What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-08-14 compared with 2020-05-15 · 752 added, 480 removed, 953 unchanged (56% of the section changed)

5 unchanged sentences

$ 1,464  

$ 2,448  

receivable, net

expense and other current assets

expenses and other current assets

current assets

4 unchanged sentences

LIABILITIES AND STOCKHOLDERS' DEFICIT

payable and accrued expense

payable and accrued expenses

$ 2,433  

1 unchanged sentence

current liabilities

payable, net of current portion

liabilities, net of current portion

non-current liabilities

11,074  

COMMITMENTS AND CONTINGENCIES (see Note 13)

3 unchanged sentences

A, 300,000 shares designated, 203,811 and 204,561 shares issued and

outstanding as of March 31, 2020 and December 31, 2019,

outstanding as of June 30, 2020 and December 31, 2019,

B, 1.5 million shares designated, 0 shares issued and outstanding

as of March 31, 2020 and December 31, 2019,

as of June 30, 2020 and December 31, 2019,

stock ($0.001 par value);

50 billion shares authorized;

billion shares and 18.9 billion shares issued and outstanding as of

March 31, 2020 and December 31, 2019, respectively

million shares and 18,974 million shares issued and outstanding as

of June 30, 2020 and December 31, 2019, respectively

18,991  

5 unchanged sentences

$ 7,848  

accompanying notes are an integral part of these unaudited

The accompanying notes are an integral part of these unaudited

condensed consolidated financial statements.

CHA RLIE’S HOL D IN GS,

CHARLIE’S HOL DINGS,

CONDENSED CONSOLIDATED STATEMENTS

2 unchanged sentences

For the three months ended

March 31,  

For the six months ended

$ 4,163  

$ 6,819  

Operating costs and expense:

$ 8,568  

$ 13,466  

13,466  

Operating costs and expenses:

of goods sold - product revenue

2 unchanged sentences

and development

operating costs and expense

income from operations

Other income:

in fair value of derivative liabilities

Net (loss) income

operating costs and expenses

10,030  

(loss) earnings per share applicable to common

13,677  

14,202  

average shares used in computing basic earnings per

from operations

Other income (expense):

in fair value of derivative liabilities

loss per share, basic and diluted

average number of common shares outstanding

18,982,383,063  

4,259,080,500  

average shares used in computing diluted earnings per

18,978,152,798  

2 unchanged sentences

condensed consolidated financial statements.

CHARLIE’S HO L D INGS,

CHARLIE’S HOL DINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

STOCKHOLDERS’

EQUITY (DEFICIT)

(in thousands)

 (Unaudited)

Preferred Stock

For the Three Months Ended June 30, 2020

Convertible Preferred Stock  

Common Stock  

Additional Paid-in

Stockholders'

 Par value

Accumulated  

Total Stockholders' 

Par value  

Capital 

Deficit 

Balance at April 1, 2020

18,982,291  

$ 18,982  

of Series A convertible preferred stock

dividends payable on Series A convertible preferred

Balance at June 30, 2020

18,990,753  

$ 18,991  

For the Six Months Ended June 30, 2020

Convertible Preferred Stock  

Common Stock  

Accumulated  

Total Stockholders' 

Par value  

Capital 

Deficit 

Balance at January 1, 2020

1 unchanged sentence

$ 18,974  

 Conversion

of Series A convertible preferred stock

 Reclassification

16,925  

Reclassification

of liability awards to equity

based compensation

Balance at March 31, 2020

dividends payable on Series A convertible preferred

Balance at June 30, 2020

18,990,753  

$ 18,991  

Preferred Stock

The accompanying notes are an integral part of these unaudited

condensed consolidated financial statements.

CHARLIE’S HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

STOCKHOLDERS’

EQUITY (DEFICIT)

(in thousands)

For the Three Months Ended June 30, 2019

Convertible Preferred Stock  

Common Stock  

Additional Paid-in

Stockholders'

 Par value

Retained  

Total Stockholders' 

Par value  

Capital 

Earnings  

Equity  

Balance at April 1, 2019

141,041  

$ 2,145  

$ 2,287  

of reverse merger 

2,377,530  

of Series B convertible preferred stock

13,963,048  

13,963  

of common stock and warrants in a private offering, net of $7,762

warrant liability

1,551,466  

18,186  

19,737  

cost related to private offering

Cash distributions

to CCD Members

902,662  

Balance at June 30, 2019

18,935,747  

$ 18,936  

$ (17,749 ) 

For the Six Months Ended June 30, 2019

Convertible Preferred Stock  

Common Stock  

Retained  

Total Stockholders' 

Par value  

Capital 

Earnings  

Equity  

Balance at January 1, 2019

141,041  

distributions to CCD Members

Balance at March 31, 2019

of reverse merger 

2,377,530  

of Series B convertible preferred stock

13,963,048  

13,963  

of common stock and warrants in a private offering, net of $7,762

warrant liability

1,551,466  

18,186  

19,737  

cost related to private offering

Cash distributions

to CCD Members

902,662  

Balance at June 30, 2019

18,935,747  

$ 18,936  

$ (17,749 ) 

The accompanying notes are an integral part of these unaudited

condensed consolidated financial statements.

CHA RLIE’S H OLDINGS, INC.

CHARLIE’S HOLDINGS,

CONDENSED CONSOLIDATED STATEMENTS

1 unchanged sentence

(Unaudited)  

For the three months ended

March 31,  

For the six months ended

Cash Flows from Operating Activities:

Net (loss) income

$ 2,476  

Reconciliation of net (loss) income to net cash provided by

operating activities:

for doubtful accounts

and amortization

in fair value of derivative liabilities

of operating lease right-of-use asset

based compensation

of non-cash charges

Changes in operating assets and liabilities:

expense and other current assets

payable and accrued expense

Reconciliation

of net loss to net cash (used in) provided by operating

Allowance for

doubtful accounts

Depreciation and

Change in fair

value of derivative liabilities

Amortization of

operating lease right-of-use asset

non-cash charges

in operating assets and liabilities:

expenses and other current assets

payable and accrued expenses

cash (used in) provided by operating activities

3 unchanged sentences

Cash Flows from Financing Activities:

from issuance of common stock and warrants in a private offering,

23,160  

from issuance of notes payable

distributions to CCD Members

cash used in financing activities

cash provided by financing activities

(decrease) increase in cash

2 unchanged sentences

$ 1,464  

Supplemental disclosure of

cash flow information

Cash paid for

Supplemental disclosure of

non-cash investing and financing

$ 5,120  

Supplemental disclosure of cash flow information

paid for interest

paid for income taxes

Su pplemental

disclosure of non-cash financing and investing

activities  

of Series A convertible preferred stock

2 unchanged sentences

$ 1,638  

dividends payable on Series A convertible preferred

$ 1,650  

of reverse merger 

$ 2,378  

of Series B convertible preferred stock

The accompanying notes are an integral part of these unaudited

condensed consolidated financial statements.

CH A RLIE’S

HOLDINGS, INC.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

102 unchanged sentences

of 50% of the Company’s issued and outstanding voting

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Share Exchange is accounted for as a reverse

23 unchanged sentences

Environment, Liquidity and Management’s Plan of

The accompanying financial statements have been

17 unchanged sentences

Company’s supply chain and sales.

For the three months ended

March 31, 2020, the Company has incurred losses from operations of

$4,351,000 and a consolidated net loss of approximately $3,916,000,

and the Company has negative stockholders’

These factors raise substantial doubt about the

Company’s ability to continue as a going concern.

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.

For the six months ended

June 30, 2020, the Company has incurred losses from operations of

approximately $5,109,000 and a consolidated net loss of

approximately $4,560,000, and the Company has a stockholders’

deficit of approximately $4,105,000 as of June 30, 2020.

factors raise substantial doubt about the Company’s ability

to continue as a going concern.

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.

plans depend on its ability to increase revenues and continue its

business development efforts, including the expenditure of

approximately $4,400,000 to complete the PMTA registration process.

The Company does not anticipate that its current cash position will

be sufficient to meet its working capital requirements, to continue

approximately $4,400,000 to complete the Premarket Tobacco

Application (“

PMTA ”) registration process.

Company does not anticipate that its current cash position will be

sufficient to meet its working capital requirements, to continue

its sales and marketing efforts and complete the PMTA registration

The Company is currently seeking debt and/or equity

financing in order to ensure that it have sufficient cash to

operate for the next 12 months.

financing in order to ensure that it has sufficient cash to operate

for the next 12 months.

There can be no assurance that such

44 unchanged sentences

this could have a significant impact on our

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 11, 2020, the World Health Organization designated the

9 unchanged sentences

duration. 

The financial impact from COVID-19 on our business

cannot be reasonably estimated at this time, however recent sales

activity has shown a decline in sales of our CBD products and, if

disruptions from the COVID-19 outbreak are prolonged, it will

continue to have an adverse impact on our business.

The financial impact from COVID-19 has caused a

decline in sales of our CBD products, and if disruptions from the

COVID-19 outbreak are prolonged, it will continue to have an

adverse impact on our business.

NOTE 2 –

67 unchanged sentences

its condensed consolidated financial statements and related

Reclassifications

              Prior

period financial statement amounts are reclassified as necessary to

conform to the current period presentation.

These prior period

reclassifications did not affect the Company’s net loss, loss

per share, stockholders’

equity (deficit) or working

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 –

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each level in the hierarchy is described below:

1 - Unadjusted quoted prices in active markets for identical

Level 1 - Unadjusted quoted prices in active markets for identical

instruments that are accessible by the Company on the measurement

2 - Quoted prices in markets that are not active or inputs which

are either directly or indirectly observable.

3 - Unobservable inputs for the instrument requiring the

Level 2 - Quoted prices in markets that are not active or inputs

which are either directly or indirectly observable.

Level 3 - Unobservable inputs for the instrument requiring the

development of assumptions by the Company.

1 unchanged sentence

at fair value on a recurring basis into the fair value hierarchy as

of March 31, 2020 and December 31, 2019 (amount in

Value at March 31, 2020  

of June 30, 2020 and December 31, 2019 (amount in

Value at June 30, 2020

liability - Warrants

1 unchanged sentence

$ 3,534  

Value at December 31, 2019  

liability - Warrants

1 unchanged sentence

$ 4,144  

were no transfers between Level 1, 2 or 3 during the three-month

period ended March 31, 2020.

were no transfers between Level 1, 2 or 3 during the six-month

period ended June 30, 2020.

following table presents changes in Level 3 liabilities measured at

fair value for the three-month period ended March 31, 2020.

fair value for the six-month period ended June 30, 2020.

observable and unobservable inputs were used to determine the

8 unchanged sentences

thousands).   

liability - Warrants

Derivative liability

at January 1, 2020

1 unchanged sentence

in fair value

at March 31, 2020

at June 30, 2020

$ 3,534  

3 unchanged sentences

that are categorized within Level 3 of the fair value hierarchy as

of March 31, 2020 and December 31, 2019 is as follows:

of June 30, 2020 and December 31, 2019 is as follows:

$ 0.0044  

yield (per share)

Contractual term

Dividend yield (per

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 –

16 unchanged sentences

was approximately $ 1,638,000 .

$ 1,638,000 .

The market condition awards were valued using a

Monte Carlo simulation technique, a risk-free interest rate of

1.44% and a volatility of 75% based on volatility over 3 years

using daily stock prices.

For the three months ended March 31,

2020, the Company recorded an expense of $ 1,321,700 for

these awards.

In addition, as these market awards were eliminated

during the first quarter of 2020 (see paragraph below), the Company

reversed the entire compensation liability of $1,638,000 to

Additional Paid In Capital during the quarter ended March 31,

market condition awards were valued using a Monte Carlo simulation

technique, a risk-free interest rate of 1.44% and a volatility of

75% based on volatility over 3 years using daily stock prices.

the six months ended June 30, 2020, the Company recorded an expense

of $ 1,322,000

for these awards.

In addition, as

these market awards were eliminated during the first quarter of

2020 (see paragraph below), the Company reversed the entire

compensation liability of $1,638,000 to Additional Paid In Capital

during the six months ended June 30, 2020.

February 12, 2020, the Company, entered into a form of Amended and

38 unchanged sentences

recorded stock-based compensation of approximately

$ 282,082 during the three months ended March 31,

$ 564,000 during the six months ended June 30,

NOTE 5 - PROPERTY AND EQUIPMENT

Equipment detail as of March 31, 2020 and December 31, 2019 are as

Equipment detail as of June 30, 2020 and December 31, 2019 are as

follows (amount in thousands):

and equipment

of lease term

estimated useful life

Lesser of lease

term or estimated useful life

Depreciation and

amortization expense totaled $43,000 and $9,000, respectively,

during the three months ended March 31, 2020 and 2019.

during the three months ended June 30, 2020 and 2019.

and amortization expense totaled $83,000 and $12,000, respectively,

during the six months ended June 30, 2020 and 2019.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - CONCENTRATIONS

The Company’s concentration of purchases are as

Company’s concentration of purchases are as

three months ended

the three months ended March 31, 2020, purchases from four vendors

represented 78% of total inventory purchases.

During the three

months ended March 31, 2019, purchases from four vendors

represented 91% of total inventory purchases.

March 31, 2020, and December 31, 2019, amounts owed to these

vendors totaled $1,172,500 and $68,000 respectively, which are

included in accounts payable in the accompanying condensed

six months ended

the three months ended June 30, 2020 and 2019, purchases from four

vendors represented 86% and 77%, respectively, of total inventory

During the six months ended June 30, 2020 and 2019,

purchases from four vendors represented 79% and 84%, respectively,

of total inventory purchases.

June 30, 2020, and December 31, 2019, amounts owed to these vendors

totaled $634,000 and $68,000 respectively, which are included in

accounts payable and accrued expenses in the accompanying condensed

consolidated balance sheets.

Accounts Receivable

The Company’s concentration of accounts receivable are as

customer made up more than 10% of accounts receivable at March 31,

Customer A owed the Company a total of $109,600, representing

7% of net receivables.

One customer made up more than 10% of net

accounts receivable at December

Customer A owed the Company a total of

$ 211,000 , representing 23% of

net receivables.

No customer exceeded 10% of total net sales for

the three-month periods ended March 31, 2020 and March 31, 2019,

respectively.

Company’s concentration of accounts receivable are as

customer made up more than 10% of accounts receivable at June 30,

One customer made up more than 10% of net accounts receivable

at December 31 , 2019.

A owed the Company a total of $ 211,000 , representing 23% of net

receivables at December 31, 2019.

No customer exceeded 10% of total

net sales for the three and six month periods ended June 30, 2020

and 2019, respectively.

NOTE 7 –

33 unchanged sentences

non-controlling interests are recorded.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 –

ACCOUNTS PAYABLE AND ACCRUED

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable

and accrued expense as of March 31, 2020 and December 31, 2019 are

and accrued expense as of June 30, 2020 and December 31, 2019 are

as follows (amounts in thousands):

$ 1,638  

accrued expense

accrued expenses

$ 2,433  

1 unchanged sentence

NOTE 9 –

EARNINGS (LOSS) PER SHARE APPLICABLE TO COMMON

earnings (loss) per common share is computed by dividing net income

by the weighted average number of common shares outstanding during

the reporting period.

Diluted earnings (loss) per common share is

computed similar to basic earnings per common share except that it

reflects the potential dilution that could occur if dilutive

securities or other obligations to issue common stock were

exercised or converted into common stock.

Diluted weighted average

common shares include common stock potentially issuable under the

Company’s preferred stock, warrants and vested and unvested

stock options.

following table sets forth the computation of earnings per share

for the three months ended March 31, 2020 and 2019, respectively

(amounts in thousands except per share data): 

three months ended  

(loss) earnings - basic

$ 2,476  

(loss) earnings - diluted

$ 2,476  

average shares outstanding - basic

18,973,921,000  

141,041,000  

B convertible preferred shares

13,963,048,000  

average shares outstanding - diluted

18,973,921,000  

NOTES PAYABLE

Red Beard Holdings, LLC Note Payable

April 1, 2020, the Company, Charlie's and its variable interest

entity, Don Polly, issued a secured promissory note (the

" Note ") to one of the

Company's largest stockholders, Red Beard Holdings, LLC (the

" Lender ") in the principal

amount of $750,000, which Note is secured by all 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 ").

Note requires the payment of principal and guaranteed minimum

interest in the amount of $75,000 on or before the earlier date of

(i) a Liquidity Event, as defined under the terms of the Note;

(ii) October 1, 2020.

In addition, if there

is an occurrence of an event of default, then, in addition to the

guaranteed minimum interest, the principal and unpaid interest and

unpaid other amounts under this Note shall, at the election of the

Holder in its sole and absolute discretion, bear interest at the

lesser of a rate equal to 20% per annum or the maximum default

Such interest shall accrue daily commencing on occurrence of

such event of default until payment in full of the Principal

Amount, together with all accrued and unpaid interest and other

amounts which may become due hereunder, has been

Company used the proceeds from the Note Financing for general

corporate purposes, and its working capital requirements, pending

availability of long-term investment

capital.  

Small Business Administration Loan Programs

On April 30, 2020,

Charlie's, a wholly owned subsidiary of the Company, received

approval to enter into a U.S.

Small Business Administration

Promissory Note (the " PPP

Loan ") with TBK Bank, SSB

Lender "), pursuant to the

Paycheck Protection Program (" PPP ")

of the Coronavirus Aid, Relief, and Economic Security Act (the

Act ") as administered by

the SBA (the " Loan

Agreement ").

The PPP Loan provides for working capital to CCD in the amount of

The PPP Loan will mature on April 30, 2022 and will

accrue interest at a rate of 1.00% per annum.

Payments of principal

and interest will be deferred for six months from the date of the

PPP Loan, or until November 30, 2020.

Interest, however, will

continue to accrue during this time.

On April 14, 2020, Don

Polly, a related company, which is consolidated as a Variable

Interest Entity (“

VIE ”)

of the Company, also obtained a PPP Loan from Community Banks of

Colorado, a division of NBH Bank (the " Polly

obtained by Don Polly provides for working capital to Don Polly in

the amount of $215,600.

The PPP Loan will mature on April 14, 2022

and will accrue interest at a rate of 1.00% per annum.

principal and interest will be deferred for six months from the

date of the PPP Loan, or until November 14, 2020.

however, will continue to accrue during this

The aforementioned PPP Loans were made under the PPP enacted by

Congress under the CARES Act.

The CARES Act (including the guidance

issued by SBA and U.S.

Department of the Treasury) provides that

all or a portion of the PPP Loans may be forgiven upon request from

the Company to the SBA Lender or the Polly Lender, as the case may

be, subject to requirements in the PPP Loans and under the CARES

On June 24, 2020, SBA authorized (under Section 7(b) of the Small

Business Act, as amended) an Economic Injury Disaster Loan

EID Loan ”) to

Don Polly in the amount of $150,000.

Installment payments,

including principal and interest of $731 monthly will begin twelve

months from date of the EID Loan agreement.

The balance of

principal and interest will be payable thirty years from the date

of the EID Loan agreement and interest will accrue at the rate of

3.75% per annum.

The following summarizes the Company’s note payable

maturities as of June 30, 2020 (amount in thousands):

months ended December 31, 2020

Ended December 31, 2021

Ended December 31, 2022

Ended December 31, 2023

Ended December 31, 2024

$ 1,766  

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 –

LOSS PER SHARE APPLICABLE TO COMMON

loss per common share is computed by dividing net income by the

weighted average number of common shares outstanding during the

reporting period.

Diluted loss per common share is computed similar

to basic earnings per common share except that it reflects the

potential dilution that could occur if dilutive securities or other

obligations to issue common stock were exercised or converted into

common stock.

Diluted weighted average common shares include common

stock potentially issuable under the Company’s preferred

stock, warrants and vested and unvested stock options.

following securities were not included in the diluted net earnings

1 unchanged sentence

the periods presented (in thousands):

three months ended  

six months ended

801,325  

61,825  

A convertible preferred stock

A convertible preferred shares

5,564,296  

2 unchanged sentences

4,033,769  

10,399,390  

8,749,993  

NOTE 11 –

STOCKHOLDERS’

Series A Preferred Share Dividend

April 25, 2020, the Company was required to pay a one-time dividend

equal to eight percent (8%) of the stated value of its Series A

Preferred, equal to $1,650,000 (“

Dividend Amount ”), which Dividend

Amount was required to be paid in cash on or before April 25, 2020.

As of June 30, 2020, The Company has not paid the dividend and has

reflected the liability on its consolidated balance

Conversion of Series A Preferred Shares

For the three months ended March 31, 2020, the

Company issued approximately 8,462,528 in common stock upon

conversion shares as 375 shares of Series A Convertible Preferred

Stock (“

For the six months ended June 30, 2020, the

Company issued approximately 16,925,000 shares of common stock upon

conversion of 750 shares of Series A Convertible Preferred Stock

Preferred ”).

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 –

15 unchanged sentences

stock options.

As of March 31, 2020, approximately 61.8 million of

As of June 30, 2020, approximately 61.8 million of

these stock options remain vested and exercisable under this

23 unchanged sentences

purchased on the open market or otherwise.

March 31, 2020, there was approximately $ 715,700 of total unrecognized compensation

June 30, 2020, there was approximately $ 515,000 of total unrecognized compensation

expense related to non-vested share-based compensation arrangements

2 unchanged sentences

over a weighted average period of 2 years.

For the three months ended March 31, 2020, the

Company recorded compensation expense of $249,200 related to the

issuance of stock options.

For the six months ended June 30, 2020, the

Company recorded compensation expense of approximately $450,000

related to the granting of stock options.

NOTE 13 –

46 unchanged sentences

The total amount paid to related parties for the

three months ended March 31, 2020 is $68,820.

March 31, 2020, the Company had operating lease liabilities of

three and six months ended June 30, 2020 was approximately $68,820

and $137,640, respectively.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020, the Company had operating lease liabilities of

approximately $1,439,000 and right of use assets of approximately

$1,522,000, which were included in the consolidated balance

$1,418,000, which were included in the condensed consolidated

balance sheet.

following summarizes quantitative information about the

Company’s operating leases for the three months ended March

31, 2020 and 2019 (amount in thousands):

three months ended  

Company’s operating leases for the three and six months ended

June 30, 2020 and 2019 (amount in thousands):

three months ended

six months ended

   Operating

   Variable

lease expense

lease rent expense

three months ended  

Operating lease

Short-term lease

six months ended

cash flows from operating leases

5 unchanged sentences

operating leases

of our operating leases as of March 31, 2020, excluding short-term

leases, are as follows:

months ended December 31, 2020

Ended December 31, 2021

Ended December 31, 2022

Ended December 31, 2023

of our operating leases as of June 30, 2020, excluding short-term

leases, are as follows (amount in thousands):

Remaining months

ended December 31, 2020

present value discount

lease liabilities as of March 31, 2020

Year Ended December

Less present value

Operating lease

liabilities as of June 30, 2020

$ 1,439  

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Legal Proceedings

19 unchanged sentences

The probability of any loss cannot be determined at this

NOTE 14- SUBSEQUENT EVENTS

Company has evaluated events subsequent to March 31, 2020 to assess

the need for potential recognition or disclosure in this report.

Such events were evaluated through the date these financial

statements were available to be issued.

Based upon this evaluation

the following items were noted.

April 1, 2020, the Company, Charlie's and its variable interest

entity, Don Polly, issued a secured promissory note (the

" Note ") to one of the

Company's largest stockholders, Red Beard Holdings, LLC (the

" Lender ") in the principal

amount of $750,000, which Note is secured by all 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 ").

Note requires the payment of principal and guaranteed interest in

the amount of at least $75,000 on or before the earlier date of (i)

a Liquidity Event, as defined under the terms of the Note;

August 13, 2020, the Company received a formal notice of default

from a holder of its Series A Preferred requesting full payment of

dividends due and payable with respect to the Series A Preferred

held by such holder on or before August 23, 2020

Default ”).

As disclosed in Note 11, the aggregate

amount of dividends due and payable to holders of the Series A

Preferred is $1,650,000.

result of the Dividend Default, all amounts due and payable under

the terms of the Note issued to the Lender, as described in Note 9,

shall, at the election of the Lender, bear interest at the lesser

of a rate equal to 20% per annum or the maximum lawful rate

authorized under applicable law, until such Note is paid in full.

The Note is due and payable on or before the earlier date of (i) a

Liquidity Event, as defined under the terms of the Note, or (ii)

October 1, 2020.

The Company intends to use the proceeds from the

Note Financing for general corporate purposes, and its working

capital requirements, pending availability of long-term working

On April 30, 2020,

Charlie's, a wholly owned subsidiary of the Company, received

approval to enter into a U.S.

Small Business Administration

Promissory Note (the " PPP

Loan ") with TBK Bank, SSB

Lender "), pursuant to the

Paycheck Protection Program (" PPP ")

of the Coronavirus Aid, Relief, and Economic Security Act (the

Act ") as administered by

the SBA (the " Loan

Agreement ").

The PPP Loan provides for working capital to CCD in the amount of

The PPP Loan will mature on April 30, 2022 and will

accrue interest at a rate of 1.00% per annum.

Payments of principal

and interest will be deferred for six months from the date of the

PPP Loan, or until November 30, 2020.

Interest, however, will

continue to accrue during this time.

On April 14, 2020, Don Polly, a related company, which is

consolidated as a Variable Interest Entity (“

VIE ”) of the Company, also

obtained a PPP Loan from Community Banks of Colorado, a division of

NBH Bank (the " Polly

The PPP Loan obtained by Don Polly provides for

working capital to Don Polly in the amount of $215,600.

Loan will mature on April 14, 2022 and will accrue interest at a

rate of 1.00% per annum.

Payments of principal and interest will be

deferred for six months from the date of the PPP Loan, or until

November 14, 2020.

Interest, however, will continue to accrue

during this time.

The aforementioned PPP Loans were made under the PPP enacted by

Congress under the CARES Act.

The CARES Act (including the guidance

issued by SBA and U.S.

Department of the Treasury) provides that

all or a portion of the PPP Loans may be forgiven upon request from

the Company to the SBA Lender or the Polly Lender, as the case may

be, subject to requirements in the PPP Loans and under the CARES

April 25, 2020, the Company was required to pay a one-time dividend

equal to eight percent (8%) of the stated value of its Series A

Preferred, equal to $1,650,000 (“

Dividend Amount ”), which Dividend

Amount was required to be paid in cash on or before April 25, 2020.

The Company failed to pay the required dividend and has requested

that holders of more than 50% of the Series A Preferred issued and

outstanding (“

Holders ”) consent to an amendment to the Series A

Preferred to allow the Company to pay such Dividend Amount in

shares of the Company’s common stock.

On May 8, 2020, the Company issued approximately

8,462,528 shares of common stock upon conversion of 375 shares of

Series A Preferred (not related to the shares described in Note 10

ITEM 2 - MANA G EMENT'S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

While no assurances can be given, management is

currently negotiating with the Lender regarding repayment of the

Note in full.

Company has evaluated events subsequent to June 30, 2020 to assess

the need for potential recognition or disclosure in the unaudited

condensed consolidated financial statements.

Such events were

evaluated through the date these financial statements were

available to be issued.

Based upon this evaluation, other than as

set forth above, there were no items requiring

ITEM 2 - MANA GEMENT'S

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

The following discussion of the financial condition and results of

90 unchanged sentences

expand our marketing and distribution reach.

In order to increase

direct-to-consumer e-commerce sales of CBD products, we have also

dedicated an internal team as well as additional financial

However, effects from the recent COVID-19 outbreak and

pandemic have had a more significant impact on our CBD products

business and may continue to do so in future

we see a significant opportunity for sales growth in international

10 unchanged sentences

our plan to obtain marketing authorization for certain of our

products through the submission of a Premarket Tobacco Application

PMTA ”), which

is due in September 2020.

We expect the cost associated with the

preparation and submission of these PMTAs will be approximately

$4.4 million in total.

In addition, we are evaluating the potential

returns associated with obtaining marketing authorization for our

other nicotine based vaping products after the September 2020

products through the submission of a PMTA, which is due in

September 2020.

We expect the cost associated with the preparation

and submission of these PMTAs will be approximately $4.4 million in

In addition, we are evaluating the potential returns

associated with obtaining marketing authorization for our other

nicotine based vaping products after the September 2020

deadline. We feel that a significant amount of our competitors

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March 11, 2020, the World Health Organization designated the

ongoing and evolving coronavirus (“

COVID-19 ”) outbreak as a

The outbreak has caused substantial disruption in

international and U.S.

economies and markets as it continues to

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.

The financial impact from COVID-19

on our business cannot be reasonably estimated at this time,

however recent sales activity has shown a decline in sales of CBD

products and, if disruptions from the COVID-19 outbreak are

prolonged, it will continue to have an adverse impact on our

Current Operating Trends and Financial Highlights

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:

results from operations for the quarter ended March 31, 2020, we

generated revenue of approximately $4,405,000, as compared to

revenue of $6,648,000 for the three months ended March 31,

This $2,243,000 decrease in revenue was due primarily to an

$3,120,000 decrease in sales of our nicotine-based products, offset

by $877,000 of sales from our CBD based products, which were

introduced in June of 2019.

generated a net loss for the three months ended March 31, 2020 of

approximately $3,916,000, as compared to net income of

approximately $2,476,000 for the three months ended March 31, 2019.

The net loss for the three months ended March 31, 2020 includes

non-cash stock-based compensation expense of approximately

$1,853,000 offset by a non-cash gain in fair value of derivative

liabilities of $430,000.

In addition, the Company expensed

$2,223,000 of consulting fees for the three months ended March 31,

2020 as a result of the PMTA registration process.

review of the three month period ended March 31, 2020

ongoing and evolving COVID-19 outbreak as a pandemic.

has caused substantial disruption in international and U.S.

economies and markets as it continues to spread.

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. 

The financial impact from COVID-19 has caused a

decline in sales of our CBD products, and if disruptions from the

COVID-19 outbreak are prolonged, it will continue to have an

adverse impact on our business.

Basis of Presentation

The unaudited interim condensed consolidated

financial statements contained elsewhere in this Report and the

disclosure in this Management’s Discussion and Analysis of

Financial Condition and Results of Operations have been prepared

pursuant to the rules and regulations of the Securities and

Exchange Commission (the “

SEC ”).

Certain information and footnote

disclosures normally included in financial statements prepared in

accordance with accounting principles generally accepted in the

United States of America (“

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.

related to disclosure of December 31, 2019 balances within the

interim condensed consolidated financial statements were derived

from audited financial statements and notes thereto included in the

Company’s Form 10-K for the year ended December 31, 2019.

the opinion of the Company, all adjustments, including normal

recurring adjustments necessary to present fairly the financial

position, results of operations, and cash flows of the Company for

the interim period have been included.

The results of operations

for the interim period are not necessarily indicative of the

results for any subsequent interim period or for the full

Share Exchange is accounted for as a reverse recapitalization under

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recapitalization of the Company and the Charlie’s Financing.

In addition, from the period April 26, 2019 until March 2020, there

were minimal costs and revenue associated with the Bazi product

line which are included in the consolidated financial statements.

We do not intend to continue to produce and sell the Bazi product

line, and these costs and expenses are nominal and will continue to

be so in the future.

The operating results of Don Polly for the

three months ended March 31, 2020 are also included.

In addition, from the period April 26, 2019 until June 30, 2020,

there were minimal costs and revenue associated with the Bazi

product line which are included in the consolidated financial

We do not intend to continue to produce and sell the

Bazi product line, and these costs and expenses are nominal and

will continue to be so in the future.

The operating results of Don

Polly for the three and six months ended June 30, 2020 are also

financial information presented prior to April 26, 2019 is that of

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Share Exchange, along with ongoing corporate costs.

Results of Operations for the Three Months Ended March 31, 2020

Compared to the Three Months Ended March 31, 2019.

Current Operating Trends and Financial Highlights

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:

results from operations for the quarter ended June 30, 2020, we

generated revenue of approximately $4,163,000, as compared to

revenue of $6,819,000 for the three months ended June 30,

This $2,656,000 decrease in revenue was due primarily to a

$2,064,000 decrease in sales of our nicotine-based products and a

$571,000 decrease in sales of our CBD based products, which were

introduced in June of 2019.

generated a net loss for the three months ended June 30, 2020 of

approximately $644,000, as compared to net loss of approximately

$3,033,000 for the three months ended June 30, 2019.

for the three months ended June 30, 2020 includes non-cash

stock-based compensation expense of approximately $483,000 offset

by a non-cash gain in fair value of derivative liabilities of

In addition, the Company expensed $400,000 of consulting

fees for the three months ended June 30, 2020 as a result of the

PMTA registration process.

results from operations for the six months ended June 30, 2020, we

generated revenue of approximately $8,568,000, as compared to

revenue of $13,466,000 for the six months ended June 30,

This $4,898,000 decrease in revenue was due primarily to a

$5,184,000 decrease in sales of our nicotine-based products, offset

by a $306,000 increase in sales from our CBD products, which were

introduced in June of 2019.

generated a net loss for the six months ended June 30, 2020 of

approximately $4,560,000, as compared to net loss of approximately

$558,000 for the six months ended June 30, 2019.

The net loss for

the six months ended June 30, 2020 includes non-cash stock-based

compensation expense of approximately $2,336,000 offset by a

non-cash gain in fair value of derivative liabilities of $610,000.

In addition, the Company expensed $2,623,000 of consulting fees for

the six months ended June 30, 2020 as a result of the PMTA

registration process.

review of the three and six month period ended June 30, 2020

Results of Operations for the Three Months Ended June 30, 2020

Compared to the Three Months Ended June 30, 2019

three months ended

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$ 6,819  

Operating costs and expense:

Operating costs and expenses:

of goods sold - product revenue

2 unchanged sentences

and development

operating costs and expense

income from operations

Other income:

operating costs and expenses

10,030  

from operations

Other income (expense):

in fair value of derivative liabilities

Net (loss) income

$ 2,389  

Revenue for the three months ended March 31, 2020

Revenue for the three months ended June 30, 2020

decreased approximately $2,656,000 or 38.9%, to approximately

1 unchanged sentence

in 2019 due to a $2,064,000 decrease in our nicotine-based product

sales, offset by the addition of sales from our CBD wellness

products business of $877,000.

The decrease in sales in our

nicotine based e-liquid flavor sales is directly related to the

current regulatory and health related news stories surrounding the

vaping industry.

based e-liquid sales decline began late in the quarter ended

September 30, 2019 and we expect sales in future quarters to be

affected until the regulatory environment becomes clear.

addition, in late February 2020, sales of our CBD wellness products

began to experience a decrease as the effects of the global

COVID-19 pandemic caused disruptions in the global economy,

however, we did not see a material decrease in our nicotine based

e-liquid products.

sales and a $571,000 decrease in sales of our CBD wellness

The decrease in our nicotine based e-liquid flavor sales

is 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 affected until the regulatory environment

becomes clear.

Uncertainty surrounding the FDA’s application

review timeline, following the PMTA submission deadline, has also

affected buying patterns in the domestic vape market.

in late February 2020, sales of our CBD wellness products began to

experience a decrease as the effects of the global COVID-19

pandemic caused disruptions in the global economy, however, we did

not see a material decrease in our nicotine based e-liquid

Cost of Revenue

2 unchanged sentences

decreased approximately $1,114,000, or 39.1%, to approximately

$1,963,000, or 44.6% of revenue, for the three months ended March

$1,732,000, or 41.6% of revenue, for the three months ended June

30, 2020, as compared to approximately $2,846,000, or 41.7% of

revenue, for the same period in 2019.

This 3.2% percent increase in

the cost of revenue is due to an increase in the sales mix to

distributors and retailers participating in volume incentive

programs, a higher provision for returns and lower fixed cost

absorption, but was slightly offset by relatively stable

manufacturing costs.

This cost, as a percent of

revenue, remained relatively unchanged due to an increase in the

sales mix to distributors and retailers participating in volume

incentive programs and a higher provision for returns, but was

offset by relatively stable manufacturing costs, added margin from

direct-to-consumer e-commerce sales of CBD products and more

favorable fixed cost absorption.

General and Administrative Expenses

the three months ended March 31, 2020, total general and

administrative expense increased approximately $3,148,000 to

the three months ended June 30, 2020, total general and

administrative expense decreased approximately $3,946,000 to

$2,428,000 as compared to approximately $6,374,000 for the same

period in 2019.

Costs relating to the completion of our share

exchange on April 26, 2019 accounted for part of the $3.1 million

increase, including $1,853,000 of non-cash stock-based compensation

The remaining $1.3 million is primarily due to

professional fees and increased salaries associated with conducting

business as a public company and certain step-up costs related to

new business activities, including the launch of our CBD business.

For the three months ended March 31, 2020, General and

Administrative expense included the salaries of our CEO and COO, a

total of approximately $250,000, which was not included in the same

period in 2019, as the Company was a privately held limited

liability company and the owners relied on equity distributions

rather than salaries.

This decrease is comprised of approximately $4.4

million of non-cash, stock-based compensation, employee bonus and

other transaction costs related to the share exchange expensed in

the quarter ended June 30, 2019, offset by an increase of

approximately $500,000 in various other general and administrative

expenses during the quarter ended June 30, 2020.

The decrease in

transaction related costs includes $2.6 million in additional

non-cash, stock-based compensation, $1.6 million of employee

bonuses and $150,000 of other expenses incurred as a result of our

share exchange in 2019.

Payroll, insurance and bad debt expenses

experienced the most significant year over year change during the

quarter ended June 30, 2020 and accounted for approximately

$435,000 of the $500,000 increase in other general and

administrative expenses.

In response to changes in the global

economic situation, management adopted a 15% reduction in pay for

May and June 2020 and reduced personnel across several departments

which resulted in approximately $170,000 of savings during the

quarter ended June 30, 2020.

Sales and Marketing Expense

the three months ended March 31, 2020, total sales and marketing

expense increased approximately $5,000, or 1.2%, to approximately

$419,000 as compared to approximately $414,000 for the same period

in 2019, which was primarily due to higher commissions paid for new

customer acquisition and enhanced marketing efforts for our CBD

the three months ended June 30, 2020, total sales and marketing

expense decreased approximately $457,000, or 56.4%, to

approximately $353,000 as compared to approximately $810,000 for

the same period in 2019, which was primarily due to lower

commissions paid for reduced sales and curtailed spending on

several marketing programs due to uncertainty in the global

Research and Development Expense

the three months ended March 31, 2020, total research and

the three months ended June 30, 2020, total research and

development expense increased approximately $408,000, to

approximately $2,223,000 as compared to approximately $5,000 for

the same period in 2019, which was primarily due to incurring costs

associated with our PMTA registrations.

Income (Loss) from Operations

had operating losses of approximately $4,351,000 for the three

months ended March 31, 2020, due primarily to a $3,148,000 million

increase in general and administrative expense as we grow the

business, a $2,218,000 increase in research and development expense

related to the PMTA registration of some of our products and a

decline in our nicotine-based product sales of $3,120,000 as

compared to the same period in 2019, offset by an increase in sales

from our CBD products business of $877,000.

For the three months

ended March 31, 2019, we had operating income of approximately

$2,476,000 from our branded nicotine-based e-cigarette liquid

Net (loss) Income is determined by adjusting income from

approximately $408,000 as compared to $0 for the same period in

2019, which was primarily due to incurring costs associated with

our PMTA registrations.

Loss from Operations

had operating losses of approximately $758,000 for the three months

ended June 30, 2020, due primarily to a $2,064,000 decrease in

sales for our nicotine-based product business and a $571,000

decrease in sales for our CBD products.

We incurred certain general

and administrative expenses that contributed to the loss from

operations including a $408,000 increase in research and

development expense related to the PMTA registration of some of our

products and $483,000 of expenses related to non-cash, stock-based

compensation.

Net loss is determined by adjusting loss from

operations by the following items:

Gain in Fair Value of Derivative Liabilities

the three months ended March 31, 2020 and 2019, the gain in fair

value of derivative liabilities was $430,000 and $0, respectively.

Gain in Fair Value of

Derivative Liabilities.

the three months ended June 30, 2020 and 2019, the gain in fair

value of derivative liabilities was $180,000 and $178,000

respectively.

The derivative liability is associated with the

issuance of the Investor Warrants and the Placement Agent Warrants

in connection with the Share Exchange and the gain for the quarter

ended June 30, 2020 and 2019 reflects the effect of the change in

stock price on the liability associated with the issuance of these

the three months ended June 30, 2020, we recorded $76,000 of

interest expense related to notes

the three months ended June 30, 2020, we had a net loss of $644,000

as compared to net loss of $3,033,000 for the same period in

Results of Operations for the Six Months Ended June 30, 2020

Compared to the Six Months Ended June 30, 2019

six months ended

($ in thousands)

$ 8,568  

$ 13,466  

13,466  

Operating costs and expenses:

of goods sold - product revenue

and administrative

and marketing

and development

operating costs and expenses

13,677  

14,202  

from operations

Other income (expense):

in fair value of derivative liabilities

Revenue for the six months ended June 30, 2020

decreased approximately $4,898,000 or 36.4%, to approximately

$8,568,000, as compared to approximately $13,466,000 for same

period in 2019 due to a $5,184,000 decrease in our nicotine-based

product sales, offset an increase in sales from our CBD wellness

products business of $306,000.

The decrease in our nicotine based

e-liquid flavor sales is directly related to the current regulatory

and health related news stories surrounding the vaping

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 affected

until the regulatory environment becomes clear.

surrounding the FDA’s application review timeline, following

the PMTA submission deadline, has also affected buying patterns in

the domestic vape market.

In addition, in late February 2020, sales

of our CBD wellness products began to experience a decrease as the

effects of the global COVID-19 pandemic caused disruptions in the

global economy, however, we did not see a material decrease in our

nicotine based e-liquid products.

Cost of Revenue

of revenue, which consists of direct costs of materials, direct

labor, third party subcontractor services, and other overhead costs

decreased approximately $1,901,000, or 34%, to approximately

3,695,000, or 43.1% of revenue, for the six months ended June 30,

2020, as compared to approximately $5,596,000, or 41.6% of revenue,

for the same period in 2019.

This 1.5% percent increase in the cost

of revenue is due to an increase in the sales mix to distributors

and retailers participating in volume incentive programs and a

higher provision for returns, but was offset by relatively stable

manufacturing costs, added margin from direct-to-consumer

e-commerce sales of CBD products and slightly better fixed cost

General and Administrative Expenses

the six months ended June 30, 2020, total general and

administrative expense decreased approximately $602,000 to

$6,427,000 as compared to approximately $7,029,000 for the same

period in 2019.

This decrease is comprised of approximately $2.5

million of non-cash, stock-based compensation, employee bonus and

other transaction costs related to the share exchange expensed in

the six months ended June 30, 2019, offset by an increase of

approximately $1.9 million in various other general and

administrative expenses during the six months ended June 30, 2020.

The decrease in transaction related costs includes $741,000 in

additional non-cash, stock-based compensation, $1.6 million of

employee bonuses and $150,000 of other expenses incurred as a

result of our share exchange in 2019.

Payroll, insurance and bad

debt expenses experienced the most significant year over year

change during the six months ended June 30, 2020 and accounted for

approximately $1.3 million of the $1.9 million increase in other

general and administrative expenses.

In response to changes in the

global economic situation, management adopted a 15% reduction in

pay for May and June 2020 and reduced personnel across several

departments which resulted in approximately $170,000 of savings

during the six months ended June 30, 2020.

Sales and Marketing Expense

the six months ended June 30, 2020, total sales and marketing

expense decreased approximately $653,000, or 41.4 %, to

approximately $924,000 as compared to approximately $1,577,000 for

the same period in 2019, which was primarily due to lower

commissions paid for reduced sales and curtailed spending on

several marketing programs due to uncertainty in the global

Research and Development Expense

the six months ended June 30, 2020, total research and development

expense increased approximately $2,631,000, to approximately

$2,631,000 as compared to approximately $0 for the same period in

2019, which was primarily due to incurring costs associated with

our PMTA registrations.

Loss from Operations

had operating losses of approximately $5,109,000 for the six months

ended June 30, 2020, due primarily to a $5,184,000 decrease in

sales from our nicotine-based product business, but was offset by a

$306,000 increase in sales for our CBD products business.

incurred certain general and administrative expenses that

contributed to the loss from operations including a $2,631,000

increase in research and development expense related to the PMTA

registration of some of our products and $2,336,000 of expenses

related to non-cash, stock-based compensation.

determined by adjusting income from operations by the following

Gain in Fair Value of

Derivative Liabilities.

the six months ended June 30, 2020 and 2019, the gain in fair value

of derivative liabilities was $610,000 and $178,000 respectively.

The derivative liability is associated with the issuance of the

Investor Warrants and the Placement Agent Warrants in connection

with the Share Exchange and the gain for the quarter ended March

31, 2020 reflects the effect of the change in stock price on the

liability associated with the issuance of these warrants.

were no warrants outstanding on March 31, 2019.

the three months ended March 31, 2020, we had a net loss of

$3,916,000 as compared to net income of $2,476,000 for the same

period in 2019. 

with the Share Exchange and the gain for the six months ended June

30, 2020 and 2019 reflects the effect of the change in stock price

on the liability associated with the issuance of these

the three months ended June 30, 2020, we recorded $76,000 of

interest expense related to notes payable.

the six months ended June 30, 2020, we had a net loss of $4,560,000

as compared to net loss of $558,000 for the same period in

Effects of Inflation

1 unchanged sentence

Liquidity and Capital Resources

As of March 31, 2020, we had negative working

As of June 30, 2020, we had negative working

capital of approximately $4,156,000, which consisted of current

3 unchanged sentences

of approximately $1,566,000 at December 31, 2019.

liabilities, as presented in the balance sheet at March 31, 2020

included elsewhere in this Quarterly Report on Form 10-Q, primarily

include approximately $3,238,000 of accounts payable and accrued

expense, approximately $74,000 of deferred revenue associated with

product shipped but not yet received by customers, approximately

$1,543,000 of lease liabilities and $3,714,000 of derivative

liability associated with the Member Warrants.

(the derivative

liability of $3,714,000 is included in determining the negative

working capital of $3,330,000 but is not expected to use any cash

to ultimately satisfy the liability).

liabilities, as presented in the condensed consolidated balance

sheet at June 30, 2020 included elsewhere in this Quarterly Report

on Form 10-Q primarily include approximately $2,433,000 of accounts

payable and accrued expenses, approximately $252,000 of deferred

revenue associated with product shipped but not yet received by

customers, approximately $445,000 of lease liabilities, notes

payable of $750,000, dividends payable of $1,650,000 and $3,534,000

of derivative liability associated with the Member Warrants.

derivative liability of $3,534,000 is included in determining the

negative working capital of $4,156,000 but is not expected to use

any cash to ultimately satisfy the liability).

In addition, the effect of the COVID-19 pandemic

may have a negative impact on our liquidity and capital

cash and cash equivalents balance at March 31, 2020 was

cash and cash equivalents balance at June 30, 2020 was

approximately $1,464,000.

For the three months ended March 31, 2020 we used

For the six months ended June 30, 2020 we used

cash from operations of $2,638,000, as compared to generating cash of

$247,000 for the same period in 2019.

This decline in the cash generated from operations is due

primarily to an increase in accounts receivable, inventories and

prepaid expense.

For the three months ended March 31, 2020 we used

This decline in the cash generated from operations is due primarily

to a net loss of $4,560,000, and an increase in accounts receivable

and inventories, but was offset by an increase in prepaid

For the six months ended June 30, 2020 we used

cash for investment activities of $112,000 as compared to

2 unchanged sentences

development and configuration phase of enterprise resource planning

software being implemented during the period ended March 31,

the three months ended March 31, 2020 there was no cash used or

generated from financing activities, as compared to a use of cash

of $979,000 for the same period in 2019.

In the 2019 period, we

used cash from financing activities for Member distributions to the

former Members of Charlie’s.

The Charlie’s Member

distributions were all prior to or part of the Share Exchange and

no further distributions will be made as Charlie’s is now a

wholly-owned subsidiary of the Company.

software being implemented during the six months ended June 30,

the six months ended June 30, 2020 we generated approximately

$1,766,000 cash from financing activities, as compared to the

generation of cash of $4,751,000 for the same period in 2019.

the 2020 period, we generated cash from financing activities from

the issuance of the note payable and funds received from PPP and

In the 2019 period, we generated cash from financing

activities from the Charlie’s Financing, which was offset by

Member distributions to the former Members of Charlie’s.

Charlie’s Member distributions were all prior to or part of

the Share Exchange and no further distributions will be made as

Charlie’s is now a wholly-owned subsidiary of the

Going Concern Uncertainty Regarding the Legal and Regulatory

16 unchanged sentences

In addition, the recent outbreak of COVID-19 in March 2020 has had

a negative impact on the global economy and markets has negatively

impacted the Company’s supply chain and sales.

For the three

months ended March 31, 2020, the Company has incurred losses from

operations of $4,351,000 and a consolidated net loss of

approximately $3,916,000 and the Company has negative

stockholders’

equity of $2,294,000.

These factors raise

substantial doubt about the Company’s ability to continue as

a going concern.

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

a negative impact on the global economy and markets which has

negatively impacted the Company’s supply chain and sales.

the six months ended June 30, 2020, the Company has incurred losses

from operations of $5,109,000 and a consolidated net loss of

approximately $4,560,000 and the Company has a stockholders’

deficit of $4,105,000.

These factors raise substantial doubt about

the Company’s ability to continue as a going concern.

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.

plans and growth depend on our ability to increase revenues and

40 unchanged sentences

Report on Form 10-K for the year ended December 31,

ITEM 3 - QU A NTITATIVE AND

ITEM 3 - QU ANTITATIVE AND

QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements