What changed in this filing

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Item 1. Financial Statements

2020-11-13 compared with 2020-08-14 · 852 added, 687 removed, 1018 unchanged (60% of the section changed)

4 unchanged sentences

(in thousands, except share and per share amounts)

September 30,

$ 1,209  

12 unchanged sentences

current liabilities

15,594  

payable, net of current portion

7 unchanged sentences

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

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

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

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

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

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

stock ($0.001 par value);

1 unchanged sentence

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

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

of September 30, 2020 and December 31, 2019,

18,991  

7 unchanged sentences

condensed consolidated financial statements.

CHARLIE’S HOL DINGS,

CHARLIE’S H OL DINGS,

CONDENSED CONSOLIDATED STATEMENTS

2 unchanged sentences

For the three months ended

For the six months ended

For the nine months ended

September 30,

$ 3,894  

3 unchanged sentences

12,462  

19,056  

Operating costs and expenses:

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and administrative

10,307  

and marketing

3 unchanged sentences

20,982  

14,202  

from operations

(1,190  

(1,926  

Other income (expense):

in fair value of derivative liabilities

loss per share, basic and diluted

average number of common shares outstanding

other income (expense)

Net (loss) income

$ 1,557  

earnings (loss) per share, basic and diluted

$ 0.00  

average number of common shares outstanding, basic and

18,990,752,596 

18,935,746,390 

18,982,382,723 

7,847,467,667  

The accompanying notes are an integral part of these unaudited

condensed consolidated financial statements.

CHARLIE’S HOL DINGS, INC.

CHARLIE’S HOL D I NGS,

CONDENSED CONSOLIDATED STATEMENTS OF

STOCKHOLDERS’

EQUITY (DEFICIT)

(in thousands)

For the Three Months Ended June 30, 2020

Convertible Preferred Stock  

Common Stock  

Accumulated  

Total Stockholders' 

Par value  

Capital 

Deficit 

Balance at April 1, 2020

For the Three Months Ended September 30, 2020  

Series A  

Series B  

Preferred Stock

 Total Stockholders'

 Par value

Paid-in Capital

Balance at July 1, 2020

18,990,753  

$ 18,991  

of Series A convertible preferred stock

dividends payable on Series A convertible preferred

Balance at June 30, 2020

Balance at September 30, 2020

18,990,753  

$ 18,991  

For the Six Months Ended June 30, 2020

Convertible Preferred Stock  

For the Nine Months Ended September 30, 2020  

Series A  

Series B  

Preferred Stock

Common Stock  

Accumulated  

Total Stockholders' 

Par value  

Capital 

Deficit 

 Total Stockholders'

 Par value

Paid-in Capital

Balance at January 1, 2020

1 unchanged sentence

$ 18,974  

 Conversion

of Series A convertible preferred stock

16,925  

Reclassification

of liability awards to equity

 Accrued

dividends payable on Series A convertible preferred

Balance at June 30, 2020

Balance at September 30, 2020

18,990,753  

1 unchanged sentence

The accompanying notes are an integral part of these unaudited

condensed consolidated financial statements.

condensed consolidated financial

CHARLIE’S HOLDINGS, INC.

1 unchanged sentence

STOCKHOLDERS’

EQUITY (DEFICIT)

(in thousands)

For the Three Months Ended June 30, 2019

Convertible Preferred Stock  

For the Three Months Ended September 30, 2019  

Series A  

Series B  

Convertible Preferred Stock

Common Stock  

Retained  

Total Stockholders' 

Par value  

Capital 

Earnings  

 Par value

(Accumulated Deficit)

Stockholders'

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  

Balance at July 1, 2019

18,935,747  

cost related to private offering

Cash distributions

to CCD Members

$ 18,936  

Balance at June 30, 2019

Balance at September 30, 2019

18,935,747  

1 unchanged sentence

$ 2,138  

For the Six Months Ended June 30, 2019

Convertible Preferred Stock  

For the Nine Months Ended September 30, 2019  

Series A  

Series B  

Preferred Stock

Common Stock  

Retained  

Total Stockholders' 

Par value  

Capital 

Earnings  

Equity  

 Total Stockholders'

 Par value

Paid-in Capital

Balance at January 1, 2019

2 unchanged sentences

2,377,530  

 Conversion

of Series B convertible preferred stock

1 unchanged sentence

13,963  

 Issuance

of Common Stock and warrants in a private offering, net of $7,762

3 unchanged sentences

19,737  

 Offering

cost related to private offering

Cash distributions

to CCD Members

distributions to CCD Members

902,662  

Balance at June 30, 2019

Balance at September 30, 2019

18,935,747  

3 unchanged sentences

condensed consolidated financial statements.

CHARLIE’S HOLDINGS,

CHAR L IE’S HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS

1 unchanged sentence

(Unaudited)  

For the six months ended

For the nine months ended

September 30,  

Cash Flows from Operating Activities:

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:

Net income (loss)

Reconciliation of net loss to net cash used in operating

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:

expenses and other current assets

payable and accrued expenses

cash (used in) provided by operating activities

cash used in operating activities

Cash Flows from Investing Activities:

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paid for income taxes

Su pplemental

disclosure of non-cash financing and investing

activities  

Supplemental disclosure of cash flow information

of Series A convertible preferred stock

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NOTE 1 –

DESCRIPTION OF THE BUSINESS AND BASIS OF

DESCRIPTION OF THE

BUSINESS AND BASIS OF PRESENTATION

Description of the Business

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Polly ”), of certain

premium vapor, tincture and topical products containing

premium vapor, ingestible and topical products containing

hemp-derived cannabidiol (“

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continue sales of the Bazi product in its current

The Company's Common Stock, par value $0.001 per

share (the " Common

Stock "), trades under the

symbol "CHUC" on the OTC:

Acquisition of True Drinks Holdings, Inc.

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in the Investor Warrants.

additional consideration for advisory services provided in

connection with the Charlie’s Financing and the Share

Exchange, 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.

Share Exchange resulted in a change of control of the Company, with

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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

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exchange rate.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Going Concern Uncertainty Regarding the Legal and Regulatory

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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 (“

Additionally, the Company is required to apply approval from the

United States Food and Drug Administration (" FDA ") to continue selling and marketing its products

used for the vaporization of nicotine in the United States.

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

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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.

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 Premarket Tobacco

Application (“

For the nine months ended

September 30, 2020, the Company has incurred losses from operations

of approximately $6.0 million and a consolidated net loss of

approximately $11.4 million, and the Company has a

stockholders’

deficit of approximately $10.5 million as of

September 30, 2020.

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.

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.

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 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.

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.

Company is currently seeking debt and/or equity financing in order

to ensure that it has sufficient cash to operate for the next 12

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 the Company’s best

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.

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.

application deadline was previously May 2020 and recently has been

extended and there is no assurance that there will not be further

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

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

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

In addition, the

Company is presently seeking to obtain marketing authorization for

certain of its nicotine-based e-liquid products.

Our applications

were submitted in September 2020 on a timely basis, which if

approved, will allow the Company to continue to sell its approved

products in the United States.

The Company is also seeking

additional financing to support potential future PMTA related

expenses and general working capital.

There is no assurance that

regulatory approval to sell our products will be granted or that we

can raise the additional financing required, and if not, this could

have a significant impact on our sales.

March 11, 2020, the World Health Organization designated the

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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.

decline in sales, and if disruptions from the COVID-19 outbreak are

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

NOTE 2 –

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Report ”) not misleading.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

related to disclosure of December 31, 2019 balances within the

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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.

April 26, 2019 includes Charlie’s, Don Polly, Bazi and the

Company, which includes the transactions associated with the Share

Exchange and Charlie's Financing, along with ongoing corporate

Use of Estimates

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The Company is currently evaluating the impact of this standard on

its condensed consolidated financial statements and related

its consolidated financial statements and related

In June 2016 the

FASB issued ASU 2016-13, Measurement of Credit Losses on Financial

Instruments, which supersedes current guidance requiring

recognition of credit losses when it is probable that a loss has

been incurred.

The standard requires the establishment of an

allowance for estimated credit losses on financial assets,

including trade and other receivables, at each reporting date.

ASU will result in earlier recognition of allowances for losses on

trade and other receivables and other contractual rights to receive

This standard is effective for fiscal years, and interim

periods within those fiscal years, beginning after December 15,

Early adoption is permitted.

The Company does not believe the

impact of adopting this standard will be material to its

consolidated financial statements and related

August 2020, the FASB issued ASU No.

2020-06, Debt—Debt

with Conversion and Other Options (Subtopic 470-20) and Derivatives

and Hedging—Contracts in Entity’s Own Equity (Subtopic

Accounting for Convertible Instruments and Contracts in an

Entity’s Own Equity, which simplifies accounting for

convertible instruments by removing major separation models

required under current GAAP.

The ASU removes certain settlement

conditions that are required for equity contracts to qualify for

the derivative scope exception and it also simplifies the diluted

earnings per share calculation in certain areas. The ASU is

effective for the Company on December 1, 2022, Early adoption is

permitted, but no earlier than December 1, 2021. The Company

is currently evaluating the impact of this standard on its

consolidated financial statements and related

Reclassifications

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

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

Value at June 30, 2020

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

Value at September 30, 2020  

liability - Warrants

1 unchanged sentence

$ 9,408  

Value at December 31, 2019

liability - Warrants

1 unchanged sentence

$ 4,144  

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

period ended June 30, 2020.

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

period ended September 30, 2020.

following table presents changes in Level 3 liabilities measured at

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

fair value for the nine-month period ended September 30, 2020.

observable and unobservable inputs were used to determine the

8 unchanged sentences

thousands).   

Derivative liability

liability - Warrants

at January 1, 2020

1 unchanged sentence

in fair value

at June 30, 2020

at September 30, 2020

$ 9,408  

3 unchanged sentences

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

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

of September 30, 2020 and December 31, 2019 is as

$ 0.0044  

Contractual term

Dividend yield (per

yield (per share)

CHARLIE’S HOLDINGS, INC.

2 unchanged sentences

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.

awards are subject to a three-year service vesting period.

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.

value of the market condition awards on the termination date

of February 12, 2020

was approximately $ 1,638,000 .

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.

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 nine months ended September 30,

2020, the Company recorded an expense of $1,322,000 for these

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 nine months ended September

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

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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

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

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.

recorded stock-based compensation of approximately

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

effect subject to further review by the Board of Directors as it

deems necessary and appropriate.

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 the Advisory

Shares (see Note 1, above), including to a member of the

Company’s Board of Directors, pursuant to a subscription

The fair value of a share of Common Stock issued as

Advisory Shares was $0.0032, which is based upon a valuation

prepared by the Company on the date of the Share Exchange.

Company recorded stock-based compensation of approximately $2.9

million on the grant date.

to the Share Exchange, Charlie’s employees held membership

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 total

stock-based compensation related to these awards of approximately

$846,000 during the nine months ended September 30,

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - PROPERTY AND EQUIPMENT

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

follows (amount in thousands):

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

as follows (amount in thousands):

and equipment

Lesser of lease

term or estimated useful life

of lease term or estimated useful life

Depreciation and

amortization expense totaled $48,000 and $24,000, respectively,

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

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

Depreciation and amortization expense totaled $131,000 and $36,000,

respectively, during the nine months ended September 30, 2020 and

NOTE 6 - CONCENTRATIONS

Company’s concentration of purchases are as

three months ended

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.

three months ended  

nine months ended  

the three months ended September 30, 2020 and 2019, purchases from

five vendors represented 91% and 96%, respectively, of total

inventory purchases.

During the nine months ended September 30,

2020 and 2019, purchases from five vendors represented 83% and 95%,

respectively, of total inventory purchases.

September 30, 2020, and December 31, 2019, amounts owed to these

vendors totaled $297,000 and $268,000 respectively, which are

included in accounts payable and accrued expenses in the

accompanying condensed consolidated balance sheets.

Accounts Receivable

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.

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

September 30, 2020.

One customer made up more than 10% of net

accounts receivable at December

Customer B owed the Company a total of $331,000,

representing 24% of net receivables at September 30, 2020.

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

1 unchanged sentence

No customer exceeded 10% of total

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

net sales for the three and nine month periods ended September 30,

2020 and 2019, respectively.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 –

DON POLLY, LLC.

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.

formulates, sells and distributes the Company’s CBD product

Polly 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

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non-controlling interests are recorded.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 –

1 unchanged sentence

Accounts payable

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

as follows (amounts in thousands):

and accrued expense as of September 30, 2020 and December 31, 2019

are as follows (amounts in thousands):

accrued expenses

4 unchanged sentences

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.

April 1, 2020, the Company, Charlie's and its VIE, Don Polly,

issued a secured promissory note (the " Red Beard Note ") to one of the

Company's largest stockholders, Red Beard Holdings, LLC

(" Red Beard ") in the

principal amount of $750,000 (the " Principal Amount "), 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 Red

Beard (the " Red Beard Note

Financing ").

Beard Note required the payment of the Principal Amount 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 Red Beard 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

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

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

guaranteed minimum interest, the Principal Amount and unpaid

interest and unpaid other amounts under the Red Beard Note shall,

at the election of the Red Beard 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 would 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

August 27, 2020, the Company’s Board of Directors, entered

into Amendment No.

1 to Secured Promissory Note and Security

Agreement (“

Beard Note ”), by and between the Company and Red

Pursuant to the Amended Red Beard Note, the terms of the Red

Beard Note held by Red Beard were amended as follows (i) the

Principal Amount under the Red Beard Note was increased from

$750,000 to $1,400,000 and (ii) the guaranteed minimum interest due

upon maturity of the Red Beard Note was increased from $75,000 to

All other terms of the respective Red Beard Note remain

in full force and effect.

September 30, 2020, the Company’s Board of Directors entered

into Amendment No.

2 to Secured Promissory Note and Security

Agreement ( “Second Amended

Red Beard Note”

), by and between the Company and Red

The Red Beard Note, as amended by Amendment 1, was further

amended by the Second Amended Red Beard Note to amend the

definition of the “Maturity Date”

in the Red Beard Note

to mean November 1, 2020.

Company used the proceeds from the Red Beard Note Financing for

general corporate purposes, and its working capital requirements,

pending availability of long-term investment

capital.  

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Small Business Administration Loan Programs

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Small Business Administration

Promissory Note (the " PPP

Loan ") with TBK Bank, SSB

Promissory Note (the " Charlie's

PPP Loan ") with TBK Bank, SSB

Lender "), pursuant to the

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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.

the SBA (the " PPP

Loan Agreement ").

The Charlie's PPP Loan provides for working capital to CCD in the

amount of $650,761.

The Charlie's 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 Charlie's PPP Loan, or until November 30,

Interest, however, will continue to accrue during this

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

Polly also obtained a loan pursuant to the PPP enacted under the

CARES Act (the " Polly

PPP Loan " and together with the

Charlie's PPP Loan, the " PPP

Loans ")) from Community

Banks of Colorado, a division of NBH Bank (the " Polly

The Polly 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

The Polly 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

Payments of principal and interest will be deferred for six months

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

Interest, however, will continue to accrue during this

The aforementioned PPP Loans were made under the PPP enacted by

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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 respective borrower 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

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.

The balance of principal and interest

will be payable thirty years from the date of the EID Loan and

interest will accrue at the rate of 3.75% per

The following summarizes the Company’s note payable

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

maturities as of September 30, 2020 (amount in

months ended December 31, 2020

$ 1,493  

Ended December 31, 2021

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$ 2,416  

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.

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, par value $0.001 per share

Stock "), warrants and vested

and unvested stock options.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

following table sets forth the computation of earnings per share

for the three and nine months ended September 30, 2020 and 2019,

respectively (amounts in thousands except per share

three months ended  

nine months ended  

earnings (loss) - basic

$ 1,557  

earnings (loss) - diluted

$ 1,557  

average shares outstanding - basic

18,990,753  

18,935,746  

18,982,383  

7,847,468  

average shares outstanding - diluted

18,990,753  

18,935,746  

18,982,383  

7,847,468  

following securities were not included in the diluted net earnings

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the periods presented (in thousands):

six months ended

For the nine months ended

September 30,  

796,127  

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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

As of September 30, 2020, the Company has not paid the Dividend

Amount to holders of its Series A Preferred and has reflected the

liability on its consolidated balance sheet.

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”

disclosed, 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 Red Beard Note, as amended, more specifically

described in Note 9, shall, at the election of Red Beard, bear

interest at the lesser of a rate equal to 20% per annum or the

maximum lawful rate authorized under applicable law, until the Red

Beard Note, as amended, is paid in full.

On October 29, 2020 the

Company entered into the Third Amended Red Beard Note, by and

between the Company and Red Beard, by which Red Beard has agreed to

waive certain rights upon the occurrence of an Event of Default, as

defined in the Red Beard Note, as amended, which was triggered by

the Company’s receipt of the notice of default from certain

holders of the Company’s Series A Preferred, dated August 13,

The Third Amended Red Beard Note is due and payable on or

before the earlier date of (i) a Liquidity Event, as defined under

the terms of the Red Beard Note, as amended, or (ii) December 1,

2020, as defined in Red Beard Note, as amended.

While no assurances

can be given, management is currently negotiating with Red Beard

regarding settlement of the Red Beard Note, as

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

Preferred ”).

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

the nine months ended September 30, 2020, the Company issued

approximately 16,925,000 shares of Common Stock upon conversion of

750 shares of Series A Preferred.

NOTE 12 –

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stock options.

As of June 30, 2020, approximately 61.8 million of

these stock options remain vested and exercisable under this

As of September 30, 2020, approximately 56.6 million

of these stock options remain vested and exercisable under this

The Company will not grant any additional awards or shares of

Common Stock under the Prior Plan beyond those that are currently

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On May 8, 2019, our

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purchased on the open market or otherwise.

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

following table summarizes stock option activities during the nine

months ended September 30, 2020 (all option amounts are in

Stock Options

Weighted Average Exercise Price

Weighted Average Remaining Contractual Life (in years)

Aggregate Intrinsic Value

at January 1, 2020

801,325  

$ 0.01  

forfeited/expired

at September 30, 2020

796,127  

$ 0.01  

vested and exercisable at September 30, 2020

303,127  

$ 0.01  

September 30, 2020, there was approximately $ 416,000 of total unrecognized compensation

expense related to non-vested share-based compensation arrangements

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over a weighted average period of 1.8 years.

For the six months ended June 30, 2020, the

For the nine months ended September 30, 2020, the

Company recorded compensation expense of approximately $549,000

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Stump, the Company’s Chief Executive Officer, Chief Operating

Officer and member of the Board.

Stump, Stump and Stump

purchased the property that is the subject of the Lease in July

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.

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.

Officer and member of the Board of Directors.

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.

terms of the Lease were negotiated and approved by the independent

members of the Board of Directors, and executed by Mr.

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

three and nine months ended September 30, 2020 was approximately

$68,820 and $206,460, respectively.

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

approximately $1.3 million and right of use assets of approximately

$1.3 million, which were included in the condensed consolidated

balance sheet.

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

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

balance sheet.

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):

Company’s operating leases for the three and nine months

ended September 30, 2020 and 2019 (amount in

three months ended

six months ended

nine months ended

   Operating

   Variable

Operating lease

Short-term lease

six months ended

lease expense

lease rent expense

nine months ended

cash flows from operating leases

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operating leases

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

leases, are as follows (amount in thousands):

Remaining months

of our operating leases as of September 30, 2020, excluding

short-term leases, are as follows (amount in

months ended December 31, 2020

Ended December 31, 2021

Year Ended December

Less present value

Operating lease

liabilities as of June 30, 2020

Ended December 31, 2022

Ended December 31, 2023

Ended December 31, 2024

present value discount

lease liabilities as of September 30, 2020

$ 1,330  

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Legal Proceedings

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NOTE 14- SUBSEQUENT EVENTS

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.

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

Amendment to Secured Promissory Note and Security Agreement held by

Red Beard Holdings, LLC

October 29, 2020, the Company entered into the Third Amended Red

Beard Note (the " Amended

Note "), by and between the Company and Red Beard, dated

April 8, 2020, and amended on August 27, 2020 and September 30,

The terms of the Amended Note held by Red Beard have been

amended to revise the maturity date from November 1, 2020 to

December 1, 2020.

Furthermore, Red Beard has agreed to waive

certain rights upon the occurrence of an Event of Default, as

defined in the Amended Note, which was triggered by the

Company’s receipt of that certain notice of default, dated

August 13, 2020, from certain holders of the Company’s Series

Company has evaluated events subsequent to September 30, 2020 to

assess the need for potential recognition or disclosure in the

unaudited condensed consolidated financial statements.

were evaluated through the date these financial statements were

available to be issued.

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set forth above, there were no items requiring

ITEM 2 - MANA GEMENT'S

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

ITEM 2 - MANA G EMENT'S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

The following discussion of the financial condition and results of

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formulate, market and distribute branded e-cigarette liquid for use

in both open and closed nicotine-only e-cigarette and vaping

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.

in both open and closed 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

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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

A ll of Charlie's 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 ”).

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rightful regulatory changes have been made.

We will continue with

We are continuing 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

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

products through the completion of a Premarket Tobacco Application

(" PMTA "), which we

submitted in September 2020.

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.

Recent Developments

the quarter ended September 30, 2020, the United States Food and

Drug Administration's (" FDA ") Center for Tobacco Products

informed us that our PMTA has received a valid submission tracking

number, passed the FDA’s filing review phase, and recently

entered the substantive review phase.

To date, Charlie’s has

invested over $4.4 million for our initial PMTA submission.

engaged a team of more than 200 professionals, including doctors,

scientists, biostatisticians, data analysts, and numerous contract

research organizations to create our comprehensive PMTA submission.

This news highlights our progress toward achieving full regulatory

compliance and our goal of providing customers with a trusted

product portfolio.

We are confident that during the substantive

review phase of the PMTA process, the FDA will recognize that our

submission is both distinguished and suitable for

Risks and Uncertainties

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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.

application deadline was previously May 2020 and recently has been

extended and there is no assurance that there will not be further

The Company is also seeking additional financing to

complete the application process.

Company is presently seeking to obtain marketing authorization for

certain of its nicotine-based e-liquid products.

applications were submitted in September 2020 on a timely basis,

which if approved, will allow the Company to continue to sell its

products in the United States.

The Company is also seeking

additional financing to support potential future PMTA related

expenses and general working capital.

There is no assurance that

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can raise the additional financing required, and if not, this could

have a material adverse effect on our sales.

have a significant impact on our sales.

March 11, 2020, the World Health Organization designated the

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Basis of Presentation

Share Exchange is accounted for as a reverse recapitalization under

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

The Share Exchange (as defined in Note 1 of Item

1, Part 1 of this Report) is accounted for as a reverse

recapitalization under generally accepted accounting principals in

the United States (" 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:

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

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recapitalization of the Company and the Charlie’s Financing

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

(as defined in Note 1 of Item 1, Part 1 of this Report).

addition, from the period April 26, 2019 until September 30, 2020,

there were minimal costs and revenue associated with the Bazi

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The operating results of Don

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

Polly for the three and nine months ended September 30, 2020 are

also included.

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

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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

results from operations for the quarter ended September 30, 2020,

we generated revenue of approximately $3,894,000, as compared to

revenue of $5,590,000 for the three months ended September

This $1,696,000 decrease in revenue was due primarily to

a $1, 181,000 decrease in sales of our nicotine-based products and

a $515,000 decrease in sales of our CBD based 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

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

of approximately $6,824,000, as compared to net income of

approximately $1,557,000 for the three months ended September 30,

The net loss for the three months ended September 30, 2020

includes non-cash stock-based compensation expense of approximately

$381,000 and a non-cash loss in fair value of derivative

liabilities of $5,874,000.

In addition, the Company expensed

$740,000 of consulting fees for the three months ended September

30, 2020 as a result of the PMTA registration process.

results from operations for the nine months ended September 30,

2020, we generated revenue of approximately $12,462,000, as

compared to revenue of $19,056,000 for the nine months ended

September 30, 2019.

This $6,594,000 decrease in revenue was due

primarily to a $6,364,000 decrease in sales of our nicotine-based

products, and a $230,000 decrease in sales from our CBD products,

which were introduced in June of 2019.

generated a net loss for the nine months ended September 30, 2020

of approximately $11,384,000, as compared to net income of

approximately $999,000 for the nine months ended September 30,

The net loss for the nine months ended September 30, 2020

includes non-cash stock-based compensation expense of approximately

$2,717,000 and a non-cash loss in fair value of derivative

liabilities of $5,264,000.

In addition, the Company expensed

$3,360,000 of consulting fees for the nine months ended September

30, 2020 as a result of the PMTA registration process.

review of the three and nine month periods ended September 30, 2020

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

Compared to the Three Months Ended September 30, 2019

three months ended

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operating costs and expenses

10,030  

from operations

1 unchanged sentence

in fair value of derivative liabilities

other income (expense)

Net income (loss)

$ 1,557  

Revenue for the three months ended June 30, 2020

Revenue for the three months ended September 30,

2020 decreased approximately $1,696,000 or 30.3%, to approximately

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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

review timeline, following the PMTA submission deadline, has

affected buying patterns in the domestic vape market as customers

reduce inventories of non-PMTA submitted products.

In addition, in

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

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

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decreased approximately $859,000, or 34.0%, to approximately

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

$1,666,000, or 43% of revenue, for the three months ended September

30, 2020, as compared to approximately $2,525,000, or 45% of

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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.

revenue, decreased 200 basis points due to a favorable mix of

higher margin sales for both Charlie’s and Don Polly, but was

slightly offset by the effects of distributors and retailers

participating in volume incentive rebate programs, as well as lower

fixed cost absorption.

General and Administrative Expenses

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

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

administrative expense decreased approximately $1,205,000 to

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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

This decrease is comprised of reductions of

approximately $825,000 of non-cash, stock-based compensation,

employee bonus and other transaction related costs as well as

$628,000 of other general and administrative expenses.

reduction in transaction related costs includes $218,000 in

additional non-cash, stock-based compensation, $362,000 of employee

bonuses and $245,000 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.

The decrease was offset by an increase of

approximately $248,000 in various other general and administrative

expenses, primarily comprised of rent, software and fees due to our

Sales and Marketing Expense

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

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

the three months ended September 30, 2020, total sales and

marketing expense decreased approximately $642,000, or 65.7%, to

approximately $335,000 as compared to approximately $977,000 for

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commissions paid for reduced sales and curtailed spending on

several marketing programs due to uncertainty in the global

several marketing programs and trade shows due to uncertainty in

the global economy.

Research and Development Expense

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

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

development expense increased approximately $741,000, to

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had operating losses of approximately $921,000 for the three months

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

ended September 30, 2020, due primarily to a $1,818,000 decrease in

sales for our nicotine-based product business and a $515,000

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operations by the following items:

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

in Fair Value of Derivative Liabilities.

three months ended September 30, 2020 and 2019, the loss and gain

in fair value of derivative liabilities was $5,874,000 and

$2,747,000 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

The derivative liability is associated

with the issuance of the Investor Warrants (as defined in Note 1 of

Item 1, Part 1 of this Report) and the Placement Agent Warrants (as

defined in Note 1 of Item 1, Part 1 of this Report) in connection

with the Share Exchange.

The loss for the quarter ended September

30, 2020 reflects the effect of the increase in stock price as of

September 30, 2020 compared to June 30, 2020.

Additionally, the

large fluctuation on change in fair value is primarily due to the

significant increase in our share price and the amount of warrants

We had approximately 4,034 million warrants

outstanding as of September 30, 2020.

the three months ended September 30, 2020 and

September 30, 2019, we recorded of interest expense related to

notes payable of $29,000 and $0, respectively.

the three months ended September 30, 2020, we had a net loss of

$6,824,000 as compared to net income of $1,557,000 for the same

period in 2019. 

Results of Operations for the Nine Months Ended September 30, 2020

Compared to the Nine Months Ended September 30, 2019

nine months ended

($ in thousands)

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12,462  

19,056  

Operating costs and expenses:

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and administrative

10,307  

and marketing

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in fair value of derivative liabilities

Revenue for the six months ended June 30, 2020

other income (expense)

Net income (loss)

Revenue for the nine months ended September 30,

2020 decreased approximately $6,594,000 or 34.6%, to approximately

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period in 2019 due to a $6,364,000 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.

product sales, and a $230,000 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

affected buying patterns in the domestic vape market as customers

reduce inventories of non-PMTA submitted products.

In addition, in

late February 2020, sales of our 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

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decreased approximately $2,760,000, 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

$5,361,000, or 43.0% of revenue, for the nine months ended

September 30, 2020, as compared to approximately $8,121,000, or

42.6% of revenue, for the same period in 2019.

This cost, as a

percent of revenue, remained relatively unchanged due to a more

favorable mix of higher margin sales for Charlie’s and Don

Polly in the most recent quarter, but was offset by the effects of

distributors and retailers participating in volume incentive rebate

programs and a relatively larger provision for returns and

obsolescence.

General and Administrative Expenses

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

the nine months ended September 30, 2020, total general and

administrative expense decreased approximately $1,807,000 to

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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

This decrease is comprised of reductions of

approximately $3.2 million of non-cash, stock-based compensation,

employee bonus and other transaction costs, as well as $300,000 of

other general and administrative expenses.

The decrease in

transaction related costs includes $959,000 in additional non-cash,

stock-based compensation, $2.0 million of employee bonuses and

$285,000 of other expenses incurred as a result of our Share

Exchange in 2019.

The decrease was offset by an increase of

approximately $1.7 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.

administrative expenses primarily comprised of salary, software,

insurance and other costs related to expansion and operations as a

public company.

Sales and Marketing Expense

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

the nine months ended September 30, 2020, total sales and marketing

expense decreased approximately $1,295,000, or 50.7%, to

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

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

approximately $1,259,000 as compared to approximately $2,554,000

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

several marketing programs and trade shows due to uncertainty in

the global economy.

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.

the nine months ended September 30, 2020, total research and

development expense increased approximately $3,372,000, to

approximately $3,372,000 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 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

had operating losses of approximately $6,030,000 for the nine

months ended September 30, 2020, due primarily to a $6,364,000

decrease in sales from our nicotine-based product business, and a

$230,000 decrease in sales for our CBD products.

certain general and administrative expenses that contributed to the

loss from operations including a $3,372,000 increase in research

and development expense related to the PMTA registration of some of

our products and $2,717,000 of expenses related to non-cash,

stock-based compensation.

Net loss is determined by adjusting

income from operations by the following items:

in Fair Value of Derivative Liabilities.

the nine months ended September 30, 2020 and 2019, the loss and

gain in fair value of derivative liabilities was $5,264,000 and

$2,925,000 respectively.

The derivative liability is associated

with the issuance of the Investor Warrants and the Placement Agent

Warrants in connection with the Share Exchange.

The loss for the

nine months ended September 30, 2020 reflects the effect of the

increase in stock price as of September 30, 2020 compared to

December 31, 2019.

Additionally, the large fluctuation on change in

fair value is primarily due to the significant increase in our

share price and the amount of warrants outstanding.

approximately 4,034 million warrants outstanding as of September

the nine months ended September 30, 2020 and

September 30, 2019, we recorded interest expense related to notes

payable of $105,000 and $0, respectively.

the nine months ended September 30, 2020, we had a net loss of

$11,384,000 as compared to net income of $999,000 for the same

period in 2019. 

Effects of Inflation

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Liquidity and Capital Resources

As of June 30, 2020, we had negative working

As of September 30, 2020, we had negative working

capital of approximately $10,599,000, which consisted of current

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approximately $15,594,000.

This compares to negative working capital

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

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

This compares to negative working

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

current liabilities, as presented in the condensed consolidated

balance sheet at September 30, 2020 included elsewhere in this

Report primarily include approximately $2,466,000 of accounts

payable and accrued expenses, approximately $220,000 of deferred

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payable of $1,400,000, dividends payable of $1,650,000 and

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 June 30, 2020 was

$9,408,000 of derivative liability associated with the Investor

Warrants (the derivative liability of $9,408,000 is included in

determining the negative working capital of $10,599,000 but is not

expected to use any cash to ultimately satisfy the

In addition, the

effect of the COVID-19 pandemic may have a negative impact on our

liquidity and capital reserves.

cash and cash equivalents balance at September 30, 2020 was

approximately $1,209,000.

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

For the six months ended June 30, 2020 we used

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

the nine months ended September 30, 2020, operating activities used

$3,502,000 of cash, resulting from a net loss of $11,384,000,

partially offset by $2,717,000 of share-based compensation,

$5,264,000 of change in fair value of derivative liabilities and

$1,022,000 changes in our operating assets and liabilities.

nine months ended September 30, 2019, operating activities used

$524,000 of cash, resulting from a net income of $999,000,

partially offset by $3,359,000 of stock-based compensation and

$2,925,000 decrease in fair value of derivative liabilities, and

$2,670,000 changes in our operating assets and

For the nine months ended September 30, 2020, we

used cash for investment activities of $153,000 as compared

to $365,000 for the same period

The cash used for investment activities is primarily for

the development and configuration phase of enterprise resource

planning software being implemented during the nine months ended

September 30, 2020.

the nine months ended September 30, 2020 we generated approximately

$2,416,000 cash from financing activities, as compared to

$4,751,000 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,

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

In the 2020 period, we

generated cash from financing activities from the PPP Loans (as

defined in Note 9 of Item 1, Part 1 of this Report) and EID Loan

(as defined in Note 9 of Item 1, Part 1 of this Report).

2019 period, we generated cash from financing activities from the

Charlie’s Financing, which was offset by Member (as defined

in Note 1 of Item 1, Part 1 of this Report) 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

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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

the nine months ended September 30, 2020, the Company has incurred

losses from operations of $6,030,000 and a consolidated net loss of

approximately $11,384,000 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.

deficit of $10,548,000 as of September 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.

plans and growth depend on our ability to increase revenues and

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

ITEM 3 - QU ANTITATIVE AND

ITEM 3 - QUAN T ITATIVE 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