Charlie's PMTA is in Substantive Review with the FDA
Q4 Showed 15% Increase in Quarterly Revenue
COSTA MESA, CA / ACCESSWIRE / April 5, 2021 / Charlie's Holdings, Inc. (OTC PINK:CHUC) ('Charlie's' or the 'Company'), an industry leader in both the premium, nicotine-based, e-cigarette space and the hemp-derived, CBD wellness space, announced today the Company's financial results for the fourth quarter and year ended December 31, 2020.
Key Financial Highlights for Q4 and Full Year 2020
- Revenue in Q4 increased 15% year-over-year to $4,230,000
- Gross profit in Q4 increased 22% year-over-year to $2,113,000
- Gross margin in Q4 increased to 50%
- Operating loss decreased 81% year-over-year to $740,000
- Right-sized cost structure reduced operating expenses 18% in 2020
- Gross margin for the full year 2020 held steady at 55% despite pricing pressure and economic turmoil
Key Business Highlights for 2020
- Filed initial Premarket Tobacco Application ('PMTA') submission with the United States Food and Drug Administration ('FDA') on August 31, 2020
- Received a valid Submission Tracking Number, passed the FDA's filing review phase, and entered Substantive Review in October 2020
- Sold Charlie's products through the top five domestic vape specialty retailers and nine of the top ten largest vape e-commerce platforms
- Added key distribution accounts for the Company's hemp-derived CBD wellness products
- Increased distributor and retailer participation in the Company's volume incentive programs
- Stabilized manufacturing costs
- Streamlined operating expenses to improve efficiencies
PMTA Progress and Update
In order to keep certain of the Company's 'newly deemed tobacco products' (e-liquids that contain nicotine derived from tobacco) on the market in the United States, Charlie's filed its initial PMTA at the end of August 2020. In order to prepare the most robust possible application, the Company invested nearly $5 million on its submission. Subsequently, in October 2020, the FDA's Center for Tobacco Products informed the Company that Charlie's PMTA had received a valid Submission Tracking Number, passed the FDA's filing review phase, and entered Substantive Review. The deadline for all other vapor products companies to submit their PMTAs passed on September 9, 2020. At this date, provided their electronic nicotine delivery system ('ENDS') products were on the market prior to August 8, 2016, vapor products companies operating in the United States may keep their ENDS products on the market for up to one year from the September 9, 2020 submission deadline, while the FDA considers their respective applications.
The Company believes that the extensive process that was required to compile and submit its comprehensive PMTA to the FDA will ultimately prove a critically important differentiating factor and competitive advantage for Charlie's.
The Company engaged a team of more than 200 professionals, including doctors, scientists, biostatisticians, data analysts, and numerous contract research organizations to create its comprehensive PMTA submission. The fact that the Company's PMTA has entered Substantive Review highlights both Charlie's progress toward achieving full regulatory compliance and the Company's goal of providing customers with a trusted product portfolio. Management is confident that during the Substantive Review phase of the PMTA process, the FDA will recognize that Charlie's submission is both distinguished and suitable for approval.
As a further measure to demonstrate the quality of Charlie's application, human clinical trials were performed with the Company's products to help detect the biomarkers of exposure associated with smoking combustible cigarettes and to determine the nicotine delivery efficiency of the products via pharmacokinetic studies. A large team of doctors, scientists, biostatisticians, and data analysts conducted these time-intensive clinical trials. Charlie's believes that this kind of study will differentiate the Company's application from others that rely solely on a literature-based approach to this critical 'in human' assessment of product performance.
Charlie's recent PMTA submission marks the first of such applications that the Company intends to take through FDA's approval process as it seeks to create a long-term, robust product portfolio. Such an accomplishment will allow Charlie's to benefit tremendously as one of a select group of companies operating responsibly in the premium e-liquid product space.
Subsequent to the End of 2020
Charlie's closed a $3 million capital raise through the private sale of 351,669,883 shares of common stock to certain family trusts in which Company founders, Brandon Stump, Chief Executive Officer, and Ryan Stump, Chief Operating Officer, are the trustees and beneficiaries. The Company intends to use the proceeds from this raise to drive substantial future growth, facilitate new product launches, and facilitate the achievement of several important near-term milestones.
Further, the new capital enabled the Company to retire outstanding debt and to strengthen its balance sheet.
'Between the COVID pandemic and the substantial regulatory changes that roiled our industry, 2020 certainly was a year unlike any other. But now, with a return to revenue growth in the most recent quarter, a rightsized cost structure, and a bolstered balance sheet, we are stronger and extremely well-positioned for accelerated growth.' explained Brandon Stump, Charlie's Holdings, Inc. Chief Executive Officer.
'What's more, we have never felt more confident about our PMTA… certainly, a win with the FDA will distinguish Charlie's as a true industry leader in the e-liquid space and will enable us to capture significantly increased market share.' Mr. Stump concluded, 'I am 100% committed to the success of Charlie's. To help fuel - and to accelerate - the Company's growth, last week my brother Ryan and I invested $3 million in Charlie's common stock. We believe that our mission - to provide adult smokers with safer, enjoyable alternatives to combustible tobacco products - is one that will enable Charlie's to emerge as America's #1 premium, vapor products company.'
Financial Results for the Year Ended December 31, 2020
Revenue for the year ended December 31, 2020 was $16,692,000, a decrease of $6,048,000, or 27%, compared to $22,740,000 for the year ended December 31, 2019. The decrease was due to a $6,364,000 decrease in our nicotine-based product sales, and a $422,000 decrease in sales of our CBD wellness products. Sales discounts, key accounts participating in volume-based rebate programs, and a relatively larger provision for returns generally contributed to a decrease in net sales. Specifically, the decrease in our nicotine-based e-liquid flavor sales was directly related to the current regulatory and health related news stories surrounding the vaping industry. The nicotine based e-liquid sales decline began late in the quarter ended September 30, 2019 and we expect sales in future quarters to be negatively affected until the regulatory environment becomes more favorable. Uncertainty surrounding the FDA's application review timeline, following the PMTA submission deadline, has continued to affect buying patterns in the domestic vape market as customers reduce inventories of non-PMTA submitted products. In addition, in late February 2020, sales of our vapor products and CBD wellness products were negatively impacted as the effects of the global COVID-19 pandemic caused disruptions in the global economy, including mandatory closures of and/or restrictions placed on, retail locations carrying our products.
Gross profit for the year ended December 31, 2020 was $9,214,000, a decrease of $3,455,000, or 27%, compared to $12,669,000 for the year ended December 31, 2019. The resulting gross margin was 55% for the year ended December 31, 2020, compared to 56% for the year ended December 31, 2019. For the year ended December 31, 2020, cost of goods sold, as a percent of revenue, remained relatively unchanged due to a more favorable mix of higher margin sales for Charlie's and Don Polly but was marginally offset by a higher provision for obsolescence.
General and administrative expense for the year ended December 31, 2020 was $10,873,000, a decrease of $4,144,000, or 28%, compared to $15,017,000 for the year ended December 31, 2019. This decrease was comprised of reductions of approximately $3,906,000 of non-cash stock-based compensation, employee bonuses and certain other transaction related costs, as well as $946,000 of other general and administrative expenses. The reduction in transaction related costs included $2,437,000 of employee bonuses, $1,063,000 in non-cash, stock-based compensation, and $406,000 of other costs, including legal and consulting fees, most of which were linked to the share exchange in April 2019. Other fluctuations in general and administrative costs netted out to a reduction of approximately $946,000, largely consisting of a reduced provision for bad debt, product testing fees and general travel expenses. The decrease was offset by an increase of approximately $708,000 in salary costs, primarily due to a higher average headcount year-over-year, as well as the addition of salaries for our CEO and COO who, prior to the Share Exchange, did not receive annual salaries from Charlie's.
During the year ended December 31, 2020, we routinely evaluated our business forecast on a quarterly basis and periodically made necessary changes in order to align our cost structure with revenue. Mid-year headcount adjustments across several departments and intermittent salary reductions for highly compensated employees accounted for the majority of realized cost cuts. We believe that, with our current staff, business processes and system infrastructure, we are now 'right-sized' to execute the Company's operating plan.
Sales and marketing expenses for the year ended December 31, 2020 was $1,733,000, a decrease of $581,000, or 25%, compared to $2,314,000 for the year ended December 31, 2019. The decrease was primarily due to lower commissions paid for reduced sales, curtailed spending on key marketing programs, and a decrease in trade show travel due to uncertainty in the global economy resulting from effects of COVID-19.
Research and development expense for the year ended December 31, 2020 was $3,378,000, an increase of $2,276,000, or 207%, compared to $1,102,000 for the year ended December 31, 2019. The increase was primarily due to costs incurred with the PMTA process.
Operating loss for the year ended December 31, 2020 was $6,770,000, an increase of $1,006,000, or 17%, compared to $5,764,000 for the year ended December 31, 2019.
Net loss for the year ended December 31, 2020 was $7,187,000, an increase of $5,041,000 or 235%, compared to $2,146,000 for the year ended December 31, 2019.
Net loss was determined by adjusting income from operations by the following non-cash items:
Change in Fair Value of Derivative Liabilities. For the year ended December 31, 2020 and 2019, the loss and gain in fair value of derivative liabilities was ($300,000) and $3,618,000, respectively. The derivative liability was associated with the issuance of investor warrants and placement agent warrants in connection with the share exchange. The loss for the year ended December 31, 2020 reflected the effect of the increase in stock price as of December 31, 2020 compared to December 31, 2019. We had warrants to purchase approximately 4,034 million shares of common stock outstanding as of December 31, 2020.
Interest Expense. For the year ended December 31, 2020 and December 31, 2019, we recorded interest expense related to notes payable of $134,000 and $0, respectively.
Other Income. For the year ended December 31, 2020 and 2019, we recorded other income related to interest and sublease income of $17,000 and $0, respectively.
About Charlie's Holdings, Inc.
Charlie's Holdings, Inc. (OTC PINK:CHUC) is an industry leader in both the premium, nicotine-based, e-cigarette space and the hemp-derived, CBD wellness space through its subsidiary companies Charlie's Chalk Dust, LLC and Don Polly, LLC. Charlie's Chalk Dust produces high quality vapor products currently distributed in more than 90 countries around the world. Charlie's Chalk Dust has developed an extensive portfolio of brand styles, flavor profiles and innovative product formats. Launched in June of 2019, Don Polly, LLC formulates innovative hemp-derived CBD wellness products. Don Polly's high quality CBD products derive from single-strain-sourced hemp extract and high purity CBD isolate crystals.
Safe Harbor Statement
This press release contains 'forward-looking statements' within the meaning of the 'safe harbor' provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to statements regarding the Company's overall business, existing and anticipated markets and expectations regarding future sales and expenses. Words such as 'expect,' 'anticipate,' 'should,' 'believe,' 'target,' 'project,' 'goals,' 'estimate,' 'potential,' 'predict,' 'may,' 'will,' 'could,' 'intend,' variations of these terms or the negative of these terms and similar expressions are intended to identify these forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties, many of which involve factors or circumstances that are beyond the Company's control. The Company's actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including but not limited to: the Company's ability to successful increase sales and enter new markets; the FDA's decision with respect to the Company's PMTAs; the Company's ability to manufacture and produce product for its customers; the Company's ability to formulate new products; the acceptance of existing and future products; the complexity, expense and time associated with compliance with government rules and regulations affecting nicotine and products containing cannabidiol; litigation risks from the use of the Company's products; risks of government regulations; the impact of competitive products; and the Company's ability to maintain and enhance its brand, as well as other risk factors included in the Company's most recent quarterly report on Form 10-K, Form 10-Q and other SEC filings. These forward-looking statements are made as of the date of this press release and were based on current expectations, estimates, forecasts and projections as well as the beliefs and assumptions of management. Except as required by law, the Company undertakes no duty or obligation to update any forward-looking statements contained in this release as a result of new information, future events or changes in its expectations.
SOURCE: Charlie's Holdings, Inc.
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