements and the judgments and assumptions used are consistent with
those described under Part II, Item 7 of our Annual Report on the 2021 Annual
Report.

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