Charlie's Holdings, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS   CHARLIE’S HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts)       June 30,     December 31,       2020     2019       (Unaudited)         ASSETS             Current assets:             Cash   $ 1,464     $ 2,448   Accounts receivable, net     1,341       918   Inventories, net     1,854       1,516   Prepaid expenses and other current assets     249       729   Total current assets     4,908       5,611                     Non-current assets:                 Property, plant and equipment, net     572       543   Right-of-use asset, net     1,418       1,623   Other assets     71       71   Total non-current assets     2,061       2,237                     TOTAL ASSETS   $ 6,969     $ 7,848                     LIABILITIES AND STOCKHOLDERS' DEFICIT                 Current liabilities:                 Accounts payable and accrued expenses   $ 2,433     $ 2,516   Derivative liability     3,534       4,144   Lease liabilities     445       426   Notes payable     750       -   Dividends payable     1,650       -   Deferred revenue     252       91   Total current liabilities     9,064       7,177                     Non-current liabilities:                 Notes payable, net of current portion     1,016       -   Lease liabilities, net of current portion     994       1,218   Total non-current liabilities     2,010       1,218                     Total liabilities     11,074       8,395                     COMMITMENTS AND CONTINGENCIES (see Note 13)                                   Stockholders' deficit:                 Convertible preferred stock ($0.001 par value); 1,800,000 shares authorized                 Series A, 300,000 shares designated, 203,811 and 204,561 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively     -       -   Series B, 1.5 million shares designated, 0 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively     -       -   Common stock ($0.001 par value); 50 billion shares authorized; 18,991 million shares and 18,974 million shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively     18,991       18,974   Additional paid-in capital     (16,060 )     (17,045 ) Accumulated deficit     (7,036 )     (2,476 ) Total stockholders' deficit     (4,105 )     (547 ) TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT   $ 6,969     $ 7,848     The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.       -1- Table of Contents     CHARLIE’S HOL DINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) (Unaudited)       For the three months ended     For the six months ended       June 30,     June 30,       2020     2019     2020     2019   Revenues:                         Product revenue, net   $ 4,163     $ 6,819     $ 8,568     $ 13,466   Total revenues     4,163       6,819       8,568       13,466   Operating costs and expenses:                                 Cost of goods sold - product revenue     1,732       2,846       3,695       5,596   General and administrative     2,428       6,374       6,427       7,029   Sales and marketing     353       810       924       1,577   Research and development     408       -       2,631       -   Total operating costs and expenses     4,921       10,030       13,677       14,202   Loss from operations     (758 )     (3,211 )     (5,109 )     (736 ) Other income (expense):                                 Interest expense     (76 )     -       (76 )     -   Change in fair value of derivative liabilities     180       178       610       178   Other income     10       -       15       -   Total other income     114       178       549       178   Net loss   $ (644 )   $ (3,033 )   $ (4,560 )   $ (558 )                                   Net loss per share, basic and diluted   $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.00 ) Weighted average number of common shares outstanding     18,982,383,063       4,259,080,500       18,978,152,798       2,211,436,493     The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.       -2- Table of Contents       CHARLIE’S HOL DINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (in thousands) (Unaudited)           For the Three Months Ended June 30, 2020       Series A Convertible Preferred Stock     Series B Convertible Preferred Stock       Common Stock             Additional Paid-in     Accumulated     Total Stockholders'            Shares      Par value     Shares      Par value     Shares      Par value      Capital      Deficit      Deficit   Balance at April 1, 2020     204     $ -       -     $ -       18,982,291     $ 18,982     $ (14,884 )   $ (6,392 )   $ (2,294 ) Conversion of Series A convertible preferred stock     -       -       -       -       8,462       9       (9 )     -       -   Accrued dividends payable on Series A convertible preferred stock     -       -       -       -       -       -       (1,650 )     -       (1,650 ) Stock-based compensation     -       -       -       -       -       -       483       -       483   Net loss     -       -       -       -       -       -       -       (644 )     (644 ) Balance at June 30, 2020     204     $ -       -     $ -       18,990,753     $ 18,991     $ (16,060 )   $ (7,036 )   $ (4,105 )         For the Six Months Ended June 30, 2020       Series A Convertible Preferred Stock     Series B Convertible Preferred Stock       Common Stock             Additional Paid-in     Accumulated     Total Stockholders'            Shares      Par value     Shares      Par value     Shares      Par value     Capital      Deficit      Deficit      Balance at January 1, 2020     204     $ -       -     $ -       18,973,828     $ 18,974     $ (17,045 )   $ (2,476 )   $ (547 ) Conversion of Series A convertible preferred stock     -       -       -       -       16,925       17       (17 )     -       -   Reclassification of liability awards to equity     -       -       -       -       -       -       1,638       -       1,638   Accrued dividends payable on Series A convertible preferred stock     -       -       -       -       -       -       (1,650 )     -       (1,650 ) Stock-based compensation     -       -       -       -       -       -       1,014       -       1,014   Net loss     -       -       -       -       -       -       -       (4,560 )     (4,560 ) Balance at June 30, 2020     204     $ -       -     $ -       18,990,753     $ 18,991     $ (16,060 )   $ (7,036 )   $ (4,105 )     The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.       -3- Table of Contents       CHARLIE’S HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (in thousands) (Unaudited)       For the Three Months Ended June 30, 2019       Series A Convertible Preferred Stock     Series B Convertible Preferred Stock     Common Stock           Additional Paid-in     Retained     Total Stockholders'            Shares      Par value     Shares      Par value     Shares      Par value     Capital      Earnings     Equity                                                                             Balance at April 1, 2019     -     $ -       1,396     $ 1       141,041     $ 141     $ -     $ 2,145     $ 2,287   Effect of reverse merger      -       -       -       -       2,377,530       2,378       (2,378 )     -       -   Conversion of Series B convertible preferred stock     -       -       (1,396 )     (1 )     13,963,048       13,963       (13,962 )     -       -   Issuance of common stock and warrants in a private offering, net of $7,762 warrant liability     206       -       -       -       1,551,466       1,551       18,186       -       19,737   Offering cost related to private offering     -       -       -       -       -       -       (4,339 )     -       (4,339 ) Cash distributions to CCD Members     -       -       -       -       -       -       (17,430 )     -       (17,430 ) Stock-based compensation     -       -       -       -       902,662       903       2,174       -       3,077   Net loss     -       -       -       -       -       -       -       (3,033 )     (3,033 ) Balance at June 30, 2019     206     $ -       -     $ -       18,935,747     $ 18,936     $ (17,749 )    $ (888 )   $ 299           For the Six Months Ended June 30, 2019       Series A Convertible Preferred Stock     Series B Convertible Preferred Stock     Common Stock           Additional Paid-in     Retained     Total Stockholders'            Shares      Par value     Shares      Par value     Shares      Par value      Capital      Earnings     Equity     Balance at January 1, 2019     -     $ -       1,396     $ 1       141,041     $ 141     $ -     $ 649     $ 791   Effect of reverse merger      -       -       -       -       2,377,530       2,378       (2,378 )     -       -   Conversion of Series B convertible preferred stock     -       -       (1,396 )     (1 )     13,963,048       13,963       (13,962 )     -       -   Issuance of common stock and warrants in a private offering, net of $7,762 warrant liability     206       -       -       -       1,551,466       1,551       18,186       -       19,737   Offering cost related to private offering     -       -       -       -       -       -       (4,339 )     -       (4,339 ) Cash distributions to CCD Members     -       -       -       -       -       -       (17,430 )     (979 )     (18,409 ) Stock-based compensation     -       -       -       -       902,662       903       2,174       -       3,077   Net loss     -       -       -       -       -       -       -       (558 )     (558 ) Balance at June 30, 2019     206     $ -       -     $ -       18,935,747     $ 18,936     $ (17,749 )    $ (888 )   $ 299     The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.       -4- Table of Contents     CHARLIE’S HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)         For the six months ended       June 30,       2020     2019   Cash Flows from Operating Activities:             Net loss   $ (4,560 )   $ (558 ) Reconciliation of net loss to net cash (used in) provided by operating activities:                 Allowance for doubtful accounts     345       (35 ) Depreciation and amortization     83       12   Change in fair value of derivative liabilities     (610 )     (178 ) Amortization of operating lease right-of-use asset     205       46   Stock based compensation     2,336       3,077   Subtotal of non-cash charges     2,359       2,922   Changes in operating assets and liabilities:                 Accounts receivable     (768 )     (1,235 ) Inventories     (338 )     (578 ) Prepaid expenses and other current assets     480       (572 ) Accounts payable and accrued expenses     233       332   Deferred revenue     161       (38 ) Lease liabilities     (205 )     (26 ) Net cash (used in) provided by operating activities     (2,638 )     247   Cash Flows from Investing Activities:                 Purchase of property, plant and equipment     (112 )     (182 ) Net cash used in investing activities     (112 )     (182 ) Cash Flows from Financing Activities:                 Proceeds from issuance of common stock and warrants in a private offering, net     -       23,160   Proceeds from issuance of notes payable     1,766       -   Cash distributions to CCD Members     -       (18,409 ) Net cash provided by financing activities     1,766       4,751   Net (decrease) increase in cash     (984 )     4,816                     Cash, beginning of the period     2,448       304   Cash, end of the period   $ 1,464     $ 5,120                     Supplemental disclosure of cash flow information                 Cash paid for interest   $ -     $ -   Cash paid for income taxes   $ -     $ -                     Su pplemental disclosure of non-cash financing and investing activities                 Conversion of Series A convertible preferred stock   $ 17     $ -   Reclassification of liability awards to equity   $ 1,638     $ -   Accrued dividends payable on Series A convertible preferred stock   $ 1,650     $ -   Effect of reverse merger    $ -     $ 2,378   Conversion of Series B convertible preferred stock   $ -     $ 1     The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.       -5- Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   NOTE 1 – DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION   Description of the Business   Charlie’s Holdings, Inc., (formerly True Drinks Holdings, Inc.) a Nevada corporation, together with its wholly owned subsidiaries and consolidated variable interest entity (collectively, the “ Company ”, “ we ”), currently formulates, markets and distributes branded e-cigarette liquid for use in both open and closed consumer e-cigarette and vaping systems. The Company’s products are produced domestically through contract manufacturers for sale by select distributors, specialty retailers and third-party online resellers throughout the United States, as well as over 80 countries worldwide. The Company’s primary international markets include the United Kingdom, Italy, Spain, Belgium, Australia, Sweden and Canada. In June 2019, The Company launched distribution, through Don Polly, a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, the Company’s Chief Executive Officer and Chief Operating Officer, respectively, and a consolidated variable interest for which the Company is the primary beneficiary (“ Don Polly ”), of certain premium vapor, tincture and topical products containing hemp-derived cannabidiol (“ CBD ”). Our CBD based products are produced, marketed and sold through, Don Polly, and the Company currently intends to develop and launch additional products containing hemp-derived CBD in the future.    In addition to Don Polly, we are also the holding company for two wholly-owned subsidiaries, Charlie’s Chalk Dust, LLC (“ Charlie’s ” or “ CCD ”), which activity includes production and sale of our branded nicotine-based e-cigarette liquid, and Bazi, Inc., which activity includes sales of all-natural energy drink Bazi® All Natural Energy. At this time, we do not intend to continue sales of the Bazi product in its current form.   Acquisition of True Drinks Holdings, Inc.     On April 26, 2019 (the “ Closing Date ”), we entered into a Securities Exchange Agreement with each of the former members (“ Members ”) of Charlie’s, and certain direct investors in the Company (“ Direct Investors ”), pursuant to which we acquired all outstanding membership interests of Charlie’s beneficially owned by the Members in exchange for the issuance by the Company of units, with such units consisting of an aggregate of (i) 15,655,538,349 shares of common stock on an as-converted basis (which includes the issuance of an aggregate of 1,396,305 shares of a newly created class of Series B Convertible Preferred Stock, par value $0.001 per share (“ Series B Preferred ”), convertible into an aggregate of 13,963,047,716 shares of common stock, issued to certain individuals in lieu of common stock); (ii) 206,249 shares of a newly created class of Series A Convertible Preferred Stock, par value $0.001 per share (“ Series A Preferred ”), convertible into an aggregate of 4,654,349,239 shares of common stock; and (iii) warrants to purchase an aggregate of 3,102,899,493 shares of common stock (the “ Investor Warrants ”) (the “ Share   Exchange ”). As a result of the Share Exchange, Charlie’s became a wholly owned subsidiary of the Company.   Immediately prior to, and in connection with, the Share Exchange, Charlie’s consummated a private offering of membership interests that resulted in net proceeds to Charlie’s of approximately $27.5 million (the “ Charlie’s Financing ”). Katalyst Securities LLC (“ Katalyst ”) acted as the sole placement agent in connection with the Charlie’s Financing pursuant to an Engagement Letter entered into by and between Katalyst, Charlie’s and the Company on February 15, 2019. As consideration for its services in connection with the Charlie’s Financing and the Share Exchange, the Company issued to Katalyst and its designees five-year warrants to purchase an aggregate of 930,869,848 shares of Common Stock at a price of $0.0044313 per share (the “ Placement Agent Warrants ”). The Placement Agent Warrants have substantially the same terms as those set forth in the Investor Warrants.   The Share Exchange resulted in a change of control of the Company, with the Members and Direct Investors owning approximately 86.1% of the Company’s outstanding voting securities immediately after the Share Exchange, and the Company’s current stockholders beneficially owning approximately 13.9% of the issued and outstanding voting securities, which includes the Advisory Shares. Following the Share Exchange, Ryan Stump and Brandon Stump, the founders of Charlie’s and the Company’s Chief Executive Officer and Chief Operating Officer, respectively, held in excess of 50% of the Company’s issued and outstanding voting securities.       -6- Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   The Share Exchange is accounted for as a reverse recapitalization in accordance with accounting principles generally accepted in the United States (“ U.S. GAAP ”) because the primary assets of the Company were nominal at the consummation of the Share Exchange. Charlie’s was determined to be the accounting acquirer based upon the terms of the Share Exchange and other factors including: (i) Charlie’s stockholders and other persons holding securities convertible, exercisable or exchangeable directly or indirectly for Charlie’s membership units now own approximately 49%, on a fully diluted basis, of the Company’s outstanding securities immediately following the effective time of the Merger, (ii) individuals associated with Charlie’s now hold a majority of the seats on the Company’s Board of Directors and (iii) Charlie’s management holds all key positions in the management of the combined Company. Accordingly, the historical financial statements of True Drinks were replaced by the Company's historical financial statements including the comparative prior periods. All references in the consolidated financial statements to the number of shares and per-share amounts of common stock have been retroactively restated to reflect the exchange rate.   Going Concern Uncertainty Regarding the Legal and Regulatory Environment, Liquidity and Management’s Plan of Operation   The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company operates in a rapidly changing legal and regulatory environment; new laws and regulations or changes to existing laws and regulations could significantly limit the Company’s ability to sell its products, and/or result in additional costs. Additionally, the Company is required to apply for FDA approval to continue selling and marketing its products used for the vaporization of nicotine in the United States. There is significant cost associated with the application process and there can be no assurance the FDA will approve the application(s). In addition, the recent outbreak of coronavirus (“ COVID-19 ”) in March 2020 has had a negative impact on the global economy and markets which has impacted the Company’s supply chain and sales. 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. 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 operations.   Management's 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 Premarket Tobacco Application (“ PMTA ”) registration process. The 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 process. The Company is currently seeking debt and/or equity financing in order to ensure that it has sufficient cash to operate for the next 12 months. There can be no assurance that such financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and in its best interests.   Risks and Uncertainties     The Company operates in an environment that is subject to rapid changes and developments in laws and regulations that could have a significant impact on the Company’s ability to sell its products. Beginning in September 2019, certain states temporarily banned the sale of flavored e-cigarettes, and several states and municipalities are considering implementing similar restrictions. Federal, state, and local governmental bodies across the United States have indicated that flavored e-cigarette liquid, vaporization products and certain other consumption accessories may become subject to new laws and regulations at the federal, state and local levels. The application of any new laws or regulations that may be adopted in the future, at a federal, state, or local level, directly or indirectly implicating flavored e-cigarette liquid and products used for the vaporization of nicotine could significantly limit the Company’s ability to sell such products, result in additional compliance expenses, and/or require the Company to change its labeling and/or methods of distribution. Any ban of the sale of flavored e-cigarettes directly limits the markets in which the Company may sell its products. In the event the prevalence of such bans and/or changes in laws and regulations increase across the United States, or internationally, the Company’s business, results of operations and financial condition could be adversely impacted. In addition, the Company is presently in the process of submitting PMTA applications for some of its nicotine-based e-liquid products. The applications are due in September 2020, which if approved, will allow the Company to continue to sell its products in the United States. This application deadline was previously May 2020 and recently has been extended and there is no assurance that there will not be further extensions. The Company is also seeking additional financing in order to complete the application process. There is no assurance that regulatory approval to sell our products will be granted or that we can raise the additional financing required, and if not, this could have a significant impact on our sales.       -7- Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   On March 11, 2020, the World Health Organization designated the ongoing and evolving COVID-19 outbreak as a pandemic. The outbreak has caused substantial disruption in international and U.S. economies and markets as it continues to 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.   NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   Basis of Presentation   The unaudited interim condensed consolidated financial statements 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 U.S. GAAP have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented in this Quarterly Report on Form 10-Q (this “ Report ”) not misleading.   Amounts 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 financial information contained in the consolidated financial statements and footnotes are based on Charlie’s historical financial statements and the Company’s financial activity beginning April 26, 2019, as adjusted, to give effect to Charlie’s reverse recapitalization of the Company and the Charlie’s Financing completed prior to the Share Exchange. In addition, from the period April 26, 2019 until December 31, 2019, there were minimal costs and revenue associated with the Bazi product line which are included in the interim condensed consolidated financial statements. As noted above, we do not intend to continue to produce and sell the Bazi product line in its current form, and these costs and expenses are nominal and will continue to be so in the future. The operating results of Don Polly are also included.   Historical financial information presented prior to April 26, 2019 is that of Charlie’s only, while financial information presented after April 26, 2019 includes Charlie’s, Don Polly, Bazi Drinks and the Company, which includes the transactions associated with the share exchange and private placement transaction along with ongoing corporate costs.   Use of Estimates   The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expense during the reporting periods. Actual results could differ from those estimates.   Significant Accounting Policies                  There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2019 Annual Report.   Recent Accounting Standards Not Yet Adopted   Income Taxes   In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ ASU 2019-12 ”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its condensed consolidated financial statements and related disclosures.   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 capital.       -8- Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)    NOTE 3 – FAIR VALUE MEASUREMENTS   In accordance with ASC 820 (Fair Value Measurements and Disclosures), the Company uses various inputs to measure the outstanding warrants on a recurring basis to determine the fair value of the liability. ASC 820 also establishes a hierarchy categorizing inputs into three levels used to measure and disclose fair value. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to unobservable inputs. An explanation of each level in the hierarchy is described below:   Level 1 - Unadjusted quoted prices in active markets for identical instruments that are accessible by the Company on the measurement date.   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.   The following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy as of June 30, 2020 and December 31, 2019 (amount in thousands):       Fair Value at June 30, 2020       Total     Level 1     Level 2     Level 3   Liabilities:                         Derivative liability - Warrants     3,534       -       -       3,534   Total liabilities   $ 3,534     $ -     $ -     $ 3,534         Fair Value at December 31, 2019       Total     Level 1     Level 2     Level 3   Liabilities:                         Derivative liability - Warrants     4,144       -       -       4,144   Total liabilities   $ 4,144     $ -     $ -     $ 4,144         There were no transfers between Level 1, 2 or 3 during the six-month period ended June 30, 2020.   The following table presents changes in Level 3 liabilities measured at fair value for the six-month period ended June 30, 2020. Both observable and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long- dated volatilities) inputs (amount in thousands).          Derivative liability - Warrants   Balance at January 1, 2020   $ 4,144   Change in fair value     (610 ) Balance at June 30, 2020   $ 3,534     A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in the Monte Carlo simulation measuring the Company’s derivative liabilities that are categorized within Level 3 of the fair value hierarchy as of June 30, 2020 and December 31, 2019 is as follows:       June 30,     December 31,       2020     2019   Exercise price   $ 0.0044     $ 0.0044   Contractual term (years)     3.82       4.32   Volatility (annual)     75.0 %     70.0 % Risk-free rate     0.2 %     1.7 % Dividend yield (per share)     0 %     0 %         -9- Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   NOTE 4 – STOCK-BASED COMPENSATION   On April 26, 2019, in connection with employment agreements with its Chief Executive Officer and Chief Operating Officer, the Company issued market condition awards contingent upon the achievement of certain market capitalization targets. The awards are subject to a three-year service vesting period. The awards are settleable in a variable number of common shares based on defined percentages of the Company's total shares determined by market capitalization targets and are, therefore, classified as liabilities in accordance with ASC 718. The fair value of the awards is remeasured at each reporting period until settlement. Compensation cost is attributed over the period encompassing the derived service period and the explicit service period. The fair value of the market condition awards on the termination date of February 12, 2020 was approximately $ 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 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.   On February 12, 2020, the Company, entered into a form of Amended and Restated Employment Agreement with both the Company’s Chief Executive Officer and Chief Operating Officer. The terms of the Amended Employment Agreements have been amended as follows: (i) the annual equity awards based upon, among other conditions, the Company’s market capitalization and a percentage of base salary have been eliminated; however, the awards based on financial milestones remain in full force and effect; and (ii) payment of the 2019 bonuses has been deferred, resulting in the accrual of such bonuses on the books and records of the Company. All other terms of the respective Employment Agreements will remain in full force and effect subject to further review by the Board as it deems necessary and appropriate.   On April 26, 2019, as additional consideration for advisory services provided in connection with the Charlie’s Financing and the Share Exchange (see Note 1 above), the Company issued an aggregate of 902.7 million shares of common stock (the “ Advisory Shares ”), including to a member of the Company’s Board of Directors, pursuant to a subscription agreement. The fair value of a share of common stock was $0.0032 which is based upon a valuation prepared by the Company on the date of the Share Exchange. The Company recorded stock-based compensation of approximately $2.9 million on the grant date.   Prior to the Share Exchange, Charlie’s employees held Member units, which were automatically converted into 7.1 million shares of common stock and 69,815 shares of Series B Preferred (or 698.1 million shares of common stock equivalents) due to the effect of the Share Exchange. The 705.3 million shares of common stock will vest over a two-year period. The fair value of a share of common stock was $0.0032 based upon a valuation prepared by the Company on the date of the Share Exchange. The Company recorded stock-based compensation of approximately $ 564,000 during the six months ended June 30, 2020.   NOTE 5 - PROPERTY AND EQUIPMENT   Property and Equipment detail as of June 30, 2020 and December 31, 2019 are as follows (amount in thousands):       June 30,     December 31,         2020     2019   Estimated Useful Life Machinery and equipment   $ 38     $ 96   5 years Trade show booth     176       171   5 years Office equipment     552       118   5 years Leasehold improvements     171       440   Lesser of lease term or estimated useful life       937       825     Accumulated depreciation     (365 )     (282 )       $ 572     $ 543       Depreciation and amortization expense totaled $43,000 and $9,000, respectively, during the three months ended June 30, 2020 and 2019. Depreciation and amortization expense totaled $83,000 and $12,000, respectively, during the six months ended June 30, 2020 and 2019.       -10- Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   NOTE 6 - CONCENTRATIONS   Vendors   The Company’s concentration of purchases are as follows:     For the three months ended     For the six months ended       June 30,     June 30,       2020     2019     2020     2019   Vendor A     24 %     54 %     28 %     66 % Vendor B     48 %     18 %     24 %     15 % Vendor C     9 %     0 %     16 %     0 % Vendor D     5 %     5 %     11 %     3 %    During the three months ended June 30, 2020 and 2019, purchases from four vendors represented 86% and 77%, respectively, of total inventory purchases. During the six months ended June 30, 2020 and 2019, purchases from four vendors represented 79% and 84%, respectively, of total inventory purchases.   As of 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 follows:       June 30,     December 31,       2020     2019   Customer A     6 %     23 %   No customer made up more than 10% of accounts receivable at June 30, 2020. One customer made up more than 10% of net accounts receivable at December 31 , 2019. Customer 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 – DON POLLY, LLC.   Don Polly, LLC is a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, the Company’s Chief Executive Officer and Chief Operating Officer, respectively, and a consolidated variable interest for which the Company is the primary beneficiary. Don Polly formulates, sells and distributes the Company’s CBD product lines.   We evaluate our ownership, contractual and other interests in entities that are not wholly-owned to determine if these entities are variable interest entities (“ VIEs ”), and, if so, whether we are the primary beneficiary of the VIE. In determining whether we are the primary beneficiary of a VIE and therefore required to consolidate the VIE, we apply a qualitative approach that determines whether we have both (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of, or the rights to receive benefits from, the VIE that could potentially be significant to that VIE. We continuously perform this assessment, as changes to existing relationships or future transactions may result in the consolidation or deconsolidation of a VIE. Effective April 25, 2019, we consolidated the financial statements of Don Polly and it is considered a VIE of the Company. Since the Company has been determined to be the primary beneficiary of Don Polly, we have included Don Polly’s assets, liabilities, and operations in the accompanying consolidated financial statements of the Company.   Don Polly operates under exclusive licensing and service contracts with the Company whereby the Company receives 75% of net income from the licensing agreement and 25% of net income from the service agreement, therefore, as the Company receives 100% of the net income or incurs 100% of the net loss of the VIE, no non-controlling interests are recorded.       -11- Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   NOTE 8 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES   Accounts payable and accrued expense as of June 30, 2020 and December 31, 2019 are as follows (amounts in thousands):       June 30,     December 31,       2020     2019   Accounts payable   $ 812     $ 673   Accrued compensation     1,234       1,635   Other accrued expenses     387       208       $ 2,433     $ 2,516     NOTE 9 – NOTES PAYABLE   Red Beard Holdings, LLC Note Payable   On 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 ").   The 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; or (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 rate. 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 made.   The 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 (" SBA ") Promissory Note (the " PPP Loan ") with TBK Bank, SSB (the " SBA Lender "), pursuant to the Paycheck Protection Program (" PPP ") of the Coronavirus Aid, Relief, and Economic Security Act (the " CARES Act ") as administered by the SBA (the " Loan Agreement ").   The PPP Loan provides for working capital to CCD in the amount of $650,761. 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 Lender "). The PPP Loan 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. 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 Act.   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):   Remaining months ended December 31, 2020   $ 750   Year Ended December 31, 2021     -   Year Ended December 31, 2022     866   Year Ended December 31, 2023     -   Year Ended December 31, 2024     -   Thereafter     150   Total   $ 1,766       -12- Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     NOTE 10 – LOSS PER SHARE APPLICABLE TO COMMON STOCKHOLDERS   Basic 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.   The following securities were not included in the diluted net earnings per share calculation because their effect was anti-dilutive as of the periods presented (in thousands):       For the six months ended       June 30       2020     2019   Options     801,325       61,825   Series A convertible preferred shares     5,564,296       4,654,399   Warrants     4,033,769       4,033,769   Total     10,399,390       8,749,993     NOTE 11 – STOCKHOLDERS’ EQUITY   Series A Preferred Share Dividend   On 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 sheet.   Conversion of Series A Preferred Shares   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 (“ Series A Preferred ”).       -13- Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   NOTE 12 – STOCK OPTIONS   The True Drinks Holdings, Inc. 2013 Stock Incentive Plan (the “ Prior Plan ”) was first approved in December 2013 and was approved by a majority of the stockholders in October 2014. The Prior Plan originally authorized 20.0 million shares of common stock for issuance as equity-based awards, which amount was increased to 120.0 million in January 2018 by authorization of the Board of Directors at that time (the “ Prior Plan Amendment ”). As of the date of the Share Exchange, April 26, 2019, a total of approximately 91.7 million awards were issued under the Prior Plan and the Prior Plan Amendment, consisting entirely of outstanding stock options. As of June 30, 2020, approximately 61.8 million of these stock options remain vested and exercisable under this plan.   The Company will not grant any additional awards or shares of common stock under the Prior Plan beyond those that are currently outstanding.   On May 8, 2019, our Board of Directors approved the Charlie’s Holdings, Inc. 2019 Omnibus Incentive Plan (the “ 2019 Plan ”), and the 2019 Plan was subsequently approved by holders of a majority of our outstanding voting securities on the same date. The 2019 Plan will supersede and replace the Prior Plan and no new awards will be granted under the Prior Plan. Any awards outstanding under the Prior Plan on the date of stockholder approval of the 2019 Plan will remain subject to and be paid under the Prior Plan, including those granted under the Prior Plan Amendment, and any shares subject to outstanding awards under the Prior Plan that subsequently expire, terminate, or are surrendered or forfeited for any reason without issuance of shares will automatically become available for issuance under the 2019 Plan. Up to 1,107,254,205 shares of common stock may be granted under the 2019 Plan. The shares of common stock issuable under the 2019 Plan will consist of authorized and unissued shares, treasury shares, and shares purchased on the open market or otherwise.   As of June 30, 2020, there was approximately $ 515,000 of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the 2019 Plan. That cost is expected to be recognized over a weighted average period of 2 years. 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 – COMMITMENTS AND CONTINGENCIES   Leases   The Company leases office space under agreements classified as operating leases that expire on various dates through 2024. All of the Company’s lease liabilities result from the lease of its headquarters in Costa Mesa, California, which expires in 2024, its warehouse in Santa Ana, California, which expires in 2021, its office and warehouse in Denver, Colorado, which expires in 2022, and its warehouse space in Huntington Beach, California, which expires in 2022. Such leases do not require any contingent rental payments, impose any financial restrictions, or contain any residual value guarantees. Certain of the Company’s leases include renewal options and escalation clauses; renewal options have not been included in the calculation of the lease liabilities and right of use assets as the Company is not reasonably certain to exercise the options. Variable expenses generally represent the Company’s share of the landlord’s operating expenses. The Company does not act as a lessor or have any leases classified as financing leases.   The Company excludes short-term leases having initial terms of 12 months or less from Topic 842 as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term. The Company entered into a commercial lease for the Company’s corporate headquarters (the “ Lease ”) in Costa Mesa, California with Brandon Stump, Ryan Stump and Keith Stump, the Company’s Chief Executive Officer, Chief Operating Officer and member of the Board. Messrs. Stump, Stump and Stump purchased the property that is the subject of the Lease in July 2019. The Lease, which was effective as of September 1, 2019, on a month to month basis, has been formalized to have a term of five years and a base rent rate of $22,940 per month, which rate is subject to annual adjustments based on the consumer price index, as may be mutually agreed upon by the parties to the Lease. The terms of the Lease were negotiated and approved by the independent members of the Board, and executed by Mr. David Allen, the Company’s Chief Financial Officer after reviewing a detailed analysis of comparable properties and rent rates compiled by an independent, third-party consultant. The total amount paid to related parties for the three and six months ended June 30, 2020 was approximately $68,820 and $137,640, respectively.       -14- Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   At June 30, 2020, the Company had operating lease liabilities of approximately $1,439,000 and right of use assets of approximately $1,418,000, which were included in the condensed consolidated balance sheet.   The following summarizes quantitative information about the Company’s operating leases for the three and six months ended June 30, 2020 and 2019 (amount in thousands):       For the three months ended     For the six months ended       June 30,     June 30,       2020     2019     2020     2019   Operating leases                            Operating lease cost   $ 149     $ 54     $ 299     $ 64      Variable lease cost     -       -       -       -   Operating lease expense     149       54       299       64   Short-term lease rent expense     -       -       -       -   Total rent expense   $ 149     $ 54     $ 299     $ 64         For the six months ended       June 30,       2020     2019   Operating cash flows from operating leases   $ 205     $ 46   Weighted-average remaining lease term – operating leases (in years)     3.37       2.82   Weighted-average discount rate – operating leases     12.00 %     12.00 %    Maturities 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   $ 396   Year Ended December 31, 2021     577   Year Ended December 31, 2022     399   Year Ended December 31, 2023     275   Year Ended December 31, 2024     206   Total     1,853   Less present value discount     (414 ) Operating lease liabilities as of June 30, 2020   $ 1,439         -15- Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   Legal Proceedings   From time to time, the Company may be involved in various claims and counterclaims and legal actions arising in the ordinary course of business.  Other than as set forth below, there are no additional pending or threatened legal proceedings at this time.   C.H. Robinson Worldwide, Inc. v. True Drinks, Inc. On September 5, 2018, C.H. Robinson Worldwide (“ Robinson ”) filed a complaint against True Drinks, Inc. in the California Superior Court for the County of Orange located in Santa Ana, California alleging open book account, account stated, reasonable value of services received, agreement, and unjust enrichment related to shipping services provided by Robinson. Robinson has asserted $121,743 in damages plus interest, attorney’s fees and costs. We believe Robinson’s claim is substantially offset by damages caused by its failures to timely deliver products it was supposed to ship and intend to vigorously defend the complaint. The probability of any loss cannot be determined at this time.   NOTE 14- SUBSEQUENT EVENTS   On 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 (“ Dividend 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.   As a 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. While no assurances can be given, management is currently negotiating with the Lender regarding repayment of the Note in full.   The 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 disclosure.           -16- Table of Contents     ITEM 2 - MANA GEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   The following discussion of the financial condition and results of operations of Charlie’s Holdings, Inc. should be read in conjunction with the financial statements and the notes to those statements appearing elsewhere in this Quarterly Report on Form 10-Q (this “Report”). Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section in this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.   As used in this Report, unless otherwise stated or the context otherwise requires, references to the “Company”, “we”, “us”, “our”, or similar references mean Charlie’s Holdings, Inc. (formerly True Drinks Holdings, Inc.), its subsidiaries and consolidated variable interest entity on a consolidated basis. References to “Charlie’s” and “CCD” refer to Charlie’s Chalk Dust, LLC, a California limited liability company and wholly-owned subsidiary of the Company, and “Don Polly” refers to Don Polly, LLC, a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, the Company’s Chief Executive Officer and Chief Operating Officer, respectively, and a consolidated variable interest for which the Company is the primary beneficiary.   Overview   Our objective is to become a significant leader in the rapidly growing, global e-cigarette segment of the broader nicotine related products industry. Through Charlie’s, we formulate, market and distribute branded e-cigarette liquid for use in both open and closed nicotine-only e-cigarette and vaping systems. Charlie’s products are produced domestically through contract manufacturers for sale through select distributors, specialty retailers and third-party online resellers throughout the United States, as well as more than 80 countries worldwide. Charlie’s primary international markets include the United Kingdom, Italy, Spain, Belgium, Australia, Sweden and Canada. In June 2019, we launched distribution, through Don Polly, of certain premium vapor, tincture and topical wellness products containing hemp-derived cannabidiol (“ CBD ”) and we currently intend to develop and launch additional products containing hemp-derived CBD in the future.   Recently there have been significant news stories and health alerts related to flavored nicotine vaping, leading to some states banning the sale of flavored nicotine products and causing the Food and Drug Administration (“ FDA ”) to review its policies on controlling the sale of these products. The most recent health related concerns seem to indicate that a vitamin E acetate related compound may be causing the health issues. On November 8, 2019, officials at the Centers for Disease Control and Prevention (“ CDC ”) reported a breakthrough in the investigation into the outbreak of vaping-related lung injuries. T he CDC's principal deputy director, Dr. Anne Schuchat, stated that "vitamin E acetate is a known additive used to dilute liquid in e-cigarettes or vaping products that contain THC”, s uggesting the possible culprit for the series of lung injuries across the U.S. A ll of Charlie's nicotine-only, e-liquid products are tested by third party laboratories which have confirmed that none of our products contain any vitamin E acetate or Tetrahydrocannabinol (“ THC ”).   However, these developments have had a negative effect on our sales since mid-September 2019 (see further discussion below) and therefore, in response to these developments and while government regulators are formulating future polices, management has adopted the following plan of operation.   First, we plan to focus on increasing the sales of our CBD related products, including topicals, tinctures and vaping liquids. We feel there is a significant upside in the CBD space, and we have begun to focus on numerous vertical markets for the sale of our isolate, full and broad-spectrum products. These vertical markets include, but aren't limited to the medical and wellness markets. In addition, we have begun conversations with various companies and organizations that, if successful, will allow us to significantly 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 resources. 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 quarters.   Secondly, we see a significant opportunity for sales growth in international markets for nicotine e-liquids. Presently, approximately 20% of our e-liquid product sales come from the international market and we are well positioned to increase those sales in the countries that we presently sell, and in additional overseas markets, as we have already built an international distribution platform.       -17- Table of Contents     Lastly, we feel that the nicotine based flavored vaping products will continue to be a significant growth opportunity, once all the rightful regulatory changes have been made. We will continue with our plan to obtain marketing authorization for certain of our 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 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 deadline. We feel that a significant amount of our competitors will not have the resources and/or expertise to complete the extensive and costly PMTA process and that once complete, we will be able to benefit from being one of only a select group of companies operating in the flavored nicotine product space.   Risks and Uncertainties   The Company operates in an environment that is subject to rapid changes and developments in laws and regulations that could have a significant impact on the Company’s ability to sell its products. Federal, state, and local governmental bodies across the United States have indicated that flavored e-cigarette liquid, vaporization products and certain other consumption accessories may become subject to new laws and regulations at the federal, state and local levels. Beginning in September 2019, certain states temporarily banned the sale of flavored e-cigarettes, and on January 2, 2020, the FDA issued an enforcement policy effectively banning the sale of flavored cartridge-based e-cigarettes marketed primarily by large manufacturers without prior authorization from the FDA. The application of any new laws or regulations that may be adopted in the future, at a federal, state, or local level, directly or indirectly implicating flavored e-cigarette liquid and products used for the vaporization of nicotine could significantly limit the Company’s ability to sell such products, result in additional compliance expenses, and/or require the Company to change its labeling and/or methods of distribution. Any ban of the sale of flavored e-cigarettes directly limits the markets in which the Company may sell its products. In the event the prevalence of such bans and/or changes in laws and regulations increase across the United States, or internationally, the Company’s business, results of operations and financial condition could be adversely impacted. In addition, the Company is presently in the process of submitting PMTA applications for some of its nicotine-based e-liquid products. The applications are due in September 2020, which if approved, will allow the Company to continue to sell its products in the United States. This application deadline was previously May 2020 and recently has been extended and there is no assurance that there will not be further extensions. The Company is also seeking additional financing to complete the application process. There is no assurance that regulatory approval to sell our products will be granted or that we can raise the additional financing required, and if not, this could have a material adverse effect on our sales.   On March 11, 2020, the World Health Organization designated the ongoing and evolving COVID-19 outbreak as a pandemic. The outbreak has caused substantial disruption in international and U.S. economies and markets as it continues to 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 Share Exchange is accounted for as a reverse recapitalization under U.S. GAAP because the primary assets of the Company were nominal following the close of the Share Exchange. Charlie’s was determined to be the accounting acquirer based upon the terms of the Share Exchange and other factors including: (i) Charlie’s stockholders and other persons holding securities convertible, exercisable or exchangeable directly or indirectly for Charlie’s membership units now own approximately 49%, on a fully diluted basis, of the Company’s outstanding securities immediately following the effective time of the Share Exchange, (ii) individuals associated with Charlie’s now hold a majority of the seats on the Company’s Board of Directors and (iii) Charlie’s management holds all key positions in the management of the combined Company.   The disclosure in this Report, including the unaudited condensed consolidated financial statements contained herein, are based on Charlie’s historical financial statements and the Company’s financial activity beginning April 26, 2019, as adjusted, to give effect to Charlie’s reverse recapitalization of the Company and the Charlie’s Financing. 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 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 and six months ended June 30, 2020 are also included.   Historical financial information presented prior to April 26, 2019 is that of Charlie’s only, while financial information presented after April 26, 2019 includes Charlie’s, Don Polly, Bazi Drinks and the Company, which includes the transactions associated with the Share Exchange and Charlie’s Financing completed prior to the Share Exchange, along with ongoing corporate costs.   Current Operating Trends and Financial Highlights   Management currently considers the following events, trends and uncertainties to be important in understanding the Company’s results of operations and financial condition for the most recent calendar quarter and full year:   Regarding results from operations for the quarter ended 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, 2019. 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.   We 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. The net loss 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 $180,000. 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.       -18- Table of Contents     Regarding 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, 2019. 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.   We 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 $2,623,000 of consulting fees for the six months ended June 30, 2020 as a result of the PMTA registration process.   A review of the three and six month period ended June 30, 2020 follows:         -19- Table of Contents     Results of Operations for the Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019       For the three months ended                   June 30,     Change       2020     2019     Amount     Percentage   ($ in thousands)                   Revenues:                         Product revenue, net   $ 4,163     $ 6,819     $ (2,656 )     -38.9 % Total revenues     4,163       6,819       (2,656 )     -38.9 % Operating costs and expenses:                                 Cost of goods sold - product revenue     1,732       2,846       (1,114 )     -39.1 % General and administrative     2,428       6,374       (3,946 )     -61.9 % Sales and marketing     353       810       (457 )     -56.4 % Research and development     408       -       408       100 % Total operating costs and expenses     4,921       10,030       (5,109 )     -50.9 % Loss from operations     (758 )     (3,211 )     2,453       -76.4 % Other income (expense):                                 Interest expense     (76 )     -       (76 )     100 % Change in fair value of derivative liabilities     180       178       2       1.1 % Other income     10       -       10       100 % Total other income     114       178       (64 )     -36.0 % Net loss   $ (644 )   $ (3,033 )   $ 2,389       -78.8 %   Revenue   Revenue for the three months ended June 30, 2020 decreased approximately $2,656,000 or 38.9%, to approximately $4,163,000, as compared to approximately $6,819,000 for same period in 2019 due to a $2,064,000 decrease in our nicotine-based product sales and a $571,000 decrease in sales of our CBD wellness products. 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 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   Cost of revenue, which consists of direct costs of materials, direct labor, third party subcontractor services, and other overhead costs decreased approximately $1,114,000, or 39.1%, to approximately $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 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.       -20- Table of Contents     General and Administrative Expenses   For 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. 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   For 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 economy.   Research and Development Expense   For the three months ended June 30, 2020, total research and development expense increased approximately $408,000, to 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   We 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.   Fo r 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 warrants.   ●   Interest Expense .   F or the three months ended June 30, 2020, we recorded $76,000 of interest expense related to notes payable.   Net Loss   For the three months ended June 30, 2020, we had a net loss of $644,000 as compared to net loss of $3,033,000 for the same period in 2019.        -21- Table of Contents     Results of Operations for the Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019       For the six months ended                   June 30,     Change       2020     2019     Amount     Percentage   ($ in thousands)                   Revenues:                         Product revenue, net   $ 8,568     $ 13,466     $ (4,898 )     -36.4 % Total revenues     8,568       13,466       (4,898 )     -36.4 % Operating costs and expenses:                                 Cost of goods sold - product revenue     3,695       5,596       (1,901 )     -34.0 % General and administrative     6,427       7,029       (602 )     -8.6 % Sales and marketing     924       1,577       (653 )     -41.4 % Research and development     2,631       -       2,631       100 % Total operating costs and expenses     13,677       14,202       (525 )     -3.7 % Loss from operations     (5,109 )     (736 )     (4,373 )     594.2 % Other income (expense):                                 Interest expense     (76 )     -       (76 )     100 % Change in fair value of derivative liabilities     610       178       432       242.7 % Other income     15       -       15       100 % Total other income     549       178       371       208.4 % Net loss   $ (4,560 )   $ (558 )   $ (4,002 )     717.2 %   Revenue   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 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 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   Cost 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 absorption.       -22- Table of Contents     General and Administrative Expenses   For 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   For 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 economy.   Research and Development Expense   For 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   We 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. We 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. Net loss is determined by adjusting income from operations by the following items:   ●   Gain in Fair Value of Derivative Liabilities.   For 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 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 warrants.   ●   Interest Expense .   For the three months ended June 30, 2020, we recorded $76,000 of interest expense related to notes payable.   Net Loss   For 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 2019.        -23- Table of Contents     Effects of Inflation   Inflation has not had a material impact on our business.   Liquidity and Capital Resources   As of June 30, 2020, we had negative working capital of approximately $4,156,000, which consisted of current assets of approximately $4,908,000 and current liabilities of approximately $9,064,000. This compares to negative working capital of approximately $1,566,000 at December 31, 2019. The current 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. (the 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 reserves.   Our cash and cash equivalents balance at June 30, 2020 was approximately $1,464,000.   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 a net loss of $4,560,000, and an increase in accounts receivable and inventories, but was offset by an increase in prepaid expense.   For the six months ended June 30, 2020 we used cash for investment activities of $112,000 as compared to $182,000 for the same period in 2019. The cash used for investment activities is primarily for the development and configuration phase of enterprise resource planning software being implemented during the six months ended June 30, 2020.   For 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. In the 2020 period, we generated cash from financing activities from the issuance of the note payable and funds received from PPP and EID loans. 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. 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.   Going Concern Uncertainty Regarding the Legal and Regulatory Environment, Liquidity and Management’s plan of operation.   Our financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company operates in a rapidly changing legal and regulatory environment; new laws and regulations or changes to existing laws and regulations could significantly limit the Company’s ability to sell its products, and/or result in additional costs. Additionally, the Company is required to apply for FDA approval to continue selling and marketing its products used for the vaporization of nicotine in the United States. There is significant cost associated with the application process and there can be no assurance the FDA will approve the application(s). In addition, the recent outbreak of COVID-19 in March 2020 has had a negative impact on the global economy and markets which has negatively impacted the Company’s supply chain and sales. For 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. 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.       -24- Table of Contents     Our plans and growth depend on our ability to increase revenues and continue our business development efforts, including the expenditure of approximately $4,400,000 to complete our PMTA registration process. We currently do not anticipate that our current cash position will be sufficient to meet our working capital requirements, to continue our sales and marketing efforts and complete the PMTA registration process. We are currently seeking term debt or other sources of financing in order to ensure that we have sufficient cash to operate for the next 12 months. If in the future our plans or assumptions change or prove to be inaccurate, or there is a significant change in the regulatory environment or the recent outbreak of COVID-19 continues to impact the global economy, we will need to raise additional funds through public or private debt or equity offerings, financings, corporate collaborations, or other means. There can be no assurance that such financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and in our best interests.   Off-Balance Sheet Arrangements   The Company has no off-balance sheet arrangements other than operating lease commitments.   Critical Accounting Policies   The condensed consolidated financial statements are prepared in conformity with U.S. GAAP, which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of expense in the periods presented. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, due to inherent uncertainties in making estimates, actual results could differ from the original estimates, requiring adjustments to these balances in future periods. The critical accounting estimates that affect the consolidated financial statements and the judgments and assumptions used are consistent with those described under Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019.   ITEM 3 - QU ANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   Not applicable.