Charlie's Holdings, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS CHARLIE’S HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) June 30, December 31, 2021 2020 (Unaudited) ASSETS Current assets: Cash $ 1,961 $ 1,422 Accounts receivable, net 1,344 1,258 Inventories, net 1,988 1,593 Prepaid expenses and other current assets 804 450 Total current assets 6,097 4,723 Non-current assets: Property, plant and equipment, net 469 531 Right-of-use asset, net 979 1,200 Other assets 67 71 Total non-current assets 1,515 1,802 TOTAL ASSETS $ 7,612 $ 6,525 LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued expenses $ 2,499 $ 2,525 Derivative liability 5,272 4,444 Lease liabilities 453 456 Notes payable - 1,400 Dividends payable - 1,650 Deferred revenue 588 268 Total current liabilities 8,812 10,743 Non-current liabilities: Notes payable, net of current portion 334 1,016 Lease liabilities, net of current portion 541 762 Total non-current liabilities 875 1,778 Total liabilities 9,687 12,521 COMMITMENTS AND CONTINGENCIES (see Note 12) Stockholders' deficit: Convertible preferred stock ($ 0.001 par value); 1,800,000 shares authorized Series A, 300,000 shares designated, 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 203 190 Additional paid-in capital 7,758 3,477 Accumulated deficit ( 10,036 ) ( 9,663 ) Total stockholders' deficit ( 2,075 ) ( 5,996 ) TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 7,612 $ 6,525 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents CHARLIE’S HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) (Unaudited) For the three months ended For the six months ended June 30, June 30, 2021 2020 2021 2020 Revenues: Product revenue, net $ 5,433 $ 4,163 $ 9,794 $ 8,568 Total revenues 5,433 4,163 9,794 8,568 Operating costs and expenses: Cost of goods sold - product revenue 2,794 1,732 4,737 3,695 General and administrative 2,457 2,428 4,675 6,427 Sales and marketing 350 353 770 924 Research and development - 408 9 2,631 Total operating costs and expenses 5,601 4,921 10,191 13,677 Loss from operations ( 168 ) ( 758 ) ( 397 ) ( 5,109 ) Other income (expense): Interest expense ( 3 ) ( 76 ) ( 31 ) ( 76 ) Change in fair value of derivative liabilities 19,274 180 ( 828 ) 610 Gain on debt extinguishment 658 - 875 - Other income 3 10 8 15 Total other income 19,932 114 24 549 Net income (loss) $ 19,764 $ ( 644 ) $ ( 373 ) $ ( 4,560 ) Net earnings (loss) per share Basic $ 0.10 $ ( 0.00 ) $ ( 0.00 ) $ ( 0.02 ) Diluted $ 0.00 $ ( 0.00 ) $ ( 0.00 ) $ ( 0.02 ) Weighted average number of common shares outstanding Basic 202,033,912 189,823,831 198,606,970 189,781,519 Diluted 278,405,523 189,823,831 198,606,970 189,781,519 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents CHARLIE’S HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (in thousands) (Unaudited) For the Three Months Ended June 30, 2021 Series A Convertible Preferred Stock Common Stock Additional Paid-in Accumulated Total Stockholders' Shares Par value Shares Par value Capital Deficit Deficit Balance at April 1, 2021 179 $ - 199,296 $ 199 $ 6,917 $ ( 29,800 ) $ ( 22,684 ) Conversion of Series A convertible preferred stock ( 4 ) - 833 1 ( 1 ) - - Issuance of common stock for dividend payment - - 1,533 2 678 - 680 Stock compensation - - 1,500 1 164 - 165 Fraction shares adjustment due to reverse split - - 3 - - - - Net income - - - - - 19,764 19,764 Balance at June 30, 2021 175 $ - 203,165 $ 203 $ 7,758 $ ( 10,036 ) $ ( 2,075 ) For the Three Months Ended June 30, 2020 Series A Convertible Preferred Stock Common Stock Additional Paid-in Accumulated Total Stockholders' Shares Par value Shares Par value Capital Deficit Deficit Balance at April 1, 2020 204 $ - 189,823 $ 190 $ 3,908 $ ( 6,392 ) $ ( 2,294 ) Conversion of Series A convertible preferred stock - - 85 - - - - Accrue dividends payable on Series A convertible preferred stock - - - - ( 1,650 ) - ( 1,650 ) Stock compensation - - - - 483 - 483 Net loss - - - - - ( 644 ) ( 644 ) Balance at June 30, 2020 204 $ - 189,908 $ 190 $ 2,741 $ ( 7,036 ) $ ( 4,105 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents CHARLIE’S HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (in thousands) (Unaudited) For the Six Months Ended June 30, 2021 Series A Convertible Preferred Stock Common Stock Additional Paid-in Accumulated Total Stockholders' Shares Par value Shares Par value Capital Deficit Deficit Balance at January 1, 2021 204 $ - 189,907 $ 190 $ 3,477 $ ( 9,663 ) $ ( 5,996 ) Issuance of common stock to related parties for cash - - 3,517 3 2,997 - 3,000 Conversion of Series A convertible preferred stock ( 29 ) - 6,502 7 ( 7 ) - - Issuance of common stock for dividend payment - - 1,736 2 768 - 770 Stock compensation - - 1,500 1 523 - 524 Fraction shares adjustment due to reverse split - - 3 - - - - Net loss - - - - - ( 373 ) ( 373 ) Balance at June 30, 2021 175 $ - 203,165 $ 203 $ 7,758 $ ( 10,036 ) $ ( 2,075 ) For the Six Months Ended June 30, 2020 Series A Convertible Preferred Stock Common Stock Additional Paid-in Accumulated Total Stockholders' Shares Par value Shares Par value Capital Deficit Deficit Balance at January 1, 2020 204 $ - 189,739 $ 190 $ 1,739 $ ( 2,476 ) $ ( 547 ) Conversion of Series A convertible preferred stock - - 169 - - - - Reclassification of liability awards to equity - - - - 1,638 - 1,638 Accrue dividends payable on Series A convertible preferred stock - - - - ( 1,650 ) - ( 1,650 ) Stock compensation - - - - 1,014 - 1,014 Net loss - - - - - ( 4,560 ) ( 4,560 ) Balance at June 30, 2020 204 $ - 189,908 $ 190 $ 2,741 $ ( 7,036 ) $ ( 4,105 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents CHARLIE’S HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) For the six months ended June 30, 2021 2020 Cash Flows from Operating Activities: Net loss $ ( 373 ) $ ( 4,560 ) Reconciliation of net loss to net cash used in operating activities: Allowance for doubtful accounts 21 345 Depreciation and amortization 102 83 Change in fair value of derivative liabilities 828 ( 610 ) Amortization of operating lease right-of-use asset 221 205 Stock based compensation 524 2,336 Gain from debt extinguishment (875 ) - Subtotal of non-cash charges 821 2,359 Changes in operating assets and liabilities: Accounts receivable ( 107 ) ( 768 ) Inventories ( 395 ) ( 338 ) Prepaid expenses and other current assets ( 354 ) 480 Other assets 4 - Accounts payable and accrued expenses ( 17 ) 233 Deferred revenue 320 161 Lease liabilities ( 224 ) ( 205 ) Net cash used in operating activities ( 325 ) ( 2,638 ) Cash Flows from Investing Activities: Purchase of property, plant and equipment ( 40 ) ( 112 ) Net cash used in investing activities ( 40 ) ( 112 ) Cash Flows from Financing Activities: Proceeds from issuance of common stock to related parties 3,000 - Proceeds from issuance of notes payable 184 1,766 Repayment of notes payable ( 1,400 ) - Dividend payment ( 880 ) - Net cash provided by financing activities 904 1,766 Net increase (decrease) in cash 539 ( 984 ) Cash, beginning of the period 1,422 2,448 Cash, end of the period $ 1,961 $ 1,464 Supplemental disclosure of cash flow information Cash paid for interest $ 150 $ - Cash paid for income taxes $ - $ - Supplemental disclosure of cash flow information Conversion of Series A convertible preferred stock $ 7 $ 17 Issuance of common stock for dividend payment $ 770 $ - Accrued dividends payable on Series A convertible preferred stock $ - $ 1,650 Reclassification of liability awards to equity $ - $ 1,638 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 – DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION Description of the Business Charlie’s Holdings, Inc., (formerly True Drinks Holdings, Inc.) a Nevada corporation, together with its wholly owned subsidiaries and consolidated variable interest entity (collectively, the “ Company ”, “ we ”), currently formulates, markets and distributes 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. 8 Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Risks and Uncertainties The Company operates in an environment that is subject to rapid changes and developments in laws and regulations that could have a significant impact on the Company’s ability to sell its products. Beginning in September 2019, certain states temporarily banned the sale of flavored e-cigarettes, and several states and municipalities are considering implementing similar restrictions. Federal, state, and local governmental bodies across the United States have indicated that flavored e-cigarette liquid, vaporization products and certain other consumption accessories may become subject to new laws and regulations at the federal, state and local levels. The application of any new laws or regulations that may be adopted in the future, at a federal, state, or local level, directly or indirectly implicating flavored e-cigarette liquid and products used for the vaporization of nicotine, could significantly limit the Company’s ability to sell such products, result in additional compliance expenses, and/or require the Company to change its labeling and/or methods of distribution. Any ban of the sale of flavored e-cigarettes directly limits the markets in which the Company may sell its products. In the event the prevalence of such bans and/or changes in laws and regulations increase across the United States, or internationally, the Company’s business, results of operations and financial condition could be adversely impacted. In addition, the Company is presently seeking to obtain marketing authorization for certain of its nicotine-based e-liquid products. Our applications were submitted in September 2020 on a timely basis, which if approved, will allow the Company to continue to sell its approved products in the United States. There is no assurance that regulatory approval to sell our products will be granted or that we would be able to raise additional financing if required, which could have a significant impact on our sales. On March 11, 2020, the World Health Organization designated the ongoing and evolving COVID-19 outbreak as a pandemic. The outbreak has caused substantial disruption in international and U.S. economies and markets as it continues to spread. The outbreak is having a temporary adverse impact on our industry as well as our business, with regards to certain supply chain disruptions and sales volume. While the disruption from COVID-19 is currently expected to be temporary, there is uncertainty around the duration. The financial impact from COVID-19 has caused a decline in sales, and if disruptions from the COVID-19 outbreak are prolonged, it will continue to have an adverse impact on our business. NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “ SEC ”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented in this Quarterly Report on Form 10-Q (this “ Report ”) not misleading. Amounts related to disclosure of December 31, 2020 balances within the interim condensed consolidated financial statements were derived from audited financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2020. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expense during the reporting periods. Actual results could differ from those estimates. 9 Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 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. 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 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 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. 10 Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 Total Level 1 Level 2 Level 3 Liabilities: Derivative liability - Warrants 5,272 - - 5,272 Total liabilities $ 5,272 $ - $ - $ 5,272 Fair Value at December 31, 2020 Total Level 1 Level 2 Level 3 Liabilities: Derivative liability - Warrants 4,444 - - 4,444 Total liabilities $ 4,444 $ - $ - $ 4,444 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). Derivative liability - Warrants Balance at January 1, 2021 $ 4,444 Change in fair value 828 Balance at June 30, 2021 $ 5,272 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: June 30, December 31, 2021 2020 Exercise price $ 0.4431 $ 0.4431 Contractual term (years) 2.82 3.32 Volatility (annual) 85.0 % 70.0 % Risk-free rate 0.4 % 1.7 % Dividend yield (per share) 0 % 0 % On April 26, 2019 (the “Closing Date” ), the Company entered into a Securities Exchange Agreement ( “Share Exchange” ) with each of the former members ( “Members” ) of Charlie’s, and certain direct investors in the Company ( “Direct Investors” ), pursuant to which the Company acquired all outstanding membership interests of Charlie’s beneficially owned by the Members in exchange for the issuance by the Company of units. Immediately prior to, and in connection with, the Share Exchange, Charlie’s consummated a private offering of membership interests that resulted in net proceeds to Charlie’s of approximately $ 27.5 million (the “Charlie’s Financing” ). In conjunction with the Share Exchange, the Company issued to holders of its Series A Convertible Preferred Stock ( “Series A Preferred” ) warrants to purchase an aggregate of 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. 11 Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment as of June 30, 2021 and December 31, 2020 are as follows (amounts in thousands): June 30, December 31, Estimated 2021 2020 Useful Life Machinery and equipment $ 38 $ 38 5 years Trade show booth 171 171 5 years Office equipment 445 405 5 years Leasehold improvements 380 380 Lesser of lease term or estimated useful life 1,034 994 Accumulated depreciation ( 565 ) ( 463 ) $ 469 $ 531 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 Vendors The Company’s concentration of purchases is as follows: For the three months ended For the six months ended June 30, June 30, 2021 2020 2021 2020 Vendor A 2 % 24 % 3 % 28 % Vendor B - 48 % 2 % 24 % Vendor C 5 % 9 % 5 % 16 % Vendor D 13 % 5 % 14 % 11 % Vendor E 69 % - 63 % 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. 12 Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Accounts Receivable The Company’s concentration of accounts receivable is as follows: June 30, December 31, 2021 2020 Customer A 15 % 17 % Customer B 10 % 10 % 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): June 30, December 31, 2021 2020 Accounts payable $ 961 $ 629 Accrued compensation 1,270 1,420 Other accrued expenses 268 476 $ 2,499 $ 2,525 13 Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 8 – NOTES PAYABLE Red Beard Holdings, LLC Note Payable On April 1, 2020, the Company, Charlie's and its VIE, Don Polly, issued a secured promissory note (the "Red Beard Note" ) to one of the Company's largest stockholders, Red Beard Holdings, LLC ( "Red Beard" ) in the principal amount of $ 750,000 (the "Principal Amount" ), requiring a guaranteed minimum interest amount of $ 75,000 ( “Minimum Interest” ), which Red Beard Note is secured by all assets of the Company pursuant to the terms of a Security Agreement entered into by and between the Company and Red Beard (the "Red Beard Note Financing" ). Red Beard Note was subsequently amended on August 27, 2020, September 30, 2020, October 29, 2020, December 1, 2020, and January 19, 2021, ultimately increasing Principal Amount to $ 1,400,000 and Minimum Interest to $ 150,000 . On March 24, 2021, the Company and Red Beard entered into a Satisfaction and Release (the "Red Beard Release" ), pursuant to which the Company made a payment to Red Beard in the amount of $ 1,550,000 in exchange for an acknowledgment of satisfaction and full release of the Company by Red Beard from liability and obligations arising under the Red Beard Note. Small Business Administration Loan Programs On April 30, 2020, Charlie's, a wholly owned subsidiary of the Company, received approval to enter into a U.S. Small Business Administration (" SBA ") Promissory Note (the " Charlie's PPP Loan ") with TBK Bank, SSB (the " SBA Lender "), pursuant to the Paycheck Protection Program (" PPP ") of the Coronavirus Aid, Relief, and Economic Security Act (the " CARES Act ") as administered by the SBA (the " PPP Loan Agreement "). The Charlie's PPP Loan provides for working capital to CCD in the amount of $ 650,761 . The Charlie's PPP Loan will mature on April 30, 2022 and will accrue interest at a rate of 1.00 % per annum. Per the PPP Loan Agreement, payments of principal and interest were deferred for six months from the date of the Charlie's PPP Loan, or until November 30, 2020. Interest, however, has continued to accrue during this time. Charlie’s was notified by SBA Lender that all payments, including principal and interest, on all PPP loans issued by the bank have been deferred indefinitely in order to allow borrowers adequate time to apply for forgiveness. Charlie’s has applied for forgiveness and is currently awaiting a response. The Company will continue to accrue interest expense relating to the Charlie’s PPP Loan, however there is no anticipated future effect on cash at this time. On April 14, 2020, Don Polly also obtained a loan pursuant to the PPP enacted under the CARES Act (the " Polly PPP Loan " and together with the Charlie's PPP Loan, the " PPP Loans ") from Community Banks of Colorado, a division of NBH Bank (the " Polly Lender "). The Polly PPP Loan obtained by Don Polly provides for working capital to Don Polly in the amount of $ 215,600 . The Polly PPP Loan will mature on April 14, 2022 and will accrue interest at a rate of 1.00 % per annum. Payments of principal and interest will be deferred for six months from the date of the Polly PPP Loan, or until November 14, 2020. Interest, however, will continue to accrue during this time. The aforementioned PPP Loans were made under the PPP enacted by Congress under the CARES Act. The CARES Act (including the guidance issued by SBA and U.S. Department of the Treasury) provides that all or a portion of the PPP Loans may be forgiven upon request from the respective borrower to the SBA Lender or the Polly Lender, as the case may be, subject to requirements in the PPP Loans and under the CARES Act. 14 Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) On February 19, 2021, Don Polly received notice from the Polly Lender, that the Polly PPP Loan was fully repaid, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the U.S. Small Business Administration. There is no further action required on the part of Don Polly to satisfy this liability. For the period ended March 31, 2021, the Company recorded a debt extinguishment gain of approximately $ 217,000 , including principal and accrued interest, which is reflected in the other income section of the Company’s condensed consolidated statements of operations. On March 17, 2021, Don Polly obtained a second draw PPP loan ( “Polly PPP Loan 2” ) under the CARES Act from Polly Lender. The Polly PPP Loan 2 obtained by Don Polly provides general working capital in the amount of $ 184,200 . The Polly PPP Loan 2 will mature on March 17, 2026 and will accrue interest at a rate of 1.00 % per annum. Payments of principal and interest will be deferred for six months from the date of the Polly PPP Loan 2, however interest will continue to accrue during this time. On April 28, 2021, Charlie’s received notice from SBA Lender that the Charlie’s PPP Loan was fully repaid, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the U.S. Small Business Administration. There is no further action required on the part of Charlie’s to satisfy this liability. 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 - Thereafter 334 Total $ 334 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. 15 Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 June 30, June 30, 2021 2020 2021 2020 Net income (loss) - basic $ 19,764 $ ( 644 ) $ ( 373 ) $ ( 4,560 ) Reversal of gain due to change in fair value of warrant liability ( 19,274 ) - - - Net income (loss) - diluted $ 490 $ ( 644 ) $ ( 373 ) $ ( 4,560 ) Weighted average shares outstanding - basic 202,033,912 189,823,831 198,606,970 189,781,519 Diluted stock options 5,437,099 - - - Diluted warrants 31,442,211 - - - Diluted preferred shares 39,492,302 - - Weighted average shares outstanding - diluted 278,405,523 189,823,831 198,606,970 189,781,519 Basic earnings (loss) per share $ 0.10 $ ( 0.00 ) $ ( 0.00 ) $ ( 0.02 ) Diluted earnings (loss) per share $ 0.00 $ ( 0.00 ) $ ( 0.00 ) $ ( 0.02 ) 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 June 30, 2021 2020 Options 7,503 8,013 Series A convertible preferred shares 39,492 55,643 Warrants 40,338 40,338 Total 87,333 103,993 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 . 16 Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 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. 17 Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Non-Qualified Stock Options 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 Outstanding at January 1, 2021 7,503 $ 0.54 8.5 $ - Options granted - - - - Options forfeited/expired - - - - Outstanding at June 30, 2021 7,503 $ 0.54 8.0 $ - Options vested and exercisable at June 30, 2021 5,516 $ 0.57 7.8 $ - 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. 18 Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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. Mr. Sicignano was awarded 1,500,000 restricted shares (subject to forfeiture) ( “Restricted Shares” ) of the Company. Mr. Sicignano will have all the rights of a shareholder of the Company with respect to voting the 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 Leases The Company leases office space under agreements classified as operating leases that expire on various dates through 2024. All of the Company’s lease liabilities result from the lease of its headquarters in Costa Mesa, California, which expires in 2024, its warehouse in Santa Ana, California, which expires in 2021, its office and warehouse in Denver, Colorado, which expires in 2022, and its warehouse space in Huntington Beach, California, which expires in 2022. Such leases do not require any contingent rental payments, impose any financial restrictions, or contain any residual value guarantees. Certain of the Company’s leases include renewal options and escalation clauses; renewal options have not been included in the calculation of the lease liabilities and right of use assets as the Company is not reasonably certain to exercise the options. Variable expenses generally represent the Company’s share of the landlord’s operating expenses. The Company does not act as a lessor or have any leases classified as financing leases. The Company excludes short-term leases having initial terms of 12 months or less from Topic 842 as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term. The Company entered into a commercial lease for the Company’s corporate headquarters (the “ Lease ”) in Costa Mesa, California with Brandon Stump, Ryan Stump and Keith Stump, the Company’s Chief Executive Officer, Chief Operating Officer and member of the Board. Messrs. Stump, Stump and Stump purchased the property that is the subject of the Lease in July 2019. The Lease, which was effective as of September 1, 2019, on a month-to-month basis, was then formalized on November 1, 2019 to have a term of five years and a base rent rate of $ 22,940 per month, which rate is subject to annual adjustments based on the consumer price index, as may be mutually agreed upon by the parties to the Lease. The terms of the Lease were negotiated and approved by the independent members of the Board, and executed by Mr. David Allen, the Company’s former Chief Financial Officer, after reviewing a detailed analysis of comparable properties and rent rates compiled by an independent, third-party consultant. The total amount paid to related parties for the 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. 19 Table of Contents CHARLIE’S HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The following summarizes quantitative information about the Company’s operating leases for the three and six months ended June 30, 2021 and 2020 (amounts in thousands): For the three months ended For the six months ended June 30, June 30, 2021 2020 2021 2020 Operating leases Operating lease cost $ 139 $ 149 $ 288 $ 299 Variable lease cost - - - - Operating lease expense 139 149 288 299 Short-term lease rent expense - - - - Total rent expense $ 139 $ 149 $ 288 $ 299 For the six months ended June 30, 2021 2020 Operating cash flows from operating leases $ 221 $ 205 Weighted-average remaining lease term – operating leases (in years) 2.65 3.37 Weighted-average discount rate – operating leases 12.0 % 12.0 % 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 $ 286 Year Ending December 31, 2022 399 Year Ending December 31, 2023 275 Year Ending December 31, 2024 206 Total 1,166 Less present value discount ( 172 ) Operating lease liabilities as of June 30, 2021 $ 994 Legal Proceedings From time to time, the Company may be involved in various claims and counterclaims and legal actions arising in the ordinary course of business. Other than as set forth below, there are no additional pending or threatened legal proceedings at this time. C.H. Robinson Worldwide, Inc. v. True Drinks, Inc. On September 5, 2018, C.H. Robinson Worldwide (“ Robinson ”) filed a complaint against True Drinks, Inc. in the California Superior Court for the County of Orange located in Santa Ana, California alleging open book account, account stated, reasonable value of services received, agreement, and unjust enrichment related to shipping services provided by Robinson. Robinson has asserted $ 121,743 in damages plus interest, attorney’s fees and costs. On November 13, 2020 the Company and Robinson reached a Settlement Agreement and Mutual Release (“ Settlement Agreement ”) by which the Company agreed to pay the total sum of $ 50,000 in two equal installments of $25,000. The first payment was to be due on or before November 19, 2020 and the second payment was to be due on or before December 17, 2020. The Company has satisfied its obligations set forth in the Settlement Agreement and has been relieved of any future liability in this matter. NOTE 13- SUBSEQUENT EVENTS 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. 20 Table of Contents