What changed in this filing

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Item 1. Financial Statements

2022-05-16 compared with 2021-11-15 · 285 added, 330 removed, 340 unchanged (64% of the section changed)

4 unchanged sentences

(in thousands, except share and per share amounts)

September 30,

Current assets:

$ 1,270  

$ 1,422  

Accounts receivable, net

8 unchanged sentences

$ 9,248  

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

4 unchanged sentences

Lease liabilities

Notes payable

Dividends payable

Deferred revenue

Total current liabilities

10,743  

Non-current liabilities:

3 unchanged sentences

Total liabilities

12,521  

COMMITMENTS AND CONTINGENCIES (see Note 12)

Stockholders' equity (deficit):

Stockholders' equity:

Convertible preferred stock ($ 0.001 par value);

1,800,000 shares authorized

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

Series A, 300,000 shares designated, 141,123 and 141,873 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively

Series B, 1,500,000 shares designated, 0 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively

Common stock ($ 0.001 par value);

500,000,000 shares authorized;

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

216,840,987 and 210,890,930 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively

Additional paid-in capital

1 unchanged sentence

( 4,149 )  

Total stockholders' equity (deficit)

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Total stockholders' equity

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$ 9,205  

6 unchanged sentences

For the three months ended

For the nine months ended

September 30,

Product revenue, net

$ 8,074  

$ 4,361  

Total revenues

13 unchanged sentences

Net earnings (loss) per share

$ 0.00  

Weighted average number of common shares outstanding

211,007,522  

195,141,950  

242,854,761  

195,141,950  

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

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’

EQUITY (DEFICIT)

(in thousands)

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

Dividends paid on Series A convertible preferred stock

Stock compensation

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

For the Three Months Ended March 31, 2022

Preferred Stock

Total Stockholders ’

Paid-in Capital

Equity  

Balance at January 1, 2022

210,890  

2 unchanged sentences

$ 3,131  

Conversion of Series A convertible preferred stock

Stock compensation

( 6,824 )  

Balance at September 30, 2020

Balance at March 31, 2022

216,840  

2 unchanged sentences

$ 3,855  

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

CHARLIE ’

S HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’

(in thousands)

For the Nine Months Ended September 30, 2021

Convertible Preferred Stock

Total Stockholders' Equity

Balance at January 1, 2021

Issuance of common stock to related parties for cash

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 September 30, 2021

For the Nine Months Ended September 30, 2020

Convertible Preferred Stock

Total Stockholders' Equity

For the Three Months Ended March 31, 2021

Preferred Stock

Total Stockholders ’

Paid-in Capital

Deficit  

3 unchanged sentences

$ ( 9,663 )  

$ ( 2,476 )  

Issuance of common stock to related parties for cash

Conversion of Series A convertible preferred stock

( 25 )  

( 17 )  

Reclassification of liability awards to equity

Accrue dividends payable on Series A convertible preferred stock

( 1,650 )  

Issuance of common stock for dividend payment

Stock compensation

( 20,137 )  

Balance at September 30, 2020

18,990,753  

Balance at March 31, 2021

199,296  

6 unchanged sentences

(in thousands)

For the nine months ended

September 30,

For the three months ended

Cash Flows from Operating Activities:

4 unchanged sentences

Change in fair value of derivative liabilities

( 340 )  

20,102  

Amortization of operating lease right-of-use asset

2 unchanged sentences

Subtotal of non-cash charges

( 41 )  

20,395  

Changes in operating assets and liabilities:

Accounts receivable

( 446 )  

Prepaid expenses and other current assets

( 471 )  

Accounts payable and accrued expenses

( 384 )  

Deferred revenue

Lease liabilities

Net cash used in operating activities

( 121 )  

Net cash (used in) provided by operating activities

( 372 )  

Cash Flows from Investing Activities:

Purchase of property, plant and equipment

( 85 )  

Net cash used in investing activities

( 85 )  

Cash Flows from Financing Activities:

2 unchanged sentences

Repayment of notes payable

Dividend payment

Net cash provided by financing activities

Net decrease in cash

Net (decrease) increase in cash

( 457 )  

Cash, beginning of the period

Cash, end of the period

$ 3,455  

Supplemental disclosure of cash flow information

1 unchanged sentence

Cash paid for income taxes

Non-cash financing and investing

Supplemental disclosure of cash flow information

Conversion of Series A convertible preferred stock

Issuance of common stock for dividend payment

Dividends paid on Series A convertible preferred stock

Reclassification of liability awards to equity

Gain from debt extinguishment

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

7 unchanged sentences

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 (“

The Company’s products are produced domestically by contract manufacturers for sale by select distributors, specialty retailers and third -party online resellers throughout the United States, as well as in more than 80 countries worldwide.

The Company’s primary international markets include the United Kingdom, Italy, Spain, New Zealand, Australia, and Canada.

In June 2019 , The Company launched distribution of certain premium vapor, ingestible and topical products containing hemp-derived cannabidiol (“

CBD ”) and other compounds derived from hemp 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 ”).

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

In addition to Don Polly, we also wholly-own 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.

CCD ”), which also produces and sells 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 Company’s Board of Directors approved a reverse stock split of the Company’s authorized, issued and outstanding shares of Common Stock, 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.

All share and per share amounts in this quarterly report on Form 10 -Q (this “

Report ”) have been retroactively adjusted to account for the Reverse 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.

Our financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

The Company operates in a rapidly changing legal and regulatory environment;

new laws and regulations or changes to existing laws and regulations could significantly limit the Company’s ability to sell its products, and/or result in additional costs.

Additionally, the Company was required to apply for 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, 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.

Additionally, the Company was required to apply for FDA approval to continue selling and marketing its products used for the vaporization of nicotine in the United States.

Currently, a substantial portion of the Company’s sales are derived from products that are subject to approval by the United States Food and Drug Administration (“

FDA ”).

There was significant cost associated with the application process and there can be no assurance the FDA will approve previous and/or future applications.

In addition, the outbreak of a novel strain of COVID- 19 (“

Coronavirus ”) which was identified in Wuhan, China around December 2019, has had a negative impact on the global economy and the Company’s supply chain and sales.

For the three months ended March 31, 2022, the Company generated income from operations of approximately $ 0.4 million, and a consolidated net income of approximately $ 0.7 million, but used cash in operations of approximately $ 0.4 million.

The Company had stockholders’

equity of $ 3.9 million at March 31, 2022.

During the three months ended March 31, 2022, the Company’s working capital requirements continued to evolve as current assets, excluding cash, increased to $ 7.6 million from $ 7.1 million as of December 31, 2021, and cash on hand decreased to $ 0.4 million from $ 0.9 million as of December 31, 2021.

Considering these facts, the issuance of one or several Marketing Denial Orders (“

MDO ”) from the FDA would increase the potential for inventory obsolescence and uncollectable accounts receivables.

These regulatory risks, as well as other industry-specific challenges remain factors that raise substantial doubt about the Company’s ability to continue as a going concern.

Management's plans depend on its ability to increase revenues, raise additional capital, and continue its business development efforts, including the expenditure of approximately $ 4,400,000 to date, to complete the Pre-Market Tobacco Application (“

PMTA ”) process for the Company’s 2020 submissions to the FDA.

In 2022 the Company intends to allocate further resources and new personnel to support research and development initiatives in order to submit one or more additional PMTAs.

The Company may require additional financing in the future to support subsequent PMTA filings, and/or in the event the FDA requests additional testing for one, or several, of the Company’s prior PMTA submissions.

There can be no assurance that additional 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.

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, the Company may require additional financing in the future should the FDA require additional testing for one, or several, of the Company’s PMTA submissions.

There can be no assurance that such financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and, in the Company’s best interests.

CHARLIE'S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Risks and Uncertainties

2 unchanged sentences

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 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.

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.

4 unchanged sentences

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.

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 15, 2022, a new rider to the Federal Food, Drug and Cosmetic Act was passed granting the FDA authority over synthetic nicotine. 

These regulations make the Company’s synthetic nicotine products subject to the same FDA rules as tobacco-derived nicotine products. 

As such, the Company was required to file a PMTA for its existing synthetic nicotine products marketed under the Pacha Syn brands by May 14, 2022 or be subject to FDA enforcement. 

The Company filed new PMTAs, for its synthetic Pacha Syn products on May 13, 2022, prior to the May 14, 2022 deadline.

On March 11, 2020, the World Health Organization designated the ongoing and evolving COVID- 19 outbreak as a pandemic.

The outbreak has caused and continues to cause a substantial disruption in international and U.S.

The outbreak has caused and continues to cause periodic disruption in international and U.S.

economies and markets.

1 unchanged sentence

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.

The impact from COVID- 19 has affected our supply chain, and if disruptions from the COVID- 19 outbreak are prolonged, it will continue to have an adverse impact on our business.

NOTE 2 –

3 unchanged sentences

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.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“

GAAP ”) have been omitted pursuant to such Securities and Exchange Commission (“

SEC ”) rules and regulations;

nevertheless, the Company believes that the disclosures are adequate to make the information presented in this Report not misleading.

Amounts related to disclosure of December 31, 2021 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, 2021 ( the “

2021 Annual Report ”).

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.

1 unchanged sentence

There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2021 Annual Report.

CHARLIE'S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

In June 2016, the Financial Accounting Standards Board (“

FASB ”) issued Accounting Standards Update (“

ASU ”) No.

2016 - 13, “

Measurement of Credit Losses on Financial Instruments ”

ASU 2016 - 13 "), which supersedes current guidance requiring recognition of credit losses when it is probable that a loss has been incurred.

ASU 2016 - 13 requires the establishment of an allowance for estimated credit losses on financial assets, including trade and other receivables, at each reporting date.

ASU 2016 - 13 will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash.

ASU 2016 - 13 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.

The Company does not believe the impact of adopting this standard will be material to its condensed 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.

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 ”).

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.

In addition, ASU 2020 - 06 modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings per share ( “

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.

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.

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

In May 2021, the FASB issued ASU No.

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 ) ”

ASU 2021 - 04 ”).

ASU 2021 - 04 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.

ASU 2021 - 04 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:

2 unchanged sentences

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.

ASU 2021 - 04 will be adopted 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 income (loss), earnings (loss) per share, stockholders’

equity (deficit) or working capital.

CHARLIE'S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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.

In accordance with Accounting Standards Codification (“

ASC ”) Topic 820 “

Fair Value Measurements and Disclosures ”

ASC 820 ”), 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.

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Level 3 - Unobservable inputs for the instrument requiring the development of assumptions by the Company.

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

Fair Value at September 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 March 31, 2022, and December 31, 2021 ( amounts in thousands):

Fair Value at March 31, 2022

Derivative liability - Warrants

3 unchanged sentences

Total liabilities

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.

There were no transfers between Level 1, 2 or 3 during the three -month period ended March 31, 2022.

The following table presents changes in Level 3 liabilities measured at fair value for the three -month period ended March 31, 2022.

Both observable and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category.

3 unchanged sentences

Change in fair value

Balance at September 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 September 30, 2021 and December 31, 2020 is as follows:

September 30,

Balance at March 31, 2022

A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in the Monte Carlo simulation measuring the Company’s derivative liabilities that are categorized within Level 3 of the fair value hierarchy as of March 31, 2022, and December 31, 2021, is as follows:

Exercise price

$ 0.4431  

Contractual term (years)

Volatility (annual)

90.0 %  

Risk-free rate

Dividend yield (per share)

CHARLIE'S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On April 26, 2019 ( the “

6 unchanged sentences

s Financing ”).

In conjunction with the Share Exchange, the Company issued to holders of its Series A Convertible Preferred Stock (“

In conjunction with the Share Exchange, the Company issued to holders of its Series A Convertible Preferred Stock, par value $ 0.001 per share (“

Series A Preferred ”), warrants to purchase an aggregate of 31,028,996 shares of Common Stock (the “

2 unchanged sentences

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.

Due to the exercise features of these warrants, they are not considered to be indexed to the Company’s own stock and are therefore not afforded equity treatment in accordance with ASC Topic 815, “

Derivatives and Hedging ”

ASC 815 ”).

In accordance with ASC 815, the Company has recorded the Investor Warrants and Placement Agent Warrants as derivative instruments on its 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.

1 unchanged sentence

NOTE 4 - PROPERTY AND EQUIPMENT

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

September 30,

Property and equipment as of March 31, 2022, and December 31, 2021, are as follows (amounts in thousands):

Estimated Useful Life (in Years)

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Accumulated depreciation

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.

( 740 )  

( 673 )  

Depreciation and amortization expense totaled $ 67,000 and $ 50,000 , respectively, during the three months ended March 31, 2022 and 2021.

NOTE 5 - CONCENTRATIONS

1 unchanged sentence

For the three months ended

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.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During the three months ended March 31, 2022 and 2021, purchases from three vendors represented 76 % and 51 %, respectively, of total inventory purchases.

As of March 31, 2022, and December 31, 2021, amounts owed to these vendors totaled $ 780,000 and $ 1,494,000 , respectively, which are included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.

Accounts Receivable

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

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 $ 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.

One customer made up more than 22 % of net accounts receivable at March 31, 2022.

The same customer made up more than 27 % of net accounts receivable at December 31, 2021.

Customer A owed the Company a total of $ 356,000 representing 22 % of net receivables at March 31, 2022.

Customer A owed the Company a total of $ 454,000 , representing 27 % of net receivables at December 31, 2021.

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 nine months ended September 30, 2021 and 2020, respectively.

No customer exceeded 10% of total net sales for the three -month periods ended March 31, 2022 and 2021.

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 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.

3 unchanged sentences

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.

Effective April 25, 2019, we began consolidating the financial statements of Don Polly and it is still considered a VIE of the Company.

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;

2 unchanged sentences

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 and accrued expenses as of March 31, 2022, and December 31, 2021, are as follows (amounts in thousands):

Accounts payable

$ 1,806  

$ 2,476  

Accrued compensation

Accrued income taxes

Other accrued expenses

CHARLIE'S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

$ 3,684  

$ 4,068  

NOTE 8 –

1 unchanged sentence

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 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 "), and required a guaranteed minimum interest amount of $ 75,000 (“

Minimum Interest ”).

The Red Beard Note was 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 ").

The 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.

On April 30, 2020, Charlie's received approval to enter into a U.S.

Small Business Administration (" SBA ") Promissory Note (the " PPP Loan Agreement ") 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 " Charlie's PPP Loan ").

The Charlie's PPP Loan provided for working capital to Charlie’s in the amount of $ 650,761 .

The Charlie's PPP Loan was set to mature on April 30, 2022 and accrued 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, continued to accrue during this time.

Interest, however, continued to accrue during that 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.

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.

The Polly PPP Loan provided for working capital to Don Polly in the amount of $ 215,600 .

The Polly PPP Loan was set to mature on April 14, 2022 and accrued interest at a rate of 1.00% per annum.

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.

Interest, however, continued to accrue during that 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.

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, 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.

The Polly PPP Loan 2 obtained by Don Polly provided general working capital in the amount of $ 184,200 .

The Polly PPP Loan 2 was set to mature on March 17, 2026, and accrued interest at a rate of 1.00% per annum.

Payments of principal and interest were deferred, however interest continued to accrue during that time.

During the year ended December 31, 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 SBA.

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.

CHARLIE'S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During the year ended December 31, 2021, Don Polly received notice from the Polly Lender that the Polly PPP Loan 2 was fully repaid, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the SBA.

There is no further action required on the part of Don Polly to satisfy this liability.

During the year ended December 31, 2021, the Company recorded a debt extinguishment gain of approximately $ 1,060,000 , including principal and accrued interest, which is reflected in the other income section of the Company’s 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.

Installment payments, including principal and interest of $ 731 monthly, will begin thirty 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 September 30, 2021 ( amounts in thousands):

April 2022 Note Financing

On April 6, 2022, Charlie's Holding's, Inc., its wholly-owned subsidiary, Charlie's Chalk Dust, LLC and its variable interest entity, Don Polly LLC (collectively, the " Company "), issued a secured promissory note (" Note ") to one of the Company's largest stockholders, Michael King (the " Lender ") in the principal amount of $ 1,000,000 , which Note is secured by certain assets of the Company pursuant to the terms of a Security Agreement entered into by and between the Company and the Lender (the " Note Financing ").

The Note requires the payment of principal and guaranteed interest in the amount of at least $ 90,000 on or before the earlier date of (i) a Liquidity Event, as defined under the terms of the Note;

or (ii) September 28, 2022.

The Company intends to use the proceeds from the Note Financing for general corporate purposes, and its working capital requirements, pending the availability of alternative debt financing.

The following summarizes the Company’s notes payable maturities as of March 31, 2022 ( amounts in thousands):

Remaining months Ending December 31, 2022

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Year Ending December 31, 2025

NOTE 9 –

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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.

For the three  months ended March 31, 2022, and 2021, 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 nine months ended

September 30,

Net income (loss) - basic

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

( 340 )  

Net income (loss) - diluted

Weighted average shares outstanding - basic

Diluted stock options

Diluted warrants

211,007,522  

195,141,950  

Diluted preferred shares

31,847,239  

Weighted average shares outstanding - diluted

242,854,761  

195,141,950  

Basic earnings (loss) per share

$ 0.00  

Diluted earnings (loss) per share

CHARLIE'S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

$ 0.00  

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,

For the three months ended

Series A convertible preferred shares

55,643  

40,338  

47,201  

103,484  

NOTE 10 –

1 unchanged sentence

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 .

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 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.

Series A Holders ”) of its 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 valued at $ 0.44313 per share, and approximately $ 880,000 in cash.

As of March 31, 2022, 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 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.

During the three months ended March 31, 2022, the Company issued approximately 169,000 shares of Common Stock upon conversion of 750 shares of Series A Preferred.

March 2021 Private Placement

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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.

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, 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.

CHARLIE'S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 (the “

Exchange Act ”).

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 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.

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.

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.

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.

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. 

On December 22, 2021, our Board of Directors unanimously adopted resolutions by written consent approving an amendment to increase the number of shares of Common Stock available for issuance under the 2019 Plan by 15.0 million shares, from 11,072,542 to 26,072,542 shares (the “2019 Plan Amendment ”).

Furthermore, the Company received written consents approving the 2019 Plan Amendment from holders of approximately 50.3 % of our outstanding voting securities.

In accordance with Rule 14c of the Exchange Act, our Board of Directors’

authority to implement the 2019 Plan Amendment became effective February 28, 2022, twenty calendar days after notification of our shareholders.

The 2019 Plan Amendment will allow the Company to maintain a sufficient number of available shares for future grants under the 2019 Plan.

Non-Qualified Stock Options

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

The following table summarizes stock option activities during the three months ended March 31, 2022 ( all option amounts are in thousands):

Stock Options

3 unchanged sentences

Outstanding at January 1, 2022

Options granted

$ 0.54  

Options forfeited/expired

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.

( 260 )  

Outstanding at March 31, 2022

$ 0.55  

Options vested and exercisable at March 31, 2022

$ 0.58  

As of March 31, 2022, there was approximately $ 24,000 of total unrecognized compensation expense related to non-vested stock option compensation arrangements granted under the 2019 Plan.

That cost is expected to be recognized over a weighted average period of 2.4 years.

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 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.

The awards are settleable in a variable number of common shares based on defined percentages of the Company's total shares determined by market capitalization targets and are, therefore, classified as liabilities in accordance with ASC 718.

The fair value of the awards is remeasured at each reporting period until settlement.

Compensation cost is attributed over the period encompassing the derived service period and the explicit service period.

The fair value of the market condition awards on the termination date of February 12, 2020 was approximately $ 1,638,000 .

The market condition awards were valued using a Monte Carlo simulation technique, a risk-free interest rate of 1.44 % and a volatility of 75 % based on volatility over 3 years using daily stock prices.

For the nine months ended September 30, 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 nine months ended September 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 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.

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.

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.

Prior to the Share Exchange, Charlie’s employees held Member units, which were automatically converted into 71,000 shares of common stock and 69,815 shares of Series B Convertible Preferred Stock (“

Series B Preferred ”) (or 6.98 million shares of common stock equivalents) due to the effect of the Share Exchange.

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

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

On April 1, 2021, the Board of Directors of the Company entered into an Employment Agreement (the " Agreement ") with Henry Sicignano III, MBA, pursuant to which the Company appointed Mr.

Sicignano to serve as President of the Company.

Pursuant to the Agreement, Mr.

Sicignano will serve as President for an initial period of two years, renewable on an annual basis unless earlier terminated by the Company or Mr.

Sicignano was awarded 1,500,000 restricted shares (subject to forfeiture) (“

Restricted Shares ”) of the Company.

Sicignano will have all the rights of a shareholder of the Company with respect to voting the 1,500,000 restricted shares awarded under this grant and share adjustments, receipt of dividends (if any) and distributions (if any) on such shares.

Restricted Shares will be subject to forfeiture in 750,000 share increments on April 1, 2022 and April 1, 2023, and will also be subject to additional forfeiture-release features set forth in Addendum A to the Employment Agreement of Henry Sicignano, III, included in the Company’s 8 -K filed April 6, 2021.

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

The Company recorded total stock-based compensation of approximately $ 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

For the three months ended March 31, 2022, and 2021, the Company recorded compensation expense of approximately $ 2,000 and $ 77,000 related to the granting of stock options, respectively.

Restricted Stock Awards  

The following table summarizes restricted stock awards activities during the three months ended March 31, 2022 ( all share amounts are in thousands):

Number of Shares

Weighted Average Grant Date Fair Value per Share

Nonvested at January 1, 2022

$ 0.044  

Restricted stock granted

Nonvested at March 31, 2022

$ 0.038  

On March 2, 2022, the Company granted approximately 5.8 million restricted stock awards (“

RSAs ”) to employees, officers and directors of the Company pursuant to the 2019 Plan, as amended.

The RSAs are subject to a vesting schedule and have all the rights of a shareholder of the Company with respect to voting, share adjustments, receipt of dividends (if any) and distributions (if any) on such shares.

As of March 31, 2022, there was approximately $ 253,000 of total unrecognized compensation expense related to non-vested restricted share-based compensation arrangements granted under the 2019 Plan.

That cost is expected to be recognized over a weighted average period of 3.0 years.

The Company recorded total stock-based compensation of approximately $ 16,000 during the three months ended March 31, 2022, related to the RSAs.

NOTE 12 –

1 unchanged sentence

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.

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 expired 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.

3 unchanged sentences

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 excludes short-term leases having initial terms of 12 months or less from ASC Topic 842, “

Leases ”, 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 “

2 unchanged sentences

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.

The terms of the Lease were negotiated and approved by the independent members of the Board of Directors, 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 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):

The total amount paid to related parties for the three months ended March 31, 2022 and 2021 was $ 68,820 and $ 69,510 , respectively.

At March 31, 2022, the Company had operating lease liabilities of approximately $ 641,000 and right of use assets of approximately $ 638,000 , which were included in the condensed consolidated balance sheet.

The following table summarizes quantitative information about the Company’s operating leases for the three months ended March 31, 2022 and 2021 (amounts in thousands):

For the three months ended

For the nine months ended

September 30,

Operating leases

4 unchanged sentences

Total rent expense

For the nine months ended

September 30,

For the three months ended

Operating cash flows from operating leases

3 unchanged sentences

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

Year Ending December 31, 2022

12.0 %  

Maturities of our operating leases as of March 31, 2022, excluding short-term leases, are as follows (amounts in thousands):

Nine Months Ending December 31, 2022

Year Ending December 31, 2023

1 unchanged sentence

Less present value discount

Operating lease liabilities as of September 30, 2021

CHARLIE'S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Operating lease liabilities as of March 31, 2022

Legal Proceedings

As of the date hereof, we are not a party to any material legal or administrative proceedings.

There are no proceedings in which any of our directors, executive officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our interest.

From time to time, the Company may be involved in various claims and counterclaims and legal actions arising in the ordinary course of business.

Other than as set forth below, there are no additional pending or threatened legal proceedings at this time.

Robinson Worldwide, Inc.

True Drinks, Inc.

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.

Litigation or any other legal or administrative proceeding, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our management’s time and attention.

NOTE 13 - INCOME TAXES

Income tax expense is comprised of domestic (US federal and state) income taxes at the applicable tax rates, adjusted for non-deductible expenses, stock compensation expenses, and other permanent differences.

Our income tax provision may be significantly affected by changes to our estimates. 

However, due to the full valuation allowance on our deferred tax assets, the net impact to our overall income tax expense is limited.

Under Sections 382 and 383 of the Internal Revenue Code (the “

Code ”), if a corporation undergoes an “ownership change”

(generally defined as a greater than 50 percentage points (by value) in the ownership of its equity over a three -year period), the corporation’s ability to use its pre-change tax attributes to offset its post change income may be limited.

We may have experienced such ownership changes in the past, and we may experience ownership changes in the future or subsequent shifts in our stock ownership, many of which are outside our control.

As of December 31, 2021, we had state net operating losses (“

NOLs ”) of approximately $ 6.1 million and federal NOLs of $ 4.2 million.

The federal NOLs do not expire but the state NOLs expire if not utilized before 2041.

If we undergo future ownership changes, many of which may be outside of our control, our ability to utilize our NOLs and tax credit carryforwards could be further limited by Sections 382 and 383 of the Code.

There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise become unavailable to offset future income tax liabilities.

Additionally, our NOLs and tax credit carryforwards could be limited under state law.

For these reasons, even if we attain profitability, we may be unable to use a material portion of our NOLs and other tax attributes.

For the three months ended March 31, 2022, the Company’s estimate for income taxes was not determined to be significant and therefore, is not reflected in the Company’s condensed consolidated financial statements and related disclosures.

NOTE 14 - SUBSEQUENT EVENTS

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.

Williamsville, New York Lease

On April 29, 2022, Charlie’s Holdings, Inc.

entered into a commercial lease agreement for the Company’s sales and marketing operations in Williamsville, New York (“

Williamsville Lease ”) with Henry Sicignano Jr., a relative of the Company’s President, Henry Sicignano III.

The Williamsville Lease, which became effective on May 1, 2022, has a term of one year and a base rent of $ 1,650 per month.

The Williamsville Lease is considered a modified gross lease and therefore the Company will also be responsible for additional monthly expenses including gas, electricity, and internet.

The Williamsville Lease was evaluated and approved by the Company’s Board of Directors and was executed by Ryan Stump, the Company’s Chief Operating Officer and a member of the Company’s Board of Directors.

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