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)       September 30,     December 31,       2020     2019       (Unaudited)         ASSETS             Current assets:             Cash   $ 1,209     $ 2,448   Accounts receivable, net     1,358       918   Inventories, net     1,764       1,516   Prepaid expenses and other current assets     664       729   Total current assets     4,995       5,611                     Non-current assets:                 Property, plant and equipment, net     565       543   Right-of-use asset, net     1,311       1,623   Other assets     71       71   Total non-current assets     1,947       2,237                     TOTAL ASSETS   $ 6,942     $ 7,848                     LIABILITIES AND STOCKHOLDERS' DEFICIT                 Current liabilities:                 Accounts payable and accrued expenses   $ 2,466     $ 2,516   Derivative liability     9,408       4,144   Lease liabilities     450       426   Notes payable     1,400       -   Dividends payable     1,650       -   Deferred revenue     220       91   Total current liabilities     15,594       7,177                     Non-current liabilities:                 Notes payable, net of current portion     1,016       -   Lease liabilities, net of current portion     880       1,218   Total non-current liabilities     1,896       1,218                     Total liabilities     17,490       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 September 30, 2020 and December 31, 2019, respectively     -       -   Series B, 1.5 million shares designated, 0 shares issued and outstanding as of September 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 September 30, 2020 and December 31, 2019, respectively     18,991       18,974   Additional paid-in capital     (15,679 )     (17,045 ) Accumulated deficit     (13,860 )     (2,476 ) Total stockholders' deficit     (10,548 )     (547 ) TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT   $ 6,942     $ 7,848     The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.     -1- Table of Contents     CHARLIE’S H OL DINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) (Unaudited)       For the three months ended     For the nine months ended       September 30,     September 30,       2020     2019     2020     2019   Revenues:                         Product revenue, net   $ 3,894     $ 5,590     $ 12,462     $ 19,056   Total revenues     3,894       5,590       12,462       19,056   Operating costs and expenses:                                 Cost of goods sold - product revenue     1,666       2,525       5,361       8,121   General and administrative     2,073       3,278       8,500       10,307   Sales and marketing     335       977       1,259       2,554   Research and development     741       -       3,372       -   Total operating costs and expenses     4,815       6,780       18,492       20,982   Loss from operations     (921 )     (1,190       (6,030 )     (1,926   Other income (expense):                                 Interest expense     (29 )     -       (105 )     -   Change in fair value of derivative liabilities     (5,874 )     2,747       (5,264 )     2,925   Other income     -       -       15       -   Total other income (expense)     (5,903 )     2,747       (5,354 )     2,925   Net (loss) income   $ (6,824 )   $ 1,557     $ (11,384 )   $ 999                                     Net earnings (loss) per share, basic and diluted   $ (0.00 )   $ 0.00     $ (0.00 )   $ 0.00   Weighted average number of common shares outstanding, basic and diluted     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.       -2- Table of Contents     CHARLIE’S HOL D I NGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (in thousands) (Unaudited)       For the Three Months Ended September 30, 2020                       Series A         Series B                                         Convertible Preferred Stock     Convertible Preferred Stock     Common Stock     Additional     Accumulated      Total Stockholders'        Shares      Par value      Shares      Par value      Shares      Par value     Paid-in Capital     Deficit       Deficit   Balance at July 1, 2020     204     $ -       -     $ -       18,990,753     $ 18,991     $ (16,060 )   $ (7,036 )   $ (4,105 )  Stock compensation     -       -       -       -       -       -       381       -       381    Net loss     -       -       -       -       -       -       -       (6,824 )     (6,824 ) Balance at September 30, 2020     204     $ -       -     $ -       18,990,753     $ 18,991     $ (15,679 )   $ (13,860 )   $ (10,548 )         For the Nine Months Ended September 30, 2020                       Series A         Series B                                         Convertible Preferred Stock     Convertible Preferred Stock     Common Stock         Additional     Accumulated      Total Stockholders'        Shares      Par value      Shares      Par value      Shares      Par value     Paid-in 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 compensation     -       -       -       -       -       -       1,395       -       1,395    Net loss     -       -       -       -       -       -       -       (11,384 )     (11,384 ) Balance at September 30, 2020     204     $ -       -     $ -       18,990,753     $ 18,991     $ (15,679 )   $ (13,860 )   $ (10,548 )     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 September 30, 2019                       Series A         Series B                           Retained           Convertible Preferred Stock     Convertible Preferred Stock     Common Stock         Additional     Earnings       Total        Shares      Par value      Shares      Par value      Shares      Par value     Paid-in Capital     (Accumulated Deficit)       Stockholders' Equity   Balance at July 1, 2019     206     $ -       -     $ -       18,935,747     $ 18,936     $ (17,749 )   $ (888 )   $ 299    Stock compensation     -       -       -       -       -       -       282       -       282    Net income     -       -       -       -       -       -       -       1,557       1,557   Balance at September 30, 2019     206     $ -       -     $ -       18,935,747     $ 18,936     $ (17,467 )   $ 669     $ 2,138           For the Nine Months Ended September 30, 2019                       Series A         Series B                                         Convertible Preferred Stock     Convertible Preferred Stock     Common Stock         Additional     Retained      Total Stockholders'        Shares      Par value      Shares      Par value      Shares      Par value     Paid-in 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 compensation     -       -       -       -       902,662       903       2,456       -       3,359    Net income     -       -       -       -       -       -       -       999       999   Balance at September 30, 2019     206     $ -       -     $ -       18,935,747     $ 18,936     $ (17,467 )   $ 669     $ 2,138       The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.       -4- Table of Contents     CHAR L IE’S HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)         For the nine months ended       September 30,           2020     2019   Cash Flows from Operating Activities:             Net income (loss)   $ (11,384 )   $ 999   Reconciliation of net loss to net cash used in operating activities:                 Allowance for doubtful accounts     480       573   Depreciation and amortization     131       36   Change in fair value of derivative liabilities     5,264       (2,925 ) Amortization of operating lease right-of-use asset     312       104   Stock based compensation     2,717       3,359   Subtotal of non-cash charges     8,904       1,147   Changes in operating assets and liabilities:                 Accounts receivable     (920 )     (1,685 ) Inventories     (248 )     (1,181 ) Prepaid expenses and other current assets     65       (393 ) Other assets     -       (26 ) Accounts payable and accrued expenses     266       720   Deferred revenue     129       (22 ) Lease liabilities     (314 )     (83 ) Net cash used in operating activities     (3,502 )     (524 ) Cash Flows from Investing Activities:                 Purchase of property, plant and equipment     (153 )     (365 ) Net cash used in investing activities     (153 )     (365 ) 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     2,416       -   Cash distributions to CCD Members     -       (18,409 ) Net cash provided by financing activities     2,416       4,751   Net (decrease) increase in cash     (1,239 )     3,862                     Cash, beginning of the period     2,448       304   Cash, end of the period   $ 1,209     $ 4,166                     Supplemental disclosure of cash flow information                 Cash paid for interest   $ -     $ -   Cash paid for income taxes   $ -     $ -                     Supplemental disclosure of cash flow information                 Conversion of Series A convertible preferred stock   $ 17     $ -   Reclassification of liability awards to equity   $ 1,638     $ -   Accrue 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, ingestible 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.   The Company's Common Stock, par value $0.001 per share (the " Common Stock "), trades under the symbol "CHUC" on the OTC: PINK market.   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.   As 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.   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.   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.       -6- Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     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 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. 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 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. 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 the Company’s 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 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.   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, 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.       -7- Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     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 and the Company, which includes the transactions associated with the Share Exchange and Charlie's Financing, 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   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 consolidated financial statements and related disclosures.   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. The ASU will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. 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 disclosures.   In 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 815-40): 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 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 September 30, 2020 and December 31, 2019 (amount in thousands):       Fair Value at September 30, 2020                   Total     Level 1     Level 2     Level 3   Liabilities:                         Derivative liability - Warrants     9,408       -       -       9,408   Total liabilities   $ 9,408     $ -     $ -     $ 9,408                                           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 nine-month period ended September 30, 2020.   The following table presents changes in Level 3 liabilities measured at fair value for the nine-month period ended September 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     5,264   Balance at September 30, 2020   $ 9,408     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 September 30, 2020 and December 31, 2019 is as follows:       September 30,     December 31,       2020     2019   Exercise price   $ 0.0044     $ 0.0044   Contractual term (years)     3.57       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 nine months ended September 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 nine months ended September 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 of Directors 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 the Advisory Shares (see Note 1, above), 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 issued as Advisory Shares 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 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, 2020.       -10- Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     NOTE 5 - PROPERTY AND EQUIPMENT   Property and Equipment detail as of September 30, 2020 and December 31, 2019 are as follows (amount in thousands):       September 30,     December 31,         2020     2019   Estimated Useful Life Machinery and equipment   $ 38     $ 96   5 years Trade show booth     217       171   5 years Office equipment     552       118   5 years Leasehold improvements     171       440   Lesser of lease term or estimated useful life       978       825     Accumulated depreciation     (413 )     (282 )       $ 565     $ 543       Depreciation and amortization expense totaled $48,000 and $24,000, respectively, 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 2019.    NOTE 6 - CONCENTRATIONS   Vendors   The Company’s concentration of purchases are as follows:       For the three months ended         For the nine months ended           September 30,         September 30,           2020     2019     2020     2019   Vendor A     10 %     20 %     21 %     18 % Vendor B     13 %     53 %     25 %     63 % Vendor C     56 %     10 %     21 %     6 % Vendor D     0 %     8 %     12 %     4 % Vendor E     12 %     5 %     4 %     4 %    During 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.   As of 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   The Company’s concentration of accounts receivable are as follows:       September 30,     December 31,       2020     2019   Customer A     0 %     23 % Customer B     24 %     0 %   One 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 31 , 2019. Customer B owed the Company a total of $331,000, representing 24% of net receivables at September 30, 2020. 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 nine month periods ended September 30, 2020 and 2019, respectively.     -11- Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     NOTE 7 – DON POLLY, LLC.   Don 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 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.   NOTE 8 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES   Accounts payable and accrued expense as of September 30, 2020 and December 31, 2019 are as follows (amounts in thousands):       September 30,     December 31,       2020     2019   Accounts payable   $ 646     $ 673   Accrued compensation     1,402       1,635   Other accrued expenses     418       208       $ 2,466     $ 2,516     NOTE 9 – NOTES PAYABLE   Red Beard Holdings, LLC Note Payable   On 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 ").   The Red 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 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 made.   On August 27, 2020, the Company’s Board of Directors, entered into Amendment No. 1 to Secured Promissory Note and Security Agreement (“ Amended Red Beard Note ”), by and between the Company and Red Beard. 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 $100,000. All other terms of the respective Red Beard Note remain in full force and effect.   On 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 Beard. 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.   The 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.       -12- Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     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 " Charlie's 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 " 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, 2020. Interest, however, will continue to accrue during this time.   On April 14, 2020, Don 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 Lender "). The Polly PPP Loan obtained by Don Polly provides for working capital to Don Polly in the amount of $215,600. The Polly 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 Polly 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 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 (“ 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. 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 annum.   The following summarizes the Company’s note payable maturities as of September 30, 2020 (amount in thousands):   Remaining months ended December 31, 2020   $ 1,493   Year Ended December 31, 2021     582   Year Ended December 31, 2022     199   Year Ended December 31, 2023     5   Year Ended December 31, 2024     5   Thereafter     132   Total   $ 2,416   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, par value $0.001 per share ( "Preferred Stock "), warrants and vested and unvested stock options.     -13- Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     The 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 data):        For the three months ended         For the nine months ended           September 30,         September 30,           2020     2019     2020     2019   Net earnings (loss) - basic   $ (6,824 )   $ 1,557     $ (11,384 )   $ 999                                     Net earnings (loss) - diluted   $ (6,824 )   $ 1,557     $ (11,384 )   $ 999                                     Weighted average shares outstanding - basic     18,990,753       18,935,746       18,982,383       7,847,468                                     Weighted average shares outstanding - diluted     18,990,753       18,935,746       18,982,383       7,847,468     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 nine months ended           September 30,           2020     2019   Options     796,127       61,825   Series A convertible preferred shares     5,564,296       4,654,399   Warrants     4,033,769       4,033,769   Total     10,394,192       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 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.   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, 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 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, 2020. 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 amended.   Conversion of Series A Preferred Shares   For 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 – 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 September 30, 2020, approximately 56.6 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.     -14- Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     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.   The following table summarizes stock option activities during the nine months ended September 30, 2020 (all option amounts are in thousands):       Stock Options     Weighted Average Exercise Price     Weighted Average Remaining Contractual Life (in years)     Aggregate Intrinsic Value   Outstanding at January 1, 2020     801,325     $ 0.01       9.41     $ -   Options granted     -       -       -       -   Options forfeited/expired     (5,198 )     0.03       -       -   Outstanding at September 30, 2020     796,127     $ 0.01       8.72     $ -   Options vested and exercisable at September 30, 2020     303,127     $ 0.01       8.15     $ -     As of September 30, 2020, there was approximately $ 416,000 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 1.8 years. For the nine months ended September 30, 2020, the Company recorded compensation expense of approximately $549,000 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 of Directors. 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 of Directors, 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 nine months ended September 30, 2020 was approximately $68,820 and $206,460, respectively.     At 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.       -15- Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     The following summarizes quantitative information about the Company’s operating leases for the three and nine months ended September 30, 2020 and 2019 (amount in thousands): table     For the three months ended     For the nine months ended       September 30,         September 30,           2020     2019     2020     2019   Operating leases                            Operating lease cost   $ 149     $ 80     $ 448     $ 145      Variable lease cost     -       -       -       -   Operating lease expense     149       80       448       145   Short-term lease rent expense     -       -       -       -   Total rent expense   $ 149     $ 80     $ 448     $ 145         For the nine months ended       September 30,           2020     2019   Operating cash flows from operating leases   $ 312     $ 83   Weighted-average remaining lease term – operating leases (in years)     3.18       2.60   Weighted-average discount rate – operating leases     12.00 %     12.00 %   Maturities of our operating leases as of September 30, 2020, excluding short-term leases, are as follows (amount in thousands):   Remaining months ended December 31, 2020   $ 288   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     1,745   Less present value discount     (415 ) Operating lease liabilities as of September 30, 2020   $ 1,330     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   Amendment to Secured Promissory Note and Security Agreement held by Red Beard Holdings, LLC   On 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, 2020. 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 A Preferred.   The 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. 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 G EMENT'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 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 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.   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 are continuing with our plan to obtain marketing authorization for certain of our 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.       -17- Table of Contents     Recent Developments   During 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. We 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 approval.   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 seeking to obtain marketing authorization for certain of its nicotine-based e-liquid products. Our PMTA 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 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.   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 (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: (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 (as defined in Note 1 of Item 1, Part 1 of this Report). In addition, from the period April 26, 2019 until September 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 nine months ended September 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.       -18- Table of Contents     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 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 30, 2019. 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.   We 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, 2019. 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.   Regarding 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.   We 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, 2019. 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 $3,360,000 of consulting fees for the nine months ended September 30, 2020 as a result of the PMTA registration process.   A review of the three and nine month periods ended September 30, 2020 follows:   Results of Operations for the Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019       For the three months ended                   September 30,         Change       2020     2019     Amount     Percentage   ($ in thousands)                         Revenues:                         Product revenue, net   $ 3,894     $ 5,590     $ (1,696 )     -30.3 % Total revenues     3,894       5,590       (1,696 )     -30.3 % Operating costs and expenses:                                 Cost of goods sold - product revenue     1,666       2,525       (859 )     -34.0 % General and administrative     2,073       3,278       (1,205 )     -36.8 % Sales and marketing     335       977       (642 )     -65.7 % Research and development     741       -       741       100 % Total operating costs and expenses     4,815       6,780       (1,965 )     -29.0 % Loss from operations     (921 )     (1,190 )     269       -22.6 % Other income (expense):                                 Interest expense     (29 )     -       (29 )     100 % Change in fair value of derivative liabilities     (5,874 )     2,747       (8,621 )     -313.8 % Total other income (expense)     (5,903 )     2,747       (8,650 )     -314.9 % Net income (loss)   $ (6,824 )   $ 1,557     $ (8,381 )     -538.2 %   Revenue   Revenue for the three months ended September 30, 2020 decreased approximately $1,696,000 or 30.3%, to approximately $3,894,000, as compared to approximately $5,590,000 for same period in 2019 due to a $1,181,000 decrease in our nicotine-based product sales and a $515,000 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 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 products.       -19- Table of Contents     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 $859,000, or 34.0%, to approximately $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 revenue, for the same period in 2019. This cost, as a percent of 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   For the three months ended September 30, 2020, total general and administrative expense decreased approximately $1,205,000 to $2,073,000 as compared to approximately $3,278,000 for the same period in 2019. 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. The 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. 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 directors.   Sales and Marketing Expense   For 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 the same period in 2019, which was primarily due to lower commissions paid for reduced sales and curtailed spending on several marketing programs and trade shows due to uncertainty in the global economy.   Research and Development Expense   For the three months ended September 30, 2020, total research and development expense increased approximately $741,000, to approximately $741,000 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 $921,000 for the three months ended September 30, 2020, due primarily to a $1,818,000 decrease in sales for our nicotine-based product business and a $515,000 decrease in sales for our CBD products. We incurred certain general and administrative expenses that contributed to the loss from operations including a $741,000 increase in research and development expense related to the PMTA registration of some of our products and $381,000 of expenses related to non-cash, stock-based compensation. Net loss is determined by adjusting loss from operations by the following items:   ● Change in Fair Value of Derivative Liabilities.   For the 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 (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 outstanding. We had approximately 4,034 million warrants outstanding as of September 30, 2020.   ● Interest Expense .   For 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.   Net Loss   For the three months ended September 30, 2020, we had a net loss of $6,824,000 as compared to net income of $1,557,000 for the same period in 2019.        -20- Table of Contents     Results of Operations for the Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019       For the nine months ended                   September 30,         Change       2020     2019     Amount     Percentage   ($ in thousands)                         Revenues:                         Product revenue, net   $ 12,462     $ 19,056     $ (6,594 )     -34.6 % Total revenues     12,462       19,056       (6,594 )     -34.6 % Operating costs and expenses:                                 Cost of goods sold - product revenue     5,361       8,121       (2,760 )     -34.0 % General and administrative     8,500       10,307       (1,807 )     -17.5 % Sales and marketing     1,259       2,554       (1,295 )     -50.7 % Research and development     3,372       -       3,372       100 % Total operating costs and expenses     18,492       20,982       (2,490 )     -11.9 % Loss from operations     (6,030 )     (1,926 )     (4,104 )     213.1 % Other income (expense):                                 Interest expense     (105 )     -       (105 )     100 % Change in fair value of derivative liabilities     (5,264 )     2,925       (8,189 )     -280.0 % Other income     15       -       15       100 % Total other income (expense)     (5,354 )     2,925       (8,279 )     -283.0 % Net income (loss)   $ (11,384 )   $ 999     $ (12,383 )     -1239.5 %   Revenue   Revenue for the nine months ended September 30, 2020 decreased approximately $6,594,000 or 34.6%, to approximately $12,462,000, as compared to approximately $19,056,000 for same period in 2019 due to a $6,364,000 decrease in our nicotine-based product sales, and a $230,000 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 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 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 $2,760,000, or 34%, to approximately $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.       -21- Table of Contents       General and Administrative Expenses   For the nine months ended September 30, 2020, total general and administrative expense decreased approximately $1,807,000 to $8,500,000 as compared to approximately $10,307,000 for the same period in 2019. 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 primarily comprised of salary, software, insurance and other costs related to expansion and operations as a public company.   Sales and Marketing Expense   For the nine months ended September 30, 2020, total sales and marketing expense decreased approximately $1,295,000, or 50.7%, to 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 and trade shows due to uncertainty in the global economy.   Research and Development Expense   For 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   We 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. We incurred 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:   ● Change in Fair Value of Derivative Liabilities.   For 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. We had approximately 4,034 million warrants outstanding as of September 30, 2020.   ● Interest Expense .   For 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.       -22- Table of Contents     Net Loss   For 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   Inflation has not had a material impact on our business.   Liquidity and Capital Resources   As of September 30, 2020, we had negative working capital of approximately $10,599,000, which consisted of current assets of approximately $4,995,000 and current liabilities of approximately $15,594,000. 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 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 revenue associated with product shipped but not yet received by customers, approximately $450,000 of lease liabilities, notes payable of $1,400,000, dividends payable of $1,650,000 and $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 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 September 30, 2020 was approximately $1,209,000.   For 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. For the 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 liabilities.   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 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 nine months ended September 30, 2020.   For 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. 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). In the 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 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 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 $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.       -23- 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 - QUAN T ITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   Not applicable.