Charlie's Holdings, Inc. - Quarter Report: 2020 June (Form 10-Q)
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended June 30, 2020
[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________ to
_________
Commission file number 001-32420
CHARLIE’S HOLDINGS,
INC.
(Exact
Name of Registrant as Specified in Its Charter)
|
Nevada
|
|
84-1575085
|
|
(State or Other Jurisdiction of Incorporation or
Organization)
|
|
(IRS Employer Identification No.)
|
1007 Brioso Drive, Costa Mesa, CA 92627
(Address
of Principal Executive Offices)
(949) 531-6855
(Registrant’s
Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No
[ ]
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit such
files). Yes [X] No
[ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
|
Large accelerated filer
|
[ ]
|
Accelerated filer
|
[ ]
|
|
Non-accelerated filer
|
[X]
|
Smaller reporting company
|
[X]
|
|
|
|
Emerging growth company
|
[ ]
|
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
[ ]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-12 of the Exchange Act). Yes
[ ] No [X]
Securities
registered pursuant to Section 12(b) of the Act: None
|
Title
of each class
|
Trading
Symbol(s)
|
Name of
each exchange on which registered
|
|
|
|
|
The number of shares of the registrant’s common stock, par
value $0.001 per share, issued and outstanding on August 14, 2020
was 18,990,752,596.
CHARLIE’S HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2020
INDEX
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Page
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1
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2
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3
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4
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Notes to Condensed Consolidated Financial Statements
(unaudited)
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6
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17
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25
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25
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26
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26
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40
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40
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40
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40
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40
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41
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ITEM 1. FINANCIAL STATEMENTS
CHARLIE’S HOLDINGS, INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
(in thousands, except share and per share amounts)
|
|
June 30,
|
December 31,
|
|
|
2020
|
2019
|
|
|
(Unaudited)
|
|
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ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash
|
$1,464
|
$2,448
|
|
Accounts
receivable, net
|
1,341
|
918
|
|
Inventories,
net
|
1,854
|
1,516
|
|
Prepaid
expenses and other current assets
|
249
|
729
|
|
Total
current assets
|
4,908
|
5,611
|
|
|
|
|
|
Non-current
assets:
|
|
|
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Property,
plant and equipment, net
|
572
|
543
|
|
Right-of-use
asset, net
|
1,418
|
1,623
|
|
Other
assets
|
71
|
71
|
|
Total
non-current assets
|
2,061
|
2,237
|
|
|
|
|
|
TOTAL ASSETS
|
$6,969
|
$7,848
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable and accrued expenses
|
$2,433
|
$2,516
|
|
Derivative
liability
|
3,534
|
4,144
|
|
Lease
liabilities
|
445
|
426
|
|
Notes
payable
|
750
|
-
|
|
Dividends
payable
|
1,650
|
-
|
|
Deferred
revenue
|
252
|
91
|
|
Total
current liabilities
|
9,064
|
7,177
|
|
|
|
|
|
Non-current
liabilities:
|
|
|
|
Notes
payable, net of current portion
|
1,016
|
-
|
|
Lease
liabilities, net of current portion
|
994
|
1,218
|
|
Total
non-current liabilities
|
2,010
|
1,218
|
|
|
|
|
|
Total
liabilities
|
11,074
|
8,395
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (see Note 13)
|
|
|
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|
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Stockholders'
deficit:
|
|
|
|
Convertible
preferred stock ($0.001 par value); 1,800,000 shares
authorized
|
|
|
|
Series
A, 300,000 shares designated, 203,811 and 204,561 shares issued and
outstanding as of June 30, 2020 and December 31, 2019,
respectively
|
-
|
-
|
|
Series
B, 1.5 million shares designated, 0 shares issued and outstanding
as of June 30, 2020 and December 31, 2019,
respectively
|
-
|
-
|
|
Common
stock ($0.001 par value); 50 billion shares authorized; 18,991
million shares and 18,974 million shares issued and outstanding as
of June 30, 2020 and December 31, 2019, respectively
|
18,991
|
18,974
|
|
Additional
paid-in capital
|
(16,060)
|
(17,045)
|
|
Accumulated
deficit
|
(7,036)
|
(2,476)
|
|
Total
stockholders' deficit
|
(4,105)
|
(547)
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$6,969
|
$7,848
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
(in thousands, except share and per share amounts)
(Unaudited)
|
|
For the three months ended
|
For the six months ended
|
||
|
|
June 30,
|
June 30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
Revenues:
|
|
|
|
|
|
Product
revenue, net
|
$4,163
|
$6,819
|
$8,568
|
$13,466
|
|
Total
revenues
|
4,163
|
6,819
|
8,568
|
13,466
|
|
Operating costs and expenses:
|
|
|
|
|
|
Cost
of goods sold - product revenue
|
1,732
|
2,846
|
3,695
|
5,596
|
|
General
and administrative
|
2,428
|
6,374
|
6,427
|
7,029
|
|
Sales
and marketing
|
353
|
810
|
924
|
1,577
|
|
Research
and development
|
408
|
-
|
2,631
|
-
|
|
Total
operating costs and expenses
|
4,921
|
10,030
|
13,677
|
14,202
|
|
Loss
from operations
|
(758)
|
(3,211)
|
(5,109)
|
(736)
|
|
Other income (expense):
|
|
|
|
|
|
Interest
expense
|
(76)
|
-
|
(76)
|
-
|
|
Change
in fair value of derivative liabilities
|
180
|
178
|
610
|
178
|
|
Other
income
|
10
|
-
|
15
|
-
|
|
Total
other income
|
114
|
178
|
549
|
178
|
|
Net loss
|
$(644)
|
$(3,033)
|
$(4,560)
|
$(558)
|
|
|
|
|
|
|
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Net
loss per share, basic and diluted
|
$(0.00)
|
$(0.00)
|
$(0.00)
|
$(0.00)
|
|
Weighted
average number of common shares outstanding
|
18,982,383,063
|
4,259,080,500
|
18,978,152,798
|
2,211,436,493
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’
EQUITY (DEFICIT)
(in thousands)
(Unaudited)
|
|
For the Three Months Ended June 30, 2020
|
||||||||
|
|
Series A
Convertible Preferred Stock |
Series B
Convertible Preferred Stock |
Common Stock
|
Additional
Paid-in
|
Accumulated
|
Total Stockholders'
|
|||
|
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Shares
|
Par value
|
Shares
|
Par value
|
Shares
|
Par value
|
Capital
|
Deficit
|
Deficit
|
|
Balance at April 1, 2020
|
204
|
$-
|
-
|
$-
|
18,982,291
|
$18,982
|
$(14,884)
|
$(6,392)
|
$(2,294)
|
|
Conversion
of Series A convertible preferred stock
|
-
|
-
|
-
|
-
|
8,462
|
9
|
(9)
|
-
|
-
|
|
Accrued
dividends payable on Series A convertible preferred
stock
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,650)
|
-
|
(1,650)
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
483
|
-
|
483
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(644)
|
(644)
|
|
Balance at June 30, 2020
|
204
|
$-
|
-
|
$-
|
18,990,753
|
$18,991
|
$(16,060)
|
$(7,036)
|
$(4,105)
|
|
|
For the Six Months Ended June 30, 2020
|
||||||||
|
|
Series A
Convertible Preferred Stock |
Series B
Convertible Preferred Stock |
Common Stock
|
Additional
Paid-in
|
Accumulated
|
Total Stockholders'
|
|||
|
|
Shares
|
Par value
|
Shares
|
Par value
|
Shares
|
Par value
|
Capital
|
Deficit
|
Deficit
|
|
Balance at January 1, 2020
|
204
|
$-
|
-
|
$-
|
18,973,828
|
$18,974
|
$(17,045)
|
$(2,476)
|
$(547)
|
|
Conversion
of Series A convertible preferred stock
|
-
|
-
|
-
|
-
|
16,925
|
17
|
(17)
|
-
|
-
|
|
Reclassification
of liability awards to equity
|
-
|
-
|
-
|
-
|
-
|
-
|
1,638
|
-
|
1,638
|
|
Accrued
dividends payable on Series A convertible preferred
stock
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,650)
|
-
|
(1,650)
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
1,014
|
-
|
1,014
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(4,560)
|
(4,560)
|
|
Balance at June 30, 2020
|
204
|
$-
|
-
|
$-
|
18,990,753
|
$18,991
|
$(16,060)
|
$(7,036)
|
$(4,105)
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
CHARLIE’S HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’
EQUITY (DEFICIT)
(in thousands)
(Unaudited)
|
|
For the Three Months Ended June 30, 2019
|
||||||||
|
|
Series A
Convertible Preferred Stock |
Series B
Convertible Preferred Stock |
Common Stock
|
Additional
Paid-in
|
Retained
|
Total Stockholders'
|
|||
|
|
Shares
|
Par value
|
Shares
|
Par value
|
Shares
|
Par value
|
Capital
|
Earnings
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 1, 2019
|
-
|
$-
|
1,396
|
$1
|
141,041
|
$141
|
$-
|
$2,145
|
$2,287
|
|
Effect
of reverse merger
|
-
|
-
|
-
|
-
|
2,377,530
|
2,378
|
(2,378)
|
-
|
-
|
|
Conversion
of Series B convertible preferred stock
|
-
|
-
|
(1,396)
|
(1)
|
13,963,048
|
13,963
|
(13,962)
|
-
|
-
|
|
Issuance
of common stock and warrants in a private offering, net of $7,762
warrant liability
|
206
|
-
|
-
|
-
|
1,551,466
|
1,551
|
18,186
|
-
|
19,737
|
|
Offering
cost related to private offering
|
-
|
-
|
-
|
-
|
-
|
-
|
(4,339)
|
-
|
(4,339)
|
|
Cash distributions
to CCD Members
|
-
|
-
|
-
|
-
|
-
|
-
|
(17,430)
|
-
|
(17,430)
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
902,662
|
903
|
2,174
|
-
|
3,077
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(3,033)
|
(3,033)
|
|
Balance at June 30, 2019
|
206
|
$-
|
-
|
$-
|
18,935,747
|
$18,936
|
$(17,749)
|
$(888)
|
$299
|
|
|
For the Six Months Ended June 30, 2019
|
||||||||
|
|
Series A
Convertible Preferred Stock |
Series B
Convertible Preferred Stock |
Common Stock
|
Additional
Paid-in
|
Retained
|
Total Stockholders'
|
|||
|
|
Shares
|
Par value
|
Shares
|
Par value
|
Shares
|
Par value
|
Capital
|
Earnings
|
Equity
|
|
Balance at January 1, 2019
|
-
|
$-
|
1,396
|
$1
|
141,041
|
$141
|
$-
|
$649
|
$791
|
|
Effect
of reverse merger
|
-
|
-
|
-
|
-
|
2,377,530
|
2,378
|
(2,378)
|
-
|
-
|
|
Conversion
of Series B convertible preferred stock
|
-
|
-
|
(1,396)
|
(1)
|
13,963,048
|
13,963
|
(13,962)
|
-
|
-
|
|
Issuance
of common stock and warrants in a private offering, net of $7,762
warrant liability
|
206
|
-
|
-
|
-
|
1,551,466
|
1,551
|
18,186
|
-
|
19,737
|
|
Offering
cost related to private offering
|
-
|
-
|
-
|
-
|
-
|
-
|
(4,339)
|
-
|
(4,339)
|
|
Cash distributions
to CCD Members
|
-
|
-
|
-
|
-
|
-
|
-
|
(17,430)
|
(979)
|
(18,409)
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
902,662
|
903
|
2,174
|
-
|
3,077
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(558)
|
(558)
|
|
Balance at June 30, 2019
|
206
|
$-
|
-
|
$-
|
18,935,747
|
$18,936
|
$(17,749)
|
$(888)
|
$299
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS
OF CASH
FLOWS
(in thousands)
(Unaudited)
|
|
For the six months ended
|
|
|
|
June 30,
|
|
|
|
2020
|
2019
|
|
Cash Flows from Operating Activities:
|
|
|
|
Net loss
|
$(4,560)
|
$(558)
|
|
Reconciliation
of net loss to net cash (used in) provided by operating
activities:
|
|
|
|
Allowance for
doubtful accounts
|
345
|
(35)
|
|
Depreciation and
amortization
|
83
|
12
|
|
Change in fair
value of derivative liabilities
|
(610)
|
(178)
|
|
Amortization of
operating lease right-of-use asset
|
205
|
46
|
|
Stock based
compensation
|
2,336
|
3,077
|
|
Subtotal of
non-cash charges
|
2,359
|
2,922
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
(768)
|
(1,235)
|
|
Inventories
|
(338)
|
(578)
|
|
Prepaid
expenses and other current assets
|
480
|
(572)
|
|
Accounts
payable and accrued expenses
|
233
|
332
|
|
Deferred
revenue
|
161
|
(38)
|
|
Lease
liabilities
|
(205)
|
(26)
|
|
Net
cash (used in) provided by operating activities
|
(2,638)
|
247
|
|
Cash Flows from Investing Activities:
|
|
|
|
Purchase
of property, plant and equipment
|
(112)
|
(182)
|
|
Net
cash used in investing activities
|
(112)
|
(182)
|
|
Cash Flows from Financing Activities:
|
|
|
|
Proceeds
from issuance of common stock and warrants in a private offering,
net
|
-
|
23,160
|
|
Proceeds
from issuance of notes payable
|
1,766
|
-
|
|
Cash
distributions to CCD Members
|
-
|
(18,409)
|
|
Net
cash provided by financing activities
|
1,766
|
4,751
|
|
Net
(decrease) increase in cash
|
(984)
|
4,816
|
|
|
|
|
|
Cash,
beginning of the period
|
2,448
|
304
|
|
Cash, end of the period
|
$1,464
|
$5,120
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
Cash
paid for interest
|
$-
|
$-
|
|
Cash
paid for income taxes
|
$-
|
$-
|
|
|
|
|
|
Supplemental
disclosure of non-cash financing and investing
activities
|
|
|
|
Conversion
of Series A convertible preferred stock
|
$17
|
$-
|
|
Reclassification
of liability awards to equity
|
$1,638
|
$-
|
|
Accrued
dividends payable on Series A convertible preferred
stock
|
$1,650
|
$-
|
|
Effect
of reverse merger
|
$-
|
$2,378
|
|
Conversion
of Series B convertible preferred stock
|
$-
|
$1
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
-5-
CHARLIE’S HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – DESCRIPTION OF THE BUSINESS AND BASIS OF
PRESENTATION
Description of the Business
Charlie’s
Holdings, Inc., (formerly True Drinks Holdings, Inc.) a Nevada
corporation, together with its wholly owned subsidiaries and
consolidated variable interest entity (collectively, the
“Company”,
“we”),
currently formulates, markets and
distributes branded e-cigarette liquid for use in both open and
closed consumer e-cigarette and vaping systems. The Company’s
products are produced domestically through contract manufacturers
for sale by select distributors, specialty retailers and
third-party online resellers throughout the United States, as well
as over 80 countries worldwide. The Company’s primary
international markets include the United Kingdom, Italy, Spain,
Belgium, Australia, Sweden and Canada. In June 2019, The Company
launched distribution, through Don Polly, a Nevada limited
liability company that is owned by entities controlled by
Brandon and Ryan Stump, the Company’s Chief Executive Officer
and Chief Operating Officer, respectively, and a consolidated
variable interest for which the Company is the primary
beneficiary (“Don
Polly”), of certain
premium vapor, tincture and topical products containing
hemp-derived cannabidiol (“CBD”). Our CBD based products are produced,
marketed and sold through, Don Polly, and the Company currently
intends to develop and launch additional products containing
hemp-derived CBD in the future.
In addition to Don Polly, we are also the holding
company for two wholly-owned subsidiaries, Charlie’s Chalk
Dust, LLC (“Charlie’s”
or “CCD”), which activity includes production and
sale of our branded nicotine-based e-cigarette liquid, and Bazi,
Inc., which activity includes sales of all-natural energy drink
Bazi® All Natural Energy. At this time, we do not intend to
continue sales of the Bazi product in its current
form.
Acquisition of True Drinks Holdings, Inc.
On April 26, 2019 (the “Closing
Date”), we entered into a
Securities Exchange Agreement with each of the former members
(“Members”) of Charlie’s, and certain direct
investors in the Company (“Direct
Investors”), pursuant to
which we acquired all outstanding membership interests of
Charlie’s beneficially owned by the Members in exchange for
the issuance by the Company of units, with such units consisting of
an aggregate of (i) 15,655,538,349 shares of common stock on an
as-converted basis (which includes the issuance of an aggregate of
1,396,305 shares of a newly created class of Series B Convertible
Preferred Stock, par value $0.001 per share
(“Series B
Preferred”), convertible
into an aggregate of 13,963,047,716 shares of common stock, issued
to certain individuals in lieu of common stock); (ii) 206,249
shares of a newly created class of Series A Convertible Preferred
Stock, par value $0.001 per share (“Series A
Preferred”), convertible
into an aggregate of 4,654,349,239 shares of common stock; and
(iii) warrants to purchase an aggregate of 3,102,899,493 shares of
common stock (the “Investor
Warrants”) (the
“Share Exchange”). As a result of the Share Exchange,
Charlie’s became a wholly owned subsidiary of the
Company.
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”). Katalyst
Securities LLC (“Katalyst”) acted as the sole placement agent in
connection with the Charlie’s Financing pursuant to an
Engagement Letter entered into by and between Katalyst,
Charlie’s and the Company on February 15, 2019. As
consideration for its services in connection with the
Charlie’s Financing and the Share Exchange, the Company
issued to Katalyst and its designees five-year warrants to purchase
an aggregate of 930,869,848 shares of Common Stock at a price of
$0.0044313 per share (the “Placement Agent
Warrants”). The Placement
Agent Warrants have substantially the same terms as those set forth
in the Investor Warrants.
The
Share Exchange resulted in a change of control of the Company, with
the Members and Direct Investors owning approximately 86.1% of the
Company’s outstanding voting securities immediately after the
Share Exchange, and the Company’s current stockholders
beneficially owning approximately 13.9% of the issued and
outstanding voting securities, which includes the Advisory Shares.
Following the Share Exchange, Ryan Stump and Brandon Stump, the
founders of Charlie’s and the Company’s Chief Executive
Officer and Chief Operating Officer, respectively, held in excess
of 50% of the Company’s issued and outstanding voting
securities.
-6-
CHARLIE’S HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Share Exchange is accounted for as a reverse
recapitalization in accordance with accounting principles generally
accepted in the United States (“U.S. GAAP”) because the primary assets of the Company
were nominal at the consummation of the Share Exchange.
Charlie’s was determined to be the accounting acquirer based
upon the terms of the Share Exchange and other factors including:
(i) Charlie’s stockholders and other persons holding
securities convertible, exercisable or exchangeable directly or
indirectly for Charlie’s membership units now own
approximately 49%, on a fully diluted basis, of the Company’s
outstanding securities immediately following the effective time of
the Merger, (ii) individuals associated with Charlie’s now
hold a majority of the seats on the Company’s Board of
Directors and (iii) Charlie’s management holds all key
positions in the management of the combined Company. Accordingly,
the historical financial statements of True Drinks were replaced by
the Company's historical financial statements including the
comparative prior periods. All references in the consolidated
financial statements to the number of shares and per-share amounts
of common stock have been retroactively restated to reflect the
exchange rate.
Going Concern Uncertainty Regarding the Legal and Regulatory
Environment, Liquidity and Management’s Plan of
Operation
The accompanying 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 is required to apply for FDA approval to
continue selling and marketing its products used for the
vaporization of nicotine in the United States. There is significant
cost associated with the application process and there can be no
assurance the FDA will approve the application(s). In addition, the
recent outbreak of 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, 2020, the Company has incurred losses from operations of
approximately $5,109,000 and a consolidated net loss of
approximately $4,560,000, and the Company has a stockholders’
deficit of approximately $4,105,000 as of June 30, 2020. 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 complete the Premarket Tobacco
Application (“PMTA”) registration process. The
Company does not anticipate that its current cash position will be
sufficient to meet its working capital requirements, to continue
its sales and marketing efforts and complete the PMTA registration
process. The Company is currently seeking debt and/or equity
financing in order to ensure that it has sufficient cash to operate
for the next 12 months. 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 its best interests.
Risks and Uncertainties
The Company operates in an environment that is
subject to rapid changes and developments in laws and regulations
that could have a significant impact on the Company’s ability
to sell its products. Beginning in September 2019, certain states
temporarily banned the sale of flavored e-cigarettes, and several
states and municipalities are considering implementing similar
restrictions. Federal, state, and local governmental bodies across
the United States have indicated that flavored e-cigarette liquid,
vaporization products and certain other consumption accessories may
become subject to new laws and regulations at the federal, state
and local levels. The application of any new laws or regulations
that may be adopted in the future, at a federal, state, or local
level, directly or indirectly implicating flavored e-cigarette
liquid and products used for the vaporization of nicotine could
significantly limit the Company’s ability to sell such
products, result in additional compliance expenses, and/or require
the Company to change its labeling and/or methods of distribution.
Any ban of the sale of flavored e-cigarettes directly limits the
markets in which the Company may sell its products. In the event
the prevalence of such bans and/or changes in laws and regulations
increase across the United States, or internationally, the
Company’s business, results of operations and financial
condition could be adversely impacted. In addition, the Company is presently in the
process of submitting PMTA applications for some of its
nicotine-based e-liquid products. The applications are due in
September 2020, which if approved, will allow the Company to
continue to sell its products in the United States. This
application deadline was previously May 2020 and recently has been
extended and there is no assurance that there will not be further
extensions. The Company is also seeking additional financing in
order to complete the application process. There is no assurance
that regulatory approval to sell our products will be granted or
that we can raise the additional financing required, and if not,
this could have a significant impact on our
sales.
-7-
CHARLIE’S HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On
March 11, 2020, the World Health Organization designated the
ongoing and evolving COVID-19 outbreak as a pandemic. The outbreak
has caused substantial disruption in international and U.S.
economies and markets as it continues to spread. The outbreak is
having a temporary adverse impact on our industry as well as our
business, with regards to certain supply chain disruptions and
sales volume. While the disruption from COVID-19 is currently
expected to be temporary, there is uncertainty around the
duration. The financial impact from COVID-19 has caused a
decline in sales of our CBD products, and if disruptions from the
COVID-19 outbreak are prolonged, it will continue to have an
adverse impact on our business.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
The unaudited interim condensed consolidated
financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (the
“SEC”). Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with U.S. GAAP have been omitted pursuant to such SEC
rules and regulations; nevertheless, the Company believes that the
disclosures are adequate to make the information presented in this
Quarterly Report on Form 10-Q (this “Report”) not misleading.
Amounts
related to disclosure of December 31, 2019 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, 2019. The
financial information contained in the consolidated financial
statements and footnotes are based on Charlie’s historical
financial statements and the Company’s financial activity
beginning April 26, 2019, as adjusted, to give effect to
Charlie’s reverse recapitalization of the Company and the
Charlie’s Financing completed prior to the Share Exchange. In
addition, from the period April 26, 2019 until December 31, 2019,
there were minimal costs and revenue associated with the Bazi
product line which are included in the interim condensed
consolidated financial statements. As noted above, we do not intend
to continue to produce and sell the Bazi product line in its
current form, and these costs and expenses are nominal and will
continue to be so in the future. The operating results of Don Polly
are also included.
Historical
financial information presented prior to April 26, 2019 is that of
Charlie’s only, while financial information presented after
April 26, 2019 includes Charlie’s, Don Polly, Bazi Drinks and
the Company, which includes the transactions associated with the
share exchange and private placement transaction along with ongoing
corporate costs.
Use of Estimates
The
preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expense during
the reporting periods. Actual results could differ from those
estimates.
Significant Accounting Policies
There
have been no material changes in the Company’s significant
accounting policies to those previously disclosed in the 2019
Annual Report.
Recent Accounting Standards Not Yet Adopted
Income Taxes
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 is currently evaluating the impact of this standard on
its condensed 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’ equity (deficit) or working
capital.
-8-
CHARLIE’S HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – FAIR VALUE MEASUREMENTS
In
accordance with ASC 820 (Fair Value Measurements and Disclosures),
the Company uses various inputs to measure the outstanding warrants
on a recurring basis to determine the fair value of the liability.
ASC 820 also establishes a hierarchy categorizing inputs into three
levels used to measure and disclose fair value. The hierarchy gives
the highest priority to quoted prices available in active markets
and the lowest priority to unobservable inputs. An explanation of
each level in the hierarchy is described below:
Level 1 - Unadjusted quoted prices in active markets for identical
instruments that are accessible by the Company on the measurement
date.
Level 2 - Quoted prices in markets that are not active or inputs
which are either directly or indirectly observable.
Level 3 - Unobservable inputs for the instrument requiring the
development of assumptions by the Company.
The
following table classifies the Company’s liabilities measured
at fair value on a recurring basis into the fair value hierarchy as
of June 30, 2020 and December 31, 2019 (amount in
thousands):
|
|
Fair
Value at June 30, 2020
|
|||
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
Derivative
liability - Warrants
|
3,534
|
-
|
-
|
3,534
|
|
Total
liabilities
|
$3,534
|
$-
|
$-
|
$3,534
|
|
|
Fair
Value at December 31, 2019
|
|||
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
Derivative
liability - Warrants
|
4,144
|
-
|
-
|
4,144
|
|
Total
liabilities
|
$4,144
|
$-
|
$-
|
$4,144
|
There
were no transfers between Level 1, 2 or 3 during the six-month
period ended June 30, 2020.
The
following table presents changes in Level 3 liabilities measured at
fair value for the six-month period ended June 30, 2020. 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 (amount in
thousands).
|
|
Derivative liability
- Warrants
|
|
Balance
at January 1, 2020
|
$4,144
|
|
Change
in fair value
|
(610)
|
|
Balance
at June 30, 2020
|
$3,534
|
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, 2020 and December 31, 2019 is as follows:
|
|
June
30,
|
December
31,
|
|
|
2020
|
2019
|
|
Exercise
price
|
$0.0044
|
$0.0044
|
|
Contractual term
(years)
|
3.82
|
4.32
|
|
Volatility
(annual)
|
75.0%
|
70.0%
|
|
Risk-free
rate
|
0.2%
|
1.7%
|
|
Dividend yield (per
share)
|
0%
|
0%
|
-9-
CHARLIE’S HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 – STOCK-BASED COMPENSATION
On April 26, 2019, in connection with employment
agreements with its Chief Executive Officer and Chief Operating
Officer, the Company issued market condition awards contingent upon
the achievement of certain market capitalization targets. The
awards are subject to a three-year service vesting period. The
awards are settleable in a variable number of common shares based
on defined percentages of the Company's total shares determined by
market capitalization targets and are, therefore, classified as
liabilities in accordance with ASC 718. The fair value of the
awards is remeasured at each reporting period until settlement.
Compensation cost is attributed over the period encompassing the
derived service period and the explicit service period. The fair
value of the market condition awards on the termination date
of February 12, 2020
was approximately $1,638,000. The
market condition awards were valued using a Monte Carlo simulation
technique, a risk-free interest rate of 1.44% and a volatility of
75% based on volatility over 3 years using daily stock prices. For
the six months ended June 30, 2020, the Company recorded an expense
of $1,322,000
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 with both the Company’s Chief
Executive Officer and Chief Operating Officer. The terms of the
Amended Employment Agreements have been amended as follows: (i) the
annual equity awards based upon, among other conditions, the
Company’s market capitalization and a percentage of base
salary have been eliminated; however, the awards based on financial
milestones remain in full force and effect; and (ii) payment of the
2019 bonuses has been deferred, resulting in the accrual of such
bonuses on the books and records of the Company. All other terms of
the respective Employment Agreements will remain in full force and
effect subject to further review by the Board 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 1 above), the Company
issued an aggregate of 902.7 million shares of common stock (the
“Advisory
Shares”), including to a
member of the Company’s Board of Directors, pursuant to a
subscription agreement. The fair value of a share of common stock
was $0.0032 which is based upon a valuation prepared by the Company
on the date of the Share Exchange. The Company recorded stock-based
compensation of approximately $2.9 million on the grant
date.
Prior to the Share Exchange, Charlie’s
employees held Member units, which were automatically converted
into 7.1 million shares of common stock and 69,815 shares of Series
B Preferred (or 698.1 million shares of common stock equivalents)
due to the effect of the Share Exchange. The 705.3 million shares
of common stock will vest over a two-year period. The fair value of
a share of common stock was $0.0032 based upon a valuation prepared
by the Company on the date of the Share Exchange. The Company
recorded stock-based compensation of approximately
$564,000 during the six months ended June 30,
2020.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and
Equipment detail as of June 30, 2020 and December 31, 2019 are as
follows (amount in thousands):
|
|
June
30,
|
December
31,
|
|
|
|
2020
|
2019
|
Estimated
Useful Life
|
|
Machinery
and equipment
|
$38
|
$96
|
5
years
|
|
Trade
show booth
|
176
|
171
|
5
years
|
|
Office
equipment
|
552
|
118
|
5
years
|
|
Leasehold
improvements
|
171
|
440
|
Lesser of lease
term or estimated useful life
|
|
|
937
|
825
|
|
|
Accumulated
depreciation
|
(365)
|
(282)
|
|
|
|
$572
|
$543
|
|
Depreciation and
amortization expense totaled $43,000 and $9,000, respectively,
during the three months ended June 30, 2020 and 2019. Depreciation
and amortization expense totaled $83,000 and $12,000, respectively,
during the six months ended June 30, 2020 and 2019.
-10-
CHARLIE’S HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 - CONCENTRATIONS
Vendors
The
Company’s concentration of purchases are as
follows:
|
|
For the
three months ended
|
For the
six months ended
|
||
|
|
June
30,
|
June
30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
Vendor
A
|
24%
|
54%
|
28%
|
66%
|
|
Vendor
B
|
48%
|
18%
|
24%
|
15%
|
|
Vendor
C
|
9%
|
0%
|
16%
|
0%
|
|
Vendor
D
|
5%
|
5%
|
11%
|
3%
|
During
the three months ended June 30, 2020 and 2019, purchases from four
vendors represented 86% and 77%, respectively, of total inventory
purchases. During the six months ended June 30, 2020 and 2019,
purchases from four vendors represented 79% and 84%, respectively,
of total inventory purchases.
As of
June 30, 2020, and December 31, 2019, amounts owed to these vendors
totaled $634,000 and $68,000 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 are as
follows:
|
|
June
30,
|
December
31,
|
|
|
2020
|
2019
|
|
Customer
A
|
6%
|
23%
|
No
customer made up more than 10% of accounts receivable at June 30,
2020. One customer made up more than 10% of net accounts receivable
at December 31, 2019. Customer
A owed the Company a total of $211,000, representing 23% of net
receivables at December 31, 2019. No customer exceeded 10% of total
net sales for the three and six month periods ended June 30, 2020
and 2019, respectively.
NOTE 7 – DON POLLY, LLC.
Don
Polly, LLC is a Nevada limited liability company that is owned
by entities controlled by Brandon and Ryan Stump, the
Company’s Chief Executive Officer and Chief Operating
Officer, respectively, and a consolidated variable interest
for which the Company is the primary beneficiary. Don Polly
formulates, sells and distributes the Company’s CBD product
lines.
We evaluate our ownership, contractual and other
interests in entities that are not wholly-owned to determine if
these entities are variable interest entities
(“VIEs”), and, if so, whether we are the primary
beneficiary of the VIE. In determining whether we are the
primary beneficiary of a VIE and therefore required
to consolidate the VIE, we apply a qualitative
approach that determines whether we have both (1) the power to
direct the activities of the VIE that most significantly impact the
VIE’s economic performance and (2) the obligation to absorb
losses of, or the rights to receive benefits from, the VIE that
could potentially be significant to that VIE. We continuously
perform this assessment, as changes to existing relationships or
future transactions may result in the consolidation or
deconsolidation of a VIE. Effective April 25, 2019, we
consolidated the financial statements of Don Polly and it is
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 consolidated financial statements 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, 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.
-11-
CHARLIE’S HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable
and accrued expense as of June 30, 2020 and December 31, 2019 are
as follows (amounts in thousands):
|
|
June
30,
|
December
31,
|
|
|
2020
|
2019
|
|
Accounts
payable
|
$812
|
$673
|
|
Accrued
compensation
|
1,234
|
1,635
|
|
Other
accrued expenses
|
387
|
208
|
|
|
$2,433
|
$2,516
|
NOTE 9 – NOTES PAYABLE
Red Beard Holdings, LLC Note Payable
On
April 1, 2020, the Company, Charlie's and its variable interest
entity, Don Polly, issued a secured promissory note (the
"Note") to one of the
Company's largest stockholders, Red Beard Holdings, LLC (the
"Lender") in the principal
amount of $750,000, which 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 the Lender (the "Note Financing").
The
Note requires the payment of principal and guaranteed minimum
interest in the amount of $75,000 on or before the earlier date of
(i) a Liquidity Event, as defined under the terms of the Note; or
(ii) October 1, 2020. In addition, if there
is an occurrence of an event of default, then, in addition to the
guaranteed minimum interest, the principal and unpaid interest and
unpaid other amounts under this Note shall, at the election of the
Holder in its sole and absolute discretion, bear interest at the
lesser of a rate equal to 20% per annum or the maximum default
rate. Such interest shall accrue daily commencing on occurrence of
such event of default until payment in full of the Principal
Amount, together with all accrued and unpaid interest and other
amounts which may become due hereunder, has been
made.
The
Company used the proceeds from the Note Financing for general
corporate purposes, and its working capital requirements, pending
availability of long-term investment
capital.
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 "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 "Loan
Agreement").
The PPP Loan provides for working capital to CCD in the amount of
$650,761. The PPP Loan will mature on April 30, 2022 and will
accrue interest at a rate of 1.00% per annum. Payments of principal
and interest will be deferred for six months from the date of the
PPP Loan, or until November 30, 2020. Interest, however, will
continue to accrue during this time.
On April 14, 2020, Don
Polly, a related company, which is consolidated as a Variable
Interest Entity (“VIE”)
of the Company, also obtained a PPP Loan from Community Banks of
Colorado, a division of NBH Bank (the "Polly
Lender"). The PPP Loan
obtained by Don Polly provides for working capital to Don Polly in
the amount of $215,600. The 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 PPP Loan, or until November 14, 2020. Interest,
however, will continue to accrue during this
time.
The aforementioned PPP Loans were made under the PPP enacted by
Congress under the CARES Act. The CARES Act (including the guidance
issued by SBA and U.S. Department of the Treasury) provides that
all or a portion of the PPP Loans may be forgiven upon request from
the Company 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 June 24, 2020, SBA authorized (under Section 7(b) of the Small
Business Act, as amended) an Economic Injury Disaster Loan
(“EID Loan”) to
Don Polly in the amount of $150,000. Installment payments,
including principal and interest of $731 monthly will begin twelve
months from date of the EID Loan agreement. The balance of
principal and interest will be payable thirty years from the date
of the EID Loan agreement and interest will accrue at the rate of
3.75% per annum.
The following summarizes the Company’s note payable
maturities as of June 30, 2020 (amount in thousands):
|
Remaining
months ended December 31, 2020
|
$750
|
|
Year
Ended December 31, 2021
|
-
|
|
Year
Ended December 31, 2022
|
866
|
|
Year
Ended December 31, 2023
|
-
|
|
Year
Ended December 31, 2024
|
-
|
|
Thereafter
|
150
|
|
Total
|
$1,766
|
-12-
CHARLIE’S HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 – LOSS PER SHARE APPLICABLE TO COMMON
STOCKHOLDERS
Basic
loss per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the
reporting period. Diluted loss per common share is computed similar
to basic earnings per common share except that it reflects the
potential dilution that could occur if dilutive securities or other
obligations to issue common stock were exercised or converted into
common stock. Diluted weighted average common shares include common
stock potentially issuable under the Company’s preferred
stock, warrants and vested and unvested stock options.
The
following securities were not included in the diluted net earnings
per share calculation because their effect was anti-dilutive as of
the periods presented (in thousands):
|
|
For the
six months ended
|
|
|
|
June
30
|
|
|
|
2020
|
2019
|
|
Options
|
801,325
|
61,825
|
|
Series
A convertible preferred shares
|
5,564,296
|
4,654,399
|
|
Warrants
|
4,033,769
|
4,033,769
|
|
Total
|
10,399,390
|
8,749,993
|
NOTE 11 – STOCKHOLDERS’ EQUITY
Series A Preferred Share Dividend
On
April 25, 2020, the Company was required to pay a one-time dividend
equal to eight percent (8%) of the stated value of its Series A
Preferred, equal to $1,650,000 (“Dividend Amount”), which Dividend
Amount was required to be paid in cash on or before April 25, 2020.
As of June 30, 2020, The Company has not paid the dividend and has
reflected the liability on its consolidated balance
sheet.
Conversion of Series A Preferred Shares
For the six months ended June 30, 2020, the
Company issued approximately 16,925,000 shares of common stock upon
conversion of 750 shares of Series A Convertible Preferred Stock
(“Series A
Preferred”).
-13-
CHARLIE’S HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12 – STOCK OPTIONS
The True Drinks
Holdings, Inc. 2013 Stock Incentive Plan (the
“Prior
Plan”) was first
approved in December 2013 and was approved by a majority of the
stockholders in October 2014. The Prior Plan originally authorized
20.0 million shares of common stock for issuance as equity-based
awards, which amount was increased to 120.0 million in January 2018
by authorization of the Board of Directors at that time (the
“Prior
Plan Amendment”). As of the
date of the Share Exchange, April 26, 2019, a total of
approximately 91.7 million awards were issued under the Prior Plan
and the Prior Plan Amendment, consisting entirely of outstanding
stock options. As of June 30, 2020, approximately 61.8 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 and be paid under the Prior Plan, including
those granted under the Prior Plan Amendment, and any shares
subject to outstanding awards under the Prior Plan that
subsequently expire, terminate, or are surrendered or forfeited for
any reason without issuance of shares will automatically become
available for issuance under the 2019 Plan. Up to 1,107,254,205
shares of common stock 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.
As of
June 30, 2020, there was approximately $515,000 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 years. For the six months ended June 30, 2020, the
Company recorded compensation expense of approximately $450,000
related to the granting of stock options.
NOTE 13 – COMMITMENTS AND CONTINGENCIES
Leases
The
Company leases office space under agreements classified as
operating leases that expire on various dates through 2024. All of
the Company’s lease liabilities result from the lease of its
headquarters in Costa Mesa, California, which expires in 2024, its
warehouse in Santa Ana, California, which expires in 2021, its
office and warehouse in Denver, Colorado, which expires in 2022,
and its warehouse space in Huntington Beach, California, which
expires in 2022. Such leases do not require any contingent rental
payments, impose any financial restrictions, or contain any
residual value guarantees. Certain of the Company’s leases
include renewal options and escalation clauses; renewal options
have not been included in the calculation of the lease liabilities
and right of use assets as the Company is not reasonably certain to
exercise the options. Variable expenses generally represent the
Company’s share of the landlord’s operating expenses.
The Company does not act as a lessor or have any leases classified
as financing leases.
The Company excludes short-term leases having
initial terms of 12 months or less from Topic 842 as an accounting
policy election and recognizes rent expense on a straight-line
basis over the lease term. The Company entered into a
commercial lease for the Company’s corporate headquarters
(the “Lease”)
in Costa Mesa, California with Brandon Stump, Ryan Stump and Keith
Stump, the Company’s Chief Executive Officer, Chief Operating
Officer and member of the Board. Messrs. Stump, Stump and Stump
purchased the property that is the subject of the Lease in July
2019. The Lease, which was effective as of September 1, 2019, on a
month to month basis, has been formalized 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 Chief Financial Officer after reviewing a detailed
analysis of comparable properties and rent rates compiled by an
independent, third-party consultant. The total amount paid to related parties for the
three and six months ended June 30, 2020 was approximately $68,820
and $137,640, respectively.
-14-
CHARLIE’S HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At
June 30, 2020, the Company had operating lease liabilities of
approximately $1,439,000 and right of use assets of approximately
$1,418,000, which were included in the condensed consolidated
balance sheet.
The
following summarizes quantitative information about the
Company’s operating leases for the three and six months ended
June 30, 2020 and 2019 (amount in thousands):
|
|
For the
three months ended
|
For the
six months ended
|
||
|
|
June
30,
|
June
30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
Operating
leases
|
|
|
|
|
|
Operating
lease cost
|
$149
|
$54
|
$299
|
$64
|
|
Variable
lease cost
|
-
|
-
|
-
|
-
|
|
Operating lease
expense
|
149
|
54
|
299
|
64
|
|
Short-term lease
rent expense
|
-
|
-
|
-
|
-
|
|
Total rent
expense
|
$149
|
$54
|
$299
|
$64
|
|
|
For the
six months ended
|
|
|
|
June
30,
|
|
|
|
2020
|
2019
|
|
Operating
cash flows from operating leases
|
$205
|
$46
|
|
Weighted-average
remaining lease term – operating leases (in
years)
|
3.37
|
2.82
|
|
Weighted-average
discount rate – operating leases
|
12.00%
|
12.00%
|
Maturities
of our operating leases as of June 30, 2020, excluding short-term
leases, are as follows (amount in thousands):
|
Remaining months
ended December 31, 2020
|
$396
|
|
Year Ended December
31, 2021
|
577
|
|
Year Ended December
31, 2022
|
399
|
|
Year Ended December
31, 2023
|
275
|
|
Year Ended December
31, 2024
|
206
|
|
Total
|
1,853
|
|
Less present value
discount
|
(414)
|
|
Operating lease
liabilities as of June 30, 2020
|
$1,439
|
-15-
CHARLIE’S HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Legal Proceedings
From time to time, the Company may be involved in
various claims and counterclaims and legal actions arising in the
ordinary course of business. Other than as set
forth below, there are no additional pending or threatened legal
proceedings at this time.
C.H. Robinson Worldwide, Inc.
v. True Drinks, Inc. On
September 5, 2018, C.H. Robinson Worldwide
(“Robinson”) filed a complaint against True Drinks,
Inc. in the California Superior Court for the County of Orange
located in Santa Ana, California alleging open book account,
account stated, reasonable value of services received, agreement,
and unjust enrichment related to shipping services provided by
Robinson. Robinson has asserted $121,743 in damages plus interest, attorney’s fees
and costs. We believe Robinson’s claim is substantially
offset by damages caused by its failures to timely deliver products
it was supposed to ship and intend to vigorously defend the
complaint. The probability of any loss cannot be determined at this
time.
NOTE 14- SUBSEQUENT EVENTS
On
August 13, 2020, the Company received a formal notice of default
from a holder of its Series A Preferred requesting full payment of
dividends due and payable with respect to the Series A Preferred
held by such holder on or before August 23, 2020
(“Dividend
Default”). As disclosed in Note 11, the aggregate
amount of dividends due and payable to holders of the Series A
Preferred is $1,650,000.
As a
result of the Dividend Default, all amounts due and payable under
the terms of the Note issued to the Lender, as described in Note 9,
shall, at the election of the Lender, bear interest at the lesser
of a rate equal to 20% per annum or the maximum lawful rate
authorized under applicable law, until such Note is paid in full.
The Note is due and payable on or before the earlier date of (i) a
Liquidity Event, as defined under the terms of the Note, or (ii)
October 1, 2020. While no assurances can be given, management is
currently negotiating with the Lender regarding repayment of the
Note in full.
The
Company has evaluated events subsequent to June 30, 2020 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 following discussion of the financial condition and results of
operations of Charlie’s Holdings, Inc. should be read in
conjunction with the financial statements and the notes to those
statements appearing elsewhere in this Quarterly Report on Form
10-Q (this “Report”). Some of the information contained
in this discussion and analysis or set forth elsewhere in this
Report, including information with respect to our plans and
strategy for our business, includes forward-looking statements that
involve risks and uncertainties. You should read the “Risk
Factors” section in this Report for a discussion of important
factors that could cause actual results to differ materially from
the results described in or implied by the forward-looking
statements contained in the following discussion and
analysis.
As used in this Report, unless otherwise stated or the context
otherwise requires, references to the “Company”,
“we”, “us”, “our”, or similar
references mean Charlie’s Holdings, Inc. (formerly True
Drinks Holdings, Inc.), its subsidiaries and consolidated variable
interest entity on a consolidated basis. References to
“Charlie’s” and “CCD” refer to
Charlie’s Chalk Dust, LLC, a California limited
liability company and wholly-owned subsidiary of the Company, and
“Don Polly” refers to Don Polly, LLC, a Nevada limited
liability company that is owned by entities controlled by
Brandon and Ryan Stump, the Company’s Chief Executive Officer
and Chief Operating Officer, respectively, and a consolidated
variable interest for which the Company is the primary
beneficiary.
Overview
Our objective is to become a significant leader in
the rapidly growing, global e-cigarette segment of the broader
nicotine related products industry. Through Charlie’s, we
formulate, market and distribute branded e-cigarette liquid for use
in both open and closed nicotine-only e-cigarette and vaping
systems. Charlie’s products are produced domestically through
contract manufacturers for sale through select distributors,
specialty retailers and third-party online resellers throughout the
United States, as well as more than 80 countries worldwide.
Charlie’s primary international markets include the United
Kingdom, Italy, Spain, Belgium, Australia, Sweden and Canada. In
June 2019, we launched distribution, through Don Polly, of certain
premium vapor, tincture and topical wellness products containing
hemp-derived cannabidiol (“CBD”) and we currently intend to develop and
launch additional products containing hemp-derived CBD in the
future.
Recently there have
been significant news stories and health alerts related to flavored
nicotine vaping, leading to some states banning the sale of
flavored nicotine products and causing the Food and Drug
Administration (“FDA”) to review its policies on
controlling the sale of these products. The most recent health
related concerns seem to indicate that a vitamin E acetate related
compound may be causing the health issues. On November 8, 2019,
officials at the Centers for Disease Control and Prevention
(“CDC”)
reported a breakthrough in the investigation into the outbreak of
vaping-related lung injuries. The CDC's principal deputy director, Dr.
Anne Schuchat, stated that "vitamin E acetate is a known additive
used to dilute liquid in e-cigarettes or vaping products that
contain THC”, suggesting the possible culprit for the
series of lung injuries across the U.S. All of Charlie's nicotine-only, e-liquid
products are tested by third party laboratories which have
confirmed that none of our products contain any vitamin E acetate
or Tetrahydrocannabinol
(“THC”).
However,
these developments have had a negative effect on our sales since
mid-September 2019 (see further discussion below) and therefore, in
response to these developments and while government regulators are
formulating future polices, management has adopted the following
plan of operation.
First, we plan to focus on increasing the sales of
our CBD related products, including topicals, tinctures and vaping
liquids. We feel there is a significant upside in the CBD space,
and we have begun to focus on numerous vertical markets for the
sale of our isolate, full and broad-spectrum products. These
vertical markets include, but aren't limited to the medical
and wellness markets. In
addition, we have begun conversations with various companies and
organizations that, if successful, will allow us to significantly
expand our marketing and distribution reach. In order to increase
direct-to-consumer e-commerce sales of CBD products, we have also
dedicated an internal team as well as additional financial
resources. However, effects from the recent COVID-19 outbreak and
pandemic have had a more significant impact on our CBD products
business and may continue to do so in future
quarters.
Secondly,
we see a significant opportunity for sales growth in international
markets for nicotine e-liquids. Presently, approximately 20% of our
e-liquid product sales come from the international market and we
are well positioned to increase those sales in the countries that
we presently sell, and in additional overseas markets, as we have
already built an international distribution platform.
Lastly,
we feel that the nicotine based flavored vaping products will
continue to be a significant growth opportunity, once all the
rightful regulatory changes have been made. We will continue with
our plan to obtain marketing authorization for certain of our
products through the submission of a PMTA, which is due in
September 2020. We expect the cost associated with the preparation
and submission of these PMTAs will be approximately $4.4 million in
total. In addition, we are evaluating the potential returns
associated with obtaining marketing authorization for our other
nicotine based vaping products after the September 2020
deadline. We feel that a significant amount of our competitors
will not have the resources and/or expertise to complete the
extensive and costly PMTA process and that once complete, we will
be able to benefit from being one of only a select group of
companies operating in the flavored nicotine product
space.
Risks and Uncertainties
The
Company operates in an environment that is subject to rapid changes
and developments in laws and regulations that could have a
significant impact on the Company’s ability to sell its
products. Federal, state, and local governmental bodies across the
United States have indicated that flavored e-cigarette liquid,
vaporization products and certain other consumption accessories may
become subject to new laws and regulations at the federal, state
and local levels. Beginning in September 2019, certain states
temporarily banned the sale of flavored e-cigarettes, and on
January 2, 2020, the FDA issued an enforcement policy effectively
banning the sale of flavored cartridge-based e-cigarettes marketed
primarily by large manufacturers without prior authorization from
the FDA. The application of any new laws or regulations that may be
adopted in the future, at a federal, state, or local level,
directly or indirectly implicating flavored e-cigarette liquid and
products used for the vaporization of nicotine could significantly
limit the Company’s ability to sell such products, result in
additional compliance expenses, and/or require the Company to
change its labeling and/or methods of distribution. Any ban of the
sale of flavored e-cigarettes directly limits the markets in which
the Company may sell its products. In the event the prevalence of
such bans and/or changes in laws and regulations increase across
the United States, or internationally, the Company’s
business, results of operations and financial condition could be
adversely impacted. In addition, the
Company is presently in the process of submitting PMTA applications
for some of its nicotine-based e-liquid products. The applications
are due in September 2020, which if approved, will allow the
Company to continue to sell its products in the United States. This
application deadline was previously May 2020 and recently has been
extended and there is no assurance that there will not be further
extensions. The Company is also seeking additional financing to
complete the application process. There is no assurance that
regulatory approval to sell our products will be granted or that we
can raise the additional financing required, and if not, this could
have a material adverse effect on our sales.
On
March 11, 2020, the World Health Organization designated the
ongoing and evolving COVID-19 outbreak as a pandemic. The outbreak
has caused substantial disruption in international and U.S.
economies and markets as it continues to spread. The outbreak is
having a temporary adverse impact on our industry as well as our
business, with regards to certain supply chain disruptions and
sales volume. While the disruption from COVID-19 is currently
expected to be temporary, there is uncertainty around the
duration. The financial impact from COVID-19 has caused a
decline in sales of our CBD products, and if disruptions from the
COVID-19 outbreak are prolonged, it will continue to have an
adverse impact on our business.
Basis of Presentation
The
Share Exchange is accounted for as a reverse recapitalization under
U.S. GAAP because the primary assets of the Company were nominal
following the close of the Share Exchange. Charlie’s was
determined to be the accounting acquirer based upon the terms of
the Share Exchange and other factors including: (i) Charlie’s
stockholders and other persons holding securities convertible,
exercisable or exchangeable directly or indirectly for
Charlie’s membership units now own approximately 49%, on a
fully diluted basis, of the Company’s outstanding securities
immediately following the effective time of the Share Exchange,
(ii) individuals associated with Charlie’s now hold a
majority of the seats on the Company’s Board of Directors and
(iii) Charlie’s management holds all key positions in the
management of the combined Company.
The
disclosure in this Report, including the unaudited condensed
consolidated financial statements contained herein, are based on
Charlie’s historical financial statements and the
Company’s financial activity beginning April 26, 2019, as
adjusted, to give effect to Charlie’s reverse
recapitalization of the Company and the Charlie’s Financing.
In addition, from the period April 26, 2019 until June 30, 2020,
there were minimal costs and revenue associated with the Bazi
product line which are included in the consolidated financial
statements. We do not intend to continue to produce and sell the
Bazi product line, and these costs and expenses are nominal and
will continue to be so in the future. The operating results of Don
Polly for the three and six months ended June 30, 2020 are also
included.
Historical
financial information presented prior to April 26, 2019 is that of
Charlie’s only, while financial information presented after
April 26, 2019 includes Charlie’s, Don Polly, Bazi Drinks and
the Company, which includes the transactions associated with the
Share Exchange and Charlie’s Financing completed prior to the
Share Exchange, along with ongoing corporate costs.
Current Operating Trends and Financial Highlights
Management
currently considers the following events, trends and uncertainties
to be important in understanding the Company’s results of
operations and financial condition for the most recent calendar
quarter and full year:
Regarding
results from operations for the quarter ended June 30, 2020, we
generated revenue of approximately $4,163,000, as compared to
revenue of $6,819,000 for the three months ended June 30,
2019. This $2,656,000 decrease in revenue was due primarily to a
$2,064,000 decrease in sales of our nicotine-based products and a
$571,000 decrease in sales of our CBD based products, which were
introduced in June of 2019.
We
generated a net loss for the three months ended June 30, 2020 of
approximately $644,000, as compared to net loss of approximately
$3,033,000 for the three months ended June 30, 2019. The net loss
for the three months ended June 30, 2020 includes non-cash
stock-based compensation expense of approximately $483,000 offset
by a non-cash gain in fair value of derivative liabilities of
$180,000. In addition, the Company expensed $400,000 of consulting
fees for the three months ended June 30, 2020 as a result of the
PMTA registration process.
Regarding
results from operations for the six months ended June 30, 2020, we
generated revenue of approximately $8,568,000, as compared to
revenue of $13,466,000 for the six months ended June 30,
2019. This $4,898,000 decrease in revenue was due primarily to a
$5,184,000 decrease in sales of our nicotine-based products, offset
by a $306,000 increase in sales from our CBD products, which were
introduced in June of 2019.
We
generated a net loss for the six months ended June 30, 2020 of
approximately $4,560,000, as compared to net loss of approximately
$558,000 for the six months ended June 30, 2019. The net loss for
the six months ended June 30, 2020 includes non-cash stock-based
compensation expense of approximately $2,336,000 offset by a
non-cash gain in fair value of derivative liabilities of $610,000.
In addition, the Company expensed $2,623,000 of consulting fees for
the six months ended June 30, 2020 as a result of the PMTA
registration process.
A
review of the three and six month period ended June 30, 2020
follows:
Results of Operations for the Three Months Ended June 30, 2020
Compared to the Three Months Ended June 30, 2019
|
|
For the
three months ended
|
|
|
|
|
|
June
30,
|
Change
|
||
|
|
2020
|
2019
|
Amount
|
Percentage
|
|
($ in thousands)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
Product
revenue, net
|
$4,163
|
$6,819
|
$(2,656)
|
-38.9%
|
|
Total
revenues
|
4,163
|
6,819
|
(2,656)
|
-38.9%
|
|
Operating costs and expenses:
|
|
|
|
|
|
Cost
of goods sold - product revenue
|
1,732
|
2,846
|
(1,114)
|
-39.1%
|
|
General
and administrative
|
2,428
|
6,374
|
(3,946)
|
-61.9%
|
|
Sales
and marketing
|
353
|
810
|
(457)
|
-56.4%
|
|
Research
and development
|
408
|
-
|
408
|
100%
|
|
Total
operating costs and expenses
|
4,921
|
10,030
|
(5,109)
|
-50.9%
|
|
Loss
from operations
|
(758)
|
(3,211)
|
2,453
|
-76.4%
|
|
Other income (expense):
|
|
|
|
|
|
Interest
expense
|
(76)
|
-
|
(76)
|
100%
|
|
Change
in fair value of derivative liabilities
|
180
|
178
|
2
|
1.1%
|
|
Other
income
|
10
|
-
|
10
|
100%
|
|
Total
other income
|
114
|
178
|
(64)
|
-36.0%
|
|
Net loss
|
$(644)
|
$(3,033)
|
$2,389
|
-78.8%
|
Revenue
Revenue for the three months ended June 30, 2020
decreased approximately $2,656,000 or 38.9%, to approximately
$4,163,000, as compared to approximately $6,819,000 for same period
in 2019 due to a $2,064,000 decrease in our nicotine-based product
sales and a $571,000 decrease in sales of our CBD wellness
products. The decrease in our nicotine based e-liquid flavor sales
is directly related to the current regulatory and health related
news stories surrounding the vaping industry. The nicotine based e-liquid sales decline began
late in the quarter ended September 30, 2019 and we expect sales in
future quarters to be affected until the regulatory environment
becomes clear. Uncertainty surrounding the FDA’s application
review timeline, following the PMTA submission deadline, has also
affected buying patterns in the domestic vape market. In addition,
in late February 2020, sales of our CBD wellness products began to
experience a decrease as the effects of the global COVID-19
pandemic caused disruptions in the global economy, however, we did
not see a material decrease in our nicotine based e-liquid
products.
Cost of Revenue
Cost
of revenue, which consists of direct costs of materials, direct
labor, third party subcontractor services, and other overhead costs
decreased approximately $1,114,000, or 39.1%, to approximately
$1,732,000, or 41.6% of revenue, for the three months ended June
30, 2020, as compared to approximately $2,846,000, or 41.7% of
revenue, for the same period in 2019. This cost, as a percent of
revenue, remained relatively unchanged due to an increase in the
sales mix to distributors and retailers participating in volume
incentive programs and a higher provision for returns, but was
offset by relatively stable manufacturing costs, added margin from
direct-to-consumer e-commerce sales of CBD products and more
favorable fixed cost absorption.
General and Administrative Expenses
For
the three months ended June 30, 2020, total general and
administrative expense decreased approximately $3,946,000 to
$2,428,000 as compared to approximately $6,374,000 for the same
period in 2019. This decrease is comprised of approximately $4.4
million of non-cash, stock-based compensation, employee bonus and
other transaction costs related to the share exchange expensed in
the quarter ended June 30, 2019, offset by an increase of
approximately $500,000 in various other general and administrative
expenses during the quarter ended June 30, 2020. The decrease in
transaction related costs includes $2.6 million in additional
non-cash, stock-based compensation, $1.6 million of employee
bonuses and $150,000 of other expenses incurred as a result of our
share exchange in 2019. Payroll, insurance and bad debt expenses
experienced the most significant year over year change during the
quarter ended June 30, 2020 and accounted for approximately
$435,000 of the $500,000 increase in other general and
administrative expenses. In response to changes in the global
economic situation, management adopted a 15% reduction in pay for
May and June 2020 and reduced personnel across several departments
which resulted in approximately $170,000 of savings during the
quarter ended June 30, 2020.
Sales and Marketing Expense
For
the three months ended June 30, 2020, total sales and marketing
expense decreased approximately $457,000, or 56.4%, to
approximately $353,000 as compared to approximately $810,000 for
the same period in 2019, which was primarily due to lower
commissions paid for reduced sales and curtailed spending on
several marketing programs due to uncertainty in the global
economy.
Research and Development Expense
For
the three months ended June 30, 2020, total research and
development expense increased approximately $408,000, to
approximately $408,000 as compared to $0 for the same period in
2019, which was primarily due to incurring costs associated with
our PMTA registrations.
Loss from Operations
We
had operating losses of approximately $758,000 for the three months
ended June 30, 2020, due primarily to a $2,064,000 decrease in
sales for our nicotine-based product business and a $571,000
decrease in sales for our CBD products. We incurred certain general
and administrative expenses that contributed to the loss from
operations including a $408,000 increase in research and
development expense related to the PMTA registration of some of our
products and $483,000 of expenses related to non-cash, stock-based
compensation. Net loss is determined by adjusting loss from
operations by the following items:
● Gain in Fair Value of
Derivative Liabilities. For
the three months ended June 30, 2020 and 2019, the gain in fair
value of derivative liabilities was $180,000 and $178,000
respectively. The derivative liability is associated with the
issuance of the Investor Warrants and the Placement Agent Warrants
in connection with the Share Exchange and the gain for the quarter
ended June 30, 2020 and 2019 reflects the effect of the change in
stock price on the liability associated with the issuance of these
warrants.
● Interest
Expense. For
the three months ended June 30, 2020, we recorded $76,000 of
interest expense related to notes
payable.
Net Loss
For
the three months ended June 30, 2020, we had a net loss of $644,000
as compared to net loss of $3,033,000 for the same period in
2019.
Results of Operations for the Six Months Ended June 30, 2020
Compared to the Six Months Ended June 30, 2019
|
|
For the
six months ended
|
|
|
|
|
|
June
30,
|
Change
|
||
|
|
2020
|
2019
|
Amount
|
Percentage
|
|
($ in thousands)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
Product
revenue, net
|
$8,568
|
$13,466
|
$(4,898)
|
-36.4%
|
|
Total
revenues
|
8,568
|
13,466
|
(4,898)
|
-36.4%
|
|
Operating costs and expenses:
|
|
|
|
|
|
Cost
of goods sold - product revenue
|
3,695
|
5,596
|
(1,901)
|
-34.0%
|
|
General
and administrative
|
6,427
|
7,029
|
(602)
|
-8.6%
|
|
Sales
and marketing
|
924
|
1,577
|
(653)
|
-41.4%
|
|
Research
and development
|
2,631
|
-
|
2,631
|
100%
|
|
Total
operating costs and expenses
|
13,677
|
14,202
|
(525)
|
-3.7%
|
|
Loss
from operations
|
(5,109)
|
(736)
|
(4,373)
|
594.2%
|
|
Other income (expense):
|
|
|
|
|
|
Interest
expense
|
(76)
|
-
|
(76)
|
100%
|
|
Change
in fair value of derivative liabilities
|
610
|
178
|
432
|
242.7%
|
|
Other
income
|
15
|
-
|
15
|
100%
|
|
Total
other income
|
549
|
178
|
371
|
208.4%
|
|
Net loss
|
$(4,560)
|
$(558)
|
$(4,002)
|
717.2%
|
Revenue
Revenue for the six months ended June 30, 2020
decreased approximately $4,898,000 or 36.4%, to approximately
$8,568,000, as compared to approximately $13,466,000 for same
period in 2019 due to a $5,184,000 decrease in our nicotine-based
product sales, offset an increase in sales from our CBD wellness
products business of $306,000. The decrease in our nicotine based
e-liquid flavor sales is directly related to the current regulatory
and health related news stories surrounding the vaping
industry. The nicotine based
e-liquid sales decline began late in the quarter ended September
30, 2019 and we expect sales in future quarters to be affected
until the regulatory environment becomes clear. Uncertainty
surrounding the FDA’s application review timeline, following
the PMTA submission deadline, has also affected buying patterns in
the domestic vape market. In addition, in late February 2020, sales
of our CBD wellness products began to experience a decrease as the
effects of the global COVID-19 pandemic caused disruptions in the
global economy, however, we did not see a material decrease in our
nicotine based e-liquid products.
Cost of Revenue
Cost
of revenue, which consists of direct costs of materials, direct
labor, third party subcontractor services, and other overhead costs
decreased approximately $1,901,000, or 34%, to approximately
3,695,000, or 43.1% of revenue, for the six months ended June 30,
2020, as compared to approximately $5,596,000, or 41.6% of revenue,
for the same period in 2019. This 1.5% percent increase in the cost
of revenue is due to an increase in the sales mix to distributors
and retailers participating in volume incentive programs and a
higher provision for returns, but was offset by relatively stable
manufacturing costs, added margin from direct-to-consumer
e-commerce sales of CBD products and slightly better fixed cost
absorption.
General and Administrative Expenses
For
the six months ended June 30, 2020, total general and
administrative expense decreased approximately $602,000 to
$6,427,000 as compared to approximately $7,029,000 for the same
period in 2019. This decrease is comprised of approximately $2.5
million of non-cash, stock-based compensation, employee bonus and
other transaction costs related to the share exchange expensed in
the six months ended June 30, 2019, offset by an increase of
approximately $1.9 million in various other general and
administrative expenses during the six months ended June 30, 2020.
The decrease in transaction related costs includes $741,000 in
additional non-cash, stock-based compensation, $1.6 million of
employee bonuses and $150,000 of other expenses incurred as a
result of our share exchange in 2019. Payroll, insurance and bad
debt expenses experienced the most significant year over year
change during the six months ended June 30, 2020 and accounted for
approximately $1.3 million of the $1.9 million increase in other
general and administrative expenses. In response to changes in the
global economic situation, management adopted a 15% reduction in
pay for May and June 2020 and reduced personnel across several
departments which resulted in approximately $170,000 of savings
during the six months ended June 30, 2020.
Sales and Marketing Expense
For
the six months ended June 30, 2020, total sales and marketing
expense decreased approximately $653,000, or 41.4 %, to
approximately $924,000 as compared to approximately $1,577,000 for
the same period in 2019, which was primarily due to lower
commissions paid for reduced sales and curtailed spending on
several marketing programs due to uncertainty in the global
economy.
Research and Development Expense
For
the six months ended June 30, 2020, total research and development
expense increased approximately $2,631,000, to approximately
$2,631,000 as compared to approximately $0 for the same period in
2019, which was primarily due to incurring costs associated with
our PMTA registrations.
Loss from Operations
We
had operating losses of approximately $5,109,000 for the six months
ended June 30, 2020, due primarily to a $5,184,000 decrease in
sales from our nicotine-based product business, but was offset by a
$306,000 increase in sales for our CBD products business. We
incurred certain general and administrative expenses that
contributed to the loss from operations including a $2,631,000
increase in research and development expense related to the PMTA
registration of some of our products and $2,336,000 of expenses
related to non-cash, stock-based compensation. Net loss is
determined by adjusting income from operations by the following
items:
● Gain in Fair Value of
Derivative Liabilities. For
the six months ended June 30, 2020 and 2019, the gain in fair value
of derivative liabilities was $610,000 and $178,000 respectively.
The derivative liability is associated with the issuance of the
Investor Warrants and the Placement Agent Warrants in connection
with the Share Exchange and the gain for the six months ended June
30, 2020 and 2019 reflects the effect of the change in stock price
on the liability associated with the issuance of these
warrants.
● Interest
Expense. For
the three months ended June 30, 2020, we recorded $76,000 of
interest expense related to notes payable.
Net Loss
For
the six months ended June 30, 2020, we had a net loss of $4,560,000
as compared to net loss of $558,000 for the same period in
2019.
Effects of Inflation
Inflation
has not had a material impact on our business.
Liquidity and Capital Resources
As of June 30, 2020, we had negative working
capital of approximately $4,156,000, which consisted of current
assets of approximately $4,908,000 and current liabilities of
approximately $9,064,000. This compares to negative working capital
of approximately $1,566,000 at December 31, 2019. The current
liabilities, as presented in the condensed consolidated balance
sheet at June 30, 2020 included elsewhere in this Quarterly Report
on Form 10-Q primarily include approximately $2,433,000 of accounts
payable and accrued expenses, approximately $252,000 of deferred
revenue associated with product shipped but not yet received by
customers, approximately $445,000 of lease liabilities, notes
payable of $750,000, dividends payable of $1,650,000 and $3,534,000
of derivative liability associated with the Member Warrants. (the
derivative liability of $3,534,000 is included in determining the
negative working capital of $4,156,000 but is not expected to use
any cash to ultimately satisfy the liability). In addition, the effect of the COVID-19 pandemic
may have a negative impact on our liquidity and capital
reserves.
Our
cash and cash equivalents balance at June 30, 2020 was
approximately $1,464,000.
For the six months ended June 30, 2020 we used
cash from operations of $2,638,000, as compared to generating cash of
$247,000 for the same period in 2019.
This decline in the cash generated from operations is due primarily
to a net loss of $4,560,000, and an increase in accounts receivable
and inventories, but was offset by an increase in prepaid
expense.
For the six months ended June 30, 2020 we used
cash for investment activities of $112,000 as compared to
$182,000 for the same period in 2019.
The cash used for investment activities is primarily for the
development and configuration phase of enterprise resource planning
software being implemented during the six months ended June 30,
2020.
For
the six months ended June 30, 2020 we generated approximately
$1,766,000 cash from financing activities, as compared to the
generation of cash of $4,751,000 for the same period in 2019. In
the 2020 period, we generated cash from financing activities from
the issuance of the note payable and funds received from PPP and
EID loans. In the 2019 period, we generated cash from financing
activities from the Charlie’s Financing, which was offset by
Member distributions to the former Members of Charlie’s. The
Charlie’s Member distributions were all prior to or part of
the Share Exchange and no further distributions will be made as
Charlie’s is now a wholly-owned subsidiary of the
Company.
Going Concern Uncertainty Regarding the Legal and Regulatory
Environment, Liquidity and Management’s plan of
operation.
Our
financial statements have been prepared assuming that the Company
will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal
course of business. The Company operates in a rapidly changing
legal and regulatory environment; new laws and regulations or
changes to existing laws and regulations could significantly limit
the Company’s ability to sell its products, and/or result in
additional costs. Additionally, the Company is required to apply
for FDA approval to continue selling and marketing its products
used for the vaporization of nicotine in the United States. There
is significant cost associated with the application process and
there can be no assurance the FDA will approve the application(s).
In addition, the recent outbreak of COVID-19 in March 2020 has had
a negative impact on the global economy and markets which has
negatively impacted the Company’s supply chain and sales. For
the six months ended June 30, 2020, the Company has incurred losses
from operations of $5,109,000 and a consolidated net loss of
approximately $4,560,000 and the Company has a stockholders’
deficit of $4,105,000. These factors raise substantial doubt about
the Company’s ability to continue as a going concern. The
financial statements do not include any adjustments to the carrying
amount and classification of recorded assets and liabilities should
the Company be unable to continue operations.
Our
plans and growth depend on our ability to increase revenues and
continue our business development efforts, including the
expenditure of approximately $4,400,000 to complete our PMTA
registration process. We currently do not anticipate that our
current cash position will be sufficient to meet our working
capital requirements, to continue our sales and marketing efforts
and complete the PMTA registration process. We are currently
seeking term debt or other sources of financing in order to ensure
that we have sufficient cash to operate for the next 12 months. If
in the future our plans or assumptions change or prove to be
inaccurate, or there is a significant change in the regulatory
environment or the recent outbreak of COVID-19 continues to impact
the global economy, we will need to raise additional funds through
public or private debt or equity offerings, financings, corporate
collaborations, or other means. There can be no assurance that such
financing will be available on acceptable terms, or at all, and
there can be no assurance that any such arrangement, if required or
otherwise sought, would be available on terms deemed to be
commercially acceptable and in our best interests.
Off-Balance Sheet Arrangements
The
Company has no off-balance sheet arrangements other than operating
lease commitments.
Critical Accounting Policies
The
condensed consolidated financial statements are prepared in
conformity with U.S. GAAP, which require the use of estimates,
judgments and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent liabilities at
the date of the financial statements, and the reported amounts of
expense in the periods presented. We believe that the accounting
estimates employed are appropriate and resulting balances are
reasonable; however, due to inherent uncertainties in making
estimates, actual results could differ from the original estimates,
requiring adjustments to these balances in future periods. The
critical accounting estimates that affect the consolidated
financial statements and the judgments and assumptions used are
consistent with those described under Part II, Item 7 of our Annual
Report on Form 10-K for the year ended December 31,
2019.
Not
applicable.
ITEM 4 - CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Our
management, with the participation of our chief executive officer
and chief financial officer, evaluated the effectiveness of our
disclosure controls and procedures pursuant to Rule 13a-15 under
the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)
as of the end of the period covered by this Quarterly Report on
Form 10-Q. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives.
In addition, the design of disclosure controls and procedures must
reflect the fact that there are resource constraints and that
management is required to apply its judgment in evaluating the
benefits of possible controls and procedures relative to their
costs.
Based
on our evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of June 30, 2020, our
disclosure controls and procedures are not designed at a reasonable
assurance level and are not effective to provide reasonable
assurance that information we are required to disclose in reports
that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms,
and that such information is accumulated and communicated to our
management, including our chief executive officer and chief
financial officer, as appropriate, to allow timely decisions
regarding required disclosure.
(b) Changes in internal control over financial
reporting.
During the quarter ended June 30, 2020, the
Company took additional measures towards remediating the material
weaknesses disclosed in the Company’s Annual Report on Form
10-K for the year ended December 31, 2019, and other periodic
reports filed with the Securities and Exchange Commission. These
measures include, among other things, additional hiring in the
accounting department, strengthening its controls over IT reporting
and management, and the implementation of an enterprise resource
planning system. The Company
believes these changes improved controls over financial reporting
and is continuing to assess and test its improved controls to
ensure they are effective and that all material weaknesses have
been adequately addressed.
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company may be involved in
various claims and counterclaims and legal actions arising in the
ordinary course of business. Other than as set
forth below, there are no additional pending or threatened legal
proceedings at this time.
C.H. Robinson Worldwide, Inc.
v. True Drinks, Inc. On
September 5, 2018, C.H. Robinson Worldwide
(“Robinson”) filed a complaint against True Drinks,
Inc. in the California Superior Court for the County of Orange
located in Santa Ana, California alleging open book account,
account stated, reasonable value of services received, agreement,
and unjust enrichment related to shipping services provided by
Robinson. Robinson has asserted $121,743 in damages plus interest, attorney’s fees
and costs. We believe Robinson’s claim is substantially
offset by damages caused by its failures to timely deliver products
it was supposed to ship and intend to vigorously defend the
complaint. The probability of any loss cannot be determined at this
time.
ITEM 1A. RISK FACTORS
Investing
in our common stock involves a high degree of risk. You should
carefully consider the risks in our Annual Report on Form 10-K for
our fiscal year ended December 31, 2019, filed on April 14, 2020,
in addition to the other information contained in this Report,
before making an investment decision. Our business, financial
condition or results of operations could be harmed by any of these
risks. As a result, you could lose some or all of your investment
in our common stock. These risks and uncertainties are not the only
ones we face. Additional risks not currently known to us or other
factors not perceived by us to present significant risks to our
business at this time also may impair our business
operations.
Our operations are now primarily dependent on the business of
Charlie’s and Don Polly, and our ability to achieve positive
cash flow under our new business plan is uncertain.
As
a result of the Share Exchange, our continued operations are now
primarily dependent on the business of Charlie’s and Don
Polly. Although Charlie’s and Don Polly generated net revenue
of approximately $8.6 million during the six months ended June 30,
2020 and $22.7 million for the year ended December 31, 2019, there
can be no guarantee that the Company will continue to grow revenue
or achieve positive cash flow in the future.
Our operating results in the past will not reflect our operating
results in the future, which makes it difficult to evaluate our
future business, prospects, and forecast revenue.
Until
recently, our business was comprised primarily of the development,
marketing, sale and distribution of all-natural, vitamin-enhanced
drinks. As a result of our decision to consummate the Share
Exchange, our future revenue will substantially differ from past
revenue, and our operating results will vary significantly compared
to past operating results. It is too early to predict whether
consumers will accept, and continue to use on a regular basis, our
new products, due in part to the fact that we have had limited
recent operating history as a combined entity with Charlie’s.
Factors that will significantly affect our operating results
include, without limitation, the following:
●
the
expected increase in revenue due to the addition of those products
developed and marketed by Charlie’s prior to the Share
Exchange, as well as any products that we may release in the
future, to our revenue stream;
●
our
decision in early 2018 to discontinue the production and sale of
AquaBall®, that in the year ended December 31, 2018,
contributed approximately $1,767,802 in revenue;
●
our
previous sole reliance on sales of Bazi®, that in the years
ended December 31, 2019 and 2018, contributed approximately $22,207
and $179,250 in revenue to the Company, respectively;
and
●
the restructuring of substantially all of our
previously outstanding debt and shares of preferred stock on
April 26, 2019, in connection with the
Share Exchange.
Our cash resources are currently insufficient to submit each of our
anticipated PMTA applications with the FDA, and otherwise satisfy
our projected short-term liquidity and capital
requirements.
As of June 30, 2020, we had negative working
capital of approximately $4,156,000, which consisted of current
assets of approximately $4,908,000 and current liabilities of
approximately $9,064,000. In addition, we expect the cost
associated with the preparation and submission of PMTAs with the
FDA will be approximately $4.4 million in total. We therefore currently believe that our cash
resources will be insufficient to fund our operations for the next
twelve months and prepare and submit our PMTA applications with the
FDA. As a result, we will be required to seek additional
financing in the future in order to fund our operations, complete
the PMTA application process and otherwise carry out our business
plan. There can be no assurance that such financing will be
available on acceptable terms, or at all, and there can be no
assurance that any such arrangement, if required or otherwise
sought, would be available on terms deemed to be commercially
acceptable and in our best interests.
The failure of the Company to pay a required one-time dividend on
its Series A Preferred, or obtain a waiver of such payment or
consent to amend the Series A Preferred to allow the Company to pay
such dividend in shares of its common stock, may have a material
adverse effect on the Company’s financial
condition.
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. The Company failed to pay
the required dividend and has requested that holders of more than
50% of the Series A Preferred issued and outstanding
(“Required
Holders”) consent to an amendment to the Series A
Preferred to allow the Company to pay such Dividend Amount in
shares of the Company’s common stock. To date, the Company
has not obtained such consent from the Required Holders. In the
event the Company is unable to obtain consents from the Required
Holders to pay the Dividend Amount in shares of common stock in
lieu of cash, or does not otherwise pay such Dividend Amount in
cash or obtain a waiver, any claims asserted by the holders of the
Series A Preferred could have a material adverse effect on the
Company’s financial condition.
Our auditors have issued a going concern opinion on our financial
statements as of December 31, 2019.
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 is required to apply for FDA approval to continue selling
and marketing its products used for the vaporization of nicotine in
the United States. There is significant cost associated with the
application process and there can be no assurance the FDA will
approve the application(s). In addition, the recent outbreak of a
novel strain of the coronavirus disease (“COVID-19”) which was identified in Wuhan, China
around December 2019 and continues to spread globally, has had a
negative impact on the global economy and markets which could
impact the Company’s supply chain and/or sales. For the six
months ended June 30, 2020, the Company has incurred losses from
operations of $5,109,000 and a consolidated net loss of
approximately $4,560,000, and the Company has negative
stockholders’ equity of $4,105,000. These factors raise
substantial doubt about the Company’s ability to continue as
a going concern. The financial statements do not include any
adjustments to the carrying amount and classification of recorded
assets and liabilities should the Company be unable to continue
operations.
Our business is difficult to evaluate because we have recently
significantly modified our product offerings and customer
base.
As
a result of the Share Exchange, we have recently modified our
operations, engaging in the sale of new products in a new market
through new distributors and new lines of business. There is a risk
that we will be unable to successfully integrate the newly acquired
businesses with our current structure. Our estimates of capital,
personnel and equipment required for our newly acquired businesses
are based on the historical experience of management and businesses
they are familiar with. Our management has limited direct
experience in operating a business of our current size, as well as
one that is publicly traded.
Our products could fail to attract or retain users or generate
revenue and profits.
As
a result of the Share Exchange, our customer base has changed
significantly. Our ability to develop, increase, and engage our new
customer base and to increase our revenue depends heavily on our
ability to continue to evolve our existing products and to create
successful new products, both independently and in conjunction with
developers or other third parties. We may introduce significant
changes to our existing products or acquire or introduce new and
unproven products, including using technologies with which we have
little or no prior development or operating experience. If new or
enhanced products fail to engage our customers, or if we are
unsuccessful in our monetization efforts, we may fail to attract or
retain customers or to generate sufficient revenue, operating
margin, or other value to justify our investments, and our business
may be adversely affected.
Our significant stockholders may have certain personal interests
that may affect the Company.
Together,
Brandon Stump and Ryan Stump, the founders of Charlie’s and
our Chief Executive Officer and Chief Operating Officer,
respectively, collectively own approximately 59% of our issued and
outstanding voting securities as a result of the Share
Exchange. As a result, Ryan Stump and Brandon Stump have the
ability to exert influence over both the actions of our Board of
Directors, the outcome of issues requiring approval by our
stockholders, as well as the execution of management’s plans.
This concentration of ownership may have effects such as delaying
or preventing a change in control of the Company that may be
favored by other stockholders or preventing transactions in which
stockholders might otherwise recover a premium for their shares
over current market prices.
We will need to hire additional qualified accounting and
administrative personnel in order to remediate material weaknesses
in our internal control over financial accounting, and we will need
to expend additional resources and efforts to establish and
maintain the effectiveness of our internal control over financial
reporting and our disclosure controls and procedures.
As a public company, we are subject to the
reporting requirements of the Securities Exchange Act of 1934, as
amended (the “Exchange
Act”), and the
Sarbanes-Oxley Act of 2002. Our management is required to evaluate
and disclose its assessment of the effectiveness of our internal
control over financial reporting as of each year-end, including
disclosing any “material weakness” in our internal
control over financial reporting. A material weakness is a control
deficiency, or combination of control deficiencies, that results in
more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or
detected. As a result of its assessment, management has determined
that there were material weaknesses due to the lack of segregation
of duties and sufficient internal controls (including
technology-based general controls) that encompass our Company as a
whole with respect to entity and transactions level controls in
order to ensure complete documentation of complex and non-routine
transactions and adequate financial reporting. If we continue to
experience material weaknesses in our internal controls or fail to
maintain or implement required new or improved controls, such
circumstances could cause us to fail to meet our periodic reporting
obligations or result in material misstatements in our financial
statements, or adversely affect the results of periodic management
evaluations and, if required, annual auditor attestation
reports.
Due
to these material weaknesses, management concluded that, as of
December 31, 2019 and 2018, our internal control over financial
reporting was ineffective. Management also concluded that our
disclosure controls and procedures were ineffective as of December
31, 2019 and 2018, as well as for the quarters ended June 30, 2020
and March 31, 2020. These weaknesses were first identified in our
Annual Report on Form 10-K for the year ended December 31, 2012. In
2018, we reduced our staff to one employee, and
outsourced our accounting and financial functions, further
exacerbating our weaknesses in our internal control over
financial reporting and our disclosure controls and procedures.
Although the number of employees has grown as a result of the Share
Exchange and the addition of Charlie’s operations, including
the hiring of a new Chief Executive Officer, Chief Financial
Officer and additional accounting and information technology staff,
no assurances can be provided that we will have sufficient
resources to resolve these material weaknesses.
These weaknesses have the
potential to adversely impact our financial reporting
process and our financial reports. We will need to hire additional
qualified accounting and administrative personnel in order to
resolve these material weaknesses.
The loss of one or more of our key personnel or our failure to
attract and retain other highly qualified personnel in the future,
could harm our business.
We
currently depend on the continued services and performance of key
members of our management team, in particular, Brandon Stump and
Ryan Stump, Charlie’s founders and our Chief Executive
Officer and Chief Operating Officer, respectively, and David Allen,
our Chief Financial Officer. If we cannot call upon them
or other key management personnel for any reason, our operations
and development could be harmed. We have not yet developed a
succession plan. Furthermore, as we grow, we will be required to
hire and attract additional qualified professionals such as
accounting, legal, finance, production, market and sales experts.
We may not be able to locate or attract qualified individuals for
such positions, which will affect our ability to grow and expand
our business.
We rely on contractual arrangements with Don Polly, our
consolidated variable interest entity for our CBD-related
business operations, which may not be as effective as direct
ownership in providing operational control.
We
have relied and expect to continue to rely on contractual
arrangements with Don Polly and its shareholders, consisting of
entities controlled by Brandon Stump and Ryan Stump, for the
operation of our CBD-related operations. These contractual
arrangements may not be as effective as direct ownership in
providing us with control over our consolidated variable interest
entity. For example, Don Polly and its shareholders could breach
their contractual arrangements with us by, among other things,
failing to conduct their operations, including maintaining our
website and using the domain names and trademarks, in an acceptable
manner or taking other actions that are detrimental to our
interests.
If
we had direct ownership of Don Polly, we would be able to exercise
our rights as a shareholder to effect changes in the board of
directors of Don Polly, which in turn could implement changes,
subject to any applicable fiduciary obligations, at the management
and operational level. However, under the current contractual
arrangements, we rely on the performance by Don Polly, and its
shareholders of their obligations under the contracts. The
shareholders of Don Polly may not act in the best interests of our
company or may not perform their obligations under these contracts.
Such risks exist throughout the period in which we intend to
operate our business through the contractual arrangements with Don
Polly. Therefore, our contractual arrangements with Don Polly, our
consolidated variable interest entity, may not be as effective in
ensuring our control over the relevant portion of our business
operations as direct ownership would be.
The shareholders of Don Polly, our consolidated variable interest
entity, may have potential conflicts of interest with us, which may
materially and adversely affect our business and financial
condition.
The
equity interests of Don Polly, our consolidated variable interest
entity, are held by entities controlled by Brandon Stump, our Chief
Executive Officer, and Ryan Stump, our Chief Operating Officer.
Their interests in Don Polly may differ from the interests of our
company as a whole. These shareholders may breach, or cause Don
Polly to breach, the existing contractual arrangements we have with
them and Don Polly, which would have a material adverse effect on
our ability to effectively control Don Polly and receive economic
benefits from it. For example, the shareholders may be able to
cause our agreements with Don Polly to be performed in a manner
adverse to us by, among other things, failing to remit payments due
under the contractual arrangements to us on a timely basis. We
cannot assure you that when conflicts of interest arise, any or all
of these shareholders will act in the best interests of our company
or such conflicts will be resolved in our favor.
Currently,
we do not have any arrangements to address potential conflicts of
interest between these shareholders and the Company. If we cannot
resolve any conflict of interest or dispute between us and the
shareholders of Don Polly, we would have to rely on legal
proceedings, which could result in the disruption of our business
and subject us to substantial uncertainty as to the outcome of any
such legal proceedings.
We have no commercial manufacturing capacity and rely on
third-party contract manufacturers to produce commercial quantities
of our products.
We
do not have the facilities, equipment or personnel to manufacture
commercial quantities of our products and therefore must rely on
qualified third-party contract manufactures with appropriate
facilities and equipment to contract manufacture commercial
quantities of products. Any performance failure on the part of our
contract manufacturers could delay commercialization of any of our
products, depriving us of potential product revenue.
Failure
by our contract manufacturers to achieve and maintain high
manufacturing standards could result in product recalls or
withdrawals, delays or failures in testing or delivery, cost
overruns or other problems that could materially adversely affect
our business. Contract manufacturers may encounter difficulties
involving production yields, quality control and quality assurance.
If for some reason our contract manufacturers cannot perform as
agreed, we may be required to replace them. Although we believe
there are a number of potential replacements, we may incur added
costs and delays in identifying and obtaining any such
replacements.
The
inability of a manufacturer to ship orders of our products in a
timely manner or to meet quality standards could cause us to miss
the delivery date requirements of our customers for those items,
which could result in cancellation of orders, refusal to accept
deliveries or a reduction in purchase prices, any of which could
have a material adverse effect as our revenue would decrease and we
would incur net losses as a result of sales of the product, if any
sales could be made.
We are subject to cyber-security risks, including those related to
customer, employee, vendor or other company data and including in
connection with integration of acquired businesses and
operations.
We
use information technologies to securely manage operations and
various business functions. We rely on various technologies, some
of which are managed by third parties, to process, transmit and
store electronic information, and to manage or support a variety of
business processes and activities, including reporting on our
business and interacting with customers, vendors and employees. In
addition, we collect and store certain data, including proprietary
business information, and may have access to confidential or
personal information that is subject to privacy and security laws,
regulations and customer-imposed controls. Our systems are subject
to repeated attempts by third parties to access information or to
disrupt our systems. Despite our security design and controls, and
those of our third-party providers, we may become subject to system
damage, disruptions or shutdowns due to any number of causes,
including cyber-attacks, breaches, employee error or malfeasance,
power outages, computer viruses, telecommunication or utility
failures, systems failures, service providers, natural disasters or
other catastrophic events. It is possible for such vulnerabilities
to remain undetected for an extended period. We may face other
challenges and risks as we upgrade and standardize our information
technology systems as part of our integration of acquired
businesses and operations. We have contingency plans in place to
prevent or mitigate the impact of these events, however, these
events could result in operational disruptions or the
misappropriation of sensitive data, and depending on their nature
and scope, could lead to the compromise of confidential
information, improper use of our systems and networks, manipulation
and destruction of data, defective products, production downtimes
and operational disruptions and exposure to liability. Such
disruptions or misappropriations and the resulting repercussions,
including reputational damage and legal claims or proceedings, may
adversely affect our results of operations, cash flows and
financial condition, and the trading price of our common
stock.
This risk is enhanced in certain jurisdictions
with stringent data privacy laws. For example, California recently
adopted the California Consumer Privacy Act of 2018
(“CCPA”), which provides new data privacy rights
for consumers and new operational requirements for businesses. The
CCPA includes a statutory damages framework and private rights of
action against businesses that fail to comply with certain CCPA
terms or implement reasonable security procedures and practices to
prevent data breaches. The CCPA went into effect in January
2020.
We are affected by extensive laws, governmental regulations,
administrative determinations, court decisions and similar other
constraints, which can make compliance costly and subject us to
enforcement actions by governmental agencies.
The
formulation, manufacturing, packaging, labeling, holding, storage,
distribution, advertising and sale of our products are affected by
extensive laws, governmental regulations and policies,
administrative determinations, court decisions and similar
constraints at the federal, state and local levels, both within the
United States and in any country where we conduct business. There
can be no assurance that we, or our independent distributors, will
be in compliance with all of these regulations. A failure by us or
our distributors to comply with these laws and regulations could
lead to governmental investigations, civil and criminal
prosecutions, administrative hearings and court proceedings, civil
and criminal penalties, injunctions against product sales or
advertising, civil and criminal liability for us and/or our
principals, bad publicity, and tort claims arising out of
governmental or judicial findings of fact or conclusions of law
adverse to us or our principals. In addition, the adoption of new
regulations and policies or changes in the interpretations of
existing regulations and policies may result in significant
new compliance costs or discontinuation of product sales, and may
adversely affect the marketing of our products, resulting in
decreases in revenue.
The business that we conduct outside the U.S. may be adversely
affected by international risk and uncertainties.
Although
our operations are based in the United States, we conduct business
outside of the United States and expect to continue to do so in the
future. Any business that we conduct outside of the United States
is subject to additional risks that may have a material adverse
effect on our ability to continue conducting business in certain
international markets, including, without limitation:
●
Potentially
reduced protection for intellectual property rights;
●
Unexpected
changes in tariffs, trade barriers and regulatory
requirements;
●
Economic
weakness, including inflation or political instability, in
particular foreign economies and markets;
●
Business
interruptions resulting from geo-political actions, including war
and terrorism or natural disasters, including earthquakes,
hurricanes, typhoons, floods and fires; and
●
Failure to comply with Office of Foreign Asset
Control rules and regulations and the Foreign Corrupt Practices Act
(“FCPA”).
These
factors or any combination of these factors may adversely affect
our revenue or our overall financial performance.
The recent outbreak of COVID-19, or coronavirus, may adversely
affect our business.
In
the event of a pandemic, epidemic or outbreak of an infectious
disease, our business may be adversely affected. In December 2019,
a novel strain of COVID-19 was identified in Wuhan, China which
continues to spread globally to, among other countries, the United
States. Such events may result in a period of business and travel
disruption, and in reduced sales and operations, any of which could
materially affect our business, financial condition and results of
operations. For example, the spread of COVID-19 in the United
States has resulted in travel restrictions impacting our sales
professionals and is causing disruptions to our manufacturing
supply chain. These conditions have begun to negatively affect our
sales and revenue, specifically relating to our CBD products,
although the magnitude of such a negative impact cannot be
determined at this time. However, if repercussions of the outbreak
are prolonged, it will have a further adverse impact on our
business.
The
outbreak and persistence of COVID-19 in international markets that
we have targeted for our international expansion have also delayed
the preparation for and launch of such expansion efforts. The
spread of COVID-19 has resulted in the inability of certain of our
products being delivered and distributed to the overseas markets on
a timely basis. If there were a shortage or halt in distribution of
our products, the cost of these materials or components may
increase which could harm our ability to provide our products on a
timely and cost-effective basis.
The
extent to which COVID-19 impacts our business will depend on future
developments, which are highly uncertain and cannot be predicted.
The Company will continue to closely monitor new information as it
emerges and adjust our operations and sales
accordingly.
Regulatory and Market Risks
Our business is primarily involved in the sales of products that
contain nicotine and/or CBD, which faces significant regulation and
actions that may have a material adverse effect on our
business.
As a result of the Share Exchange, our current
business is primarily involved in the sale of products that contain
nicotine and/or CBD. The general market in which our products
are sold faces significant governmental and private sector actions,
including efforts aimed at reducing the incidence of use in minors
and efforts seeking to hold the makers and sellers of these
products responsible for the adverse health effects associated with
them. More broadly, new regulatory actions by the Food and Drug
Administration (“FDA”) and other federal, state or local
governments or agencies, may impact the consumer acceptability of
or access to our products, including regulations promulgated by the
FDA which will require us to file PMTA(s) for any of our products
that are identified as “Deemed Tobacco Products” by the
FDA that we intend to market and sell after September 9, 2020.
Additionally, on January 2, 2020 the FDA issued an enforcement
policy effectively banning the sale of flavored cartridge-based
e-cigarettes marketed primarily by large manufacturers in the
United States without prior authorization from the FDA. According
to the FDA, it is expected that the new policy will have minimal
impact on small manufacturers, such as vape shops, that sell
non-cartridge based products. We believe that any ban on
flavored e-cigarettes, or similar enforcement action by the FDA,
would have a significant material adverse impact on Charlie’s
products, which would, in turn, have a material adverse impact on
our overall business.
Additional
regulatory challenges may come in future months and years,
including the FDA’s publication of new product standards or
additional rule making that may impact vape shops or other small
manufacturers, limit adult consumer choices, delay or prevent the
launch of new or modified risk tobacco products or products with
claims of reduced risk, require the recall or other removal of
certain products from the marketplace, restrict communications
including marketing, advertising, and educational campaigns
regarding the product category to adult consumers, restrict the
ability to differentiate products, create a competitive advantage
or disadvantage for certain companies, impose additional
manufacturing, labeling or packaging requirements, interrupt
manufacturing or otherwise significantly increase the cost of doing
business, or restrict or prevent the use of specified products in
certain locations or the sale of products by certain retail
establishments. Any of these actions may also have a material
adverse effect on our business. Each of our products are also
subject to intense competition and changes in adult consumer
preferences, which could have a material adverse effect on our
business.
Certain of our products contain nicotine, which is considered to be
a highly addictive substance.
Certain
of our products contain nicotine, a chemical found in cigarettes,
e-cigarettes, certain other vapor products and other tobacco
products, which is considered to be highly addictive. The Family
Smoking Prevention and Tobacco Control Act empowers the FDA to
regulate the amount of nicotine found in vapor products, but may
not require the reduction of nicotine yields of a vapor product to
zero. Any FDA regulation may require us to reformulate, recall and
or discontinue certain of the products we may sell from time to
time, which may have a material adverse effect on our ability to
market our products and have a material adverse effect on our
business, financial condition, results of operations, cash flows
and or future prospects.
Recent bans on the sales of flavored e-cigarettes directly impacts
the markets in which we may sell Charlie’s products, and may
have a material adverse impact on our business.
On
January 2, 2020 the FDA issued an enforcement policy
effectively banning the sale of flavored cartridge-based
e-cigarettes marketed primarily by large manufacturers in the
United States without prior authorization from the FDA. In
addition, Utah, Washington, Rhode Island, New York and
Massachusetts have temporarily banned the sale of flavored
e-cigarettes, while previously imposed bans in Michigan and Oregon
have been temporarily halted by judicially imposed injunctions. In
addition, other states and municipalities are considering
implementing similar restrictions, and some cities have implemented
more restrictive measures than their state counterparts, such as
San Francisco, which in June 2019, approved a new ban on the sale
of flavored nicotine products, including vaping liquids and menthol
cigarettes. Any ban of on the sale of flavored e-cigarettes
directly limits the markets in which we may sell Charlie’s
products. In the event the prevalence of such bans increases across
the United States, our business, results of operations and
financial condition will be materially harmed.
There is uncertainty related to the regulation of flavored
e-cigarette liquid and vaporization products and certain other
consumption accessories, including the possibility that flavored
e-cigarette liquid and vaporization products may be recalled or
removed from the market entirely. Any increased regulatory
compliance burdens will have a material adverse impact on our
operations and future business development efforts.
There
has been increasing activity on the federal, state, and local
levels with respect to scrutiny of flavored e-cigarette liquid and
vaporizer products, and there is uncertainty regarding whether and
in what circumstances federal, state, or local regulatory
authorities will seek to develop and/or enforce regulations
relative to products used for the vaporization of nicotine.
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 state and local
levels. In addition to the initiatives taken by the FDA at the
federal level, over 25 states have implemented statewide
regulations that prohibit vaping in public places, and, as of
January 21, 2020, Utah, Washington, Rhode Island, New York and
Massachusetts have temporarily banned the sale of flavored
e-cigarettes, while previously imposed bans in Michigan and Oregon
have been temporarily halted by judicially imposed injunctions.
Many states, provinces, and some cities have passed laws
restricting the sale of e-cigarettes and certain other nicotine
vaporizer products.
Changes
to the application of existing laws and regulations, and/or the
implementation 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 would materially limit our
ability to sell such products, result in additional compliance
expenses, and require us to change our labeling and methods of
distribution, any of which would have a material adverse effect on
our business, results of operations and financial
condition.
The regulation of tobacco products by the FDA in the United States
and the issuance of Deeming Regulations may materially adversely
affect the Company.
The
“Deeming Regulations” issued by the FDA in May 2016
require any e-liquid, e-cigarettes, and other vaping products
considered to be Deemed Tobacco Products that were not commercially
marketed as of the grandfathering date of February 15, 2007, to
obtain premarket approval by the FDA before any new e-liquid or
other vaping products can be marketed in the United States.
However, any Deemed Tobacco Products such as certain products from
our Charlie's Chalk Dust and Pachamama product lines that were
on the market in the United States prior to August 8, 2016 have a
grace period to continue to market such products, ending on
September 9, 2020 whereby a premarket application, likely though
the PMTA pathway, must be completed and filed with the FDA. Upon
submission of a PMTA, products would then be able to be
marketed pending the FDA’s review of the submission. Without
obtaining marketing authorization by the FDA prior to September 9,
2020 or having submitted a PMTA by such date,
non-authorized products would be required to be removed from the
market in the United States until such authorization could be
obtained, although such products may continue to be sold if a PMTA
is pending as of the September 9, 2020 deadline.
As
at the date of this Report, we are preparing to submit three PMTAs
for certain of our traditional nicotine vapor products, including,
but not limited to menthol and/or tobacco products with the
assistance of Avail, pursuant to the terms of the Avail Agreement.
We estimate the cost associated with these PMTAs to be
approximately $4.4 million in total. We are also evaluating the
potential market perception and clinical studies that may be
required in connection with each PMTA. If we do not submit
a PMTA for any Charlie’s products considered to be
Deemed Tobacco Products prior to the lapse of the grace period or
if any PMTA submitted by the Company is denied, we will
be required to cease the marketing and distribution of such
Charlie’s products, which, in turn, would have a material
adverse effect on the Company’s business, results of
operations and financial condition. Furthermore, there can be
no assurance that if the Company were to complete a PMTA for any of
the affected Charlie's products, that any application would be
approved by the FDA.
There is substantial concern regarding the effect of long-term use
of vaping products. Despite the recent outbreak of vaping-related
lung injuries, the medical profession does not yet definitively
know the cause of such injuries. Should vapor products, such as
Charlie’s products, be determined conclusively to pose
long-term health risks, including a risk of vaping-related lung
injury, our business will be negatively impacted.
Because
vapor products have been developed and commercialized recently, the
medical profession has not yet had a sufficient period of time to
fully realize the long-term health effects attributable to vapor
product use. On November 8, officials at the CDC reported a
breakthrough in the investigation into the outbreak of
vaping-related lung injuries. The CDC's principal deputy director,
Dr. Anne Schuchat, stated that "vitamin E acetate is a known
additive used to dilute liquid in e-cigarettes or vaping products
that contain THC”, suggesting the possible culprit for the
series of lung injuries across the U.S. As a result, there is
currently no way of knowing whether or not vapor products are safe
for their intended use. If the medical profession were to determine
conclusively that vapor product usage poses long-term health risks,
the use of such products, including Charlie’s products, could
decline, which could have a material adverse effect on our
business, results of operations and financial
condition.
The market for vapor products is a niche market, subject to a great
deal of uncertainty, and is still evolving.
Vapor
products, having recently been introduced to market, are still at
an early stage of development, represent a niche market, are
evolving rapidly and are characterized by an increasing number of
market entrants. Our future sales and any future profits are
substantially dependent upon the widespread acceptance and use of
vapor products. Rapid growth in the use of, and interest in, vapor
products is recent, and may not continue on a lasting basis. The
demand and market acceptance for these products is subject to a
high level of uncertainty. Therefore, we are subject to all of the
business risks associated with a new enterprise in a niche market,
including risks of unforeseen capital requirements, failure of
widespread market acceptance of vapor products, in general or,
specifically our products, failure to establish business
relationships and competitive disadvantages as against larger and
more established competitors.
Possible yet unanticipated changes in federal and state law could
cause any of our current products, as well as products that we
intend to launch, containing hemp-derived CBD oil to be
illegal, or could otherwise prohibit, limit or restrict any of our
products containing CBD.
We recently launched and commenced distribution of
certain premium vapor products containing hemp-derived CBD,
and we currently intend to develop and launch additional products
containing hemp-derived CBD in the future. Until 2014, when 7 U.S.
Code §5940 became federal law as part of the Agricultural Act
of 2014 (the “2014 Farm
Act”), products
containing oils derived from hemp, notwithstanding a minimal or
non-existing THC content, were classified as Schedule I illegal
drugs. The 2014 Farm Act expired on September 30, 2018, and was
thereafter replaced by the Agricultural Improvement Act of 2018 on
December 20, 2018 (the “2018 Farm
Act”), which amended
various sections of the U.S. Code, thereby removing hemp, defined
as cannabis with less than 0.3% THC, from Schedule 1 status under
the Controlled Substances Act, and legalizing the cultivation and
sale of industrial-hemp at the federal level, subject to compliance
with certain federal requirements and state law, amongst other
things. THC is the psychoactive component of plants in the cannabis
family generally identified as marihuana or marijuana. There is no
assurance that the 2018 Farm Act will not be repealed or amended
such that our products containing hemp-derived CBD would once again
be deemed illegal under federal law.
The
2018 Farm Act delegates the authority to the states to regulate and
limit the production of hemp and hemp derived products within their
territories. Although many states have adopted laws and regulations
that allow for the production and sale of hemp and hemp derived
products under certain circumstances, no assurance can be given
that such state laws may not be repealed or amended such that our
intended products containing hemp-derived CBD would once again be
deemed illegal under the laws of one or more states now permitting
such products, which in turn would render such intended products
illegal in those states under federal law even if the federal law
is unchanged. In the event of either repeal of federal or of state
laws and regulations, or of amendments thereto that are adverse to
our intended products, we may be restricted or limited with respect
to those products that we may sell or distribute, which could
adversely impact our intended business plan with respect to such
intended products.
Additionally,
the FDA has indicated its view that certain types of products
containing CBD may not be permissible under the FDCA. The
FDA’s position is related to its approval of Epidiolex, a
marijuana-derived prescription medicine to be available in the
United States. The active ingredient in Epidiolex is CBD. On
December 20, 2018, after the passage of the 2018 Farm Bill,
FDA Commissioner Scott Gottlieb issued a statement in which he
reiterated the FDA’s position that, among other things, the
FDA requires a cannabis product (hemp-derived or otherwise)
that is marketed with a claim of therapeutic benefit, or with any
other disease claim, to be approved by the FDA for its intended use
before it may be introduced into interstate commerce and that the
FDCA prohibits introducing into interstate commerce food products
containing added CBD, and marketing products containing CBD as a
dietary supplement, regardless of whether the substances are
hemp-derived. Although we believe our existing and planned CBD
product offerings comply with applicable federal and state laws and
regulations, legal proceedings alleging violations of such laws
could have a material adverse effect on our business, financial
condition and results of operations.
Sources of hemp-derived CBD depend upon legality of
cultivation, processing, marketing and sales of products derived
from those plants under state law.
Hemp-derived
CBD can only be legally produced in states that have laws and
regulations that allow for such production and that comply with the
2018 Farm Act, apart from state laws legalizing and regulating
medical and recreational cannabis or marijuana, which remains
illegal under federal law and regulations. We purchase all of our
hemp-derived CBD from licensed growers and processors in states
where such production is legal. As described in the preceding risk
factor, in the event of repeal or amendment of laws and regulations
which are now favorable to the cannabis/hemp industry in such
states, we would be required to locate new suppliers in states with
laws and regulations that qualify under the 2018 Farm Act. If we
were to be unsuccessful in arranging new sources of supply of our
raw ingredients, or if our raw ingredients were to become legally
unavailable, our intended business plan with respect to such
products could be adversely impacted.
Because our distributors may only sell and ship our products
containing hemp-derived CBD in states that have adopted
laws and regulations qualifying under the 2018 Farm Act, a
reduction in the number of states having such qualifying laws and
regulations could limit, restrict or otherwise preclude the sale of
intended products containing hemp-derived CBD.
The
interstate shipment of hemp-derived CBD from one state to another
is legal only where both states have laws and regulations that
allow for the production and sale of such products and that qualify
under the 2018 Farm Act. Therefore, the marketing and sale of our
intended products containing hemp-derived CBD is limited by such
factors and is restricted to such states. Although we believe we
may lawfully sell any of our finished products, including those
containing CBD, in a majority of states, a repeal or adverse
amendment of laws and regulations that are now favorable to the
distribution, marketing and sale of finished products we intend to
sell could significantly limit, restrict or prevent us from
generating revenue related to our products that contain
hemp-derived CBD. Any such repeal or adverse amendment of now
favorable laws and regulations could have an adverse impact on our
business plan with respect to such products.
Due to recent expansion into the CBD industry, we may have a
difficult time obtaining the various insurances that are desired to
operate our business, which may expose us to additional risk and
financial liability.
Insurance
that is otherwise readily available, such as general liability, and
directors and officer’s insurance, may become more difficult
for us to find, and more expensive, due to our recent launch of
certain products containing hemp-derived CBD. There are no
guarantees that we will be able to find such insurances in the
future, or that the cost will be affordable to us. If we are forced
to go without such insurances, it may prevent us from entering into
certain business sectors, may inhibit our growth, and may expose us
to additional risk and financial liabilities.
We face significant competition from existing suppliers of products
similar to ours. If we are not able to compete with these companies
effectively, we may not be able to achieve
profitability.
We
face intense competition from numerous resellers, manufacturers and
wholesalers of e-liquids similar to those developed and sold by us,
from both retail and online providers. We face competition from
direct and indirect competitors, which arguably
includes “big tobacco”, “big
pharma”, and other known and established or yet to be
formed vapor product manufacturing companies, each of whom
pose a competitive threat to our current business and future
prospects. We compete against “big tobacco”, who
offers not only conventional tobacco cigarettes and electronic
cigarettes, but also smokeless tobacco products such as
“snus” (a form of moist ground smokeless tobacco that
is usually sold in sachet form that resembles small tea bags),
chewing tobacco and snuff. “Big tobacco” has nearly
limitless resources, global distribution networks in place and a
customer base that is fiercely loyal to their brands. Furthermore,
we believe that “big tobacco” is likely to devote more
attention and resources to developing and offering electronic
cigarettes or other vapor products as the market for electronic
cigarettes grows. Because of their well-established sales and
distribution channels, marketing depth, financial resources, and
proven expertise navigating complex regulatory landscapes,
“big tobacco” is better positioned than small
competitors like us to capture a larger share of the vapor
markets. We also face competition from companies in the vapor
market that are much larger, better funded, and more established
than us.
Companies
with greater capital and research capabilities could re-formulate
existing products or formulate new products that could gain wide
marketplace acceptance, which could have a depressive effect on our
future sales. In addition, aggressive advertising and promotion by
our competitors may require us to compete by lowering prices
because we do not have the resources to engage in marketing
campaigns against these competitors, and the economic viability of
our operations likely would be diminished.
Adverse publicity associated with our products or ingredients, or
those of similar companies, could adversely affect our sales and
revenue.
Adverse
publicity concerning any actual or purported failure by us to
comply with applicable laws and regulations regarding any aspect of
our business could have an adverse effect on the public perception
of the Company. This, in turn, could negatively affect our ability
to obtain financing, endorsers and attract distributors or
retailers for our products, which would have a material adverse
effect on our ability to generate sales and revenue.
Our
distributors’ and customers’ perception of the safety
and quality of our products or even similar products distributed by
others can be significantly influenced by national media attention,
publicized scientific research or findings, product liability
claims and other publicity concerning our products or similar
products distributed by others. Adverse publicity, whether or not
accurate, that associates consumption of our products or any
similar products with illness or other adverse effects, will likely
diminish the public’s perception of our products. Claims that
any products are ineffective, inappropriately labeled or have
inaccurate instructions as to their use, could have a material
adverse effect on the market demand for our products, including
reducing our sales and revenue.
Our products may not meet health and safety standards or could
become contaminated.
We
have adopted various quality, environmental, health and safety
standards. We do not have control over all of the third parties
involved in the manufacturing of our products and their compliance
with government health and safety standards. Even if our
products meet these standards, they could otherwise become
contaminated. A failure to meet these standards or contamination
could occur in our operations or those of our manufacturers,
distributors or suppliers. This could result in expensive
production interruptions, recalls and liability claims. Moreover,
negative publicity could be generated from false, unfounded or
nominal liability claims or limited recalls. Any of these failures
or occurrences could negatively affect our business and financial
performance.
The sale of our products involves product liability and related
risks that could expose us to significant insurance and loss
expense.
We
face an inherent risk of exposure to product liability claims if
the use of our products results in, or is believed to have resulted
in, illness or injury. Our products contain combinations of
ingredients, and there is little long-term experience with the
effect of these combinations. In addition, interactions of these
products with other products, prescription medicines and
over-the-counter drugs have not been fully explored or understood
and may have unintended consequences. While our third-party
manufacturers perform tests in connection with the
formulations of our products, these tests are not designed to
evaluate the inherent safety of our products.
Any
product liability claim may increase our costs and adversely
affect our revenue and operating income. Moreover, liability claims
arising from a serious adverse event may increase our costs
through higher insurance premiums and deductibles and may make
it more difficult to secure adequate insurance coverage in the
future. In addition, our product liability insurance may fail
to cover future product liability claims, which, if adversely
determined, could subject us to substantial monetary
damages.
The success of our business will depend upon our ability to create
and expand our brand awareness.
The
market we compete in is highly competitive, with many well-known
brands leading the industry. Our ability to compete effectively and
generate revenue will be based upon our ability to create and
expand awareness of our products distinct from those of our
competitors. It is imperative that we are able to convey to
consumers the benefits of our products. However, advertising
and packaging and labeling of such products will be limited by
various regulations. Our success will be dependent upon our
ability to convey to consumers that our products are superior to
those of our competitors.
We must develop and introduce new products to succeed.
Our
industry is subject to rapid change. New products are constantly
introduced to the market. Our ability to remain competitive depends
in part on our ability to enhance existing products, to develop and
manufacture new products in a timely and cost-effective manner, to
accurately predict market transitions, and to effectively market
our products. Our future financial results will depend to a great
extent on the successful introduction of several new products. We
cannot be certain that we will be successful in selecting,
developing, manufacturing and marketing new products or in
enhancing existing products.
The
success of new product introductions depends on various factors,
including, without limitation, the following:
●
proper
new product selection;
●
successful
sales and marketing efforts;
●
timely
delivery of new products;
●
availability
of raw materials;
●
pricing
of raw materials;
●
regulatory
allowance of the products; and
●
customer
acceptance of new products.
If we are not able to adequately protect our intellectual property,
then we may not be able to compete effectively, and we
may not be profitable.
Our
existing proprietary rights may not afford remedies and
protections necessary to prevent infringement, reformulation,
theft, misappropriation and other improper use of our products by
competitors. We own the formulations for our products and we
consider these product formulations our critical proprietary
property, which must be protected from competitors. We do not
currently have any patents for our product formulations. Although
trade secret, trademark, copyright and patent laws generally
provide a certain level of protection, and we attempt to protect
ourselves through contracts with manufacturers of our products, we
may not be successful in enforcing our rights. In addition,
enforcement of our proprietary rights may require lengthy and
expensive litigation. We have attempted to protect some of the
trade names and trademarks used for our products by registering
them with the U.S. Patent and Trademark Office, but we must rely on
common law trademark rights to protect our unregistered trademarks.
Common law trademark rights do not provide the same remedies as are
granted to federally registered trademarks, and the rights of a
common law trademark are limited to the geographic area in which
the trademark is actually used. Our inability to protect our
intellectual property could have a material adverse impact on our
ability to compete and could make it difficult for us to achieve a
profit.
Compliance with changing corporate governance regulations and
public disclosures may result in additional risks and
exposures.
Changing
laws, regulations and standards relating to corporate governance
and public disclosure, including the Sarbanes-Oxley Act of 2002 and
new regulations from the SEC, have created uncertainty for public
companies such as ours. These laws, regulations, and standards are
subject to varying interpretations in many cases, and as a result,
their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies. This could result
in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and
governance practices. As a result, our efforts to comply with
evolving laws, regulations, and standards have resulted in, and are
likely to continue to result in, increased expense and significant
management time and attention.
Risks Related to Our Common Stock
A limited trading market currently exists for our securities, and
we cannot assure you that an active market will ever develop, or if
developed, will be sustained.
There
is currently a limited trading market for our common stock on the
OTC Pink Marketplace and an active trading market for our common
stock may not develop. Consequently, we cannot assure you when and
if an active-trading market in our shares will be established, or
whether any such market will be sustained or sufficiently liquid to
enable holders of shares of our common stock to liquidate their
investment in our Company. If an active public market should
develop in the future, the sale of unregistered and restricted
securities by current stockholders may have a substantial impact on
any such market.
Sales of a
substantial number of shares of our common stock, or the perception
that such sales may occur, may adversely impact the price of our
common stock.
Sales
of a substantial number of shares of our common stock in the public
market could occur at any time. These sales, or the perception that
such sales may occur, may adversely impact the price of our common
stock, even if there is no relationship between such sales and the
performance of our business. As of August 14, 2020, we had
18,990,752,596 shares of common stock outstanding, as well as
outstanding options to purchase an aggregate of
801,325,000 shares of our common stock at a weighted average
exercise price of $0.0044313 per share, up to 4,599,343,033
shares of common stock issuable upon conversion of outstanding
shares of Series A Preferred and outstanding warrants to purchase
up to an aggregate of 4,033,769,340 shares of our common stock at a
weighted average exercise price of $0.0044313 per share. The
exercise and/or conversion of such outstanding derivative
securities may result in further dilution to our
stockholders.
If we issue additional shares of common stock in the future, it
will result in the dilution of our existing
stockholders.
Our
Charter currently authorizes the issuance of up to 50.0 billion
shares of common stock, of which approximately 18.990 billion
shares are currently issued and outstanding. In addition, we have
reserved approximately 10.2 billion shares for issuance upon
conversion and/or exercise of our outstanding shares of Series A
Preferred, warrants and stock options, as well as for issuance as
awards under our 2019 Omnibus Incentive Plan. The issuance of any
additional shares of our common stock, including those shares
issuable upon conversion and/or exercise of our outstanding
derivative securities, will result in significant dilution to our
stockholders and a reduction in value of our outstanding common
stock. Further, any such issuance may result in a change of control
of our corporation.
Holders of Series A Convertible Preferred Stock have substantial
rights and ranks senior to our common stock.
Our
common stock ranks junior as to dividend rights, redemption rights,
conversion rights and rights in any liquidation, dissolution or
winding-up of the Company to the Series A Preferred. Upon
liquidation, dissolution or winding-up of the Company, the holders
of the Series A Preferred are entitled to a liquidation preference
equal to the original purchase price of Series A Preferred prior to
and in preference to any distribution to the holders of our common
stock. In addition, the holders of the Series A Preferred are also
entitled to an annual 8% dividend payable in cash or shares of our
common stock. Such rights could cause dilution of our common stock
or limit our cash.
Our outstanding
Series A Preferred contains anti-dilution provisions that, if
triggered, could cause substantial dilution to our then-existing
common stock holders which could adversely affect our stock
price.
Our
outstanding Series A Preferred contains certain anti-dilution
provisions that benefit the holders thereof. As a result, if we, in
the future, issue common stock or grant any rights to purchase our
common stock or other securities convertible into our common stock
for a per share price less than the then existing conversion price
of the Series A Preferred, an adjustment to the then current
conversion price would occur. This reduction in the conversion
price could result in substantial dilution to our then-existing
common stockholders as well as give rise to a beneficial conversion
feature reported on our statement of operations. Either or both of
which could adversely affect the price of our common
stock.
The price of our securities could be subject to wide fluctuations
and your investment could decline in value.
The
market price of the securities of a company such as ours with
little name recognition in the financial community can be subject
to wide price swings. The market price of our common stock may be
subject to wide changes in response to quarterly variations in
operating results, announcements of new products by us or our
competitors, reports by securities analysts, volume trading, or
other events or factors. In addition, the financial markets have
experienced significant price and volume fluctuations for a number
of reasons, including the failure of certain companies to meet
market expectations. These broad market price swings, or any
industry-specific market fluctuations, may adversely affect the
market price of our securities.
Companies
that have experienced volatility in the market price of their stock
have been the subject of securities class action litigation. If we
were to become the subject of securities class action litigation,
it could result in substantial costs and a significant diversion of
our management’s attention and resources.
Because
our common stock may be classified as “penny stock”,
trading may be limited, and the share price could decline.
Moreover, trading of our common stock, if any, may be limited
because broker-dealers would be required to provide their customers
with disclosure documents prior to allowing them to participate in
transactions involving our common stock. These disclosure
requirements are burdensome to broker-dealers and may discourage
them from allowing their customers to participate in transactions
involving our common stock.
We have issued preferred stock with rights senior to our common
stock, and may issue additional preferred stock in the
future.
Our
Charter authorizes the issuance of up to
5.0 million shares of preferred stock, par value $0.001
per share, without stockholder approval and on terms established by
our directors, of which 300,000 shares have been designated as
Series A Preferred and 1.5 million shares have been designated
as Series B Preferred. We may issue additional shares of
preferred stock in the future in order to consummate a financing or
other transaction, in lieu of the issuance of shares of our common
stock. The rights and preferences of any such class or series
of preferred stock would be established by our Board of Directors
in its sole discretion and may have dividend, voting, liquidation
and other rights and preferences that are senior to the rights of
the common stock.
Our Amended and Restated Bylaws designate courts within the state
of Nevada as the sole and exclusive forum for certain types of
actions and proceedings that may be initiated by our stockholders,
which could limit our stockholders’ ability to obtain a
favorable judicial forum for disputes with us or our directors,
officers, employees or agents.
Our Amended and Restated Bylaws
(“Bylaws”) require that, to the fullest extent
permitted by law, and unless the Company consents in writing to the
selection of an alternative forum, a state court located within the
State of Nevada (or, if no state court located within the State of
Nevada has jurisdiction, the federal district court for the
District of Nevada), will, to the fullest extent permitted by law,
be the sole and exclusive forum for each of the
following:
●
any
derivative action or proceeding brought on behalf of the
Company;
●
any
action asserting a claim of breach of a fiduciary duty owed by any
director or officer or other employee of the Company to the Company
or the Company’s stockholders;
●
any
action asserting a claim against the Company or any director or
officer or other employee of the Company arising pursuant to any
provision of the Nevada Revised Statutes or the Company’s
Amended and Restated Articles of Incorporation, as amended, or the
Amended and Restated Bylaws; or
●
any
action asserting a claim against the Company or any director or
officer or other employee of the Company governed by the internal
affairs doctrine.
Because the applicability of the exclusive forum
provision is limited to the extent permitted by law, we believe
that the exclusive forum provision would not apply to suits brought
to enforce any duty or liability created by the Securities Exchange
Act of 1934, as amended (“Exchange
Act”), or any other claim
for which the federal courts have exclusive jurisdiction, and that
federal courts have concurrent jurisdiction over all suits brought
to enforce any duty or liability created by the Securities Act of
1933, as amended (“Securities
Act”). We note that there
is uncertainty as to whether a court would enforce the provision
and that investors cannot waive compliance with the federal
securities laws and the rules and regulations thereunder. Although
we believe this provision benefits us by providing increased
consistency in the application of Nevada law in the types of
lawsuits to which it applies, the provision may have the effect of
discouraging lawsuits against our directors and
officers.
You may not be able to hold our securities in your regular
brokerage account.
In
the case of publicly-traded companies, it is common for a broker to
hold securities on your behalf, in “street name”
(meaning the broker is shown as the holder on the issuer’s
records and then you show up on the broker’s records as the
person the broker is holding for). Due to regulatory uncertainties,
certain brokers may not agree to hold securities of companies whose
products include hemp-derived CBD for their customers, meaning that
you may not be able to take advantage of the convenience of having
all your holdings reflected in one place.
You should not rely on an investment in our common stock for the
payment of cash dividends.
Because
of our previous significant operating losses and because we intend
to retain future profits, if any, to expand our business, we have
never paid cash dividends on our common stock and do not anticipate
paying any cash dividends in the foreseeable future. You should not
make an investment in our common stock if you require dividend
income. Any return on investment in our common stock would only
come from an increase in the market price of our stock, which is
uncertain and unpredictable.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not
applicable.
ITEM 5. OTHER INFORMATION
None.
|
(a)
|
|
Exhibits
|
|
31.1
|
|
Certification
of the Principal Executive Officer pursuant to Rule 13a-14(a) and
15d-14(a).
|
|
31.2
|
|
Certification
of the Principal Financial and Accounting Officer pursuant to Rule
13a-14(a) and 15d-14(a).
|
|
32.1
|
|
Certification
by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2
|
|
Certification
by the Principal Financial and Accounting Officer pursuant to 18
U.S.C. 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
101.INS
|
|
XBRL
Instance Document
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase
|
In
accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
Date: August 14,
2020
|
|
CHARLIE’S HOLDINGS, INC.
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Brandon
Stump
|
|
|
|
|
Brandon Stump
Chief Executive Officer and Chair of the Board
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/ David Allen
|
|
|
|
|
David Allen
Chief Financial Officer
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
-41-