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Item 1. Financial Statements

2021-11-15 compared with 2021-08-16 · 356 added, 211 removed, 314 unchanged (64% of the section changed)

FINANCIAL STATEMENTS

CHARLIE’S HOLDINGS, INC.

CHARLIE ’

S HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

September 30,

Current assets:

$ 1,270  

$ 1,422  

Accounts receivable, net

6 unchanged sentences

Total non-current assets

LIABILITIES AND STOCKHOLDERS' DEFICIT

$ 7,052  

$ 6,525  

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:

Accounts payable and accrued expenses

$ 2,006  

$ 2,525  

Derivative liability

4 unchanged sentences

Total current liabilities

10,743  

Non-current liabilities:

3 unchanged sentences

Total liabilities

12,521  

COMMITMENTS AND CONTINGENCIES (see Note 12)

Stockholders' deficit:

Stockholders' equity (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

Series A, 300,000 shares designated, 142,818 and 203,811 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively

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

210,427,674 shares and 189,907,526 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively

Additional paid-in capital

Accumulated deficit

Total stockholders' deficit

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

( 6,929 )  

Total stockholders' equity (deficit)

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

$ 7,052  

$ 6,525  

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

CHARLIE’S HOLDINGS, INC.

CHARLIE ’

S HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

1 unchanged sentence

For the three months ended

For the six months ended

For the nine months ended

September 30,

Product revenue, net

6 unchanged sentences

Total operating costs and expenses

Loss from operations

Income (loss) from operations

Other income (expense):

2 unchanged sentences

Gain on debt extinguishment

Total other income

Total other income (loss)

Net income (loss)

2 unchanged sentences

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

CHARLIE’S HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

CHARLIE ’

S HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’

(in thousands)

For the Three Months Ended June 30, 2021

Preferred Stock

Total Stockholders'

Balance at April 1, 2021

For the Three Months Ended September 30, 2021

Convertible Preferred Stock

Total Stockholders' 

Balance at July 1, 2021

Conversion of Series A convertible preferred stock

Issuance of common stock for dividend payment

Dividends paid on Series A convertible preferred stock

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

Balance at September 30, 2021

For the Three Months Ended September 30, 2020

Convertible Preferred Stock

Total Stockholders' Equity

(Deficit)  

Balance at July 1, 2020

18,990,753  

$ 18,991  

$ ( 16,060 )  

$ ( 7,036 )  

Stock compensation

Balance at June 30, 2020

( 6,824 )  

Balance at September 30, 2020

18,990,753  

$ 18,991  

$ ( 15,679 )  

$ ( 13,860 )  

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

CHARLIE’S HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

CHARLIE ’

S HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’

(in thousands)

For the Six Months Ended June 30, 2021

Preferred Stock

Total Stockholders'

For the Nine Months Ended September 30, 2021

Convertible Preferred Stock

Total Stockholders' Equity

Balance at January 1, 2021

2 unchanged sentences

Issuance of common stock for dividend payment

Dividends paid on Series A convertible preferred stock

Stock compensation

Fraction shares adjustment due to reverse split

Balance at June 30, 2021

For the Six Months Ended June 30, 2020

Preferred Stock

Stockholders'

Balance at September 30, 2021

For the Nine Months Ended September 30, 2020

Convertible Preferred Stock

Total Stockholders' Equity

(Deficit)  

Balance at January 1, 2020

18,973,828  

$ 18,974  

$ ( 17,045 )  

$ ( 2,476 )  

Conversion of Series A convertible preferred stock

16,925  

( 17 )  

Reclassification of liability awards to equity

Accrue dividends payable on Series A convertible preferred stock

( 1,650 )  

Stock compensation

Balance at June 30, 2020

( 11,384 )  

Balance at September 30, 2020

18,990,753  

$ 18,991  

$ ( 15,679 )  

$ ( 13,860 )  

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

CHARLIE’S HOLDINGS, INC.

CHARLIE ’

S HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

For the six months ended

For the nine months ended

September 30,

Cash Flows from Operating Activities:

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

Net income (loss)

Reconciliation of net income (loss) to net cash (used in) provided by operating activities:

Allowance for doubtful accounts

21 unchanged sentences

Net cash provided by financing activities

Net increase (decrease) in cash

Net decrease in cash

Cash, beginning of the period

3 unchanged sentences

Cash paid for income taxes

Supplemental disclosure of cash flow information

Non-cash financing and investing

Conversion of Series A convertible preferred stock

Issuance of common stock for dividend payment

Accrued dividends payable on Series A convertible preferred stock

Dividends paid on Series A convertible preferred stock

Reclassification of liability awards to equity

2 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

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.

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 former Chief Executive Officer and current 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 ”) and other synthetic compounds derived from hemp.

Our hemp-based products are produced, marketed and sold through, Don Polly, and the Company currently intends to develop and launch additional products containing hemp-derived cannabinoids in the future.

In addition to Don Polly, we are also the holding company for Charlie’s Chalk Dust, LLC (“

Charlie ’

CCD ”), a wholly-owned subsidiary of the Company, which activity includes production and sale of our premium, nicotine-based vapor products.

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 ”).

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

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.

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 certain of its electronic nicotine delivery system (“

ENDS ”) products used for the vaporization of tobacco-derived 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.

In addition, the outbreak of coronavirus (“

COVID- 19 ”) in March 2020 has had, and continues to have, a negative impact on the global economy and markets which has impacted the Company’s supply chain and sales.

For the nine months ended September 30, 2021, the Company has incurred losses from operations of approximately $ 19,000 and a consolidated net income of approximately $ 2,734,000 , and the Company has a stockholders’

equity of approximately $ 1,068,000 as of September 30, 2021.

However, net cash used in operating activities was approximately $ 980,000 , and net income for the period was largely the result of $ 2,753,000 in other income, including a $ 1,901,000 gain in fair value of derivative liabilities.

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.

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.

However, 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.

CHARLIE'S HOLDINGS, INC.

1 unchanged sentence

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.

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 other ENDS products, 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.

In addition, the Company is presently seeking to obtain marketing authorization for certain of its tobacco-derived nicotine e-liquid products.

The Company’s 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.

Beginning in August 2021, the FDA began issuing Marketing Denial Orders (“

MDO ”) for ENDS products that lack evidence to demonstrate that permitting the marketing of such products would be appropriate for the protection of the public health.

The Company has not received an MDO for any of its submissions, however 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 has caused and continues to cause a substantial disruption in international and U.S.

economies and markets.

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.

1 unchanged sentence

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

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 ”).

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.

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.

Use of Estimates

2 unchanged sentences

Actual results could differ from those estimates.

Significant Accounting Policies

There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2020 Annual Report.

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

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.

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.

1 unchanged sentence

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.

5 unchanged sentences

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.

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.

2 unchanged sentences

The Company is currently evaluating the impact of ASU 2020 - 06 on its consolidated financial statements.

In May 2021, the FASB issued ASU 

2021 - 04, Earnings Per Share (Topic 260 ), Debt-Modifications and Extinguishments (Subtopic 470 - 50 ), Compensation-Stock Compensation (Topic 718 ), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815 - 40 ).

This ASU reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange.

This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic.

It specifically addresses:

( 1 ) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange;

( 2 ) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange;

and ( 3 ) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange.

This ASU will be effective for all entities for fiscal years beginning after December 15, 2021.

An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments.

Early adoption is permitted, including adoption in an interim period.

The Company does not believe the impact of adopting this standard will be material to its consolidated financial statements and related disclosures.

Reclassifications

Prior period financial statement amounts are reclassified as necessary to conform to the current period presentation.

These prior period reclassifications did not affect the Company’s net loss, loss per share, stockholders’ deficit or working capital.

NOTE 3 – FAIR VALUE MEASUREMENTS

These prior period reclassifications did not affect the Company’s net income (loss), earnings (loss) per share, stockholders’

equity (deficit) or working capital.

CHARLIE'S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

5 unchanged sentences

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

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

Fair Value at September 30, 2021

Derivative liability - Warrants

3 unchanged sentences

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.

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

The following table presents changes in Level 3 liabilities measured at fair value for the nine -month period ended September 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

Derivative liability - Warrants

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:

Balance at September 30, 2021

September 30,

Exercise price

3 unchanged sentences

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” ).

CHARLIE'S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

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.

1 unchanged sentence

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

Changes in fair value are reflected in the Company’s earnings for each reporting period.

NOTE 4 - PROPERTY AND EQUIPMENT

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

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

September 30,

Estimated Useful Life (in years)

Machinery and equipment

4 unchanged sentences

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.

Depreciation and amortization expense totaled $ 53,000 and $ 48,000 , respectively, during the three months ended September 30, 2021 and 2020.

Depreciation and amortization expense totaled $ 155,000 and $ 131,000 , respectively, during the nine months ended September 30, 2021 and 2020.

NOTE 5 - CONCENTRATIONS

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.

For the nine months ended

September 30,

During the three months ended September 30, 2021, purchases from two vendors represented 86 % of total inventory purchases, and during the three months ended September 30, 2020, purchases from four vendors represented 91 % of total inventory purchases.

During the nine months ended September 30, 2021, purchases from two vendors represented 80 % of total inventory purchases, and during the nine months ended September 30, 2020, purchases from five vendors represented 83 % of total inventory purchases.

As of September 30, 2021, and December 31, 2020, amounts owed to these vendors totaled $ 131,000 and $ 270,000 respectively, which are included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.

CHARLIE'S HOLDINGS, INC.

1 unchanged sentence

Accounts Receivable

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

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

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

September 30,

Two customers made up 27 % of net accounts receivable at September 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 $ 147,700 , representing 14 % of net receivables at September 30, 2021.

Customer C owed the Company a total of $ 137,700 , representing 13 % of net receivables at September 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.

No customer exceeded 10% of total net sales for the nine months ended September 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, a former and current executive officer of the Company, respectively, and a consolidated variable interest for which the Company is the primary beneficiary.

Don Polly formulates, sells and distributes the Company’s hemp-derived 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):

NOTE 7 –

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

September 30,

Accounts payable

3 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – NOTES PAYABLE

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" ).

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 .

6 unchanged sentences

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.

Interest, however, continued to accrue during this time.

On April 14, 2020, Don Polly also obtained a loan pursuant to the PPP enacted under the CARES Act (the " Polly PPP Loan " and together with the Charlie's PPP Loan, the " PPP Loans ") from Community Banks of Colorado, a division of NBH Bank (the " Polly Lender ").

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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.

Payments of principal and interest were deferred for six months from the date of the Polly PPP Loan, or until November 14, 2020.

Interest, however, continued to accrue during this time.

The aforementioned PPP Loans were made under the PPP enacted by Congress under the CARES Act.

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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.

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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.

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.

Payments of principal and interest will be deferred, however interest will continue to accrue during this time.

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 .

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

CHARLIE'S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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):

The following summarizes the Company’s notes payable maturities as of September 30, 2021 ( amounts in thousands):

Remaining months Ending December 31, 2021

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Year Ending December 31, 2025

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

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

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 nine  months ended September 30, 2021 and 2020, net income (loss) is adjusted for gain from change in fair value of warrant liabilities.

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

For the nine months ended

September 30,

Net income (loss) - basic

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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.

The following securities were not included in the diluted net income (loss) per share calculation because their effect was anti-dilutive as of the periods presented (in thousands):

For the nine months ended

September 30,

Series A convertible preferred shares

NOTE 10 –

STOCKHOLDERS ’

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.

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 .

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.

During the three months ended September 30, 2021, the Company incurred an additional $ 3,000 dividend payment in order to fully satisfy the Series A Preferred dividend.

As of September 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.

For the nine months ended September 30, 2021, the Company issued approximately 13,764,000 shares of Common Stock upon conversion of 60,992 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.

Brandon Stump and Mr.

Ryan Stump, the Company's former Chief Executive Officer and Chief Operating Officer, respectfully, 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

CHARLIE'S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 ”).

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.

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.

As of September 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.

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.

2 unchanged sentences

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

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

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

Stock Options

Weighted Average Exercise Price

Weighted Average Remaining Contractual Life

Intrinsic Value

Weighted Average Remaining Contractual Life (in years)

Aggregate Intrinsic Value

Outstanding at January 1, 2021

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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.

Outstanding at September 30, 2021

Options vested and exercisable at September 30, 2021

As of September 30, 2021, there was approximately $ 94,000 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 2.9 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.

For the three and nine months ended September 30, 2021, the Company recorded compensation expense of approximately $ 32,000 and $ 172,000 related to the granting of stock options, respectively.

CHARLIE'S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

On April 26, 2019, in connection with employment agreements with its former 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.

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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.

For the nine months ended September 30, 2021 and 2020, the Company recorded an expense of $ 0 and $ 1,322,000 , respectively, for these awards.

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 former 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.

On October 29, 2021, the Employment Agreement with Brandon Stump, the Company’s former Chief Executive Officer, was terminated pursuant to that certain Letter Agreement, dated October 29, 2021.

All other terms of the Employment Agreement with the Company's Chief Operating Officer remain in full force and effect subject to further review by the Board of Directors as it deems necessary and appropriate.

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.

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.

4 unchanged sentences

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 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.

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 recorded total stock-based compensation of approximately $ 39,000 and $ 563,000 during the three and nine months ended September 30, 2021, respectively.

CHARLIE'S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 Company entered into a commercial lease for the Company’s corporate headquarters (the “

Lease ”) in Costa Mesa, California with Brandon Stump, the Company’s former Chief Executive Officer, Ryan Stump, the Company’s Chief Operating Officer, and Keith Stump, a former member of the Company’s Board of Directors.

The Stumps 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):

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 nine months ended September 30, 2021 and 2020 was $ 208,530 and $ 206,460 , respectively.

At September 30, 2021, the Company had operating lease liabilities of approximately $ 880,000 and right of use assets of approximately $ 869,000 , which were included in the condensed consolidated balance sheet.

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

For the three months ended

For the six months ended

For the nine months ended

September 30,

Operating leases

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Total rent expense

For the six months ended

For the nine months ended

September 30,

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):

Weighted-average remaining lease term –

operating leases (in years)

Weighted-average discount rate –

operating leases

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

Remaining Months Ending December 31, 2021

3 unchanged sentences

Less present value discount

Operating lease liabilities as of June 30, 2021

Operating lease liabilities as of September 30, 2021

CHARLIE'S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Legal Proceedings

4 unchanged sentences

On September 5, 2018, C.H.

Robinson Worldwide (“ Robinson ”) filed a complaint against True Drinks, Inc.

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.

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.

1 unchanged sentence

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.

The Company evaluated subsequent events for their potential impact on the consolidated condensed financial statements and disclosures through the date the consolidated condensed financial statements were available to be issued and determined that, except as set forth below, no subsequent events occurred that were reasonably expected to impact the consolidated condensed financial statements presented herein.

Resignation of Brandon Stump

On October 29, 2021, Brandon Stump resigned from his position as:

(i) Chief Executive Officer and Chairman of the Board of Directors;

and (ii) all positions held for each direct and indirect subsidiary of the Company (each, a " Subsidiary "), including as a member of the Board of Directors of the Company and each Subsidiary.

In connection with Mr.

Stump's resignation, the Company and Mr.

Stump entered into an agreement regarding Mr.

Stump's resignation (the " Termination Agreement "), which Termination Agreement is dated October 29, 2021.

Pursuant to the Termination Agreement, in consideration for Mr.

Stump agreeing to terminate his employment agreement with the Company, as amended and restated on February 12, 2020 ( the " Employment Agreement "), and agreeing to certain restrictions and covenants, the Company will:

(i) continue to pay Mr.

Stump his base salary (as defined in the Employment Agreement), through April 22, 2022;

( ii) pay Mr.

Stump certain bonus compensation owed to Mr.

Stump in an amount equal to $ 300,000 , payable in installments of $ 75,000 on each of November 1, 2021, December 1, 2021, January 1, 2022, and February 1, 2022;

and (iii) continue to make available to Mr.

Stump certain employee benefits offered by the Company until April 22, 2022.

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