Executive Summary / Key Takeaways

• Charlie's Holdings, operating in the highly competitive and regulated vapor products industry, is executing a strategic pivot towards alternative alkaloid products, primarily featuring its proprietary Metatine compound, as a regulatory hedge against restrictions impacting traditional nicotine products.
• Despite a significant 47.7% revenue decline in FY 2024 to $8.49 million and an increased net loss of $4.16 million, the company is aggressively cutting costs and targeting a return to profitability in 2025, contingent on the success of new product launches and strategic initiatives.
• The company has made substantial investments (over $6.5 million by end of 2024) in the FDA's Premarket Tobacco Application (PMTA) process for its nicotine products, viewing its portfolio of over 700 Acceptance Filings as a valuable asset, partially validated by the recent $5 million upfront sale of certain PMTA-covered assets to R.J. Reynolds Vapor Company (BTI).
• A critical near-term catalyst is the market acceptance and potential for "transformational" regional and national rollouts of the Metatine-based SBX disposable vape line, which the company believes is not subject to current FDA tobacco regulations or state flavor bans.
• Significant financial challenges persist, including a working capital deficit of $1.85 million and negative operating cash flow, raising substantial doubt about the company's ability to continue as a going concern without securing additional financing or achieving rapid operational improvements.

Setting the Scene: A Pivot in the Vapor Landscape

Charlie's Holdings, Inc., through its subsidiary Charlies Chalk Dust, LLC, operates in the dynamic and intensely scrutinized vapor products market. Since acquiring the Charlies Chalk Dust business in 2019, the company has focused on formulating, marketing, and distributing premium vapor products, initially built on a foundation of nicotine-based e-liquids and disposables under brands like Pacha and Pachamama. This market, however, has been reshaped by evolving consumer preferences and, more significantly, a rapidly tightening regulatory environment, particularly in the United States.

The industry landscape is highly fragmented, yet dominated by the immense resources and established distribution channels of "Big Tobacco" players like British American Tobacco, Philip Morris International (PM), Altria Group (MO), and Imperial Brands (IMBBY). These giants compete across various tobacco and reduced-risk product categories, including vapor, often leveraging scale and regulatory expertise that smaller players like Charlie's Holdings find challenging to match. While CHUC competes on innovation, product quality, and brand loyalty, its smaller scale results in higher operating costs and less financial flexibility compared to its larger rivals. For instance, while CHUC's gross margin stood at 35.21% on a TTM basis, competitors like MO and BTI boast significantly higher margins, reflecting their manufacturing efficiencies and pricing power.

In response to these pressures and the inherent uncertainties of the nicotine market, Charlie's Holdings has embarked on a strategic pivot. Recognizing the potential for regulatory headwinds to constrain its core nicotine business, the company is actively developing and promoting alternative product categories, most notably those utilizing a proprietary compound called Metatine. This dual-track strategy – pursuing regulatory compliance for existing nicotine products while simultaneously developing non-regulated alternatives – forms the core of the company's current investment narrative.

Technological Differentiation: The Metatine Advantage

Central to Charlie's Holdings' strategic pivot is its investment in alternative alkaloids, specifically Metatine. Described as a synthetically derived molecule structurally similar but chemically distinct from other vaping alkaloids, Metatine is positioned as a non-nicotine compound. The company asserts that vape devices containing Metatine provide adult users with a sense of satisfaction and enjoyment largely indistinguishable from traditional nicotine products.

The critical differentiator, as articulated by the company, is the perceived regulatory status of Metatine. Because Metatine is not made or derived from tobacco and does not contain nicotine from any source, Charlie's Holdings believes products containing Metatine as the active ingredient are not subject to regulation as tobacco products under the U.S. Food, Drug and Cosmetic Act, as amended by the Tobacco Control Act. This potentially exempts Metatine-based products from the stringent Premarket Tobacco Application (PMTA) requirements that apply to nicotine products and, notably, from state-level flavor bans specifically targeting nicotine-based electronic nicotine delivery systems (ENDS).

The company's flagship Metatine product is the SBX Disposable device. These disposables offer features designed to appeal to adult consumers, including a high puff count (17,000-25,000), three firing modes, and active battery and e-liquid monitoring. They are available in ten unique flavors, a stark contrast to the limited or banned flavor options for many regulated nicotine products. In a company-sponsored focus group, 287 out of 306 adult vapers reportedly preferred SBX over Juul's tobacco-flavored vapes, highlighting the potential consumer appeal of flavored alternatives.

The "so what" for investors is significant: if the company's interpretation of Metatine's regulatory status holds, the SBX line could access markets and distribution channels currently restricted for flavored nicotine products, including mass-market convenience chains. This offers a potential competitive moat, as there are currently no known competitors with significant market share in this specific product category. The company is actively test marketing SBX in these channels, viewing successful rollouts as potentially "transformational." Beyond disposables, the company is also developing Metatine-based e-liquids (PACHAMAMA PLUS) and a pouch line expected in late 2025, indicating a broader commitment to this alternative alkaloid strategy.

Another technological initiative involves developing patented age-gating technology for nicotine vapor products. Led by a director with scientific and regulatory expertise, this effort aims to address youth access concerns, a major focus of the FDA and a key hurdle for flavored nicotine products. If successful and recognized by the FDA, this technology could potentially allow CHUC's age-gated flavored nicotine products to gain marketing authorization in the future, opening up a significant portion of the market currently inaccessible.

Navigating Regulatory Currents: PMTAs and Asset Monetization

Simultaneously with its pivot to alternative alkaloids, Charlie's Holdings has invested heavily in the regulatory compliance process for its nicotine and synthetic nicotine products. Since 2020, the company has spent over $6.5 million on the PMTA process, engaging a large team of professionals to prepare comprehensive submissions. By the end of 2024, CHUC had received FDA Acceptance Filings for over 650 PMTAs, a number that grew to over 700 by March 2025.

This investment is crucial because, under FDA regulations, products not on the market as of February 15, 2007, require pre-market authorization to be legally sold. While the FDA has received millions of applications, it has authorized only a small number of tobacco- and menthol-flavored e-cigarette products, issuing Marketing Denial Orders (MDOs) for the vast majority, particularly flavored ones. No company has yet received an FDA marketing order for a flavored non-tobacco or non-menthol disposable vape product.

Despite the low success rate industry-wide, Charlie's Holdings views its extensive portfolio of PMTA Acceptance Filings, particularly for flavored products, as a significant competitive advantage and a valuable asset. The company believes the monetary value of this portfolio, as a standalone asset, far exceeds its current market capitalization. This belief was recently underscored by a significant subsequent event: the sale of twelve PACHA synthetic products and related PMTA assets to R.J. Reynolds Vapor Company on April 16, 2025. This transaction brought in $5 million upfront, with the potential for up to $4.2 million in contingent payments based on future sales by RJR. This sale not only provides a much-needed cash infusion but also validates the company's strategy of investing in and potentially monetizing its regulatory assets.

While the company continues to seek marketing authorization for its remaining PMTA submissions, the RJR deal demonstrates a path to realizing value from these efforts even without direct marketing orders for all products. This strategy contrasts with many smaller competitors who may lack the resources to pursue PMTAs or the assets to attract interest from larger players.

Financial Performance and the Going Concern Question

Against the backdrop of strategic shifts and regulatory challenges, Charlie's Holdings' recent financial performance reflects significant headwinds. For the year ended December 31, 2024, total revenue decreased sharply by 47.7% to $8.49 million, down from $16.25 million in 2023. This decline was primarily driven by a $6.48 million decrease in nicotine-based product sales (including the Pacha Disposable line and e-liquids) and a $1.27 million decrease in sales of hemp-derived/alternative products (reflecting the underperformance of the initial SPREE BAR launch).

The decrease in sales, coupled with a higher cost of revenue as a percentage of revenue (66.0% in 2024 vs. 62.8% in 2023) due to lower fixed cost absorption and margin compression, resulted in an increased loss from operations. The operating loss widened to $3.45 million in 2024 from $2.20 million in 2023. After accounting for other income/expense items, including interest expense and changes in derivative liabilities, the net loss for 2024 was $4.16 million, nearly double the $2.09 million loss in 2023.

The company's liquidity position is a critical concern. As of December 31, 2024, Charlie's Holdings had a working capital deficit of $1.85 million, a significant deterioration from a $332,000 surplus at the end of 2023. Cash and cash equivalents stood at only $211,000. The company used $1.62 million in cash from operating activities in 2024, continuing a trend of cash burn.

These factors – recurring operating losses, negative cash flow, and a low working capital position – lead the company to conclude there is substantial doubt about its ability to continue as a going concern. Management explicitly states that generating positive cash flows and achieving profitability in the future depends on increasing revenue, procuring cost-effective financing, and successful business development efforts.

In response to the financial strain, management implemented aggressive cost-cutting measures in 2024, including reductions in non-commission wages and benefits (with executives voluntarily reducing salaries by 20-50%) and decreases in professional fees and information systems costs. While these efforts contributed to a reduction in general and administrative expenses, they were insufficient to offset the impact of declining revenue on overall profitability and liquidity.

Subsequent to the year-end, the company utilized proceeds from the RJR asset sale and potentially other financing activities to address some immediate debt obligations, including repaying the Pinnacle Receivables Financing ($1.25M) and loans from related parties (Ryan Stump loan of $308k), and modifying terms on other related party notes. While these actions provide some temporary relief and improve the balance sheet, the fundamental need to increase revenue and achieve profitability remains paramount.

Outlook and Strategic Path Forward

Despite the challenging financial position, Charlie's Holdings management has outlined a clear strategic path aimed at achieving profitability in 2025 and driving future growth. The core of this plan rests on several key initiatives:

1. Product Innovation & Market Penetration: The company is banking heavily on the Metatine-based SBX line to capture significant future sales and market share, particularly in channels inaccessible to flavored nicotine products. Successful test marketing and subsequent regional/national rollouts are viewed as potentially "transformational." The planned launch of a Metatine-based pouch line in late 2025 further expands the potential market opportunity in the rapidly growing pouch category.
2. PMTA Monetization: Beyond seeking marketing orders, the company is actively pursuing strategic partnerships to monetize its extensive PMTA portfolio, leveraging the value of its Acceptance Filings, especially for flavored products. The RJR asset sale is a prime example of this strategy in action.
3. Cost Structure Optimization: Building on the aggressive cost cuts implemented in 2024, the company continues to focus on improving margins and right-sizing the business to accelerate the path to profitability.
4. Sales Team Improvement & International Expansion: Efforts are underway to enhance the sales team's focus on acquiring new customers, complementing existing account management. International markets, which represented approximately 10% of vapor sales in 2024, are seen as a significant growth opportunity, leveraging the existing distribution platform to mitigate domestic regulatory risk.
5. Uplist Ambition: As the business returns to growth and meets listing requirements, the company plans to uplist from the OTCQB to a national securities exchange, aiming to increase market visibility, liquidity, and access to capital.

Management's stated objective is to achieve profitability in 2025. This target is ambitious, requiring a significant turnaround from the losses incurred in 2024. It hinges on the successful execution of the strategic initiatives, particularly the commercial success of the SBX line and the ability to manage costs effectively while driving revenue growth.

Risks and Critical Considerations

Investing in Charlie's Holdings involves significant risks, many of which are inherent to the highly regulated and competitive vapor products industry. The most prominent risks include:

• Regulatory Uncertainty: The FDA's PMTA process remains a major hurdle for nicotine products. There is no guarantee that CHUC will receive marketing orders for its pending applications, and MDOs could be issued at any time, forcing products off the market. Furthermore, the regulatory status of Metatine, while currently believed to be outside FDA tobacco jurisdiction, could change if the FDA or Congress asserts authority, potentially requiring PMTA submissions for these products as well. State and local regulations, including flavor bans and excise taxes, also pose ongoing threats to market access and profitability.
• Going Concern Risk: The company's current financial state, characterized by losses, negative working capital, and cash burn, raises substantial doubt about its ability to continue operations without securing additional financing. There is no assurance that such financing will be available on acceptable terms or at all.
• Competition: The company faces intense competition from well-established, significantly larger, and better-financed players, including Big Tobacco. These competitors have superior resources for R&D, marketing, distribution, and navigating the regulatory landscape, which could limit CHUC's ability to gain or maintain market share and pressure margins.
• Product Acceptance and Market Demand: The success of new products, particularly the Metatine-based SBX line, is not guaranteed. Consumer acceptance of alternative alkaloids is unproven at scale, and market dynamics could shift rapidly.
• Reliance on Third Parties: The company relies on contract manufacturers for production and distributors/retailers for sales. Disruptions in the supply chain or loss of key partners could materially harm the business.
• Key Personnel Dependence: The company's success depends on key members of its management team, and the loss of their services could adversely affect operations.

These risks are interconnected and could individually or collectively have a material adverse effect on Charlie's Holdings' business, financial condition, and results of operations.

Conclusion

Charlie's Holdings is at a critical juncture, attempting to engineer a turnaround in a challenging industry. The investment thesis hinges on the success of its strategic pivot: leveraging the potential regulatory advantage of its Metatine-based alternative alkaloid products, extracting value from its significant investment in the FDA PMTA process, and implementing aggressive cost controls to achieve profitability.

The launch of the SBX line represents the most immediate and potentially impactful opportunity, offering a path to markets currently restricted for flavored nicotine vapes. The recent asset sale to R.J. Reynolds provides a vital cash infusion and validates the strategic value of the company's PMTA portfolio, offering a potential model for future monetization efforts. Management's stated goal of achieving profitability in 2025 provides a clear target, though the path is steep given the current financial state and historical losses.

However, the risks are substantial. The going concern doubt looms large, requiring successful execution of financing plans or rapid operational improvements. Regulatory uncertainty remains a constant threat, potentially impacting both nicotine and, conceivably, alternative alkaloid products. Competition from industry behemoths with vastly superior resources presents an ongoing challenge to market penetration and margin expansion.

For investors considering Charlie's Holdings, this is a high-risk, potentially high-reward proposition. The story is compelling – a nimble player attempting to outmaneuver regulatory hurdles and compete with giants through innovation and strategic asset management. The key factors to watch will be the commercial performance of the SBX line in test markets, further developments regarding FDA regulation of both nicotine and alternative products, the company's ability to secure necessary financing, and tangible progress towards the stated goal of profitability in 2025. The outcome will determine whether Charlie's Holdings can successfully pivot its way to sustainable growth and overcome the significant challenges it faces.