Charlie's Holdings, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS CHARLIE’S HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts)       March 31,     December 31,       2021     2020       (Unaudited)         ASSETS             Current assets:             Cash   $ 3,455     $ 1,422   Accounts receivable, net     1,081       1,258   Inventories, net     1,591       1,593   Prepaid expenses and other current assets     354       450   Total current assets     6,481       4,723                     Non-current assets:                 Property, plant and equipment, net     500       531   Right-of-use asset, net     1,087       1,200   Other assets     71       71   Total non-current assets     1,658       1,802                     TOTAL ASSETS   $ 8,139     $ 6,525                     LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                 Current liabilities:                 Accounts payable and accrued expenses   $ 2,187     $ 2,525   Derivative liability     24,546       4,444   Lease liabilities     462       456   Notes payable     -       1,400   Dividends payable     1,560       1,650   Deferred revenue     442       268   Total current liabilities     29,197       10,743                     Non-current liabilities:                 Notes payable, net of current portion     985       1,016   Lease liabilities, net of current portion     641       762   Total non-current liabilities     1,626       1,778                     Total liabilities     30,823       12,521                     COMMITMENTS AND CONTINGENCIES (see Note 12)                                   Stockholders' deficit:                 Convertible preferred stock ($0.001 par value); 1,800,000 shares authorized                 Series A, 300,000 shares designated, 178,690 and 203,811 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively     -       -   Series B, 1,500,000 shares designated, 0 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively     -       -   Common stock ($0.001 par value); 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, respectively     19,930       18,991   Additional paid-in capital     (12,814 )     (15,324 ) Accumulated deficit     (29,800 )     (9,663 ) Total stockholders' deficit     (22,684 )     (5,996 ) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)   $ 8,139     $ 6,525       The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.       -1- Table of Contents     CHA R LIE’S HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) (Unaudited)       For the three months ended         March 31,       2021     2020   Revenues:             Product revenue, net   $ 4,361     $ 4,405   Total revenues     4,361       4,405   Operating costs and expenses:                 Cost of goods sold - product revenue     1,943       1,963   General and administrative     2,218       4,151   Sales and marketing     420       419   Research and development     9       2,223   Total operating costs and expenses     4,590       8,756   Loss from operations     (229 )     (4,351 ) Other income (expense):                 Interest expense     (28 )     -   Change in fair value of derivative liabilities     (20,102 )     430   Gain on debt extinguishment     217       -   Other income     5       5   Total other income (expense)     (19,908 )     435   Net loss   $ (20,137 )   $ (3,916 )                   Net loss per share, basic and diluted   $ (0.00 )   $ (0.00 ) Weighted average number of common shares outstanding     19,514,195,000       18,973,921,000     The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.         -2- Table of Contents     CHARLI E ’S HOLD INGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (in thousands) (Unaudited)       Series A Convertible Preferred Stock     Common Stock         Additional     Accumulated      Total Stockholders'        Shares      Par value      Shares      Par value     Paid-in Capital     Deficit       Deficit   Balance at January 1, 2021     204     $ -       18,990,753     $ 18,991     $ (15,324 )   $ (9,663 )   $ (5,996 )  Issuance of common stock to related parties for cash     -       -       351,700       352       2,648       -       3,000    Conversion of Series A convertible preferred stock     (25 )     -       566,883       567       (567 )     -       -    Issuance of common stock for dividend payment     -       -       20,310       20       70       -       90    Stock compensation     -       -       -       -       359       -       359    Net loss     -       -       -       -       -       (20,137 )     (20,137 ) Balance at March 31, 2021     179     $ -       19,929,646     $ 19,930     $ (12,814 )   $ (29,800 )   $ (22,684 )       Series A Convertible Preferred Stock     Common Stock         Additional     Accumulated      Total Stockholders'        Shares      Par value      Shares      Par value     Paid-in Capital     Deficit       Deficit   Balance at January 1, 2020     204     $ -       18,973,828     $ 18,974     $ (17,045 )   $ (2,476 )   $ (547 )  Conversion of Series A convertible preferred stock     -       -       8,463       8       (8 )     -       -    Reclassification of liability awards to equity     -       -       -       -       1,638       -       1,638    Stock compensation     -       -       -       -       531       -       531    Net loss     -       -       -       -       -       (3,916 )     (3,916 ) Balance at March 31, 2020     204     $ -       18,982,291     $ 18,982     $ (14,884 )   $ (6,392 )   $ (2,294 )     The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.         -3- Table of Contents     CHA R LIE’S HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)       For the three months ended         March 31,       2021     2020   Cash Flows from Operating Activities:             Net loss   $ (20,137 )   $ (3,916 ) Reconciliation of net loss to net cash provided by (used in) operating activities:                 Allowance for (recovery of) doubtful accounts     (12 )     134   Depreciation and amortization     50       40   Change in fair value of derivative liabilities     20,102       (430 ) Amortization of operating lease right-of-use asset     113       101   Stock based compensation     359       1,853   Gain from debt extinguishment     (217 )     -   Subtotal of non-cash charges     20,395       1,698   Changes in operating assets and liabilities:                 Accounts receivable     189       (792 ) Inventories     2       (123 ) Prepaid expenses and other current assets     96       41   Accounts payable and accrued expenses     (336 )     1,038   Deferred revenue     174       (17 ) Lease liabilities     (115 )     (101 ) Net cash provided by (used in) operating activities     268       (2,172 ) Cash Flows from Investing Activities:                 Purchase of property, plant and equipment     (19 )     (43 ) Net cash used in investing activities     (19 )     (43 ) Cash Flows from Financing Activities:                 Proceeds from issuance of common stock to related parties     3,000       -   Proceeds from issuance of notes payable     184       -   Repayment of notes payable     (1,400 )     -   Net cash provided by financing activities     1,784       -   Net increase (decrease) in cash     2,033       (2,215 )                   Cash, beginning of the period     1,422       2,448   Cash, end of the period   $ 3,455     $ 233                     Supplemental disclosure of cash flow information                 Cash paid for interest   $ 150     $ -   Cash paid for income taxes   $ -     $ -                     Supplemental disclosure of cash flow information                 Conversion of Series A convertible preferred stock   $ 567     $ 8   Issuance of common stock for dividend payment   $ 90     $ -   Reclassification of liability awards to equity   $ -     $ 1,638   Gain from debt extinguishment   $ 217     $ -   The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.         -4- Table of Contents     CH A RLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     NOTE 1 – DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION   Description of the Business   Charlie’s Holdings, Inc., (formerly True Drinks Holdings, Inc.) a Nevada corporation, together with its wholly owned subsidiaries and consolidated variable interest entity (collectively, the “ Company ”, “ we ”), currently formulates, markets and distributes branded e-cigarette liquid for use in both open and closed consumer e-cigarette and vaping systems. The Company’s products are produced domestically through contract manufacturers for sale by select distributors, specialty retailers and third-party online resellers throughout the United States, as well as over 80 countries worldwide. The Company’s primary international markets include the United Kingdom, Italy, Spain, Belgium, Australia, Sweden and Canada. In June 2019, The Company launched distribution, through Don Polly, a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, the Company’s Chief Executive Officer and Chief Operating Officer, respectively, and a consolidated variable interest for which the Company is the primary beneficiary (“ Don Polly ”), of certain premium vapor, ingestible and topical products containing hemp-derived cannabidiol (“ CBD ”). Our CBD based products are produced, marketed and sold through, Don Polly, and the Company currently intends to develop and launch additional products containing hemp-derived CBD in the future.    In addition to Don Polly, we are also the holding company for two wholly-owned subsidiaries, Charlie’s Chalk Dust, LLC (“ Charlie’s ” or “ CCD ”), which activity includes production and sale of our branded nicotine-based e-cigarette liquid, and Bazi, Inc., which activity includes sales of all-natural energy drink Bazi® All Natural Energy. At this time, we do not intend to continue sales of the Bazi product in its current form.   The Company's Common Stock, par value $0.001 per share (the " Common Stock "), trades under the symbol "CHUC" on the OTC: PINK market.    Going Concern Uncertainty Regarding the Legal and Regulatory Environment, Liquidity and Management’s Plan of Operation   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 business. The Company operates in a rapidly changing legal and regulatory environment; new laws and regulations or changes to existing laws and regulations could significantly limit the Company’s ability to sell its products, and/or result in additional costs. Additionally, the Company 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. There is significant cost associated with the application process and there can be no assurance the FDA will approve the application(s). In addition, the 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 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 Company’s ability to continue as a going concern. The financial statements do not include any adjustments to the carrying amount and classification of recorded assets and liabilities should the Company be unable to continue operations.   Management's plans depend on its ability to increase revenues and continue its business development efforts, including the expenditure of approximately $4,400,000 to date, to complete the Premarket Tobacco Application (“ PMTA ”) registration process. 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. The Company intends to use the proceeds to fund future growth, increase working capital, retire outstanding debt, and for other general corporate purposes. 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 submissions. There can be no assurance that such financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and in the Company’s best interests.       -5- Table of Contents     Risks and Uncertainties     The Company operates in an environment that is subject to rapid changes and developments in laws and regulations that could have a significant impact on the Company’s ability to sell its products. Beginning in September 2019, certain states temporarily banned the sale of flavored e-cigarettes, and several states and municipalities are considering implementing similar restrictions. Federal, state, and local governmental bodies across the United States have indicated that flavored e-cigarette liquid, vaporization products and certain other consumption accessories may become subject to new laws and regulations at the federal, state and local levels. The application of any new laws or regulations that may be adopted in the future, at a federal, state, or local level, directly or indirectly implicating flavored e-cigarette liquid and products used for the vaporization of nicotine, could significantly limit the Company’s ability to sell such products, result in additional compliance expenses, and/or require the Company to change its labeling and/or methods of distribution. Any ban of the sale of flavored e-cigarettes directly limits the markets in which the Company may sell its products. In the event the prevalence of such bans and/or changes in laws and regulations increase across the United States, or internationally, the Company’s business, results of operations and financial condition could be adversely impacted. In addition, the Company is presently seeking to obtain marketing authorization for certain of its nicotine-based e-liquid products. Our applications were submitted in September 2020 on a timely basis, which if approved, will allow the Company to continue to sell its approved products in the United States. There is no assurance that regulatory approval to sell our products will be granted or that we would be able to raise additional financing if required, which could have a significant impact on our sales.   On March 11, 2020, the World Health Organization designated the ongoing and evolving COVID-19 outbreak as a pandemic. The outbreak has caused substantial disruption in international and U.S. economies and markets as it continues to spread. The outbreak is having a temporary adverse impact on our industry as well as our business, with regards to certain supply chain disruptions and sales volume. While the disruption from COVID-19 is currently expected to be temporary, there is uncertainty around the duration.  The financial impact from COVID-19 has caused a decline in sales, and if disruptions from the COVID-19 outbreak are prolonged, it will continue to have an adverse impact on our business.   NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   Basis of Presentation   The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “ SEC ”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented in this Quarterly Report on Form 10-Q (this “ Report ”) not misleading.   Amounts 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.   Use of Estimates   The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expense during the reporting periods. Actual results could differ from those estimates.   Significant Accounting Policies                  There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2020 Annual Report.   Recent Accounting Standards Not Yet Adopted   In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ ASU 2019-12 ”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company has adopted this standard as of January 1, 2021.       -6- Table of Contents     In June 2016 the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which supersedes current guidance requiring recognition of credit losses when it is probable that a loss has been incurred. The standard requires the establishment of an allowance for estimated credit losses on financial assets, including trade and other receivables, at each reporting date. The ASU will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted. The Company does not believe the impact of adopting this standard will be material to its consolidated financial statements and related disclosures.   In August 2020, the FASB issued ASU No. 2020-06 , Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity. ASU 2020-06 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 years. 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 statements.   Reclassifications                 Prior period financial statement amounts are reclassified as necessary to conform to the current period presentation. These prior period reclassifications did not affect the Company’s net loss, loss per share, stockholders’ deficit or working capital.    NOTE 3 – FAIR VALUE MEASUREMENTS   In accordance with ASC 820 (Fair Value Measurements and Disclosures), the Company uses various inputs to measure the outstanding warrants on a recurring basis to determine the fair value of the liability. ASC 820 also establishes a hierarchy categorizing inputs into three levels used to measure and disclose fair value. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to unobservable inputs. An explanation of each level in the hierarchy is described below:   Level 1 - Unadjusted quoted prices in active markets for identical instruments that are accessible by the Company on the measurement date.   Level 2 - Quoted prices in markets that are not active or inputs which are either directly or indirectly observable.   Level 3 - Unobservable inputs for the instrument requiring the development of assumptions by the Company.     The following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy as of March 31, 2021 and December 31, 2020 (amounts in thousands):       Fair Value at March 31, 2021       Total     Level 1     Level 2     Level 3   Liabilities:                         Derivative liability - Warrants     24,546       -       -       24,546   Total liabilities   $ 24,546     $ -     $ -     $ 24,546                                           Fair Value at December 31, 2020       Total     Level 1     Level 2     Level 3   Liabilities:                         Derivative liability - Warrants     4,444       -       -       4,444   Total liabilities   $ 4,444     $ -     $ -     $ 4,444         -7- Table of Contents     There were no transfers between Level 1, 2 or 3 during the three-month period ended March 31, 2021.   The following table presents changes in Level 3 liabilities measured at fair value for the three-month period ended March 31, 2021. Both observable and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long- dated volatilities) inputs (amounts in thousands).          Derivative liability - Warrants   Balance at January 1, 2021   $ 4,444   Change in fair value     20,102   Balance at December 31, 2020   $ 24,546     A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in the Monte Carlo simulation measuring the Company’s derivative liabilities that are categorized within Level 3 of the fair value hierarchy as of March 31, 2021 and December 31, 2020 is as follows:       March 31,     December 31,       2021     2020   Exercise price   $ 0.0044     $ 0.0044   Contractual term (years)     3.07       3.32   Volatility (annual)     85.0 %     75.0 % Risk-free rate     0.4 %     0.2 % Dividend yield (per share)     0 %     0 %   On April 26, 2019 (the “Closing Date” ), the Company entered into a Securities Exchange Agreement ( “Share Exchange” ) with each of the former members ( “Members” ) of 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” ) and to 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 period.   NOTE 4 - PROPERTY AND EQUIPMENT   Property and equipment details as of March 31, 2021 and December 31, 2020 are as follows (amounts in thousands):       March 31,     December 31,         2021     2020   Estimated Useful Life Machinery and equipment   $ 38     $ 38   5 years Trade show booth     171       171   5 years Office equipment     424       405   5 years Leasehold improvements     380       380   Lesser of lease term or estimated useful life       1,013       994     Accumulated depreciation     (513 )     (463 )       $ 500     $ 531       Depreciation and amortization expense totaled $50,000 and $40,500, respectively, during the three months ended March 31, 2021 and 2020.        -8- Table of Contents     NOTE 5 - CONCENTRATIONS   Vendors   The Company’s concentration of purchases is as follows:       For the three months ended       March 31,       2021     2020   Vendor A     37 %     - % Vendor B     - %     31 % Vendor C     - %     20 % Vendor D     14 %     15 % Vendor F     - %     12 %   During the three months ended March 31, 2021 and 2020, purchases from four vendors represented 51% and 78%, respectively, of total inventory purchases.   As of March 31, 2021, and December 31, 2020, amounts owed to these vendors totaled $21,000 and $270,000 respectively, which are included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.   Accounts Receivable   The Company’s concentration of accounts receivable is as follows:       March 31,     December 31,       2021     2020   Customer A     13 %     - % Customer B     - %     17 % Customer C     - %     10 %   One 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. Customer A 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, 2020. 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.   NOTE 6 – DON POLLY, LLC.   Don Polly, LLC is a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, the Company’s Chief Executive Officer and Chief Operating Officer, respectively, and a consolidated variable interest for which the Company is the primary beneficiary. Don Polly formulates, sells and distributes the Company’s CBD product lines.   We evaluate our ownership, contractual and other interests in entities that are not wholly-owned to determine if these entities are variable interest entities (“ VIEs ”), and, if so, whether we are the primary beneficiary of the VIE. In determining whether we are the primary beneficiary of a VIE and therefore required to consolidate the VIE, we apply a qualitative approach that determines whether we have both (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of, or the rights to receive benefits from, the VIE that could potentially be significant to that VIE. We continuously perform this assessment, as changes to existing relationships or future transactions may result in the consolidation or deconsolidation of a VIE. Effective April 25, 2019, we consolidated the financial statements of Don Polly and it is  still considered a VIE of the Company. Since the Company has been determined to be the primary beneficiary of Don Polly, we have included Don Polly’s assets, liabilities, and operations in the accompanying condensed consolidated financial statements of the Company since April 25, 2019.   Don Polly operates under exclusive licensing and service contracts with the Company whereby the Company receives 75% of net income from the licensing agreement and 25% of net income from the service agreement; therefore, as the Company receives 100% of the net income or incurs 100% of the net loss of the VIE, no non-controlling interests are recorded.       -9- Table of Contents     NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES   Accounts payable and accrued expenses as of March 31, 2021 and December 31, 2020 are as follows (amounts in thousands):       March 31,     December 31,       2021     2020   Accounts payable   $ 356     $ 629   Accrued compensation     1,481       1,420   Other accrued expenses     350     476       $ 2,187     $ 2,525     NOTE 8 – NOTES PAYABLE   Red Beard Holdings, LLC Note Payable   On April 1, 2020, the Company, Charlie's and its VIE, Don Polly, issued a secured promissory note (the "Red Beard Note" ) to one of the Company's largest stockholders, Red Beard Holdings, LLC ( "Red Beard" ) in the principal amount of $750,000 (the "Principal Amount" ), requiring a guaranteed minimum interest amount of $75,000 ( “Minimum Interest” ), which 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 $150,000.   On 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 Beard Note.    Small Business Administration Loan Programs   On April 30, 2020, Charlie's, a wholly owned subsidiary of the Company, received approval to enter into a U.S. Small Business Administration (" SBA ") Promissory Note (the " Charlie's PPP Loan ") with TBK Bank, SSB (the " SBA Lender "), pursuant to the Paycheck Protection Program (" PPP ") of the Coronavirus Aid, Relief, and Economic Security Act (the " CARES Act ") as administered by the SBA (the " PPP Loan Agreement ").   The Charlie's PPP Loan provides for working capital to CCD in the amount of $650,761. The Charlie's PPP Loan will mature on April 30, 2022 and will accrue interest at a rate of 1.00% per annum. Per the 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 Polly also obtained a loan pursuant to the PPP enacted under the CARES Act (the " Polly PPP Loan " and together with the Charlie's PPP Loan, the " PPP Loans ") from Community Banks of Colorado, a division of NBH Bank (the " Polly Lender "). The Polly PPP Loan obtained by Don Polly provides for working capital to Don Polly in the amount of $215,600. The Polly PPP Loan will mature on April 14, 2022 and will accrue interest at a rate of 1.00% per annum. Payments of principal and interest will be deferred for six months from the date of the Polly PPP Loan, or until November 14, 2020. Interest, however, will continue to accrue during this time.   The aforementioned PPP Loans were made under the PPP enacted by Congress under the CARES Act. The CARES Act (including the guidance issued by SBA and U.S. Department of the Treasury) provides that all or a portion of the PPP Loans may be forgiven upon request from the respective borrower to the SBA Lender or the Polly Lender, as the case may be, subject to requirements in the PPP Loans and under the CARES Act.       -10- Table of Contents     On 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 by the U.S. 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 operations.   On March 17, 2021, Don Polly obtained a second draw PPP loan ( “Polly PPP Loan 2” ) under the CARES Act from Polly Lender. The Polly 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 annum. 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.   On 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. There 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 (“ EID Loan ”) to Don Polly in the amount of $150,000. Installment payments, including principal and interest of $731 monthly, will begin twelve months from 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 annum.   The following summarizes the Company’s notes payable maturities as of March 31, 2021 (amounts in thousands):   Remaining months Ending December 31, 2021   $ -   Year Ending December 31, 2022     651   Year Ending December 31, 2023     -   Year Ending December 31, 2024     -   Year Ending December 31, 2025     -   Thereafter     334   Total   $ 985   NOTE 9 – LOSS PER SHARE APPLICABLE TO COMMON STOCKHOLDERS   Basic 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 options.    The 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):       For the three months ended           March 31,           2021     2020   Options     750,294       801,325   Series A convertible preferred shares     5,543,986       5,572,758   Warrants     4,033,769       4,033,769   Total     10,328,049       10,407,852         -11- Table of Contents     NOTE 10 – STOCKHOLDERS’ EQUITY     Series A Preferred Share Dividend   On April 25, 2020, the Company was required to pay a one-time dividend equal to eight percent (8%) of the stated value of its Series A Preferred, equal to $1,650,000 (“ Dividend Amount ”), which Dividend Amount was required to be paid in cash on or before April 25, 2020.   On August 13, 2020, the Company received a formal notice of default from a holder of its Series A Preferred requesting full payment of dividends due and payable with respect to the Series A Preferred held by such holder on or before August 23, 2020 ( “Dividend Default” ). As of 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   For 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 Placement   On March 19, 2021, the Company entered into Securities Purchase Agreements by and between the Company and certain family trusts in which Mr. Brandon Stump, the Company's Chief Executive Officer, and Mr. 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 million. 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-BASED COMPENSATION   The True Drinks Holdings, Inc. 2013 Stock Incentive Plan (the “ Prior Plan ”) was first approved in December 2013 and was approved by a majority of the stockholders in October 2014. The Prior Plan originally authorized 20.0 million shares of common stock for issuance as equity-based awards, which amount was increased to 120.0 million in January 2018 by authorization of the Board of Directors at that time (the “ Prior Plan Amendment ”). As of the date of the Share Exchange, April 26, 2019, a total of approximately 91.7 million awards were issued under the Prior Plan and the Prior Plan Amendment, consisting entirely of outstanding stock options. As of March 31, 2021, approximately 56.6 million of these stock options remain vested and exercisable under this plan.   The Company will not grant any additional awards or shares of Common Stock under the Prior Plan beyond those that are currently outstanding.                  On May 8, 2019, our Board of Directors approved the Charlie’s Holdings, Inc. 2019 Omnibus Incentive Plan (the “ 2019 Plan ”), and the 2019 Plan was subsequently approved by holders of a majority of our outstanding voting securities on the same date. The 2019 Plan will supersede and replace the Prior Plan and no new awards will be granted under the Prior Plan. Any awards outstanding under the Prior Plan on the date of stockholder approval of the 2019 Plan will remain subject to 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 otherwise.         -12- Table of Contents     Non-Qualified Stock Options   The following table summarizes stock option activities during the three months ended March 31, 2021 (all option amounts are in thousands):       Stock Options     Weighted Average Exercise Price     Weighted Average Remaining Contractual Life (in years)     Aggregate Intrinsic Value   Outstanding at January 1, 2021     750,294     $ 0.01       8.5     $ -   Options granted     -       -       -       -   Options forfeited/expired     -       -       -       -   Outstanding at March 31, 2021     750,294     $ 0.01       8.2     $ 3,030   Options vested and exercisable at March 31, 2021     355,960     $ 0.01       7.8     $ 1,308     As of March 31, 2021, there was approximately $ 177,000 of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the 2019 Plan. That cost is expected to be recognized over a weighted average period of 1.8 years. For the three months ended March 31, 2021, the Company recorded compensation expense of approximately $77,000 related to the granting of stock options.   Common Stock Awards   On April 26, 2019, in connection with employment agreements with its Chief Executive Officer and Chief Operating Officer, the Company issued market condition awards contingent upon the achievement of certain market capitalization targets. The awards are subject to a three-year service vesting period. The awards are settleable in a variable number of common shares based on defined percentages of the Company's total shares determined by market capitalization targets and are, therefore, classified as liabilities in accordance with ASC 718. The fair value of the awards is remeasured at each reporting period until settlement. Compensation cost is attributed over the period encompassing the derived service period and the explicit service period. The fair value of the market condition awards on the termination date of February 12, 2020 was approximately $1,638,000. The market condition awards were valued using a Monte Carlo simulation technique, a risk-free interest rate of 1.44% and a volatility of 75% based on volatility over 3 years using daily stock prices. For the 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.   On 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: (i) the annual equity awards based upon, among other conditions, the Company’s market capitalization and a percentage of base salary have been eliminated; however, the awards based on financial milestones remain in full force and effect; and (ii) payment of the 2019 bonuses has been deferred, resulting in the accrual of such bonuses on the books and records of the Company. All other terms of the respective Employment Agreements will remain in full force and effect subject to further review by the Board of Directors as it deems necessary and appropriate.   On April 26, 2019, as additional consideration for advisory services provided in connection with the Charlie’s Financing and the Share Exchange (see Note 3 above), the Company issued an aggregate of 902.7 million shares of common stock (the “ Advisory Shares ”), including to a member of the Company’s Board of Directors, pursuant to a subscription agreement. The fair value of a share of common stock was $0.0032 which is based upon a valuation prepared by the Company on the date of the Share Exchange. The Company recorded stock-based compensation of approximately $2.9 million on the grant date.   Prior to the Share Exchange, Charlie’s employees held Member units, which were automatically converted into 7.1 million shares of common stock and 69,815 shares of Series B Convertible Preferred Stock ( “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 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.           -13- Table of Contents     NOTE 12 – COMMITMENTS AND CONTINGENCIES   Leases   The Company leases office space under agreements classified as operating leases that expire on various dates through 2024. All of the Company’s lease liabilities result from the lease of its headquarters in Costa Mesa, California, which expires in 2024, its warehouse in Santa Ana, California, which expires in 2021, its office and warehouse in Denver, Colorado, which expires in 2022, and its warehouse space in Huntington Beach, California, which expires in 2022. Such leases do not require any contingent rental payments, impose any financial restrictions, or contain any residual value guarantees. Certain of the Company’s leases include renewal options and escalation clauses; renewal options have not been included in the calculation of the lease liabilities and right of use assets as the Company is not reasonably certain to exercise the options. Variable expenses generally represent the Company’s share of the landlord’s operating expenses. The Company does not act as a lessor or have any leases classified as financing leases.   The Company excludes short-term leases having initial terms of 12 months or less from Topic 842 as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term. The Company entered into a commercial lease for the Company’s corporate headquarters (the “ Lease ”) in Costa Mesa, California with Brandon Stump, Ryan Stump and Keith Stump, the Company’s Chief Executive Officer, Chief Operating Officer and member of the Board. Messrs. Stump, Stump and Stump purchased the property that is the subject of the Lease in July 2019. The Lease, which was effective as of September 1, 2019, on a month to month basis, 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. David 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.    At 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.   The following summarizes quantitative information about the Company’s operating leases for the three months ended March 31, 2021 and 2020 (amounts in thousands):       For the three months ended       March 31,           2021     2020   Operating leases                Operating lease cost   $ 149     $ 149      Variable lease cost     -       -   Operating lease expense     149       149   Short-term lease rent expense     -       -   Total rent expense   $ 149     $ 149         For the three months ended       March 31,           2021     2020   Operating cash flows from operating leases   $ 113     $ 101   Weighted-average remaining lease term – operating leases (in years)     2.15       3.60   Weighted-average discount rate – operating leases     12.0 %     12.0 % Maturities of our operating leases as of March 31, 2021, excluding short-term leases, are as follows (amounts in thousands):   Remaining Months Ending December 31, 2021   $ 427   Year Ending December 31, 2022     399   Year Ending December 31, 2023     275   Year Ending December 31, 2024     206   Total     1,307   Less present value discount     (204 ) Operating lease liabilities as of December 31, 2020   $ 1,103         -14- Table of Contents     Legal Proceedings   From time to time, the Company may be involved in various claims and counterclaims and legal actions arising in the ordinary course of business.  Other than as set forth below, there are no additional pending or threatened legal proceedings at this time.   C.H. Robinson Worldwide, Inc. v. True Drinks, Inc. On September 5, 2018, C.H. Robinson Worldwide (“ Robinson ”) filed a complaint against True Drinks, Inc. in the California Superior Court for the County of Orange located in Santa Ana, California alleging open book account, account stated, reasonable value of services received, agreement, and unjust enrichment related to shipping services provided by Robinson. Robinson has asserted $121,743 in damages plus interest, attorney’s fees and costs. On November 13, 2020 the Company and Robinson reached a Settlement Agreement and Mutual Release (“ Settlement 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    On 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. Mr. Sicignano was awarded one hundred fifty million (150,000,000) restricted shares (subject to forfeiture) ( “Restricted Shares” ) of the Company. Mr. 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.   On 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. On May 2, 2021, the Company commenced payment of dividends for Stock Payees that elected for delivery of cash payment in satisfaction of their dividend payment.   The 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. Based upon this evaluation, other than as set forth above, there were no items requiring disclosure.         -15- Table of Contents     ITEM 2 - MANA G EMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   The following discussion of the financial condition and results of operations of Charlie’s Holdings, Inc. should be read in conjunction with the financial statements and the notes to those statements appearing elsewhere in this Quarterly Report on Form 10-Q (this “Report”). Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section in this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.   As used in this Report, unless otherwise stated or the context otherwise requires, references to the “Company”, “we”, “us”, “our”, or similar references mean Charlie’s Holdings, Inc. (formerly True Drinks Holdings, Inc.), its subsidiaries and consolidated variable interest entity on a consolidated basis. References to “Charlie’s” and “CCD” refer to Charlie’s Chalk Dust, LLC, a California limited liability company and wholly-owned subsidiary of the Company, and “Don Polly” refers to Don Polly, LLC, a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, the Company’s Chief Executive Officer and Chief Operating Officer, respectively, and a consolidated variable interest “(VIE”) for which the Company is the primary beneficiary.   Overview   Our objective is to become a significant leader in the rapidly growing, global e-cigarette segment of the broader nicotine related products industry. Through Charlie’s, we formulate, market and distribute branded e-cigarette liquid for use in both open and closed e-cigarette and vaping systems. Charlie’s products are 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 Kingdom, Italy, Spain, Belgium, Australia, Sweden and Canada. In June 2019, we launched distribution, through Don Polly, of certain premium vapor, tincture and topical wellness products containing hemp-derived cannabidiol (“ CBD ”) and we currently intend to develop and launch additional products containing hemp-derived CBD in the future.   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. 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 injuries. T he CDC's 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 tested by third party laboratories which have confirmed that none of our products contain any vitamin E acetate or Tetrahydrocannabinol (“ THC ”).   However, these developments have had a negative effect on our sales since mid-September 2019 (see further discussion below) and therefore, in response to these developments and while government regulators are formulating future polices, management has adopted the following plan of operation.   First, we plan to 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 products.   Secondly, 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.       -16- Table of Contents     Most 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. We are continuing with our plan to obtain marketing authorization for certain of our products through the completion of a Premarket Tobacco Application (" PMTA "), which we submitted in September 2020. 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 vapor products space.   Recent Developments    March 2021 Private Placement   On March 19, 2021, the Company entered into Securities Purchase Agreements by and between the Company and certain family trusts in which Mr. Brandon Stump, the Company's Chief Executive Officer, and Mr. 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 million. 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   On April 1, 2020, the Company, Charlie's and its VIE, Don Polly, issued a secured promissory note (the "Red Beard Note" ) to one of the Company's largest stockholders, Red Beard Holdings, LLC ( "Red Beard" ) in the principal amount of $750,000 (the "Principal Amount" ), requiring a guaranteed minimum interest amount of $75,000 ( “Minimum Interest” ), which 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 $150,000.    On 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 Beard Note.   Small Business Administration Loan Programs   On April 30, 2020, Charlie's, a wholly owned subsidiary of the Company, received approval to enter into a U.S. Small Business Administration (" SBA ") Promissory Note (the " Charlie's PPP Loan ") with TBK Bank, SSB (the " SBA Lender "), pursuant to the Paycheck Protection Program (" PPP ") of the Coronavirus Aid, Relief, and Economic Security Act (the " CARES Act ") as administered by the SBA (the " PPP Loan Agreement ").   The Charlie's PPP Loan provides for working capital to CCD in the amount of $650,761. The Charlie's PPP Loan will mature on April 30, 2022 and will accrue interest at a rate of 1.00% per annum. Payments of principal and interest will be deferred for six months from the date of the Charlie's PPP Loan, or until November 30, 2020. Interest, however, will continue to accrue during this time.   On April 14, 2020, Don Polly also obtained a loan pursuant to the PPP enacted under the CARES Act (the " Polly PPP Loan " and together with the Charlie's PPP Loan, the " PPP Loans ") from Community Banks of Colorado, a division of NBH Bank (the " Polly Lender "). The Polly PPP Loan obtained by Don Polly provides for working capital to Don Polly in the amount of $215,600. The Polly PPP Loan will mature on April 14, 2022 and will accrue interest at a rate of 1.00% per annum. Payments of principal and interest will be deferred for six months from the date of the Polly PPP Loan, or until November 14, 2020. Interest, however, will continue to accrue during this time.     -17- Table of Contents     The aforementioned PPP Loans were made under the PPP enacted by Congress under the CARES Act. The CARES Act (including the guidance issued by SBA and U.S. Department of the Treasury) provides that all or a portion of the PPP Loans may be forgiven upon request from the respective borrower to the SBA Lender or the Polly Lender, as the case may be, subject to requirements in the PPP Loans and under the CARES Act.   On 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 by the U.S. Small Business Administration. There is no further action required on the part of Don Polly to satisfy this liability.   On March 17, 2021, Don Polly obtained a second draw PPP loan ( “Polly PPP Loan 2” ) under the CARES Act from Polly Lender. The Polly 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 annum. 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.   On 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. There 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 (“ EID Loan ”) to Don Polly in the amount of $150,000. Installment payments, including principal and interest of $731 monthly will begin twelve months from date of the EID Loan. The balance of principal and interest will be payable thirty years from the date of the EID Loan and interest will accrue at the rate of 3.75% per annum.   PMTA   During the quarter ended September 30, 2020, the United States Food and Drug Administration's (" FDA ") Center for Tobacco Products informed us that our PMTA has received a valid submission tracking number, passed the FDA’s filing review phase, and recently entered the substantive review phase. To date, Charlie’s has invested over $4.4 million for our initial PMTA submission. We engaged a team of more than 200 professionals, including doctors, scientists, biostatisticians, data analysts, and numerous contract research organizations to create our comprehensive PMTA submission. This news highlights our progress toward achieving full regulatory compliance and our goal of providing customers with a trusted product portfolio.   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. We may 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.         -18- Table of Contents     Risks and Uncertainties   The Company operates in an environment that is subject to rapid changes and developments in laws and regulations that could have a significant impact on the Company’s ability to sell its products. Federal, state, and local governmental bodies across the United States have indicated that flavored e-cigarette liquid, vaporization products and certain other consumption accessories may become subject to new laws and regulations at the federal, state and local levels. Beginning in September 2019, certain states temporarily banned the sale of flavored e-cigarettes, and on January 2, 2020, the FDA issued an enforcement policy effectively banning the sale of flavored cartridge-based e-cigarettes marketed primarily by large manufacturers without prior authorization from the FDA. The application of any new laws or regulations that may be adopted in the future, at a federal, state, or local level, directly or indirectly implicating flavored e-cigarette liquid and products used for the vaporization of nicotine could significantly limit the Company’s ability to sell such products, result in additional compliance expenses, and/or require the Company to change its labeling and/or methods of distribution. Any ban of the sale of flavored e-cigarettes directly limits the markets in which the Company may sell its products. In the event the prevalence of such bans and/or changes in laws and regulations increase across the United States, or internationally, the Company’s business, results of operations and financial condition could be adversely impacted. In addition, the Company is presently seeking to obtain marketing authorization for certain of its nicotine-based e-liquid products. Our PMTA applications were submitted in September 2020 on a timely basis, which if approved, will allow the Company to continue to sell its products in the United States. The Company 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 sales.   On March 11, 2020, the World Health Organization designated the ongoing and evolving COVID-19 outbreak as a pandemic. The outbreak has caused substantial disruption in international and U.S. economies and markets as it continues to spread. The outbreak is having a temporary adverse impact on our industry as well as our business, with regards to certain supply chain disruptions and sales volume. While the disruption from COVID-19 is currently expected to be temporary, there is uncertainty around the duration.   Basis of Presentation   The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “ SEC ”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States ( “U.S. GAAP” ) have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented in this Quarterly Report on Form 10-Q (this “ Report ”) not misleading.   Amounts related to disclosure of December 31, 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 are also included.   Current Operating Trends and Financial Highlights   Management currently considers the following events, trends and uncertainties to be important in understanding the Company’s results of operations and financial condition for the most recent calendar quarter and full year:   Regarding results from operations for the quarter ended 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, 2020. 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 products.   We 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. The net loss 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 $20,102,000.         -19- Table of Contents     A review of the three month period ended March 31, 2021 follows:       For the three months ended                   March 31,         Change   ($ in thousands)   2021     2020     Amount     Percentage   Revenues:                         Product revenue, net   $ 4,361     $ 4,405     $ (44 )     -1.0 % Total revenues     4,361       4,405       (44 )     -1.0 % Operating costs and expenses:                                 Cost of goods sold - product revenue     1,943       1,963       (20 )     -1.0 % General and administrative     2,218       4,151       (1,933 )     -46.6 % Sales and marketing     420       419       1       0.2 % Research and development     9       2,223       (2,214 )     -99.6 % Total operating costs and expenses     4,590       8,756       (4,166 )     -47.6 % Loss from operations     (229 )     (4,351 )     4,122       -94.7 % Other income (expense):                                 Interest expense     (28 )     -       (28 )     100 % Change in fair value of derivative liabilities     (20,102 )     430       (20,532 )     -4774.9 % Gain on debt extinguishment     217       -       217       100 % Other income     5       5       -       0.0 % Total other income (expense)     (19,908 )     435       (20,343 )     -4676.6 % Net loss   $ (20,137 )   $ (3,916 )   $ (16,221 )     414.2 %   Results of Operations for the Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020   Revenue   Revenue for the three months ended March 31, 2021 decreased approximately $44,000 or 1%, to approximately $4,361,000, 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 products. 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. However, 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 Act” ) 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. Beginning 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 and altered buying patterns for certain consumer discretionary goods. We have 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   Cost of revenue, which consists of direct costs of materials, direct labor, third party subcontractor services, and other overhead costs decreased approximately $20,000, or 1%, to approximately $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 revenue, for the same period in 2020. This cost, as a percent of 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   For the three months ended March 31, 2021, total general and administrative expense decreased approximately $1,948,000 to $2,203,000 as compared to approximately $4,151,000 for the same period in 2020. This decrease is comprised of reductions of approximately $1,494,000 of non-cash, stock-based compensation, $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 measures.       -20- Table of Contents     Sales and Marketing Expense   For 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 launches.   Research and Development Expense   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.   Loss from Operations   We had operating losses of approximately $229,000 for the three months 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 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.   ● 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.   Net Loss   For 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.    Effects of Inflation   Inflation has not had a material impact on our business.   Liquidity and Capital Resources   As of March 31, 2021, we had negative working capital of approximately $22,716,000, which consisted of current assets of approximately $6,481,000 and current liabilities of approximately $29,197,000. This compares to negative working capital of approximately $6,020,000 at December 31, 2020. The current liabilities, as presented in the condensed consolidated 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 reserves.       -21- Table of Contents     Our cash and cash equivalents balance at March 31, 2021 was approximately $3,455,000.   For 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 in 2020. The cash used for investment activities is primarily for the on-going development and configuration of enterprise resource planning software during the three months ended March 31, 2021.   For 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 Environment, Liquidity and Management’s plan of operation.   Our financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company operates in a rapidly changing legal and regulatory environment; new laws and regulations or changes to existing laws and regulations could significantly limit the Company’s ability to sell its products, and/or result in additional costs. Additionally, the Company was required to apply for FDA approval to continue selling and marketing its products used for the vaporization of nicotine in the United States. There is significant cost associated with the application process and there can be no assurance the FDA will approve the application(s). In addition, the recent outbreak of COVID-19 in March 2020 has had a negative impact on the global economy and markets which has negatively impacted the Company’s supply chain and sales. For the 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 $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 operations.   Our plans and growth depend on our ability to increase revenues and continue our business development efforts, including the expenditure of approximately $4,400,000 to 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 environment or the recent outbreak of COVID-19 continues to impact the global economy, we will need to raise additional funds through public or private debt or equity offerings, financings, corporate collaborations, or other means. There can be no assurance that such financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and in our best interests.   Off-Balance Sheet Arrangements   The Company has no off-balance sheet arrangements other than operating lease commitments.   Critical Accounting Policies   The condensed consolidated financial statements are prepared in conformity with U.S. GAAP, which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of expense in the periods presented. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, due to inherent uncertainties in making estimates, actual results could differ from the original estimates, requiring adjustments to these balances in future periods. The critical accounting estimates that affect the consolidated financial statements and the judgments and assumptions used are consistent with those described under Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020.       -22- Table of Contents     ITEM 3 - QU A NTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   Not applicable.