What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-05-17 compared with 2020-11-13 · 885 added, 1048 removed, 822 unchanged (70% of the section changed)

4 unchanged sentences

(in thousands, except share and per share amounts)

September 30,

$ 3,455  

7 unchanged sentences

$ 6,525  

LIABILITIES AND STOCKHOLDERS' DEFICIT

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

payable and accrued expenses

1 unchanged sentence

$ 2,525  

24,546  

current liabilities

29,197  

10,743  

payable, net of current portion

2 unchanged sentences

30,823  

12,521  

COMMITMENTS AND CONTINGENCIES (see Note 12)

3 unchanged sentences

A, 300,000 shares designated, 178,690 and 203,811 shares issued and

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

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

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

outstanding as of March 31, 2021 and December 31, 2020,

B, 1,500,000 shares designated, 0 shares issued and outstanding as

of March 31, 2021 and December 31, 2020, respectively

stock ($0.001 par value);

50 billion shares authorized;

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

of September 30, 2020 and December 31, 2019,

50,000,000,000 shares authorized;

19,929,645,221 shares and 18,990,752,596 shares issued and

outstanding as of March 31, 2021 and December 31, 2020,

19,930  

2 unchanged sentences

stockholders' deficit

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

$ 8,139  

$ 6,525  

The accompanying notes are an integral part of these unaudited

accompanying notes are an integral part of these unaudited

condensed consolidated financial statements.

CHARLIE’S H OL DINGS,

CHA R LIE’S HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS

2 unchanged sentences

For the three months ended

For the nine months ended

September 30,

$ 4,361  

$ 4,405  

$ 12,462  

$ 19,056  

12,462  

19,056  

Operating costs and expenses:

1 unchanged sentence

and administrative

10,307  

and marketing

1 unchanged sentence

operating costs and expenses

18,492  

20,982  

from operations

(1,190  

(1,926  

Other income (expense):

in fair value of derivative liabilities

on debt extinguishment

other income (expense)

Net (loss) income

$ 1,557  

earnings (loss) per share, basic and diluted

$ 0.00  

average number of common shares outstanding, basic and

18,990,752,596 

18,935,746,390 

loss per share, basic and diluted

average number of common shares outstanding

19,514,195,000  

2 unchanged sentences

condensed consolidated financial statements.

CHARLIE’S HOL D I NGS,

CHARLI E ’S HOLD INGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

1 unchanged sentence

(in thousands)

For the Three Months Ended September 30, 2020  

Series A  

Series B  

Preferred Stock

 Total Stockholders'

 Par value

Paid-in Capital

Balance at July 1, 2020

18,990,753  

$ 18,991  

Balance at September 30, 2020

18,990,753  

$ 18,991  

For the Nine Months Ended September 30, 2020  

Series A  

Series B  

Preferred Stock

Series A Convertible

Preferred Stock

3 unchanged sentences

 Par value

Paid-in Capital

2 unchanged sentences

$ 18,991  

 Issuance

of common stock to related parties for cash

351,700  

 Conversion

1 unchanged sentence

566,883  

 Reclassification

of liability awards to equity

 Accrued

dividends payable on Series A convertible preferred

Balance at September 30, 2020

18,990,753  

$ 18,991  

The accompanying notes are an integral part of these unaudited

condensed consolidated financial

CHARLIE’S HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

STOCKHOLDERS’

(in thousands)

For the Three Months Ended September 30, 2019  

Series A  

Series B  

Convertible Preferred Stock

Common Stock  

 Par value

(Accumulated Deficit)

Stockholders'

Equity  

Balance at July 1, 2019

18,935,747  

$ 18,936  

Balance at September 30, 2019

 Issuance

of common stock for dividend payment

20,310  

Balance at March 31, 2021

19,929,646  

$ 19,930  

For the Nine Months Ended September 30, 2019  

Series A  

Series B  

Preferred Stock

Series A Convertible

Preferred Stock

3 unchanged sentences

 Par value

Paid-in Capital

1 unchanged sentence

18,973,828  

of reverse merger 

$ 18,974  

 Conversion

of Series B convertible preferred stock

13,963,048  

13,963  

 Issuance

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

warrant liability

1,551,466  

18,186  

19,737  

 Offering

cost related to private offering

distributions to CCD Members

902,662  

Balance at September 30, 2019

18,935,747  

of Series A convertible preferred stock

 Reclassification

of liability awards to equity

Balance at March 31, 2020

18,982,291  

1 unchanged sentence

The accompanying notes are an integral part of these unaudited

condensed consolidated financial statements.

CHAR L IE’S HOLDINGS, INC.

condensed consolidated financial

CHA R LIE’S

HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS

1 unchanged sentence

(Unaudited)  

For the nine months ended

September 30,  

For the three months ended

Cash Flows from Operating Activities:

Net income (loss)

Reconciliation of net loss to net cash used in operating

for doubtful accounts

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

operating activities:

for (recovery of) doubtful accounts

and amortization

in fair value of derivative liabilities

20,102  

of operating lease right-of-use asset

based compensation

from debt extinguishment

of non-cash charges

20,395  

Changes in operating assets and liabilities:

1 unchanged sentence

payable and accrued expenses

cash used in operating activities

cash provided by (used in) operating activities

Cash Flows from Investing Activities:

2 unchanged sentences

Cash Flows from Financing Activities:

from issuance of Common Stock and warrants in a private offering,

23,160  

from issuance of common stock to related parties

from issuance of notes payable

distributions to CCD Members

of notes payable

cash provided by financing activities

(decrease) increase in cash

increase (decrease) in cash

beginning of the period

1 unchanged sentence

$ 3,455  

$ 4,166  

Supplemental disclosure of cash flow information

3 unchanged sentences

of Series A convertible preferred stock

of common stock for dividend payment

Reclassification

1 unchanged sentence

$ 1,638  

dividends payable on Series A convertible preferred

$ 1,650  

of reverse merger 

$ 2,378  

of Series B convertible preferred stock

Gain from debt extinguishment

The accompanying notes are an integral part of these unaudited

condensed consolidated financial statements.

CHARLIE’S HOLDINGS, INC.

CH A RLIE’S HOLDINGS,

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 –

DESCRIPTION OF THE

BUSINESS AND BASIS OF PRESENTATION

DESCRIPTION OF THE BUSINESS AND BASIS OF

Description of the Business

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symbol "CHUC" on the OTC:

Acquisition of True Drinks Holdings, Inc.

On April 26, 2019 (the “

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 (“

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

Preferred ”), convertible

into an aggregate of 13,963,047,716 shares of Common Stock, issued

to certain individuals in lieu of Common Stock);

shares of a newly created class of Series A Convertible Preferred

Stock, par value $0.001 per share (“

Preferred ”), convertible

into an aggregate of 4,654,349,239 shares of Common Stock;

(iii) warrants to purchase an aggregate of 3,102,899,493 shares of

Common Stock (the “

Warrants ”) (the

Exchange ”).

As a result of the Share Exchange,

Charlie’s became a wholly owned subsidiary of the

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 ”).

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.

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.

additional consideration for advisory services provided in

connection with the Charlie’s Financing and the Share

Exchange, the Company issued an aggregate of 902.7 million shares

of Common Stock (the “

Advisory Shares ”), including to a

member of the Company’s Board of Directors, pursuant to a

subscription agreement.

The fair value of a share of common stock

was $0.0032 which is based upon a valuation prepared by the Company

on the date of the Share Exchange.

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

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

The Share Exchange is accounted for as a reverse

recapitalization in accordance with accounting principles generally

accepted in the United States (“

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.

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.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Going Concern Uncertainty Regarding the Legal and Regulatory

Environment, Liquidity and Management’s Plan of

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.

Company operates in a rapidly changing legal and regulatory

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

The accompanying condensed consolidated 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

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 was required to apply

for 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.

1 unchanged sentence

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.

In addition, the 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

For the three months ended March 31, 2021, the Company has

incurred losses from operations of approximately $229,000 and a

consolidated net loss of approximately $20,137,000, and the Company

has a stockholders’

deficit of approximately $ 22,684,000 as

of March 31, 2021.

These factors raise substantial doubt about the

5 unchanged sentences

increase revenues and continue its business development efforts,

including the expenditure of approximately $4,400,000 to complete

the Premarket Tobacco Application (“

including the expenditure of approximately $4,400,000 to date, 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.

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

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

On March 23, 2021,

The Company closed a $3,000,000 capital raise through the private

sale of 351,669,883 shares of its common stock to the

Company’s founders Brandon Stump and Ryan Stump.

intends to use the proceeds to fund future growth, increase working

capital, retire outstanding debt, and for other general corporate

However, it’s possible that the Company may require

additional financing in the future should the FDA require

additional testing for one, or several, of the Company’s PMTA

There can be no assurance that such financing will be

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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.

would be able to raise additional financing if required, which

could have a significant impact on our sales.

March 11, 2020, the World Health Organization designated the

28 unchanged sentences

Report ”) not misleading.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

related to disclosure of December 31, 2020 balances within the

2 unchanged sentences

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

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.

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.

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

Use of Estimates

23 unchanged sentences

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

In June 2016 the

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

Instruments, which supersedes current guidance requiring

The Company has adopted this standard as of January 1,

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

12 unchanged sentences

August 2020, the FASB issued ASU No.

2020-06, Debt—Debt

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

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

Accounting for Convertible Instruments and Contracts in an

Entity’s Own Equity, which simplifies accounting for

convertible instruments by removing major separation models

required under current GAAP.

The ASU removes certain settlement

conditions that are required for equity contracts to qualify for

the derivative scope exception and it also simplifies the diluted

earnings per share calculation in certain areas. The ASU is

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

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

is currently evaluating the impact of this standard on its

consolidated financial statements and related

2020-06 , Debt - Debt with

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

Hedging - Contracts in Entity’s Own Equity.

eliminates the beneficial conversion and cash conversion accounting

models for convertible instruments.

It also amends the accounting

for certain contracts in an entity’s own equity that are

currently accounted for as derivatives because of specific

settlement provisions.

In addition, ASU 2020-06 modifies how

particular convertible instruments and certain contracts that may

be settled in cash or shares impact the diluted EPS computation.

The amendments in ASU 2020-06 are effective for smaller reporting

companies as defined by the SEC for fiscal years beginning after

December 15, 2023, including interim periods within those fiscal

Early adoption is permitted, but no earlier than fiscal

years beginning after December 15, 2020.

The Company is currently

evaluating the impact of ASU 2020-06 on its condensed financial

Reclassifications

5 unchanged sentences

per share, stockholders’

equity (deficit) or working

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

deficit or working

NOTE 3 –

18 unchanged sentences

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

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

Value at September 30, 2020  

of March 31, 2021 and December 31, 2020 (amounts in

Value at March 31, 2021

liability - Warrants

1 unchanged sentence

24,546  

Value at December 31, 2019  

$ 24,546  

Value at December 31, 2020

liability - Warrants

1 unchanged sentence

$ 4,444  

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

period ended September 30, 2020.

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

period ended March 31, 2021.

following table presents changes in Level 3 liabilities measured at

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

fair value for the three-month period ended March 31, 2021.

observable and unobservable inputs were used to determine the

6 unchanged sentences

rates) and unobservable (e.g., changes in unobservable long- dated

volatilities) inputs (amount in

volatilities) inputs (amounts in

thousands).   

3 unchanged sentences

in fair value

at September 30, 2020

20,102  

at December 31, 2020

$ 24,546  

summary of the weighted average (in aggregate) significant

2 unchanged sentences

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

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

of March 31, 2021 and December 31, 2020 is as follows:

$ 0.0044  

1 unchanged sentence

yield (per share)

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 –

STOCK-BASED COMPENSATION

April 26, 2019, in connection with employment agreements with its

Chief Executive Officer and Chief Operating Officer, the Company

issued market condition awards contingent upon the achievement of

certain market capitalization targets.

The awards are subject to a

three-year service vesting period.

The awards are settleable in a

variable number of common shares based on defined percentages of

the Company's total shares determined by market capitalization

targets and are, therefore, classified as liabilities in accordance

with ASC 718.

The fair value of the awards is remeasured at each

reporting period until settlement.

Compensation cost is attributed

over the period encompassing the derived service period and the

explicit service period.

The fair value of the market condition

awards on the termination date of February 12, 2020 was

approximately $1,638,000.

The market condition awards were valued

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

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

using daily stock prices.

For the nine months ended September 30,

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

In addition, as these market awards were eliminated during

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

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

Additional Paid In Capital during the nine months ended September

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

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:

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.

April 26, 2019, as additional consideration for advisory services

provided in connection with the Charlie’s Financing and the

Share Exchange (see Note 1 above), the Company issued the Advisory

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

Company’s Board of Directors, pursuant to a subscription

The fair value of a share of Common Stock issued as

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

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

Company recorded stock-based compensation of approximately $2.9

million on the grant date.

to the Share Exchange, Charlie’s employees held membership

units, which were automatically converted into 7.1 million shares

of Common Stock and 69,815 shares of Series B Preferred (or 698.1

million shares of Common Stock equivalents) due to the effect of

the Share Exchange.

The 705.3 million shares of Common Stock will

vest over a two-year period.

The fair value of a share of Common

Stock was $0.0032 based upon a valuation prepared by the Company on

the date of the Share Exchange.

The Company recorded total

stock-based compensation related to these awards of approximately

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

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

April 26, 2019 (the “Closing

), the Company entered into a Securities Exchange

Agreement ( “Share

Exchange”

) with each of the former members

( “Members”

Charlie’s, and certain direct investors in the Company

( “Direct

Investors”

), pursuant to which the Company acquired

all outstanding membership interests of Charlie’s

beneficially owned by the Members in exchange for the issuance by

the Company of units.

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”

In conjunction with the Share Exchange,

the Company issued to holders of its Series A Convertible Preferred

Stock ( “Series A

Preferred”

) warrants to purchase an aggregate of

3,102,899,493 shares of Common Stock (the “Investor Warrants”

its placement agent Katalyst Securities LLC warrants to purchase an

aggregate of 930,869,848 shares of Common Stock (the “Placement Agent

Warrants”

Both the Investor Warrants and Placement

Agent Warrants have a five-year term and a strike price of

$0.0044313 per share.

In accordance with

ASC 815, the Company has recorded the Investor Warrants and

Placement Agent Warrants as derivative instruments on its condensed

consolidated balance sheet.

ASC 815 requires derivatives to be

recorded on the balance sheet as an asset or liability and to be

measured at fair value.

Changes in fair value are reflected in the

Company’s earnings for each reporting

NOTE 4 - PROPERTY AND EQUIPMENT

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

as follows (amount in thousands):

equipment details as of March 31, 2021 and December 31, 2020 are as

follows (amounts in thousands):

and equipment

2 unchanged sentences

amortization expense totaled $50,000 and $40,500, 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

during the three months ended March 31, 2021 and 2020.

NOTE 5 - CONCENTRATIONS

Company’s concentration of purchases are as

three months ended  

nine months ended  

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

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

inventory purchases.

During the nine months ended September 30,

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

respectively, of total inventory purchases.

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

Company’s concentration of purchases is as

three months ended

the three months ended March 31, 2021 and 2020, purchases from four

vendors represented 51% and 78%, respectively, of total inventory

March 31, 2021, and December 31, 2020, amounts owed to these

vendors totaled $21,000 and $270,000 respectively, which are

2 unchanged sentences

Accounts Receivable

Company’s concentration of accounts receivable are as

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

September 30, 2020.

One customer made up more than 10% of net

accounts receivable at December

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

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

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

receivables at December 31, 2019.

No customer exceeded 10% of total

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

Company’s concentration of accounts receivable is as

customer made up 13% of net accounts receivable at March 31, 2021.

Two customers made up 27% of net accounts receivable at

December 31 , 2020.

owed the Company a total of $140,000, representing 13% of net

receivables at March 31, 2021.

Customer B owed the Company a total

of $210,000, representing 17% of net receivables at December 31,

Customer C owed the Company a total of $127,000, representing

10% of net receivables at December 31, 2020.

No customer exceeded

10% of total net sales for the three months ended March 31, 2021

and 2020, respectively.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 –

DON POLLY, LLC.

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.

Polly, LLC is a Nevada limited liability company that is owned

by entities controlled by Brandon and Ryan Stump, the

Company’s Chief Executive Officer and Chief Operating

Officer, respectively, and a consolidated variable interest

for which the Company is the primary beneficiary.

formulates, sells and distributes the Company’s CBD product

We evaluate our ownership, contractual and other

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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.

consolidated the financial statements of Don Polly and it is 

still considered a VIE of the Company.

Since the Company has been

1 unchanged sentence

included Don Polly’s assets, liabilities, and operations in

the accompanying consolidated financial statements of the

the accompanying condensed consolidated financial statements of the

Company since April 25, 2019.

Polly operates under exclusive licensing and service contracts with

1 unchanged sentence

licensing agreement and 25% of net income from the service

agreement, therefore, as the Company receives 100% of the net

therefore, as the Company receives 100% of the net

income or incurs 100% of the net loss of the VIE, no

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Accounts payable

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

are as follows (amounts in thousands):

and accrued expenses as of March 31, 2021 and December 31, 2020 are

as follows (amounts in thousands):

accrued expenses

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( "Red Beard" ) in the

principal amount of $750,000 (the " Principal Amount "), which Note is

secured by all assets of the Company pursuant to the terms of a

Security Agreement entered into by and between the Company and Red

Beard (the " Red Beard Note

Financing ").

Beard Note required the payment of the Principal Amount and

guaranteed minimum interest in the amount of $75,000 on or before

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

terms of the Red Beard Note;

or (ii) October 1, 2020.

In addition, if there

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

guaranteed minimum interest, the Principal Amount and unpaid

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

at the election of the Red Beard in its sole and absolute

discretion, bear interest at the lesser of a rate equal to 20% per

annum or the maximum default rate.

Such interest would accrue daily

commencing on occurrence of such event of default until payment in

full of the Principal Amount, together with all accrued and unpaid

interest and other amounts which may become due hereunder, has been

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

into Amendment No.

1 to Secured Promissory Note and Security

Agreement (“

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

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

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

Principal Amount under the Red Beard Note was increased from

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

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

All other terms of the respective Red Beard Note remain

in full force and effect.

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

into Amendment No.

2 to Secured Promissory Note and Security

Agreement ( “Second Amended

Red Beard Note”

), by and between the Company and Red

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

amended by the Second Amended Red Beard Note to amend the

definition of the “Maturity Date”

in the Red Beard Note

to mean November 1, 2020.

Company used the proceeds from the Red Beard Note Financing for

general corporate purposes, and its working capital requirements,

pending availability of long-term investment

capital.  

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

guaranteed minimum interest amount of $75,000 ( “Minimum Interest”

Red Beard 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" ).

Red Beard Note was subsequently

amended on August 27, 2020, September 30, 2020, October 29, 2020,

December 1, 2020, and January 19, 2021, ultimately increasing

Principal Amount to $1,400,000 and Minimum Interest to

March 24, 2021, the Company and Red Beard entered into a

Satisfaction and Release (the "Red

Beard Release" ), pursuant to which the Company made a

payment to Red Beard in the amount of $1,550,000 in exchange for an

acknowledgment of satisfaction and full release of the Company by

Red Beard from liability and obligations arising under the Red

Small Business Administration Loan Programs

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2022 and will accrue interest at a rate of 1.00% per annum.

Payments of principal and interest will be deferred for six months

from the date of the Charlie's PPP Loan, or until November 30,

Interest, however, will continue to accrue during this

PPP Loan Agreement , payments of principal and interest were

deferred for six months from the date of the Charlie's PPP Loan, or

until November 30, 2020.

Interest, however, has continued to accrue

during this time.

Charlie’s was notified by SBA Lender that

all payments, including principal and interest, on all PPP loans

issued by the bank have been deferred indefinitely in order to

allow borrowers adequate time to apply for forgiveness.

Charlie’s has applied for forgiveness and is currently

awaiting a response.

The Company will continue to accrue interest

expense relating to the Charlie’s PPP Loan, however there is

no anticipated future effect on cash at this time.

On April 14, 2020, Don

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Charlie's PPP Loan, the " PPP

Loans ")) from Community

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

Loans ") from Community Banks

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

The Polly PPP Loan

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the CARES Act.

February 19, 2021, Don Polly received notice from the Polly Lender,

that the Polly PPP Loan was fully repaid, and its promissory note

was cancelled as a result of the loan forgiveness process set forth

Small Business Administration.

There is no further

action required on the part of Don Polly to satisfy this liability.

For the period ended March 31, 2021, the Company recorded a debt

extinguishment gain of approximately $217,000, including principal

and accrued interest, which is reflected in the other income

section of the Company’s condensed consolidated statements of

March 17, 2021, Don Polly obtained a second draw PPP loan

( “Polly PPP Loan

) under the CARES Act from Polly Lender.

PPP Loan 2 obtained by Don Polly provides general working capital

in the amount of $184,200.

The Polly PPP Loan 2 will mature on

March 17, 2026 and will accrue interest at a rate of 1.00% per

Payments of principal and interest will be deferred for six

months from the date of the Polly PPP Loan 2, however interest will

continue to accrue during this time.

April 28, 2021, Charlie’s received notice from SBA Lender

that the Charlie’s PPP Loan was fully repaid, and its

promissory note was cancelled as a result of the loan forgiveness

process set forth by the U.S.

Small Business Administration.

is no further action required on the part of Charlie’s to

satisfy this liability.

On June 24, 2020, SBA

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principal and interest of $731 monthly, will begin twelve months

from date of the EID Loan.

The balance of principal and interest

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

interest will accrue at the rate of 3.75% per

The following summarizes the Company’s note payable

maturities as of September 30, 2020 (amount in

months ended December 31, 2020

$ 1,493  

Ended December 31, 2021

Ended December 31, 2022

Ended December 31, 2023

Ended December 31, 2024

$ 2,416  

from the date of the EID Loan.

The balance of principal and

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

and interest will accrue at the rate of 3.75% per

The following summarizes the Company’s notes payable

maturities as of March 31, 2021 (amounts in

months Ending December 31, 2021

Ending December 31, 2022

Ending December 31, 2023

Ending December 31, 2024

Ending December 31, 2025

NOTE 9 –

LOSS PER SHARE APPLICABLE TO COMMON

Basic loss per common share is computed by

dividing net income by the weighted average number of common shares

outstanding during the reporting period.

Diluted loss per common

share is computed similar to basic earnings per common share except

that it reflects the potential dilution that could occur if

dilutive securities or other obligations to issue Common Stock were

exercised or converted into Common Stock.

Diluted weighted average

common shares include Common Stock potentially issuable under the

Company’s preferred stock, par value $0.001 per share

Stock "), warrants and vested

and unvested stock options.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

following table sets forth the computation of earnings per share

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

respectively (amounts in thousands except per share

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

weighted average number of common shares outstanding during the

reporting period.

Diluted earnings 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

convertible preferred stock, warrants and vested and unvested stock

following securities were not included in the diluted net loss per

share calculation because their effect was anti-dilutive as of the

periods presented (in thousands):

three months ended  

nine months ended  

earnings (loss) - basic

750,294  

earnings (loss) - diluted

801,325  

average shares outstanding - basic

18,990,753  

18,935,746  

18,982,383  

7,847,468  

average shares outstanding - diluted

18,990,753  

18,935,746  

18,982,383  

7,847,468  

following securities were not included in the diluted net earnings

per share calculation because their effect was anti-dilutive as of

the periods presented (in thousands):

For the nine months ended

September 30,  

796,127  

61,825  

A convertible preferred shares

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STOCKHOLDERS’

Series A Preferred Share Dividend

Series A Preferred

Share Dividend

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

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

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

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

liability on its consolidated balance sheet.

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

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held by such holder on or before August 23, 2020 ( “Dividend Default”

disclosed, the aggregate amount of dividends due and payable to

holders of the Series A Preferred is $1,650,000.

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

the terms of the Red Beard Note, as amended, more specifically

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

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

maximum lawful rate authorized under applicable law, until the Red

Beard Note, as amended, is paid in full.

On October 29, 2020 the

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

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

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

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

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

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

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

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

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

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

While no assurances

can be given, management is currently negotiating with Red Beard

regarding settlement of the Red Beard Note, as

March 31, 2021, approximately $89,000 of the dividend liability has

been satisfied, and the Company expects to pay the dividend, in

full, during the quarter ending June 30, 2021.

As of March 31,

2021, the aggregate amount of dividends due and payable to holders

of the Series A Preferred is $1,560,000, which is reflected on the

Company’s condensed consolidated balance sheet.

Conversion of Series A Preferred Shares

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.

the three months ended March 31, 2021, the Company issued

approximately 566.9 million shares of Common Stock upon conversion

of 25,120 shares of Series A Preferred.

March 2021 Private

March 19, 2021, the Company entered into Securities Purchase

Agreements by and between the Company and certain family trusts in

Brandon Stump, the Company's Chief Executive Officer, and

Ryan Stump, the Company's Chief Operating Officer are trustees

and beneficiaries (the " Purchase

Agreements "), for the private placement of an aggregate of

351,699,883 shares of its common stock, par value $0.001

(" Common Stock "), at a

purchase price per share of $0.00853 (the " Private Placement "), which Private

Placement was consummated on March 22, 2021.

The Private Placement

resulted in gross proceeds to the Company of approximately $3.0

The Private Placement was undertaken pursuant to Rule 506

promulgated under the Securities Act of 1933, as amended, and was

consummated in a transaction approved by the Company's independent

directors in accordance with Rule 16b-3(d)(1) of the Securities

Exchange Act of 1934, as amended.

NOTE 11 –

STOCK OPTIONS

STOCK-BASED COMPENSATION

The True Drinks

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stock options.

As of September 30, 2020, approximately 56.6 million

of these stock options remain vested and exercisable under this

As of March 31, 2021, approximately 56.6 million of

these stock options remain vested and exercisable under this

The Company will not grant any additional awards or shares of

Common Stock under the Prior Plan beyond those that are currently

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On May 8, 2019, our

Board of Directors approved the Charlie’s Holdings, Inc.

May 8, 2019, our Board of Directors approved the Charlie’s

Holdings, Inc.

2019 Omnibus Incentive Plan (the “

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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.

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.

following table summarizes stock option activities during the nine

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

will remain subject to the terms in 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 stock options 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

Non-Qualified Stock Options

following table summarizes stock option activities during the three

months ended March 31, 2021 (all option amounts are in

Stock Options

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forfeited/expired

at September 30, 2020

at March 31, 2021

750,294  

$ 0.01  

vested and exercisable at September 30, 2020

$ 3,030  

vested and exercisable at March 31, 2021

355,960  

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

$ 0.01  

$ 1,308  

March 31, 2021, there was approximately $ 177,000 of total unrecognized compensation

expense related to non-vested share-based compensation arrangements

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over a weighted average period of 1.8 years.

For the nine months ended September 30, 2020, the

For the three months ended March 31, 2021, the

Company recorded compensation expense of approximately $77,000

related to the granting of stock options.

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 three months ended March 31, 2021

and 2020, the Company recorded an expense of $0 and $1,322,000,

respectively, 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 three months

ended March 31, 2020.

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

Restated Employment Agreement (together the “Amended Employment

Agreements”

) with both the Company’s Chief

Executive Officer and Chief Operating Officer.

The terms of the

Amended Employment Agreements have been amended as follows:

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 3 above), the Company

issued an aggregate of 902.7 million shares of common stock (the

Shares ”), including to a

member of the Company’s Board of Directors, pursuant to a

subscription agreement.

The fair value of a share of common stock

was $0.0032 which is based upon a valuation prepared by the Company

on the date of the Share Exchange.

The Company recorded stock-based

compensation of approximately $2.9 million on the grant

Prior to the Share Exchange, Charlie’s

employees held Member units, which were automatically converted

into 7.1 million shares of common stock and 69,815 shares of Series

B Convertible Preferred Stock ( “Series B

Preferred”

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 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 $282,000 during the three

months ended March 31, 2021.

NOTE 12 –

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

Officer and member of the Board of Directors.

and Stump purchased the property that is the subject of the Lease

in July 2019.

The Lease, which was effective as of September 1,

2019, on a month to month basis, has been formalized to have a term

of five years and a base rent rate of $22,940 per month, which rate

is subject to annual adjustments based on the consumer price index,

as may be mutually agreed upon by the parties to the Lease.

terms of the Lease were negotiated and approved by the independent

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

the Company’s Chief Financial Officer after reviewing a

detailed analysis of comparable properties and rent rates compiled

by an independent, third-party consultant.

The total amount paid to related parties for the

three and nine months ended September 30, 2020 was approximately

Officer and member of the Board.

Stump, Stump and Stump

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

The Lease, which was effective as of September 1, 2019, on a

month to month basis, was then formalized on November 1, 2019 to

have a term of five years and a base rent rate of $22,940 per

month, which rate is subject to annual adjustments based on the

consumer price index, as may be mutually agreed upon by the parties

to the Lease.

The terms of the Lease were negotiated and approved

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

Allen, the Company’s former 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 months ended March 31, 2021 and 2020 was

$69,510 and $68,820, respectively.

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

approximately $1.3 million and right of use assets of approximately

$1.3 million, which were included in the condensed consolidated

March 31, 2021, the Company had operating lease liabilities of

approximately $1,100,000 and right of use assets of approximately

$1,100,000, which were included in the condensed consolidated

balance sheet.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

following summarizes quantitative information about the

Company’s operating leases for the three and nine months

ended September 30, 2020 and 2019 (amount in

Company’s operating leases for the three months ended March

31, 2021 and 2020 (amounts in thousands):

three months ended

nine months ended

   Operating

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lease rent expense

nine months ended

three months ended

cash flows from operating leases

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operating leases

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

short-term leases, are as follows (amount in

months ended December 31, 2020

Ended December 31, 2021

Ended December 31, 2022

Ended December 31, 2023

Ended December 31, 2024

Maturities of our

operating leases as of March 31, 2021, excluding short-term leases,

are as follows (amounts in thousands):

Months Ending December 31, 2021

Ending December 31, 2022

Ending December 31, 2023

Ending December 31, 2024

present value discount

lease liabilities as of September 30, 2020

lease liabilities as of December 31, 2020

$ 1,103  

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and unjust enrichment related to shipping services provided by

Robinson has asserted $121,743 in damages plus interest, attorney’s fees

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

The probability of any loss cannot be determined at this

Robinson has asserted $121,743 in damages plus interest,

attorney’s fees and costs.

On November 13, 2020 the Company

and Robinson reached a Settlement Agreement and Mutual Release

Agreement ”) by which the

Company agreed to pay the total sum of $50,000 in two equal

installments of $25,000.

The first payment was to be due on or

before November 19, 2020 and the second payment was to be due on or

before December 17, 2020.

The Company has satisfied its obligations

set forth in the Settlement Agreement and has been relieved of any

future liability in this matter.

NOTE 13- SUBSEQUENT EVENTS

Amendment to Secured Promissory Note and Security Agreement held by

Red Beard Holdings, LLC

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

Beard Note (the " Amended

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

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

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

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

December 1, 2020.

Furthermore, Red Beard has agreed to waive

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

defined in the Amended Note, which was triggered by the

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

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

Company has evaluated events subsequent to September 30, 2020 to

assess the need for potential recognition or disclosure in the

unaudited condensed consolidated financial statements.

were evaluated through the date these financial statements were

April 1, 2021, the Board of Directors of the Company entered into

an Employment Agreement (the " Agreement ") with Henry Sicignano III,

MBA, pursuant to which the Company appointed Mr.

Sicignano to serve

as President of the Company. 

Pursuant to the Agreement, Mr.

Sicignano will serve as President for an initial period of two

years, renewable on an annual basis unless earlier terminated by

the Company or Mr.

Sicignano was awarded one hundred

fifty million (150,000,000) restricted shares (subject to

forfeiture) ( “Restricted

Shares”

) of the Company.

Sicignano will have all

the rights of a shareholder of the Company with respect to voting

the 150,000,000 restricted shares awarded under this grant and

share adjustments, receipt of dividends (if any) and distributions

(if any) on such shares.

Restricted Shares will be subject to

forfeiture in 75,000,000 share increments on April 1, 2022 and

April 1, 2023, and will also be subject additional

forfeiture-release features set forth in Addendum A to the

Employment Agreement of Henry Sicignano, III, included in the

Company’s 8-K filed April 6, 2021.

April 21, 2021, the Company issued a waiver and exchange agreement

( “Waiver

Agreement”

) to shareholders of its Series A Preferred

shares ( “Stock

Payees”

) requesting such Stock Payee's respective

amount of the dividend payment (each individual Stock Payee's

respective amount the "Stock Payee

Indebtedness" ) to be paid in the form of shares of Common

Stock (the "Stock Payment" )

and agreeing to consummate an exchange of such Stock Payee's right

to the Stock Payee Indebtedness in cash for shares of Common Stock

(the "Exchange" ), pursuant

to which the entire Stock Payee Indebtedness shall be exchanged for

that number of shares of Common Stock (the “Shares”

) equal to the

total Stock Payee Indebtedness divided by $0.0044313.

2021, the Company commenced payment of dividends for Stock Payees

that elected for delivery of cash payment in satisfaction of their

dividend payment.

Company has evaluated events subsequent to March 31, 2021 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.

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and Chief Operating Officer, respectively, and a consolidated

variable interest for which the Company is the primary

variable interest “(VIE”)

for which the Company is the primary beneficiary.

Our objective is to become a significant leader in

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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 products are mostly produced domestically through

contract manufacturers for sale through select distributors,

specialty retailers and third-party online resellers throughout the

United States, as well as more than 80 countries worldwide.

Charlie’s primary international markets include the United

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launch additional products containing hemp-derived CBD in the

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 (“

Industry Specific Challenges

Beginning in late

2019, our industry experienced 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.

Initial research indicated

that a vitamin E acetate related compound could be causing the

health-related 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

principal deputy director, Dr.

Anne Schuchat, in fact 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

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plan of operation.

First, we plan to focus on increasing the sales of

our CBD related products, including topicals, tinctures and vaping

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.

vertical markets include, but aren't limited to the medical

and wellness markets.

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

However, effects from the recent COVID-19 outbreak and

pandemic have had a more significant impact on our CBD products

business and may continue to do so in future

we see a significant opportunity for sales growth in international

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.

we feel that the nicotine based flavored vaping products will

continue to be a significant growth opportunity, once all the

First, we plan to increase the sales of our CBD

related products, including topicals and ingestibles.

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.

We have also dedicated an

internal team as well as additional financial resources to increase

direct-to-consumer e-commerce sales of CBD

we continue to see a significant opportunity for sales growth in

international markets for our e-liquid and other vapor products.

Presently, approximately 20% of our vapor 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.

importantly, we feel that the e-liquid and other vapor products

will continue to be a significant growth opportunity, once all the

rightful regulatory changes have been made.

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submitted in September 2020.

We feel that a significant amount of

our competitors will not have the resources and/or expertise to

Obtaining a marketing order from the

United States Food and Drug Administration ( “FDA ”

) would, in our opinion, help to

remediate the disruption caused by any perceived health issues

related to vaping, and further position the Company as a trusted,

industry leader.

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.

select group of companies operating in the flavored vapor products

Recent Developments

 March 2021 Private Placement

March 19, 2021, the Company entered into Securities Purchase

Agreements by and between the Company and certain family trusts in

Brandon Stump, the Company's Chief Executive Officer, and

Ryan Stump, the Company's Chief Operating Officer are trustees

and beneficiaries (the " Purchase

Agreements "), for the private placement of an aggregate of

351,699,883 shares of its common stock, par value $0.001

(" Common Stock "), at a

purchase price per share of $0.00853 (the " Private Placement "), which Private

Placement was consummated on March 22, 2021.

The Private Placement

resulted in gross proceeds to the Company of approximately $3.0

The Private Placement was undertaken pursuant to Rule 506

promulgated under the Securities Act of 1933, as amended, and was

consummated in a transaction approved by the Company's independent

directors in accordance with Rule 16b-3(d)(1) of the Securities

Exchange Act of 1934, as amended.

Red Beard Holdings, LLC Note Payable

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" ), requiring a

guaranteed minimum interest amount of $75,000 ( “Minimum Interest”

Red Beard 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" ).

Red Beard Note was subsequently

amended on August 27, 2020, September 30, 2020, October 29, 2020,

December 1, 2020, and January 19, 2021, ultimately increasing

Principal Amount to $1,400,000 and Minimum Interest to

March 24, 2021, the Company and Red Beard entered into a

Satisfaction and Release (the " Red

Beard Release "), pursuant to which the Company made a

payment to Red Beard in the amount of $1.55 million in exchange for

an acknowledgment of satisfaction and full release of the Company

by Red Beard from liability and obligations arising under the Red

Small Business Administration Loan Programs

On April 30, 2020,

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

approval to enter into a U.S.

Small Business Administration

Promissory Note (the " Charlie's

PPP Loan ") with TBK Bank, SSB

Lender "), pursuant to the

Paycheck Protection Program (" PPP ")

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

Act ") as administered by

the SBA (the " PPP

Loan Agreement ").

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

amount of $650,761.

The Charlie's PPP Loan will mature on April 30,

2022 and will accrue interest at a rate of 1.00% per annum.

Payments of principal and interest will be deferred for six months

from the date of the Charlie's PPP Loan, or until November 30,

Interest, however, will continue to accrue during this

On April 14, 2020, Don

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

CARES Act (the " Polly

PPP Loan " and together with the

Charlie's PPP Loan, the " PPP

Loans ") from Community Banks

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

The Polly PPP Loan

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

the amount of $215,600.

The 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

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.

February 19, 2021 Don Polly received notice from the Polly Lender,

that the Polly PPP Loan was fully repaid, and its promissory note

was cancelled as a result of the loan forgiveness process set forth

Small Business Administration.

There is no further

action required on the part of Don Polly to satisfy this

March 17, 2021, Don Polly obtained a second draw PPP loan

( “Polly PPP Loan

) under the CARES Act from Polly Lender.

PPP Loan 2 obtained by Don Polly provides general working capital

in the amount of $184,200.

The Polly PPP Loan 2 will mature on

March 17, 2026 and will accrue interest at a rate of 1.00% per

Payments of principal and interest will be deferred for six

months from the date of the Polly PPP Loan 2, however interest will

continue to accrue during this time.

April 28, 2021, Charlie’s received notice from SBA Lender

that the Charlie’s PPP Loan was fully repaid, and its

promissory note was cancelled as a result of the loan forgiveness

process set forth by the U.S.

Small Business Administration.

is no further action required on the part of Charlie’s to

satisfy this liability.

On June 24, 2020, SBA

authorized (under Section 7(b) of the Small Business Act, as

amended) an Economic Injury Disaster Loan

Loan ”) to Don Polly

in the amount of $150,000.

Installment payments, including

principal and interest of $731 monthly will begin twelve months

from date of the EID Loan.

The balance of principal and interest

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

interest will accrue at the rate of 3.75% per

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

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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

Impact of COVID-19

The outbreak of a novel strain of COVID-19

Coronavirus ”) has had a negative impact on the global

economy and the markets in which we operate.

Beginning in March

2020, the Company transitioned nearly all employees to a remote

working environment for their safety and to protect the integrity

of Company operations.

We have updated certain sales, accounting

and administrative processes, and corresponding information

technology platforms, in an effort to help facilitate the virtual

work environment in which we now operate.

During 2020, we engaged

in periodic, informal testing of our business operations, and we do

not believe that our financial position, work efficiency and

overall operational integrity have been materially affected.

However, we recognize that a certain degree of employee enthusiasm,

teamwork, creativity, and support is normally generated by being

present at a physical location, and we believe that prolonged

remote working may have a negative impact over time on our

business, and on employee productivity.

Our Denver, CO office and

Huntington Beach, CA warehouse locations have fully returned to on

premise status, while our corporate headquarters in Costa Mesa, CA

remains remote for most employees.

We will continue to monitor the

COVID-19 situation in all regions we operate and will maintain

strict adherence to local health guidelines and mandates.

have to take further actions that we determine are in the best

interests of our employees or as required by federal, state, or

local authorities.

Risks and Uncertainties

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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.

The Company may also require

additional financing in the future to support potential 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

March 11, 2020, the World Health Organization designated the

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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:

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.

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).

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

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 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 generally accepted accounting principles in the

United States ( “U.S.

) 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.

related to disclosure of December 31, 2020 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, 2020,

filed with the SEC on April 5, 2021.

The operating results of Don

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

also included.

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

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.

Polly are also included.

Current Operating Trends and Financial Highlights

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quarter and full year:

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

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

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

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

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

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

introduced in June of 2019.

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

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

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

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

includes non-cash stock-based compensation expense of approximately

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

liabilities of $5,874,000.

In addition, the Company expensed

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

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

results from operations for the nine months ended September 30,

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

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

September 30, 2019.

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

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

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

which were introduced in June of 2019.

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

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

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

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

includes non-cash stock-based compensation expense of approximately

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

liabilities of $5,264,000.

In addition, the Company expensed

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

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

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

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

Compared to the Three Months Ended September 30, 2019

results from operations for the quarter ended March 31, 2021, we

generated revenue of approximately $4,361,000, as compared to

revenue of $4,405,000 for the three months ended March 31,

This $44,000 decrease in revenue was due primarily to a

$327,000 decrease in sales of our CBD based products, but was

offset by a $283,000 increase in sales of nicotine-based e-liquid

generated a net loss for the three months ended March 31, 2021 of

approximately $20,137,000, as compared to net loss of approximately

$3,916,000 for the three months ended March 31, 2020.

for the three months ended March 31, 2021 includes non-cash

stock-based compensation expense of approximately $359,000 and a

non-cash loss in fair value of derivative liabilities of

review of the three month period ended March 31, 2021

three months ended

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in fair value of derivative liabilities

on debt extinguishment

other income (expense)

Net income (loss)

$ 1,557  

Revenue for the three months ended September 30,

Results of Operations for the Three Months Ended March 31, 2021

Compared to the Three Months Ended March 31, 2020

Revenue for the three months ended March 31, 2021

decreased approximately $44,000 or 1%, to approximately $4,361,000,

$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

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

as compared to approximately $4,405,000 for same period in 2020 due

to a $283,000 increase in sales of our nicotine-based e-liquid

products and a $327,000 decrease in sales of our CBD wellness

The increase in our nicotine-based e-liquid sales is

directly related to the launch of our Pachamama Disposable product

line, which offers users a variety of flavors containing

tobacco-free nicotine in a compact, disposable format.

uncertainty surrounding the FDA’s application review

timeline, following the PMTA submission deadline, as well as the

addition of vapor products to the Prevent All Cigarette

Trafficking Act ( “PACT

) have affected

buying patterns in the domestic vape market as customers reduce

inventories of non-PMTA submitted products and adjust their

business models to suit recent changes in regulation.

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

pandemic caused disruptions in the global economy and altered

buying patterns for certain consumer discretionary goods.

begun to streamline our CBD wellness product offering and narrow

our sales and marketing focus, targeting our highest value customer

types with the most desired product offerings.

Cost of Revenue

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decreased approximately $20,000, or 1%, to approximately

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

$1,943,000, or 44.6% of revenue, for the three months ended March

31, 2021, as compared to approximately $1,963,000, or 44.6% of

1 unchanged sentence

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.

revenue, remained unchanged due to a favorable mix of higher margin

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

offset by a higher provision for obsolescence.

General and Administrative Expenses

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

the three months ended March 31, 2021, total general and

administrative expense decreased approximately $1,948,000 to

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approximately $1,494,000 of non-cash, stock-based compensation,

employee bonus and other transaction related costs as well as

$628,000 of other general and administrative expenses.

reduction in transaction related costs includes $218,000 in

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

bonuses and $245,000 of other expenses incurred as a result of our

Share Exchange in 2019.

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

$262,000 in non-commission-based salary and benefits as well as

$98,000 in other general and administrative expenses.

The reduction

in non-cash, stock-based compensation is primarily due to the

forfeiture of stock awards by Brandon Stump and Ryan Stump pursuant

to the adoption of the Amended Employment Agreements entered into

February 12, 2020.

The $262,000 decrease of non-commission-based

salary and benefits, and the $98,000 decrease of other general

administrative expenses were the result of headcount reduction,

compensation adjustments and overall cost-cutting

Sales and Marketing Expense

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.

the three months ended March 31, 2021, total sales and marketing

expense increased approximately $16,000, or 3.8%, to approximately

$435,000 as compared to approximately $419,000 for the same period

in 2020, which was primarily due to slightly lower commissions paid

for reduced sales, but was offset by increased spending on several

marketing programs in support of customer retention and product

Research and Development Expense

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

For the three months ended March 31, 2021, total

research and development expense decreased approximately

$2,214,000, to approximately $9,000 as compared to $2,223,000 for

the same period in 2020, which was primarily due to reduced costs associated with

our PMTA registrations.

1 unchanged sentence

had operating losses of approximately $229,000 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:

in Fair Value of Derivative Liabilities.

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

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

$2,747,000 respectively.

The derivative liability is associated

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

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

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

with the Share Exchange.

The loss for the quarter ended September

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

September 30, 2020 compared to June 30, 2020.

Additionally, the

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

significant increase in our share price and the amount of warrants

We had approximately 4,034 million warrants

outstanding as of September 30, 2020.

the three months ended September 30, 2020 and

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

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

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

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

period in 2019. 

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

Compared to the Nine Months Ended September 30, 2019

nine months ended

($ in thousands)

$ 12,462  

$ 19,056  

12,462  

19,056  

Operating costs and expenses:

of goods sold - product revenue

and administrative

10,307  

and marketing

and development

operating costs and expenses

18,492  

20,982  

from operations

Other income (expense):

in fair value of derivative liabilities

other income (expense)

Net income (loss)

Revenue for the nine months ended September 30,

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

$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

The decrease in our nicotine based e-liquid flavor sales

is directly related to the current regulatory and health related

news stories surrounding the vaping industry.

The nicotine based e-liquid sales decline began

late in the quarter ended September 30, 2019 and we expect sales in

future quarters to be affected until the regulatory environment

becomes clear.

Uncertainty surrounding the FDA’s application

review timeline, following the PMTA submission deadline, has

affected buying patterns in the domestic vape market as customers

reduce inventories of non-PMTA submitted products.

In addition, in

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

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

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

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

Cost of Revenue

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.

General and Administrative Expenses

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

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

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

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

approximately $3,372,000 as compared to approximately $0 for the

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

associated with our PMTA registrations.

Loss from Operations

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

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

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

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

certain general and administrative expenses that contributed to the

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

and development expense related to the PMTA registration of some of

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

ended March 31, 2021, due primarily to a $327,000 decrease in sales

for our CBD products.

We incurred certain general and

administrative expenses that contributed to the loss from

operations including a $359,000 of expenses related to non-cash,

stock-based compensation.

Net loss is determined by adjusting

income from operations by the following items:

in Fair Value of Derivative Liabilities.

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

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

$2,925,000 respectively.

The derivative liability is associated

with the issuance of the Investor Warrants and the Placement Agent

Warrants in connection with the Share Exchange.

The loss for the

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

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

December 31, 2019.

Additionally, the large fluctuation on change in

fair value is primarily due to the significant increase in our

share price and the amount of warrants outstanding.

approximately 4,034 million warrants outstanding as of September

the nine months ended September 30, 2020 and

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

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 March 31, 2021 and

2020, the loss and gain in fair value of derivative liabilities was

$20,102,000 and $430,000 respectively.

The derivative liability is

associated with the issuance of the Investor Warrants and the

Placement Agent Warrants (as defined in Note 3 of this Report) in

connection with the Share Exchange.

The loss for the quarter ended

March 31, 2021 reflects the effect of the significant increase in

stock price as of March 31, 2021 compared to December 31, 2020.

During the quarter ended March 31, 2021, we experienced a

substantial increase in trading volume for our stock, which may

persist in the future.

Due to the limited supply of shares freely

trading, this could cause price volatility and therefore,

considerable fluctuations in the value of our warrant derivative

liability in the future.

We had 4,033,769,341 warrants outstanding

as of March 31, 2021.

Interest Expense .

For the three months ended March 31,

2021 and 2020, we recorded interest expense related to notes

payable of $28,000 and $0, respectively.

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

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

Other Income.

For the three

months ended March 31, 2021 and 2020, we recorded other income of

$222,000 and $5,000, respectively.

The increase was primarily

related to a debt extinguishment gain of $217,000, including

principal and accrued interest, related to the forgiveness of the

Don Polly PPP Loan.

the three months ended March 31, 2021, we had a net loss of

$20,137,000 as compared to net loss of $3,916,000 for the same

period in 2020. 

2 unchanged sentences

Liquidity and Capital Resources

As of September 30, 2020, we had negative working

As of March 31, 2021, we had negative working

capital of approximately $22,716,000, which consisted of current

4 unchanged sentences

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

In addition, the

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

liquidity and capital reserves.

cash and cash equivalents balance at September 30, 2020 was

balance sheet at March 31, 2021 included elsewhere in this Report

primarily include approximately $2,187,000 of accounts payable and

accrued expenses, approximately $442,000 of deferred revenue

associated with product shipped but not yet received by customers,

approximately $462,000 of lease liabilities, dividends payable of

$1,560,000 and $24,546,000 of derivative liability associated with

the Investor Warrants and Placement Agent Warrants (the derivative

liability of $24,546,000 is included in determining the negative

working capital of $22,716,000 but is not expected to use any cash

to ultimately satisfy the liability).

In addition, the effect of the COVID-19 pandemic

may have a negative impact on our liquidity and capital

cash and cash equivalents balance at March 31, 2021 was

approximately $3,455,000.

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

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

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

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

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

nine months ended September 30, 2019, operating activities used

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

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

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

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

For the nine months ended September 30, 2020, we

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

the three months ended March 31, 2021, net cash provided by

operating activities was approximately $268,000, resulting from a

net loss of $20,137,000, partially offset by $359,000 of

share-based compensation, $20,102,000 of change in fair value of

derivative liabilities and $10,000 changes in our operating assets

and liabilities.

For the three months ended March 31, 2021, we used

cash for investment activities of approximately $19,000 as compared

to $43,000 for the same period

The cash used for investment activities is primarily for

the development and configuration phase of enterprise resource

planning software being implemented during the nine months ended

September 30, 2020.

the nine months ended September 30, 2020 we generated approximately

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

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

In the 2020 period, we

generated cash from financing activities from the PPP Loans (as

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

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

2019 period, we generated cash from financing activities from the

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

in Note 1 of Item 1, Part 1 of this Report) distributions to the

former Members of Charlie’s.

The Charlie’s Member

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

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

wholly-owned subsidiary of the Company.

the on-going development and configuration of enterprise resource

planning software during the three months ended March 31,

the three months ended March 31, 2021 we generated approximately

$1,784,000 cash from financing activities as compared to $0 for the

same period in 2020.

In the 2021 period, we generated cash from

financing activities from the Polly PPP Loan 2 (as defined in Note

8 of Item 1, Part 1 of this Report) and the Private Placement (as

defined in Note 10 of Item 1, Part 1 of this Report).

Going Concern Uncertainty Regarding the Legal and Regulatory

10 unchanged sentences

additional costs.

Additionally, the Company is required to apply

Additionally, the Company was required to apply

for FDA approval to continue selling and marketing its products

5 unchanged sentences

negatively impacted the Company’s supply chain and sales.

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

the three months ended March 31, 2021, the Company has incurred

losses from operations of $229,000 and a consolidated net loss of

approximately $20,137,000 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.

deficit of $22,684,000 as of March 31, 2021.

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

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.

in the future our plans or assumptions change or prove to be

expenditure of approximately $4,400,000 to date, to complete our

PMTA registration process.

On March 23, 2021, we closed a $3

million capital raise through the private sale of 351,669,883

shares of our common stock to the Company’s founders Brandon

Stump and Ryan Stump (see Recent Developments).

We intend to use

the proceeds to fund future growth, increase working capital,

retire outstanding debt, and for other general corporate purposes.

If in the future our plans or assumptions change or prove to be

inaccurate, or there is a significant change in the regulatory

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

ITEM 3 - QUAN T ITATIVE AND

QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 3 - QU A NTITATIVE

AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

What changed 10-Q

Item 1. Financial Statements