What changed in this filing

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Item 1. Financial Statements

2021-08-16 compared with 2021-05-17 · 472 added, 1654 removed, 53 unchanged (98% of the section changed)

FINANCIAL STATEMENTS

CHARLIE’S HOLDINGS, INC.

CONDENSED CONSOLIDATED

BALANCE SHEETS

CHARLIE’S HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

$ 3,455  

$ 1,422  

receivable, net

expenses and other current assets

Current assets:

plant and equipment, net

Accounts receivable, net

Inventories, net

Prepaid expenses and other current assets

Total current assets

Non-current assets:

$ 8,139  

$ 6,525  

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

payable and accrued expenses

$ 2,187  

$ 2,525  

24,546  

Property, plant and equipment, net

Right-of-use asset, net

Total non-current assets

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:

29,197  

10,743  

payable, net of current portion

liabilities, net of current portion

Accounts payable and accrued expenses

Derivative liability

Lease liabilities

Notes payable

Dividends payable

Deferred revenue

Total current liabilities

Non-current liabilities:

30,823  

12,521  

Notes payable, net of current portion

Lease liabilities, net of current portion

Total non-current liabilities

Total liabilities

COMMITMENTS AND CONTINGENCIES (see Note 12)

Stockholders'

preferred stock ($0.001 par value);

1,800,000 shares

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

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);

50,000,000,000 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  

18,991  

paid-in capital

Stockholders' deficit:

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

$ 8,139  

$ 6,525  

accompanying notes are an integral part of these unaudited

condensed consolidated financial statements.

CHA R LIE’S HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS

OF OPERATIONS

Convertible preferred stock ($ 0.001 par value);

1,800,000 shares authorized

Series A, 300,000 shares designated, 175,000 and 203,811 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively

Series B, 1,500,000 shares designated, 0 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively

Common stock ($ 0.001 par value);

500,000,000 shares authorized;

203,165,202 shares and 189,907,526 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively

Additional paid-in capital

Accumulated deficit

Total stockholders' deficit

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CHARLIE’S HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

For the three months ended

$ 4,361  

$ 4,405  

Operating costs and expenses:

of goods sold - product revenue

and administrative

and marketing

and development

For the six months ended

Product revenue, net

Total revenues

Operating costs and expenses:

from operations

Other income (expense):

in fair value of derivative liabilities

on debt extinguishment

Cost of goods sold - product revenue

General and administrative

Sales and marketing

Research and development

Total operating costs and expenses

Loss from operations

Other income (expense):

loss per share, basic and diluted

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.

CHARLI E ’S HOLD INGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

STOCKHOLDERS’

Interest expense

Change in fair value of derivative liabilities

Gain on debt extinguishment

Total other income

Net income (loss)

Net earnings (loss) per share

Weighted average number of common shares outstanding

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CHARLIE’S HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(in thousands)

Series A Convertible

For the Three Months Ended June 30, 2021

Preferred Stock

Common Stock  

 Total Stockholders'

 Par value

Paid-in Capital

Total Stockholders'

Balance at April 1, 2021

Conversion of Series A convertible preferred stock

Issuance of common stock for dividend payment

Stock compensation

Fraction shares adjustment due to reverse split

Balance at June 30, 2021

For the Three Months Ended June 30, 2020

Preferred Stock

Stockholders'

Balance at April 1, 2020

Conversion of Series A convertible preferred stock

Accrue dividends payable on Series A convertible preferred stock

Stock compensation

Balance at June 30, 2020

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CHARLIE’S HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(in thousands)

For the Six Months Ended June 30, 2021

Preferred Stock

Total Stockholders'

Balance at January 1, 2021

18,990,753  

$ 18,991  

 Issuance

of common stock to related parties for cash

351,700  

 Conversion

of Series A convertible preferred stock

566,883  

 Issuance

of common stock for dividend payment

20,310  

Balance at March 31, 2021

19,929,646  

$ 19,930  

Series A Convertible

Issuance of common stock to related parties for cash

Conversion of Series A convertible preferred stock

Issuance of common stock for dividend payment

Stock compensation

Fraction shares adjustment due to reverse split

Balance at June 30, 2021

For the Six Months Ended June 30, 2020

Preferred Stock

Common Stock  

 Total Stockholders'

 Par value

Paid-in Capital

Stockholders'

Balance at January 1, 2020

18,973,828  

$ 18,974  

 Conversion

of Series A convertible preferred stock

 Reclassification

of liability awards to equity

Balance at March 31, 2020

18,982,291  

$ 18,982  

The accompanying notes are an integral part of these unaudited

condensed consolidated financial

CHA R LIE’S

HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS

Conversion of Series A convertible preferred stock

Reclassification of liability awards to equity

Accrue dividends payable on Series A convertible preferred stock

Stock compensation

Balance at June 30, 2020

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CHARLIE’S HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)  

For the three months ended

For the six months ended

Cash Flows from Operating Activities:

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  

Reconciliation of net loss to net cash used in operating activities:

Allowance for doubtful accounts

Depreciation and amortization

Change in fair value of derivative liabilities

Amortization of operating lease right-of-use asset

Stock based compensation

Gain from debt extinguishment

Subtotal of non-cash charges

Changes in operating assets and liabilities:

expenses and other current assets

payable and accrued expenses

cash provided by (used in) operating activities

Accounts receivable

Prepaid expenses and other current assets

Accounts payable and accrued expenses

Deferred revenue

Lease liabilities

Net cash used in operating activities

Cash Flows from Investing Activities:

of property, plant and equipment

cash used in investing activities

Purchase of property, plant and equipment

Net cash used in investing activities

Cash Flows from Financing Activities:

from issuance of common stock to related parties

from issuance of notes payable

of notes payable

cash provided by financing activities

increase (decrease) in cash

beginning of the period

Proceeds from issuance of common stock to related parties

Proceeds from issuance of notes payable

Repayment of notes payable

Dividend payment

Net cash provided by financing activities

Net increase (decrease) in cash

Cash, beginning of the period

Cash, end of the period

$ 3,455  

Supplemental disclosure of cash flow information

paid for interest

paid for income taxes

Cash paid for interest

Cash paid for income taxes

Supplemental disclosure of cash flow information

of Series A convertible preferred stock

of common stock for dividend payment

Reclassification

of liability awards to equity

$ 1,638  

Gain from debt extinguishment

The accompanying notes are an integral part of these unaudited

condensed consolidated financial statements.

CH A RLIE’S HOLDINGS,

Conversion of Series A convertible preferred stock

Issuance of common stock for dividend payment

Accrued dividends payable on Series A convertible preferred stock

Reclassification of liability awards to equity

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 –

DESCRIPTION OF THE BUSINESS AND BASIS OF

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 (“

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 ”

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

All Natural Energy.

At this time, we do not intend to

continue sales of the Bazi product in its current

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

share (the " Common

Stock "), trades under the

symbol "CHUC" on the OTC:

Going Concern Uncertainty Regarding the Legal and Regulatory

Environment, Liquidity and Management’s Plan of

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.

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

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.

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.

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

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

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 premium, nicotine-based vapor products.

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 premium, nicotine-based vapor products, 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 OTCQB Venture Market.

Reverse Stock Split

The Company’s Board of Directors approved a reverse stock split of the Company’s authorized, issued and outstanding shares of Common Stock, par value $0.001 per share, at a ratio of 1-for-100 (the “ Reverse Split ”).

The Reverse Split was effective as of June 16, 2021 (the “ Effective Date ”).

All share and per share amounts in the Form 10-Q have been retroactively adjusted to account for the reverse stock split.

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 six months ended June 30, 2021, the Company has incurred losses from operations of approximately $397,000 and a consolidated net loss of approximately $373,000, and the Company has a stockholders’ deficit of approximately $ 2,075,000 as of June 30, 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 3,517,000 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.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

September 2019, certain states temporarily banned the sale of

flavored e-cigarettes, and several states and municipalities are

considering implementing similar restrictions.

Federal, state, and

local governmental bodies across the United States have indicated

that flavored e-cigarette liquid, vaporization products and certain

other consumption accessories may become subject to new laws and

regulations at the federal, state and local levels.

The application

of any new laws or regulations that may be adopted in the future,

at a federal, state, or local level, directly or indirectly

implicating flavored e-cigarette liquid and products used for the

vaporization of nicotine, could significantly limit the

Company’s ability to sell such products, result in additional

compliance expenses, and/or require the Company to change its

labeling and/or methods of distribution.

Any ban of the sale of

flavored e-cigarettes directly limits the markets in which the

Company may sell its products.

In the event the prevalence of such

bans and/or changes in laws and regulations increase across the

United States, or internationally, the Company’s business,

results of operations and financial condition could be adversely

In addition, the

Company is presently seeking to obtain marketing authorization for

certain of its nicotine-based e-liquid products.

Our applications

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

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

products in the United States.

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.

March 11, 2020, the World Health Organization designated the

ongoing and evolving COVID-19 outbreak as a pandemic.

has caused substantial disruption in international and U.S.

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

NOTE 2 –

SUMMARY OF SIGNIFICANT ACCOUNTING

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.

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,

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

preparation of financial statements in conformity with U.S.

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

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.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

December 2019, the FASB issued ASU No.

2019-12, “Income Taxes

Simplifying the Accounting for Income Taxes

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.

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

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.

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

Financial Instruments, which supersedes current guidance requiring

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

been incurred.

The standard requires the establishment of an

allowance for estimated credit losses on financial assets,

including trade and other receivables, at each reporting date.

ASU will result in earlier recognition of allowances for losses on

trade and other receivables and other contractual rights to receive

This standard is effective for fiscal years, and interim

periods within those fiscal years, beginning after December 15,

The impact of adopting this standard was not material to the Company’s consolidated financial statements and related disclosures.

In June 2016 the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which supersedes current guidance requiring recognition of credit losses when it is probable that a loss has been incurred.

The standard requires the establishment of an allowance for estimated credit losses on financial assets, including trade and other receivables, at each reporting date.

The ASU will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash.

This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022.

Early adoption is permitted.

The Company does not believe the

impact of adopting this standard will be material to its

consolidated financial statements and related

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.

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

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 consolidated 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

NOTE 3 –

FAIR VALUE MEASUREMENTS

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

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.

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

Value at March 31, 2021

liability - Warrants

24,546  

$ 24,546  

Value at December 31, 2020

liability - Warrants

$ 4,444  

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 three-month period ended March 31, 2021.

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).   

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.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy as of June 30, 2021 and December 31, 2020 (amounts in thousands):

Fair Value at June 30, 2021

Derivative liability - Warrants

Total liabilities

Fair Value at December 31, 2020

Derivative liability - Warrants

Total liabilities

There were no transfers between Level 1, 2 or 3 during the six-month period ended June 30, 2021.

The following table presents changes in Level 3 liabilities measured at fair value for the six-month period ended June 30, 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).

liability - Warrants

at January 1, 2021

$ 4,444  

in fair value

20,102  

at December 31, 2020

$ 24,546  

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:

$ 0.0044  

yield (per share)

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

Balance at January 1, 2021

Change in fair value

Balance at June 30, 2021

A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in the Monte Carlo simulation measuring the Company’s derivative liabilities that are categorized within Level 3 of the fair value hierarchy as of June 30, 2021 and December 31, 2020 is as follows:

Exercise price

Contractual term (years)

Volatility (annual)

Risk-free rate

Dividend yield (per share)

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 31,028,996 shares of Common Stock (the “Investor Warrants” ) and to its placement agent Katalyst Securities LLC warrants to purchase an aggregate of 9,308,699 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 $ 0.44313 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.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - PROPERTY AND EQUIPMENT

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

follows (amounts in thousands):

and equipment

of lease term or estimated useful life

Depreciation and

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

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

Property and equipment as of June 30, 2021 and December 31, 2020 are as follows (amounts in thousands):

Machinery and equipment

Trade show booth

Office equipment

Leasehold improvements

Lesser of lease term or estimated useful life

Accumulated depreciation

Depreciation and amortization expense totaled $52,000 and $43,000, respectively, during the three months ended June 30, 2021 and 2020.

Depreciation and amortization expense totaled $102,000 and $83,000, respectively, during the six months ended June 30, 2021 and 2020.

NOTE 5 - CONCENTRATIONS

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

included in accounts payable and accrued expenses in the

accompanying condensed consolidated balance sheets.

The Company’s concentration of purchases is as follows:

For the three months ended

For the six months ended

During the three months ended June 30, 2021 and 2020, purchases from five vendors represented 89 % and 86 %, respectively, of total inventory purchases.

During the six months ended June 30, 2021 and 2020, purchases from five vendors represented 87 % and 79 %, respectively, of total inventory purchases.

As of June 30, 2021, and December 31, 2020, amounts owed to these vendors totaled $ 86,000 and $ 270,000 respectively, which are included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Accounts Receivable

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.

NOTE 6 –

DON POLLY, LLC.

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

by entities controlled by Brandon and Ryan Stump, the

Company’s Chief Executive Officer and Chief Operating

Officer, respectively, and a consolidated variable interest

for which the Company is the primary beneficiary.

formulates, sells and distributes the Company’s CBD product

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.

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

therefore, as the Company receives 100% of the net

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

non-controlling interests are recorded.

NOTE 7 –

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

The Company’s concentration of accounts receivable is as follows:

Two customers made up 25 % of net accounts receivable at June 30, 2021.

Two customers made up 27 % of net accounts receivable at December 31, 2020.

Customer A owed the Company a total of $ 202,000 , representing 15 % of net receivables at June 30, 2021.

Customer B owed the Company a total of $ 137,000 , representing 10 % of net receivables at June 30, 2021.

Customer A owed the Company a total of $ 210,000 , representing 17 % of net receivables at December 31, 2020.

Customer B 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 six months ended June 30, 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.

NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses as of June 30, 2021 and December 31, 2020 are as follows (amounts in thousands):

Accounts payable

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

as follows (amounts in thousands):

accrued expenses

$ 2,187  

$ 2,525  

NOTE 8 –

NOTES PAYABLE

Accrued compensation

Other accrued expenses

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – NOTES PAYABLE

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 $1,550,000 in exchange for an

acknowledgment of satisfaction and full release of the Company by

Red Beard from liability and obligations arising under the Red

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

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.

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

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

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.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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.

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.

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 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

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  

750,294  

801,325  

A convertible preferred shares

5,543,986  

5,572,758  

4,033,769  

10,328,049  

10,407,852  

NOTE 10 –

STOCKHOLDERS’

Series A Preferred

Share Dividend

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,

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”

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.

There is no further action required on the part of Charlie’s to satisfy this liability.

For the period ended June 30, 2021, the Company recorded a debt extinguishment gain of approximately $ 657,300 , including principal and accrued interest, which is reflected in the other income section of the Company’s condensed consolidated statements of operations.

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 June 30, 2021 (amounts in thousands):

Remaining months Ending December 31, 2021

Year Ending December 31, 2022

Year Ending December 31, 2023

Year Ending December 31, 2024

Year Ending December 31, 2025

NOTE 9 – EARNINGS (LOSS) PER SHARE APPLICABLE TO COMMON STOCKHOLDERS

Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the reporting period.

Diluted earnings (loss) per common share is computed similar to basic earnings (loss) 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.

For the three and six months ended June 30, 2021 and 2020, net income is adjusted for gain from change in fair value of warrant liabilities.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth the computation of earnings (loss) per share (amounts in thousands, except share and per share amounts):

For the three months ended

For the six months ended

Net income (loss) - basic

Reversal of gain due to change in fair value of warrant liability

Net income (loss) - diluted

Weighted average shares outstanding - basic

Diluted stock options

Diluted warrants

Diluted preferred shares

Weighted average shares outstanding - diluted

Basic earnings (loss) per share

Diluted earnings (loss) per share

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 six months ended

Series A convertible preferred shares

NOTE 10 – STOCKHOLDERS’ EQUITY

Series A Preferred Share Dividend & Share Waiver

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” ).

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 $ 0.44313 .

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On May 25, 2021, the Company entered into a Dividend Waiver and Exchange Agreement (the “ Exchange Agreement ”), between the Company and the holders (the “ Series A Holders ”) of its Series A Convertible Preferred Stock, par value $ 0.001 (“ Series A Preferred ”), pursuant to which the Company paid to the Series A Holders total consideration of approximately $1,650,000 (the “ Dividend Amount ”), which Dividend Amount was paid in the form of 1,736,501 shares of the Company’s common stock, par value $ 0.001 (“ Common Stock ”), valued at $0.44313 per share (the “ Shares ”), and approximately $ 880,000 in cash.

As of June 30, 2021, all dividend liability has been satisfied which is reflected on the Company’s condensed consolidated balance sheet.

Conversion of Series A Preferred Shares

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-BASED COMPENSATION

The True Drinks

Holdings, Inc.

2013 Stock Incentive Plan (the

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

Plan Amendment ”).

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

The Company will not grant any additional awards or shares of

Common Stock under the Prior Plan beyond those that are currently

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

Holdings, Inc.

2019 Omnibus Incentive Plan (the “

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

For the six months ended June 30, 2021, the Company issued approximately 6,502,000 shares of Common Stock upon conversion of 28,810 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 3,517,000 shares of its common stock, par value $0.001 (" Common Stock "), at a purchase price per share of $ 0.853 (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 0.9 million awards were issued under the Prior Plan and the Prior Plan Amendment, consisting entirely of outstanding stock options.

As of June 30, 2021, approximately 0.6 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 11,072,542 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.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Non-Qualified Stock Options

following table summarizes stock option activities during the three

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

The following table summarizes stock option activities during the six months ended June 30, 2021 (all option amounts are in thousands):

Stock Options

Weighted Average Exercise Price

Weighted Average Remaining Contractual Life (in years)

Aggregate Intrinsic Value

at January 1, 2021

750,294  

$ 0.01  

forfeited/expired

at March 31, 2021

750,294  

$ 0.01  

$ 3,030  

vested and exercisable at March 31, 2021

355,960  

$ 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

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.

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 –

COMMITMENTS AND CONTINGENCIES

Company leases office space under agreements classified as

operating leases that expire on various dates through 2024.

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.

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.

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.

following summarizes quantitative information about the

Company’s operating leases for the three months ended March

31, 2021 and 2020 (amounts in thousands):

three months ended

   Operating

   Variable

lease expense

lease rent expense

three months ended

cash flows from operating leases

Weighted-average

remaining lease term –

operating leases (in

Weighted-average

discount rate –

Weighted Average Remaining Contractual Life

Intrinsic Value

Outstanding at January 1, 2021

Options granted

Options forfeited/expired

Outstanding at June 30, 2021

Options vested and exercisable at June 30, 2021

As of June 30, 2021, there was approximately $ 114,000 of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the 2019 Plan.

That cost is expected to be recognized over a weighted average period of 2.5 years.

For the three and six months ended June 30, 2021, the Company recorded compensation expense of approximately $ 63,000 and $ 140,000 related to the granting of stock options, respectively.

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 six months ended June 30, 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 six months ended June 30, 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 9.0 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 $0.32 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.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Prior to the Share Exchange, Charlie’s employees held Member units, which were automatically converted into 71,000 shares of common stock and 69,815 shares of Series B Convertible Preferred Stock ( “Series B Preferred” ) (or 6.98 million shares of common stock equivalents) due to the effect of the Share Exchange.

The 7.1 million shares of common stock vested over a two-year period, which concluded during the quarter ended June 30, 2021.

The fair value of a share of common stock was $0.32 which is based upon a valuation prepared by the Company on the date of the Share Exchange.

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 was awarded 1,500,000 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 1,500,000 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 750,000 share increments on April 1, 2022 and April 1, 2023, and will also be subject to 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.

The grant date fair value of the 1,500,000 restricted shares was approximately $ 65,000 .

The Company recorded total stock-based compensation of approximately $ 165,000 and $ 524,000 during the three and six months ended June 30, 2021, respectively.

NOTE 12 – COMMITMENTS AND CONTINGENCIES

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.

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 six months ended June 30, 2021 and 2020 was $ 69,510 and $ 137,640 , respectively.

At June 30, 2021, the Company had operating lease liabilities of approximately $994,000 and right of use assets of approximately $979,000, which were included in the condensed consolidated balance sheet.

CHARLIE’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following summarizes quantitative information about the Company’s operating leases for the three and six months ended June 30, 2021 and 2020 (amounts in thousands):

For the three months ended

For the six months ended

Operating leases

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 December 31, 2020

$ 1,103  

Operating lease cost

Variable lease cost

Operating lease expense

Short-term lease rent expense

Total rent expense

For the six months ended

Operating cash flows from operating leases

Weighted-average remaining lease term – operating leases (in years)

Weighted-average discount rate – operating leases

Maturities of our operating leases as of June 30, 2021, excluding short-term leases, are as follows (amounts in thousands):

Remaining Months Ending December 31, 2021

Year Ending December 31, 2022

Year Ending December 31, 2023

Year Ending December 31, 2024

Less present value discount

Operating lease liabilities as of June 30, 2021

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.

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.

Robinson Worldwide, Inc.

True Drinks, Inc.

September 5, 2018, C.H.

Robinson Worldwide

Robinson ”) filed a complaint against True Drinks,

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 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.

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

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.

Based upon this evaluation, other than as

set forth above, there were no items requiring

ITEM 2 - MANA G EMENT'S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

The following discussion of the financial condition and results of

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

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”

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.

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.

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

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

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 ”).

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

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.

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

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

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

informed us that our PMTA has received a valid submission tracking

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

entered the substantive review phase.

To date, Charlie’s has

invested over $4.4 million for our initial PMTA submission.

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

scientists, biostatisticians, data analysts, and numerous contract

research organizations to create our comprehensive PMTA submission.

This news highlights our progress toward achieving full regulatory

compliance and our goal of providing customers with a trusted

product portfolio.

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

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

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 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.

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

March 11, 2020, the World Health Organization designated the

ongoing and evolving COVID-19 outbreak as a pandemic.

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

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.

) 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 are also included.

Current Operating Trends and Financial Highlights

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:

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

($ in thousands)

$ 4,361  

$ 4,405  

Operating costs and expenses:

of goods sold - product revenue

and administrative

and marketing

and development

operating costs and expenses

from operations

Other income (expense):

in fair value of derivative liabilities

on debt extinguishment

other income (expense)

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,

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 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

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

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

Sales and Marketing Expense

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

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

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.

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

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.

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

cash and cash equivalents balance at March 31, 2021 was

approximately $3,455,000.

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 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

Environment, Liquidity and Management’s plan of

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.

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.

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

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

Company has no off-balance sheet arrangements other than operating

lease commitments.

Critical Accounting Policies

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

however, due to inherent uncertainties in making

estimates, actual results could differ from the original estimates,

requiring adjustments to these balances in future periods.

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,

ITEM 3 - QU A NTITATIVE

AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has evaluated events subsequent to June 30, 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.

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