UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, | |
or | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file No.
001-32420CHARLIE’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)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock ($0.001 par value) | OTC Markets |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ]☐ No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ]☐ No [X]
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 (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 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 | Smaller reporting company | ||
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-2 of the Exchange Act). Yes [ ]☐ No [X]
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 20192021 was approximately $53,148,000$60,949,561 based on a closing market price of $0.011$0.30 per share, as reported on the OTC Pink Marketplace.
There were 18,982,290,068216,840,987 shares of the registrant’s common stock outstanding as of April 14, 2020.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2019
TABLE OF CONTENTS
Page | ||
| 56 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains “forward-looking”“forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the safe harbor created by those sections. We intend to identify forward-looking statements in this report by using words such as “believes”“believes”, “intends”“intends”, “expects”“expects”, “may”“may”, “will”“will”, “should”“should”, “plan”“plan”, “projected”“projected”, “contemplates”“contemplates”, “anticipates”“anticipates”, “estimates” “predicts”“estimates”“predicts”, “potential”“potential”, “continue”“continue” or similar terminology. These statements are based on our beliefs as well as assumptions we made using information currently available to us. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties, and assumptions. Actual future results may differ significantly from the results discussed in the forward-looking statements. These risks include changes in production and demand for our products, changes in the level of operating expense, our ability to expand our network of customers, changes in general economic conditions that impact consumer behavior and spending, product supply, the availability, amount, and cost of capital to us and our use of such capital, and other risks discussed in this report. Additional risks that may affect our performance are discussed below under the section entitled “Risk Factors”“Risk Factors”.
ITEM 1. DESCRIPTION OF BUSINESS
As used in this Annual 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 “On April 26, 2019, the Company (then known as True Drinks Holdings, Inc.), entered into a Securities Exchange Agreement (“SEC”) with each of the members of Charlie’s on that date (the “Charlie’sCharlie’s Members”), pursuant to which the Company acquired all outstanding membership interests beneficially owned by the Charlie’s Members in exchange for certain units consisting of the Company’s securities (the “Share Exchange”). As a result, Charlie’s became a wholly owned subsidiary of the Company. Following the consummation of the Share Exchange, the primary business operations of the Company consisted of those of Charlie’s and, more recently, Don Polly.
The Share Exchange resulted in a change of control of the Company, with the Members and Direct Investors (as defined in the Securities Exchange Agreement) 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.Shares (See Note 11). Together, Brandon Stump and Ryan Stump, the founders of Charlie’s and the Company’s newly appointedformer Chief Executive Officer and current Chief Operating Officer, respectively, own approximately 57%38% of the Company’s issued and outstanding voting securities as a result of the Share Exchange.
Overview
Our objective is to become a leader in the rapidly growing, global e-cigarette and e-liquid segments of CBD Products
Operational Plan
Considering industry-specific hurdles, as well as the potential for future regulatory changes, management has targeted opportunities for growth and has adopted the following operational plan.
First, we plan to increase the sales of our hemp-derived products, including topicals, ingestibles and disposable vapor devices. We feel there is a significant upside in the hemp-derived products space, and we have begun to shift our focus in this business to the burgeoning market for products containing compounds synthetically derived from hemp, including Delta-8-Tetrahydrocannabinol ("Delta-8-THC") and other synthetic tetrahydrocannabinol ("Synthetic THC") compounds. These product variations. The newly releasedcategories have grown rapidly, as they offer consumers a range of benefits across varying potencies and product formats. We have also recently allocated additional financial resources to increase e-commerce sales of hemp-derived products.
Secondly, we continue to see a significant opportunity for sales growth in international markets for our e-liquid and other vapor products. Presently, approximately 15% of our vapor product sales come from the international market and we are well positioned to increase sales in countries where we already have a presence, and in additional overseas markets, as we have already built an international distribution platform. Specifically, the Company intends to launch proprietary new disposables, containing synthetically derived nicotine, that have been specially formulated for the European and Middle East markets. In partnership with our international distributors, Charlie’s will sell award winning products werein markets where more than 20% of the population consumes nicotine in some format.
Most importantly, we feel that tobacco and synthetically derived nicotine vapor products will continue to provide a significant growth opportunity domestically. During the quarter ended March 31, 2021, we launched underour synthetic nicotine (not derived from tobacco) Pacha Syn Disposable product line (formerly Pachamama Disposables), which will provide access to additional sales channels and broaden our customer base. These innovative product formats currently represent Charlie’s most important, fastest-growing product category. We are continuing with our plan to obtain marketing authorization for certain of our nicotine-based vapor products through the Pachamama™ brand by waycompletion of a licensing agreement between Don PollyPremarket Tobacco Application ("PMTA"), which we submitted in September 2020. Obtaining a marketing order from the FDA would, we believe, help to remediate perceived health issues related to vaping, and Charlie’s, entered on April 25, 2019. Infurther position the near term,Company as a trusted, industry leader. We feel that a significant number of our competitors will not have the necessary resources and/or expertise to complete the extensive and costly PMTA process and that once authorized by the FDA, we expectwill benefit significantly by emerging as one of a select group of companies able to expand the hemp-derived CBD-based products line to include additional CBD isolate products and Tetrahydrocannabinol (“
Recent Developments
Resignation of Brandon Stump
On October 29, 2021, Brandon Stump resigned from his position as: (i) Chief Executive Officer and Chairman of the Board of Directors; and (ii) all positions held for each direct and indirect subsidiary of the Company (each, a "Subsidiary"), Mexico, U.K.including as a member of the Board of Directors of the Company and Switzerland,each Subsidiary.
In connection with Mr. Stump's resignation, the Company and we expectMr. Stump entered into an agreement regarding Mr. Stump's resignation (the "Termination Agreement"), which Termination Agreement is dated October 29, 2021. Pursuant to continue expanding both our domestic and international distribution efforts.
Reverse Stock Split
Our Board of Directors approved a reverse stock split of our authorized, issued, and holdersoutstanding shares of common stock, par value $0.001 per share (the “Common Stock”), at a ratio of 1-for-100 (the “Reverse Split”). The Reverse Split was effective as of June 16, 2021 (the “Effective Date”). All share and per share amounts in this Report have been retroactively adjusted to account for the reverse stock split.
March 2021 Private Placement
On March 19, 2021, the Company entered into Securities Purchase Agreements by and between the Company and certain family trusts in which Mr. Brandon Stump, the Company's former Chief Executive Officer and significant shareholder of the Company, and Mr. Ryan Stump, the Company's current Chief Operating Officer, are trustees and beneficiaries (the "Purchase Agreements"), for the private placement of an aggregate of 3,517,000 shares of its Common Stock, at a purchase price per share of $0.853 (the "Private Placement"), which Private Placement was consummated on March 22, 2021. The Private Placement resulted in gross proceeds to the Company of approximately $3.0 million. The Private Placement was undertaken pursuant to Rule 506 promulgated under the Securities Act of 1933, as amended, and was consummated in a transaction approved by the Company's independent directors in accordance with Rule 16b-3(d)(1) of the Securities Exchange Act of 1934, as amended.
Red Beard Holdings, LLC Note Payable
On April 1, 2020, the Company, Charlie's and its VIE, Don Polly, issued a secured promissory note (the "Red Beard Note") to one of the Company's largest stockholders, Red Beard Holdings, LLC ("Red Beard") in the principal amount of $750,000 (the "Principal Amount"), requiring a guaranteed minimum interest amount of $75,000 (“Minimum Interest”). The Red Beard Note is secured by all assets of the Company pursuant to the terms of a majoritySecurity Agreement entered into by and between the Company and Red Beard (the "Red Beard Note Financing"). The Red Beard Note was subsequently amended on August 27, 2020, September 30, 2020, October 29, 2020, December 1, 2020, and January 19, 2021, ultimately increasing Principal Amount to $1.4 million and Minimum Interest to $150,000.
On March 24, 2021, the Company and Red Beard entered into a Satisfaction and Release (the "Red Beard Release"), pursuant to which the Company made a payment to Red Beard in the amount of our outstanding voting securities$1.55 million in exchange for an acknowledgment of satisfaction and full release of the Company by Red Beard from liability and obligations arising under the Red Beard Note.
Small Business Administration Loan Programs
On April 30, 2020, Charlie's, a wholly owned subsidiary of the Company, received approval to enter into a U.S. Small Business Administration ("SBA") Promissory Note (the " Charlie's PPP Loan") with TBK Bank, SSB (the "SBA Lender"), pursuant to the Paycheck Protection Program ("PPP") of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") as administered by the SBA (the "PPP Loan Agreement").
The Charlie's PPP Loan provides for working capital to CCD in the amount of $650,761. The Charlie's PPP Loan was set to mature on May 8, 2019,April 30, 2022 and accrued interest at a rate of 1.00% per annum. Payments of principal and interest were deferred for six months from the Amendeddate of the Charlie's PPP Loan, or until November 30, 2020. Interest, however, continued to accrue during that time.
On April 14, 2020, Don Polly also obtained a loan pursuant to the PPP enacted under the CARES Act (the "Polly PPP Loan" and Restated Charter was filedtogether with the StateCharlie's PPP Loan, the "PPP Loans") from Community Banks of NevadaColorado, a division of NBH Bank (the "Polly Lender"). The Polly PPP Loan obtained by Don Polly provided for working capital to Don Polly in the amount of $215,600. The Polly PPP Loan was set to mature on June 28, 2019.
The aforementioned PPP Loans were made under the PPP enacted by Congress under the CARES Act. The CARES Act (including the guidance issued by SBA and U.S. Department of the Treasury) provides that all or a portion of the PPP Loans may be forgiven upon request from the respective borrower to the SBA Lender or the Polly Lender, as the case may be, subject to requirements in the PPP Loans and under the CARES Act.
On February 19, 2021, Don Polly received notice from the Polly Lender, that the Polly PPP Loan was fully repaid, and its promissory note was cancelled as a result of the filingloan forgiveness process set forth by the U.S. Small Business Administration. There is no further action required on the part of Don Polly to satisfy this liability.
On March 17, 2021, Don Polly obtained a second draw PPP loan (“Polly PPP Loan 2”) under the CARES Act from Polly Lender. The Polly PPP Loan 2 obtained by Don Polly provided general working capital in the amount of $184,200. The Polly PPP Loan 2 was set to mature on March 17, 2026 and accrued interest at a rate of 1.00% per annum. Payments of principal and interest were deferred, however interest continued to accrue.
On April 28, 2021, Charlie’s received notice from SBA Lender that the Charlie’s PPP Loan was fully repaid, and its promissory note was cancelled as a result of the Amendedloan forgiveness process set forth by the U.S. Small Business Administration. There is no further action required on the part of Charlie’s to satisfy this liability.
On November 9, 2021, Don Polly received notice from the Polly Lender, that the Polly PPP Loan 2 was fully repaid, and Restated Charterits promissory note was cancelled as a result of the loan forgiveness process set forth by the U.S. Small Business Administration. There is no further action required on the part of Don Polly to satisfy this liability.
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. The balance of principal and interest will be payable thirty years from the date of the EID Loan and interest will accrue at the rate of 3.75% per annum.
PMTA
During the quarter ended September 30, 2020, the FDA's Center for Tobacco Products informed us that our PMTA has received a valid submission tracking number, passed the FDA’s filing review phase, and recently entered the substantive review phase. To date, Charlie’s has invested over $4.4 million for our initial PMTA submission. We engaged a team of more than 200 professionals, including doctors, scientists, biostatisticians, data analysts, and numerous contract research organizations to create our comprehensive PMTA submission. During the quarter ended September 30, 2021, the FDA began issuing Marketing Denial Orders (“MDO”) for electronic nicotine delivery system (“ENDS”) products that lack evidence to demonstrate that permitting the marketing of such products would be appropriate for the protection of the public health. As of December 31, 2021, the Company had not received an MDO for any of its submissions. Management believes this is an indicator of our progress toward achieving full regulatory compliance and our objective of providing customers with a trusted product portfolio.
Impact of COVID-19
The outbreak of a novel strain of coronavirus ("COVID-19", or, “Coronavirus”) has had and continues to have a negative impact on the global economy and the increasemarkets in which we operate. Beginning in March 2020, the Company transitioned nearly all employees to a remote working environment for their safety and to protect the integrity of Company operations. We have updated certain sales, accounting and administrative processes, and corresponding information technology platforms, in an effort to help facilitate the hybrid work environment in which we now operate. During the year ended December 31, 2021, we engaged in periodic, informal testing of our authorized common stockbusiness operations, and we do not believe that our financial position, work efficiency and overall operational integrity have been materially affected. However, we recognize that a certain degree of employee enthusiasm, teamwork, creativity, and support is normally generated by being present at a physical location, and we believe that prolonged remote working may have a negative impact over time on our business, and on employee productivity. Our Denver, CO office and Huntington Beach, CA warehouse locations have returned fully to 50.0 billion shares,“on premise” status, while our corporate headquarters in Costa Mesa, CA remains remote for some employees. We will continue to monitor the COVID-19 situation in all 1,396,305 outstanding sharesregions in which we operate and will maintain strict adherence to local health guidelines and mandates. We may need to take further actions that we determine are in the best interests of Series B Preferred automatically converted into a total of 13,963,047,716 shares of common stock in accordance with the Certificate of Designations, Preferences and Rights of the Series B Convertible Preferred Stock.
Our Products
Charlie’s Product Line
Our business efforts consist primarily of formulating, marketing and distributing our portfolio of branded e-cigarette liquid and other premium vapor products, for use in consumer e-cigarette and vaping systems, which we collectively refer to as the
Disposables
Disposable vapes, also referred to as (“Disposables”), are pre-filled and pre-charged vapor delivery systems. These single-use electronic vaporizers offer a draw-activated mouthpiece and are infused with e-liquid, making them ready to use immediately after purchase. Our Disposables are available in a variety of sizes (2ml, 4ml, and 8ml) and flavors, including some of our award-winning proprietary blends.
Charlie’s disposable products are produced under two brand names distinguished by their size and intended market, and offer users a variety of premium flavors containing synthetic nicotine (not derived from tobacco) in a compact, discrete format. All disposables are shipped in flavor specific consumer display units (“CDU”) which hold ten individually packaged disposables for quick and convenient retail sales.
● | Pachamama 2mL Disposable. Pachamama 2mL Disposables were specifically designed with the European Union’s (“EU”) Tobacco Products Directive (“TPD”) in mind and are currently sold only in the EU. All thirteen flavors have been registered in eight EU member states. |
● | Pacha Syn 4mL Disposable. Pacha Syn 4mL Disposables were designed for the US market with the objective of providing a convenient and satisfying user experience. Currently, we have eleven flavors available in the US market. |
● | Pacha Syn 8mL Disposable. Pacha Syn 8mL Disposables are the newest addition to our disposable portfolio, available in ten flavors ranging from our innovative “Clear” (flavorless) offering, to novel fruit blends and distinctive dessert flavors. |
E-Liquids
E-liquids used to produce vapor in vaping devices are sold separately for use in refillable tanks of open system vaporizers. Liquids are available in differingvariable nicotine concentrations (0 mg, 3 mg and 6 mg per milliliter) to suit user preferences. Liquids are available in a variety of flavors, including our proprietary blends. Liquidproprietary-blended flavors. The liquid solution consists of flavoring and/or nicotine dissolved in one or several hygroscopic components, which turns the water in the solution into the smoke-like vapor when heated. The most commonly used hygroscopic components are propylene glycol (“
Charlie’s e-liquid products are produced under sevenfive brand names distinguished by their flavor profiles, packaging art and ingredient transparency. All products are packaged in plastic drip containers that are typically available in seven sizes ranging from 10ml to 100ml, as well as bulk concentrate formats.
● | Black Label and White Label. Charlie’s original black and white product line launched in 2015. Black Label is currently available in five flavors and White Label is currently available in four flavors. |
● | Pachamama™. A line launched in 2016 consisting of eight eclectic mixes of natural fruit flavors such as passion fruit raspberry yuzu, blood orange banana gooseberry and huckleberry pear acai. |
● | Meringue. The third brand launched in 2016, based on creative character stories, currently includes three flavors. |
● | Campfire™. Outdoors and Smores flavor inspired by camp nostalgia. |
Nicotine Salt Products
Nicotine salt e-liquids (“
NIC salts”) are formulated for use in lower wattage open, semi-open and closed system vaporizers and are available in higher nicotine concentrations (25mg and 50mg per milliliter) than traditional e-liquids. Nicotine salts consist of nicotine dissolved in an acid that results in a lower PH level than other e-liquids. This form of nicotine has a higher bioavailability resulting in faster blood stream absorption and more closely mimics the effects of combustible tobacco products. We broadly released Pachamama™ Salts, an extension of the Pachamama™ line, in late December 2018 to a select group of key accounts, whichDon Polly
Don Polly is a company under common ownership with the Company, and was established in April 2019 for the specific purpose of developing, marketing and distributing proprietary and innovative hemp-derived, cannabidiol (“
Don Polly is owned by two limited liabilities companies, of which one is wholly-owned by Brandon Stump, the Company’s former Chief Executive Officer, and the other is wholly-owned by Ryan Stump, the Company’s Chief Operating Officer. In June 2019, Charlie’s entered into aPursuant to the Licensing Agreement, with Don Polly, pursuant to which Charlie's granted Don Polly a limited right and license to use certain of Charlie’s trademarks, copyrights and original artwork, in connection with Don Polly’s branded CBDhemp products, as well as a Services Agreement pursuant to which Charlie’s provides certain services to Don Polly related to the sales, marketing, brand development of Don Polly products.
As a result, the Company and Don Polly launched a line of premium vapor, tincture and topical products containing hemp-derived CBD in June 2019, which we refer to the “
Don Polly Products” and “Don Polly Product Line”. Don Polly’s efforts have been focused on developing and producing high quality CBD products made from single-strain-sourced hemp extract and high purity CBD isolate crystals.Full Spectrum CBD Products
Our full spectrum hemp extract comes from whole plant extraction which retains the plant’s natural compounds. This extraction method ensures each product preserves the holistic benefits of the plant including minimal amounts of THC (0.3% or less), which allows for optimal absorption of the plant’s nutrients. While CBD alone is a beneficial cannabinoid, full spectrum products provide the body access to all the plant’s cannabinoids, allowing the end user to achieve a wide range of therapeutic benefits. The full spectrum products are formulated with single-source and single strain hemp extracts. Don Polly believes this sourcing practice yields various compounds that work synergistically to heighten the effects of the products, making them superior to single-compound CBD isolates. In June 2019, we introduced the Pachamama™ tincture and topical full spectrum products. TheCurrently, the tincture offering includes fourtwo flavors (the Natural, Green Tea Echinacea, Goji CacaoBlack Pepper Turmeric and Kava Kava Valerian)Valerian, which are available in 30ml bottle sizes and both 750mg and 1750mg strengths. Our topical products include the Cooling Ointment, available in a one ounce jar and 750mg strength, and the Athletic Rub, available in a two ounce jar and 500mg strength. We plan on continuing to research, develop, and launch products in these categories.
In addition to isolate and fillfull spectrum CBD products, we believe there is an opportunity to develop broad spectrum hemp-derived CBD extracts thatproducts can be developed to provide the same benefits of full spectrum CBD products but, throughproducts. Through additional processing of hemp-derived extracts, we can eliminate the presence of THC. This category of THC-free, broad spectrum products will provide consumers with concerns about THC access to the same level of quality and the same nutrients we value in our full spectrum products. We are currently developing certainproducts, without the concern of consuming minimal amounts of THC. In Q4 of 2019, we released three very dynamic broad spectrum topicals; our Pain Cream 850mg, Icy Muscle Gel 500mg and Body Lotion 300mg. The Pain Cream, offered in a 100ml bottle, offers a combination of broad-spectrum CBD, menthol, MSM, arnica and capsaicin to provide quick, effective relief. The Icy Muscle Gel roll-on has a blend of ancient Chinese herbs along with cooling menthol and camphor to temporarily relieve nagging pains, and provide anti-inflammatory treatment to muscles and joints. Don Polly’s Body Lotion rounds out the initial broad spectrum topical portfolio offerings with 300mg of CBD and an ultra-nourishing blend of botanical oils for soft, radiant, and balanced skin. The Body Lotion is not currently offered. In March 2021 we launched Sleep Well Gummies, specifically formulated with a unique blend of cannabinol (“CBN”), CBD, melatonin, and Elderberry extract to support the immune system and to encourage better sleep. Sleep Well Gummies have grown to become the Company’s best-selling product in the broad-spectrum category.
Other Cannabinoids
Our Other Cannabinoid products which, ultimately, will allow usare formulated using Delta-8 tetrahydrocannabinol (“Delta-8”), THC-O Acetate (“THC-O”), and Hexahydrocannabinol (“HHC”) that are sourced from industrial-grade hemp. Since our products contain only THC-O, Delta-8, or HHC made from 100% hemp extract, we are able to launch products which matchlegally manufacture, distribute and sell to consumers in the consumer accessibility of our CBD isolate products with the experience and benefits of our full spectrum products.
● | Pacha D8. Delta-8 tetrahydrocannabinol (“Delta 8 THC” or “D8”) is a cannabis compound that shares almost the same molecular structure as the more recognizable cannabinoid, delta-9 THC (“THC”). Like THC, delta-8 THC has psychoactive effects on humans, although less potent. The Pacha D8 line is currently available in two forms, a pre-filled disposable 1 gram vape or as an edible gummy. Our disposable D8 vapes are offered across four flavors: “Pineapple OG” (Sativa), “Rainbow Kush” (Hybrid), “Wedding Cake” (Indica), and “Gelato” (Hybrid). Our edible gummies are offered in two flavors: “Pomegranate Lemonade” and “Blue Raspberry”. |
● | Pacha THC-O. THC-O Acetate is a man-made compound that is derived from hemp. It doesn’t occur naturally, and instead, requires the acetylation of THC or THCA. This is done through a chemical reaction that replaces a hydrogen group with an acetyl group which strips away the terpenes and flavonoids and leaves only the THC isolate. Pacha THC-O is available in 5 unique flavors: “Cucumber Watermelon” (Hybrid), “Grape Ape” (Indica), “Mimosa” (Sativa), “Blueberry Afgoo” (Hybrid) and “Runtz” (Sativa). |
● | Pacha HHC. Hexahydrocannabinol is a hydrogenated derivative of tetrahydrocannabinol. It is a naturally occurring phytocannabinoid that has rarely been identified as a trace component in Cannabis sativa but can also be produced synthetically by hydrogenation of cannabis extracts. Pacha HHC is available in the following flavors: “Fruit Punch” (Sativa), “Berry Zkittles” (Sativa), “Peaches & Cream” (Hybrid), and “Lemon Pound Cake” (Sativa). |
Manufacturing and Distribution
Manufacturing
Charlie’s Product Line
. We work closely with contract manufacturing partners in the United States, Ireland, Scotland andDon Polly Product Line
. Our hemp-derived,Distribution
Charlie’s Product and have not any sales since the end of 2019.
Don Polly Product Line
.Online Sales
Charlie’s Product Line and Don Polly Product Line.
Sales and Marketing
Charlie’s and Don Polly Product Lines.
We haveWe intend to expand strategically expand our advertising activities in 20202022 and to increase our public relations efforts to gain industry awareness as well as editorial coverage for our brands. Some of our competitors promote their brands through print media and through celebrity endorsements and have substantial resources to devote to such efforts. We believe that our and our competitors’ efforts have helped increase our sales, our product acceptance and general industry awareness. In addition, we have allocated resources and personnel to increase our sales in the markets outside of the United States.
Source and Availability of Raw Materials
Charlie’s Product Line.
Our manufacturing partners source the ingredients for our proprietaryDon Polly Product Line. For our full spectrumand broad-spectrum CBD products, we currently source the individual components and CBD from several suppliers. Each areis delivered to our primary manufacturer for storage prior to manufacturing. Our primary manufacturer for isolate CBD products handles all raw material sourcing internally.
Although we own the formulas for the Charlie’s Products and the Don Polly Products, and Bazi®, we obtain certain components, such as packaging, flavors and certain raw materials, from third party suppliers. None of the third-party suppliers are considered to be material to the business on a standalone basis and all arethe components that are readily available from other suppliers on the market. However, given the rapid growth of the vaping, e-cigarette and CBDhemp-derived products industries, there may be fluctuations in the availability of certain of the materials we obtain from third-parties due to high demand from our competitors. If any given supplier or distributor is lost or unavailable in a specific region, and we are unable to contract with alternative suppliers or distributors to provide the requisite service(s) and product(s), we may be unable to fulfill customer orders and our business could be materially harmed.
Competition
The industries in which we operate are highly competitive.
Charlie’s Product Line.
Our Charlie's Product Line competes in a highly-fragment and rapidly evolving industry. Some identifiable competitors of Charlie's include Naked100,In the e-liquid flavorvapor products space, new flavor brands emerge daily due to low barriers to entry.entry, new brands and products emerge frequently despite the need to conform with FDA guidelines for certain products. Companies that produce electronic cigarettes and vaporizers, including Vaporfi, Atmos and Njoy, carry their own flavor lines for the refillable market. OtherMore recently, the emergence of disposable vapor products from companies such as Puff Bar have become popular in the market. Some brands like Mount Baker Vapor focus on wide variety of choice and value, while other brandscompanies like Charlie’s Chalk Dust carve out their identity with branding, and more nuanced flavor combinations. The nature of our competitors is varied as the market is highly fragmented and the barriers to entry into the business are low.
Part of our business strategy focuses on the establishment of relationships with distributors and prominent branding focused on performance and quality. We are aware that e-cigarette competitors in the industry are also seeking to enter into such relationships andto try toand create brand loyalty. In many cases, competitors for such relationships may have greater management, human, and financial resources than we do for attracting distributor relationships. Furthermore, certain of our electronic cigarette competitors may have better control of their supply and distribution, are better established, larger and better financed than our Company.
We plan to compete primarily on the basis of product quality, brand recognition, brand loyalty, service, marketing, and advertising. We are subject to highly competitive conditions in all aspects of our business. The competitive environment and our competitive position can be significantly influenced by weak economic conditions, erosion of consumer confidence, competitors’ introduction of low-priced products or innovative products, cigarette excise taxes, higher absolute prices and larger gaps between price categories, and product regulation that diminishes thea company’s ability to differentiate tobaccoits products.
We also compete against “big tobacco”,“Big Tobacco” – U.S. cigarette manufacturers of both conventional tobacco cigarettes and electronic cigarettes like Altria Group, Inc., Lorillard, Inc. and Reynolds American, Inc. We compete against big tobacco who offerswith Big Tobacco companies that offer 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 nearlyvirtually limitless resources, global distribution networks in place and a customer base that is fiercely loyal to their brands. Furthermore, we believe that big tobaccoBig Tobacco will devote more attention and resources to developing and offering electronic cigarettes as the market for electronic cigarettes grows. Because of their well-established sales and distribution channels, marketing expertise and significant resources, big tobaccoBig Tobacco companies may be better positioned than small competitors like usCharlie’s to capture a larger share of the electronic cigarette market.
Don Polly Product Line
. The market forPatents and Trademarks
Charlie’s Product Line and Don Polly Product Line.
We are the registered owner of the federal trademarks for CHARLIE’S CHALK DUST, PACHAMAMA, STUMPS, AUNT MERINGUE & Design, CAMPFIRE & Design, Mr. MERINGUE & Design, and THE CREATOR OF FLAVOR & Design. We also maintain registrations in several international markets and will work with our international distributors to manage intellectual property and trademark registrations when necessary.We plan to continue to expand our brand names and our proprietary trademarks and designs worldwide as our business grows.
Licensing Agreements
Charlie’s Product Line. The Company occasionally evaluates licensing opportunities to expand its footprint in the patentglobal nicotine-based products marketplace. Charlie's doesn’t currently license any of its intellectual property rights for AquaBall®’s stackable, spherical drink containeruse in 2009, via GT Beverage Company, LLC, who we purchased on March 31, 2012. In both 2016 and 2017, we stopped using this bottle and, instead, switched to a bottle specifically designed for us by Niagara. In 2016 and 2017, we took impairment charges on the value of the spherical drink container patent.
Don Polly Product Line
. On April 25, 2019, the Company and Charlie’s entered into a License AgreementConcurrently with the execution of the License Agreement, Charlie’s and Don Polly also entered into a Services Agreement (the “
Services Agreement”), pursuant to which Charlie’s provides certain services to Don Polly, including, without limitation, (i) the development and creation of Don Polly’s sales, marketing, brand development and customer service strategies and (ii) performing sales, branding, marketing and other business functions at the request of Don Polly. Charlie’s will perform such services in the capacity of a contractor, and all materials and work product created by Charlie’s in its capacity as such will be the property of Don Polly. As consideration for the Services provided by Charlie’s, Don Polly (i) pays Charlie’s 25% of its net profits on a quarterly basis, and (ii) reimburse Charlie’s for all out-of-pocket business expenses that are preapproved in writing by Don Polly. The Services Agreement will continue in perpetuity unless terminated in accordance with its terms.Government Regulations
Charlie’s Product Line
Pursuant to a December 2010, decision, by the U.S. Court of Appeals for the District of Columbia Circuit, in Sottera, Inc. v. Food & Drug Administration, 627 F.3d 891 (D.C. Cir. 2010), the FDA is permitted to regulate electronic cigarettes as “tobacco products” under the Family Smoking Prevention and Tobacco Control Act of 2009 (the “
Tobacco Control Act”).Under this Court decision, the FDA is not permitted to regulate electronic cigarettes as “drugs” or “devices” or a “combination product” under the Federal Food, Drug and Cosmetic Act unless they are marketed for therapeutic purposes.
The Tobacco Control Act also requires establishment, within the FDA’s new Center for Tobacco Products, of a Tobacco Products Scientific Advisory Committee to provide advice, information and recommendations with respect to the safety, dependence or health issues related to tobacco products.
The FDA had previously indicated that it intended to regulate e-cigarettes under the Tobacco Control Act through the issuance of “Deeming Regulations” that would include e-liquid, e-cigarettes, and other vaping products (collectively, “Deemed Tobacco Products”) under the Tobacco Control Act and subject to the FDA’s jurisdiction.
On May 10, 2016, the FDA issued the “Deeming Regulations” which came into effect August 8, 2016. The Deeming Regulations amended the definition of “tobacco products” to include e-liquid, e-cigarettes and other vaping products. Deemed Tobacco Products include, but are not limited to, e-liquids, atomizers, batteries, cartomizers, clearomisers, tank systems, flavors, bottles that contain e-liquids, and programmable software. Beginning August 8, 2016, Deemed Tobacco Products became subject to all FDA regulations applicable to cigarettes, cigarette tobacco, and other tobacco products which require:
● | a prohibition on sales to those younger than 18 years of age and requirements for verification by means of photographic identification; |
● | health and addictiveness warnings on product packages and in advertisements; |
● | a ban on vending machine sales unless the vending machines are located in a facility where the retailer ensures that individuals under 18 years of age are prohibited from entering at any time; |
● | registration with, and reporting of product and ingredient listings to, the FDA; |
● | no marketing of new tobacco products prior to FDA review; |
● | no direct and implied claims of reduced risk such as "light", "low" and "mild" descriptions unless FDA confirms (a) that scientific evidence supports the claim and (b) that marketing the product will benefit public health; |
● | payment of user fees; |
● | ban on free samples; and |
● | childproof packaging. |
In addition, the Deeming Regulations requiresrequire any Deemed Tobacco Product that was not commercially marketed as of the “grandfathering” date of February 15, 2007, to obtain premarket approval before it can be marketed in the United States. Premarket approval could take any of the following three pathways: (1) submission of a
Since there were virtually no e-liquid, e-cigarettes or other vaping products on the market as of February 15, 2007, there is no way to utilize the less onerous substantial equivalence or substantial equivalence exemption pathways that traditional tobacco corporationcorporations can utilize. In order to obtain premarket approval, practically all e-liquid, e-cigarettes or other vaping products would have to follow the PMTA pathway which would cost hundreds of thousands of dollars per application. Furthermore, the Deeming Regulations also effectively froze the US market on August 8, 2016 since any new e-liquid, e-cigarette or other vaping product would be required to obtain an FDA marketing authorization though one of the aforementioned pathways. Deemed Tobacco Products that were on the market prior to August 8, 2016 have been provided with a grace period where such products cancould continue to be marketed until the May 12,September 9, 2020 PMTA submission deadline. Upon submission of a PMTA, such products would be permitted to be sold pending the FDA’s review of the submitted PMTAs, even iffollowing the May 12,September 9, 2020 deadline has passed.
In a press release dated July 28, 2017, the FDA also stated that “the FDA plans to issue foundational rules to make the product review process more efficient, predictable, and transparent for manufacturers, while upholding the agency’s public health mission. Among other things, the FDA intends to issue regulations outlining what information the agency expects to be included in PMTAs, Modified Risk Tobacco Product (“
MRTP”) applications and reports to demonstrate Substantial Equivalence (“SE”). The FDA also plans to finalize guidance on how it intends to review PMTAs for ENDS. The agency also will continue efforts to assist the industry in complying with federal tobacco regulations through online information, meetings, webinars and guidanceAs at the date of this Annual Report on Form 10-K, the Company continues to evaluate the potential returns associated with the preparation and submission of additional PMTAs during the remainderon certain of theits products. Such products would be afforded a similar grace period to determine whether or not to continue marketing e-liquid or other vaping products inbe marketed while the United States after the grace period lapses on May 12, 2020.
State and local governments currently legislate and regulate tobacco products, including what is considered a tobacco product, how tobacco taxes are calculated and collected, to whom tobacco products can be sold and by whom, in addition to where tobacco products, specifically cigarettes may be smoked and where they may not. Certain municipalities have enacted local ordinances which preclude the use of e-liquid, e-cigarettes and other vaping products where traditional tobacco burning cigarettes cannot be used and certain states have proposed legislation that would categorize vaping products as tobacco products, equivalent to their tobacco burning counterparts. If these bills become laws, vaping products may lose their appeal as an alternativealternatives to traditional cigarettes, which may have the effect of reducing the demand for the products.
The Company may be required to discontinue, prohibit or suspend sales of its e-liquidvapor products in states that require us to obtain a retail tobacco license. If the Company is unable to obtain certain licenses, approvals or permits and if the Company is not able to obtain the necessary licenses, approvals or permits for financial reasons or otherwise and/or any such license, approval or permit is determined to be overly burdensome to the Company, then the Company may be required to cease sales and distribution of its e-liquidvapor products to those states, which would have a material adverse effect on the Company’s business, results of operations, and financial condition.
As a result of FDA import alert 66-41 (which allows the detention of unapproved drugs promoted in the U.S.), U.S. Customs has from time to time temporarily and in some instances indefinitely detained certain products. If the FDA modifies the import alert from its current form which allows U.S. Customs discretion to release the products, to a mandatory and definitive hold, the Company may no longer be able to ensure a supply of raw materials or saleable product, which will have material adverse effect on the Company’s business, results of operations, and financial condition.
On December 27, 2020, President Trump signed the
Further Consolidated Appropriations Act, 2021, into law. This law included an amendment to the Jenkins Act expanding the definition of “cigarette” to include “electronic nicotine delivery systems,” or ENDS, and requires that the United States Postal Service ("USPS") promulgate regulations clarifying the applicability of the prohibition on delivery sales of cigarettes to ENDS. This amendment to the definition of “cigarette” now requires Charlie’s to comply with the Prevent All CigaretteAt present, the FederalCigaretteLabeling and Advertising Act
The tobacco industry expects significant regulatory developments to take place over the next few years, driven principally by the World Health Organization’s Framework Convention on Tobacco Control (“
FCTC”). The FCTC is the first international public health treaty on tobacco, and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. Regulatory initiatives that have been proposed, introduced or enacted include:● | the levying of substantial and increasing tax and duty charges; |
● | restrictions or bans on advertising, marketing and sponsorship; |
● | the display of larger health warnings, graphic health warnings and other labeling requirements; |
● | restrictions on packaging design, including the use of colors and generic packaging; |
● | restrictions or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines; |
● | requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituent levels; |
● | requirements regarding testing, disclosure and use of tobacco product ingredients; |
● | increased restrictions on smoking in public and work places and, in some instances, in private places and outdoors; |
● | elimination of duty-free allowances for travelers; and |
● | encouraging litigation against tobacco companies. |
If e-liquid, e-cigarettes or other vaping products are subject to one or more significant regulatory initiatives enacted under the FCTC, the Company’s business, results of operations, and financial condition could be materially and adversely affected.
On March 15, 2022, a new rider to the Federal Food, Drug and Cosmetic Act was passed granting the FDA authority over synthetic nicotine. These regulations make synthetic nicotine products subject to the same FDA rules as tobacco-derived nicotine products. As such, the Company must file a PMTA for its existing synthetic nicotine products marketed under the Pacha Syn brands by May 14, 2022, or be subject to FDA enforcement. Currently, the Company plans to file a PMTA for its synthetic Pacha Syn products prior to the May 14, 2022 deadline. If the PMTA is ultimately unsuccessful, or if the FDA issues a warning letter, or takes other action against the Company resulting in us not being able to distribute our Pacha Syn brand products in the United States, our revenues and, thereby our financial results and condition, could be materially adversely affected.
European Union
On April 3, 2014, the European Union issued the “
New Tobacco Product Directive” and is intended to regulate “tobacco products”, including cigarettes, roll-your-own tobacco, cigars and smokeless tobacco, and “electronic cigarettes and herbal products for smoking”, including e-cigarettes, e-liquid, refill containers, liquid holding tanks and e-liquid bottles sold directly to consumers. The New Tobacco Product Directive became effective May 20, 2016.The New Tobacco Product Directive introduces a number of new regulatory requirements for e-cigarettes, e-liquid and other vaping products, which includes the following: (i) restricts the amount of nicotine that e-cigarettes and e-liquid can contain; (ii) requires e-cigarettes, e-liquid and refill containers to be sold in child and tamper-proof packaging and nicotine liquids to contain only “ingredients of high purity”; (iii) provides that e-cigarettes, e-liquid and other vaping products must deliver nicotine doses at “consistent levels under normal conditions of use” and come with health warnings, instructions for their use, information on “addictiveness and toxicity”, an ingredients list, and information on nicotine content; (iv) significantly restricts the advertising and promotion of e-cigarettes, e-liquid and other vaping products; and (v) requires e-cigarette, e-liquid and other vaping product manufacturers and importers to notify EU Member States before placing new products on the market and to report annually such to Member States (including on their sales volumes, types of users and their “preferences”). Failure to make annual reports to Member State Competent Authorities or to properly notify prior to a substantive change to an existing product or introduction of a new product could result in the Company’s inability to market or sell its products and cause material adverse effect on the Company’s business, results of operations, and financial condition.
The New Tobacco Product Directive requires Member States to transpose into law New Tobacco Product Directive provisions by May 20, 2016. An “EU directive” requires Member States to achieve particular results. However, it does not dictate the means by which they do so. Its effect depends on how Member States transpose the New Tobacco Product Directive into their national laws. Member States may decide, for example, to introduce further rules affecting e-cigarettes, e-liquid and other vaping products (for example, age restrictions) provided that these are compatible with the principles of free movement of goods in the Treaty on the Functioning of the European Union. The Tobacco Product Directive also includes provisions that allow Member States to ban specific e-cigarettes, e-liquid and other vaping products or specific types of e-cigarettes, e-liquid and other vaping products in certain circumstances if there are grounds to believe that they could present a serious risk to human health. If at least three Member States impose a ban and it is found to be duly justified, the European Commission could implement a European Union wide ban. Similarly, the New Tobacco Product Directive provides that Member States may prohibit a certain category of tobacco, flavoring or related products on grounds relating to a specific situation in that Member State for public health purposes. Such measures must be notified to the European Commission to determine whether they are justified.
There are also other national laws in Member States regulating e-cigarettes, e-liquid and other vaping products. It is not clear what impact the new Tobacco Product Directive will have on these laws.
On September 27, 2017, Health Canada released a Notice to the Industry that portions of Bill S-5 related to the sale of vaping products that are marketed without health or therapeutic claims are to be enacted immediately upon Royal Assent. In effect, this both legitimizes the sale of vaping products within Canada and creates an initial regulatory framework. Health Canada has taken the stance that vaping products that are not marketed as therapeutic are to be considered consumer products and subject to the requirements of the
Canada Consumer Product Safety Act (“CCPSA”). Under the CCPSA, there is a “general prohibition” on products that are classified as “very toxic” under the Consumer Chemicals and Containers Regulations, 2001 (“CCCR, 2001”). Health Canada has reviewed the toxicity of nicotine containing products and has determined that “vaping liquids containing equal to or more than 66 mg/ml (6.6%) nicotine meet the classification of "very toxic" under the CCCR, 2001 and will be prohibited from import, advertising or sale under Section 38 of the CCCR, 2001. None of the Company’s e-liquid products for sale fall under this classification of “very toxic” and are therefore able to be marketed for sale within Canada. Health Canada has also determined that products containing any nicotine that falls below the “very toxic” classification to be regulated as “toxic” under the CCCR, 2001. This classification requires the use of childproof packaging, specific labeling requirements and pictograms as outlined in the CCCR, 2001.At present, the Company has made efforts to ensure that its e-liquid products that are being marketed in Canada are in full compliance with the recommendations of Health Canada and will expect no interruption to business upon Royal Ascent of Bill S-5.
Health Canada had also stated an intent to develop additional regulations under the authority of the CCPSA, however, at this time it is unclear what those additional regulations may be or how they will affect the Company’s business. If e-liquid, e-cigarettes or other vaping products are subject to one or more significant regulatory initiatives enacted under the Bill S-5 or otherwise, the Company’s business, results of operations and financial condition could be materially and adversely affected.
Currently in Canada, electronic smoking products (i.e., electronic products for the vaporization and administration of inhaled doses of nicotine including electronic cigarettes, cigars, cigarillos and pipes, as well as cartridges of nicotine solutions and related products) fall within the scope of the
Food and Drugs Act. All of these products require market authorization prior to being imported, advertised or sold in Canada. Market authorization is granted by Health Canada following successful review of scientific evidence demonstrating safety, quality and efficacy with respect to the intended purpose of the health product. To date, no electronic smoking product has been authorized for sale by Health Canada.In the absence of evidence establishing otherwise, an electronic smoking product delivering nicotine is regulated as a “new drug” under Division 8, Part C of the
Food and Drug Regulations. In addition, the delivery system within an electronic smoking kit that contains nicotine must meet the requirements of the Medical Devices Regulations. Appropriate establishment licenses issued by Health Canada are also needed prior to importing, and manufacturing electronic cigarettes. Products that are found to pose a risk to health and/or are in violation of the Food and Drugs Act and related regulations may be subject to compliance and enforcement actions in accordance with the Health Products and Food Branch Inspectorate’s Compliance and Enforcement Policy (POL-0001). According to Health Canada regulations, it is not permissible to import, advertise or sell electronic smoking products without the appropriate authorizations, and persons that violate these regulations are subject to repercussions from Health Canada, including but not limited to, seizure of the products.Since no scientific evidence demonstrating safety, quality and efficacy with respect to the intended purpose of e-cigarettes, e-liquid or other vaping products has been submitted to Health Canada to date, there is the possibility that in the future Health Canada may modify or retract the current prohibitions currently in place. However, there can be no assurance that the Company will be in total compliance, remain competitive, or financially able to meet future requirements and regulations imposed by Health Canada.
To date, Health Canada has not imposed any restrictions on e-cigarettes, e-liquid and other vaping products that do not contain nicotine. e-cigarettes,E-cigarettes, e-liquid and other vaping products that do not make any health claim and do not contain nicotine may legally be sold in Canada. Thus, vendors can openly sell nicotine-free e-cigarettes, e-liquid and other vaping products. However, there are vape shops operating throughout Canada selling e-cigarettes, e-liquid and other vaping products containing nicotine without any implications from Health Canada. e-cigarettes, e-liquid and other vaping products are subject to standard product regulations in Canada, including the
At present, neither the Tobacco Act (which regulates the manufacture, sale, labelling and promotion of tobacco products) nor the Tobacco Products Labelling Regulations (Cigarettes and Little Cigars) (which governs how cigarettes can be advertised and marketed) apply to e-cigarettes, e-liquid and other vaping products. The application of these federal laws to e-cigarettes, e-liquid and other vaping products would have a material adverse effect on the Company’s business, results of operations and financial condition.
Company’s efforts to mitigate risks associated with new and evolving regulation.
The Company is constantly seeking to stay in compliance with all existing and reasonably expected future regulations. The Company, through its internal compliance team, market consultants and technicians and testing labs hopes to stay in accordance with all standards whether set forth in the New Tobacco Products Directive or the Deeming Regulations. Making sure that all e-liquid products meet and exceed the standards set forth by each market’s regulatory body is of the highest concern for the Company. Staying in compliance with all marketing and packaging directives is imperative to maintaining access to the markets. Although these processes are costly and time consuming, it is imperative for the Company’s success that these steps are taken and constantly kept up to date. These regulations may limit our ability to enter certain markets outside the U.S. Similar to the costs of regulatory compliance in the U.S., foreign regulations require significant financial and operational resources to ensure compliance, and we cannot assure that we will always be in compliance despite our best efforts to do so. Failure to comply in a timely fashion to any particular directive or regulation could have material adverse effects on the results of business operations.
Don Polly Product Line
Don Polly’s CBD products are subject to various state and federal laws regarding the production and sales of hemp-based products. Section 12619 of the Agriculture Improvement Act of 2018 (“
2018Farm Bill”) removed “hemp”, as defined in the Agricultural Marketing Act of 1946 (the “1946 Agricultural Act”), from the classification of “marijuana,” which is generally prohibited as a Schedule I drug under the Controlled Substances Act of 1970 (“CSA”). Under the 1946 Agricultural Act (as amended by the 2018 Farm Bill), the term “hemp” means “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis”. As a result of the passage of the 2018 Farm Bill, and since the Company believes the Don Polly Products contain parts of the cannabis plant with a THC concentration of not more than 0.3 percent on a dry weight basis, the Company believes that the Don Polly Products are not governed by the CSA and, ergo, would not be subject to prosecution thereunder because the Company believes the Don Polly Products contain “hemp” within the meaning of the 1946 Agricultural Act (as amended by the 2018 Farm Bill) and do not contain any “marijuana” as prohibited under the CSA (as amended by the 2018 Farm Bill); provided, however, there is a lack of legal protection for hemp-based products that contain more than 0.3 percent THC and there is a risk that the Company would be subject to prosecution under the CSA in the event that its CBD products are found to contain more than 0.3 percent THC.Furthermore, the 1946 Agricultural Act (as amended by the 2018 Farm Bill) provides additional regulations regarding the production of hemp-based products and there is the risk that the Don Polly Products may be found to be in violation of these regulations. Specifically, the 1946 Agricultural Act (as amended by the 2018 Farm Bill) contains provisions relating to the shared state-federal jurisdiction over hemp cultivation and production, whereby states and Indian tribes have been delegated the broad authority to regulate and limit the production and sale of hemp and hemp products within their borders. Under the 1946 Agricultural Act (as amended by the 2018 Farm Bill), a plan under which a State or Indian tribe monitors and regulates the production of hemp shall only be required to include “(i) a practice to maintain relevant information regarding land on which hemp is produced in the State or territory of the Indian tribe, including a legal description of the land, for a period of not less than three calendar years; (ii) a procedure for testing, using post-decarboxylation or other similarly reliable methods, delta-9 tetrahydrocannabinol concentration levels of hemp produced in the State or territory of the Indian tribe; (iii) a procedure for the effective disposal of—(I) plants, whether growing or not, that are produced in violation of this subtitle; and (II) products derived from those plants; (iv) a procedure to comply with enforcement procedures; (v) a procedure for conducting annual inspections of, at a minimum, a random sample of hemp producers to verify that hemp is not produced in violation of this subtitle; (vi) a procedure for submitting the information, as applicable, to the Secretary of Agriculture (the “Secretary”) not more than 30 days after the date on which the information is received; and (vii) a certification that the State or Indian tribe has the resources and personnel to carry out the practices and procedures described in clauses (i) through (vi)”. Further, a hemp producer in a State or the territory of an Indian tribe for which a State or Tribal plan is approved shall be determined to have negligently violated the State or Tribal plan, including by negligently— “(i) failing to provide a legal description of land on which the producer produces hemp; (ii) failing to obtain a license or other required authorization from the State department of agriculture or Tribal government, as applicable; or (iii) producing Cannabis sativa L. with a delta-9 THC concentration of more than 0.3 percent on a dry weight basis”. A hemp producer that negligently violates a State or Tribal plan 3 times in a 5-year period shall be ineligible to produce hemp for a period of 5 years beginning on the date of the third violation. If the State department of agriculture or Tribal government in a State or the territory of an Indian tribe for which a State or Tribal plan, as applicable, determines that a hemp producer in the State or territory has violated the State or Tribal plan with a culpable mental state greater than negligence— “(i) the State department of agriculture or Tribal government, as applicable, shall immediately report the hemp producer to —(I) the Attorney General; and (II) the chief law enforcement officer of the State or Indian tribe, as applicable”. In the case of a State or Indian tribe for which a State or Tribal plan is not approved, the production of hemp in that State or the territory of that Indian tribe shall be subject to a plan established by the Secretary to monitor and regulate that production. A plan established by the Secretary under shall include— “(A) a practice to maintain relevant information regarding land on which hemp is produced in the State or territory of the Indian tribe, including a legal description of the land, for a period of not less than 3 calendar years; (B) a procedure for testing, using post-decarboxylation or other similarly reliable methods, delta-9 tetrahydrocannabinol concentration levels of hemp produced in the State or territory of the Indian tribe; (C) a procedure for the effective disposal of—(i) plants, whether growing or not, that are produced in violation of this subtitle; and (ii) products derived from those plants; (D) a procedure to comply with the enforcement procedures; (E) a procedure for conducting annual inspections of, at a minimum, a random sample of hemp producers to verify that hemp is not produced in violation of this subtitle; and (F) such other practices or procedures as the Secretary considers to be appropriate. The Secretary shall also establish a procedure to issue licenses to hemp producers. In the case of a State or Indian tribe for which a State or Tribal plan is not approved under applicable law, it shall be unlawful to produce hemp in that State or the territory of that Indian tribe without a license issued by the Secretary. A violation of a plan established by the Secretary shall be subject to enforcement and the Secretary shall report the production of hemp without a license issued by the Secretary to the Attorney General. In the event that the Company’s CBDhemp-derived products are found to be in violation of these regulations, the Company may become subject to enforcement action as provided for in the 1946 Agricultural Act (as amended by the 2018 Farm Bill) and may become subject to prosecution thereunder.
Research and Development
Our research and development activities consist of development and testing of new flavors, formulations, formats and delivery methods for our existing products, as well as development of new products for the Charlie’s Product Line and the Don Polly Product Line. Costs related to the completion and submission of PMTAs to the FDA also constitute research and development activities. For the year ended December 31, 2019,2021, research and development costs primarily consisted of product development and testing and development fees related to the Company’s PMTA submissions.
For the years ended December 31, 20192021 and 2018,2020, Charlie’s recorded research and development expense of $1,102,000$24,000 and $0,$3,378,000, respectively.
Employees
We had 5940 full-time employees across Charlie’s Holdings Inc., Charlie’s Chalk Dust LLC and Don Polly LLC as of April 6, 2020.
Cost of Compliance with Environmental Laws
We have not incurred any costs associated with compliance with environmental regulations, nor do we anticipate any future costs associated with environmental compliance; however, no assurances can be given that we will not incur such costs in the future.
Available Information
As a public company, we are required to file our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements on Schedule 14A and other information (including any amendments) with the SEC. You can also find the Company’s SEC filings at the SEC’s website at
www.sec.gov.Our Internet address is
www.charliesholdings.com. Information contained on our website is not part of this Annual Report on Form 10-K. Our SEC filings (including any amendments) will be made available free of charge onwww.charliesholdings.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.ITEM 1A. RISKRISK FACTORS
We are subject to various risks that could have a negative effect on the Company and its financial condition. These risks could cause actual operating results to differ from those expressed in certain “forward looking statements” contained in this Annual Report on Form 10-K as well as in other communications.
Risks Related to the Company
Our operations are now primarily dependent on the business of Charlie’s,Charlie’s, 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. Although Charlie’s generated net revenue of approximately $20.0$21.5 million during the year ended December 31, 20192021 and $20.8$16.7 million for the year ended December 31, 2018,2020, there can be no guarantee that the Company will continue to grow revenue or achieve positive cash flow in the future.
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 December 31, 2019,2021, we had negative working capital of approximately $1,566,000,$2.5 million, which consisted of current assets of approximately $5,611,000$8.0 million and current liabilities of approximately $7,177,000.$5.5 million. In addition,
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 iswas required to apply for FDA approval to continue selling and marketing its products used for the vaporization of nicotine in the United States. Currently, a substantial portion of the Company’s sales are derived from products that are subject to approval by the FDA. There iswas significant cost associated with the application process and there can be no assurance the FDA will approve the application(s).previous and/or future application. In addition, the recent outbreak of a novel strain of COVID-19 (“
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, a significant shareholder and founder of the Company, and Ryan Stump, the founders of Charlie’s and our Chief Executive Officer and Chief Operating Officer respectively,and a founder of the Company, collectively own approximately 59%38% of our issued and outstanding voting securities as a result of the Share Exchange.securities. 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.
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, BrandonRyan Stump, and Ryan Stump,one of Charlie’s founders and our Chief Executive Officer and Chief Operating Officer, respectively, and David Allen,Matt Montesano, our Chief Financial Officer.Officer, and Henry Sicignano, our President. 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-relatedhemp-derived 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 companyCompany 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 ("VIE"), 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,VIE, are held by entities controlled by Ryan Stump, the Company's Chief Operating Officer and member of our Board of Directors, and Brandon Stump, our Chief Executive Officer, and Ryan Stump, our Chief Operating Officer.a significant shareholder of the Company. 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 companyCompany 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.
The equity interests of Don Polly, our consolidated VIE, are held by entities controlled by Ryan Stump, the Company's Chief Operating Officer and member of our Board of Directors, and Brandon Stump, a significant shareholder of the Company and former Chief Executive Officer. Their interests in certain jurisdictionsDon 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 stringent data privacy laws.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, California recently adopted the California Consumer Privacy Actshareholders 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 2018 (“
The business that we conduct outside the U.S.United States 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, mayhas adversely affectaffected 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 (“
The outbreak and persistence of CoronavirusCOVID-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 CoronavirusCOVID-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 the CoronavirusCOVID-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 (“
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.
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. Moreover, the current trend is toward increasing regulation of the tobacco industry, which is likely to differ between the various U.S. states in which we currently conduct the majority of our business. Extensive and inconsistent regulation by multiple states and at different governmental levels could prove to be particularly disruptive to our business as we may be unable to accommodate such regulations in a cost-effective manner that allows us to continue to compete in an economically viable way. Regulations are often introduced without the tobacco industry’s input and have been a significant reason behind reduced industry sales volumes and increased illicit trade.
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.
In 1986, federal legislation was enacted regulating smokeless tobacco products (including dry and moist snuff and chewing tobacco) by, among other things, requiring health warnings on smokeless tobacco packages and prohibiting the advertising of smokeless tobacco products on media subject to the jurisdiction of the Federal Communications Commission (“FCC”). Since 1986, other proposals have been made at the federal, state, and local levels for additional regulation of tobacco products. It is likely that additional proposals will be made in the coming years. For example, the Prevent All Cigarette Trafficking Act (“PACT Act”) initially prohibited the use of the U.S. Postal Service to mail cigarette and smokeless tobacco products and also amended the Jenkins Act, which established cigarette sales reporting requirements for state excise tax collection, to require individuals and businesses that make interstate sales of certain cigarette or smokeless tobacco comply with state tax laws. The PACT Act was recently amended expanding the definition of “cigarette” to include “electronic nicotine delivery systems,” or ("ENDS"), and requires that the United States Postal Service ("USPS") promulgate regulations clarifying the applicability of the prohibition on delivery sales of cigarettes to ENDS. This amendment to the PACT Act applies to certain products manufactured and sold by the Company, which has impacts at the federal and state levels. Failure to comply with the PACT Act could result in significant financial or criminal penalties. To the extent we are unable to respond to, or comply with, these new requirements, there could be a material adverse effect on our business, results of operations and financial condition.
On June 22, 2009, the Family Smoking Prevention and Tobacco Control Act (the “Tobacco Control Act”) granted the FDA regulatory authority over tobacco products. The Act also amended the Federal Cigarette Labeling and Advertising Act, which governs how cigarettes can be advertised and marketed, as well as the Comprehensive Smokeless Tobacco Health Education Act (“CSTHEA”), which governs how smokeless tobacco can be advertised and marketed. In addition to the FDA and FCC, we are subject to regulation by numerous other federal agencies, including the Federal Trade Commission (“FTC”), the Department of Justice (“DOJ”), the Alcohol and Tobacco Tax and Trade Bureau (“TTB”), the U.S. Environmental Protection Agency (“EPA”), the U.S. Department of Agriculture (“USDA”), the Consumer Product Safety Commission (“CPSC”), the U.S. Customs and Border Protection (“CBP”) and the U.S. Center for Disease Control and Prevention’s (“CDC”) Office on Smoking and Health. There have also been adverse legislative and political decisions and other unfavorable developments concerning cigarette smoking and the tobacco industry, which we believe have received widespread public attention. The FDA has, and other governmental entities have, expressed concerns about the use of flavors in tobacco products and an interest in significant regulation of such use, up to and including de facto bans in certain products. There can be no assurance as to the ultimate content, timing or effect of any regulation of tobacco products by governmental bodies, nor can there be any assurance that potential corresponding declines in demand resulting from negative media attention would not have a material adverse effect on our business, results of operations and financial condition.
Recently enacted legislative changes to the Federal Food, Drug and Cosmetic Act could materially affect sales of our Pacha Syn branded products, and if we do not file a PMTA for these products, we will not be able to market them which could materially affect our revenue and financial results.
On March 15, 2022, a new rider to the Federal Food, Drug and Cosmetic Act was passed granting the FDA authority over synthetic nicotine. These regulations make synthetic nicotine products subject to the same FDA rules as tobacco-derived nicotine products. As such, the Company must file a PMTA for its existing synthetic nicotine products marketed under the Pacha Syn brand by May 14, 2022, or be subject to FDA enforcement. Currently, the Company plans to file a PMTA for its synthetic Pacha Syn products prior to the May 14, 2022 deadline. If the PMTA is ultimately unsuccessful, or if the FDA issues a warning letter, or takes other action against the Company resulting in us not being able to distribute our Pacha Syn branded products in the United States, our revenues and, thereby our financial results and condition, could be materially adversely affected.
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 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 have been filed with the FDA. Upon submission of a PMTA, products are able to be marketed pending the FDA’s review of the submission. Without obtaining marketing authorization by the FDA prior to the September 9, 2020 deadline or having submitted a PMTA by such date, non-authorized products were 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 was pending as of the September 9, 2020 deadline.
As at the date of this Report, we have submitted PMTAs for certain of our 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. The costs to date associated with these PMTAs are 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.
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,Charlie’s products, and maysignificant increases in state and local regulation of Charlie's products 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 and Massachusetts have temporarily banned the sale of flavored e-cigarettes, while previously imposed bans in New York, 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 the 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.
Certain states and cities have already restricted the saleuse of electronic cigarettes and vaporizer products in smoke-free venues, imposed excise taxes, or limited sales of flavored e-cigarettes, while previously imposed bans in New York, MichiganCharlie's products. Additional city, state or federal regulators, municipalities, local governments and Oregon have been temporarily halted by judicially imposed injunctions. Many states, provinces,private industry may enact additional rules and some cities have passed lawsregulations restricting the sale of e-cigaretteselectronic cigarettes and certain other nicotine vaporizer products.
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 the Charlie’s Products,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, 2019 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 the Charlie’s Products,products, could decline, which could have a material adverse effect on our business, results of operations and financial condition.
The marketing and sale ofDelta-8-THC and other syntheticcannabinolproductsby the Company could subject it to limitations or restrictions imposed by the FDA, the states or other regulatory authorities.
The Company’s production of Delta-8-Tetrahydrocannabinol ("Delta-8-THC") and other synthetic tetrahydrocannabinol ("Synthetic THC") products derived from hemp could subject it to limitations or restrictions, which could result in an outright ban on such marketing or sale. Regulatory uncertainties regarding potential adverse changes in Federal and state laws may have a materially adverse effect on our business and the trading price of our common stock. These risks are heightened as they relate to the nicotine, marijuana, Delta-8-THC, Synthetic THC, CBD and other cannabinoid varieties, derivatives and /or equivalents which are controversial socially, scientifically and legally. In addition, although we believe that Delta-8-THC is legal under the Farm Bill, certain states have moved to ban Synthetic THC or have moved to regulate Synthetic THC as marijuana.
Notwithstanding the foregoing, the legality of hemp derived Synthetic THC is in a gray area and varies from state-to-state, with some states allowing Synthetic THC, others not addressing Synthetic THC specifically, while others have banned Synthetic THC due to its similarity to tetrahydrocannabinol. The Federal legality of Synthetic THC is still unknown, and the Federal government has yet to take a definitive position. Should the Company become subject to enforcement action by Federal, state or other regulatory agencies, it could be forced to spend significant sums defending against such enforcement action and ultimately could be forced to stop marketing and selling some or all of its Delta-8-THC products and/or be subject to other sanctions, which would have a material adverse effect on the Company’s business and shareholders’ investments.
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,Act, 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-liquidsvapor products 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 expenses.
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.United States 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.
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 stockCommon Stock on the OTC Pink MarketplaceOTCQB Venture Market and an active trading market for our common stockCommon 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 stockCommon 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,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 stockCommon 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,Common Stock, even if there is no relationship between such sales and the performance of our business. As of April 6, 2020,December 31, 2021, we had 18,982,290,068210,890,930 shares of common stockCommon Stock outstanding, as well as outstanding options to purchase an aggregate of 801,325,0007,122,937 shares of our common stockCommon Stock at a weighted average exercise price of $ 0.0044313$0.5417 per share, up to 4,607,805,56132,016,491 shares of common stockCommon Stock issuable upon conversion of outstanding shares of Series A Preferred and outstanding warrants to purchase up to an aggregate of 4,033,769,34040,424,000 shares of our common stockCommon Stock at a weighted average exercise price of $0.0044313$0.44313 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 stockCommon 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 billion500.0 million shares of common stock,Common Stock, of which approximately 18.982 billion216,840,987 million shares are currently issued and outstanding.outstanding as of April 12, 2022. In addition, we have reserved approximately 10.2 billion79.5 million shares for issuance upon conversion and/or exercise of our outstanding shares of Series A Preferred, warrants and stock options.,options, as well as for issuance as awards under our 2019 Omnibus Incentive Plan. The issuance of any additional shares of our common stock,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.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 it ranks senior to our common stock
Our common stockCommon 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.Common Stock. Such rights could cause dilution of our common stockCommon 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 of Common Stock 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 stockCommon Stock or grant any rights to purchase our common stockCommon Stock or other securities convertible into our common stockCommon 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 stockholdersholders of Common Stock 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.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 stockCommon 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 stockCommon Stock may be classified as “penny stock”, trading may be limited, and the share price could decline. Moreover, trading of our common stock,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.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 stockPreferred Stock with rights senior to our common stock,Common Stock, and may issue additional preferred stockPreferred 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,Preferred Stock without stockholder approval and on terms established by our directors,Board of 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 stockPreferred Stock in the future in order to consummate a financing or other transaction, in lieu of the issuance of shares of our common stock.Common Stock. The rights and preferences of any such class or series of preferred stockPreferred 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’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 (“
In the case of publicly-tradedpublicly 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 stockCommon 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 stockCommon Stock and do not anticipate paying any cash dividends in the foreseeable future. You should not make an investment in our common stockCommon Stock if you require dividend income. Any return on investment in our common stockCommon Stock would only come from an increase in the market price of our stock, which is uncertain and unpredictable.
None.
ITEM 2. PROPERTIES
Facilities
The Company leases office space that expireexpires on various dates through 2024. All of the Company’s lease liabilities result from the lease of its warehouse in Santa Ana, California, which expiresexpired in 2021, its office and warehouse in Denver, Colorado, which expires in 2022, its warehouse space in Huntington Beach, California, which expires in 2022, and its corporate headquarters in Costa Mesa, California which expires in 2024.
Insurance
We maintain commercial general liability insurance, including product liability coverage, and property insurance. The Charlie’s policy provided for a general liability limit of $2.0$1.0 million per occurrence and $10.0$2.0 million in annual aggregate umbrellacoverage. The Don Polly policy provided for a general liability limit of $6.0 million per occurrence and $7.0 million in annual aggregate coverage. We also maintain Director's and Officer's insurance.
ITEM 3. LEGALLEGAL PROCEEDINGS
From time to time, claims are made against the Company in the ordinary course of business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties, and unfavorable outcomes could occur. In the opinion of management, the resolution of these matters, if any, will not have a material adverse impact on the Company’s financial position or results of operations.
ITEM 4. MINEMINE SAFETY DISCLOSURES
None.
ITEM 5. MARKETMARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our
common stock is traded on the OTCQB Venture Marketplace under the symbol “CHUC”. Prior to August 3, 2021, our common stock was traded on the OTC Pink Marketplace under the symbolThe following table sets forth high and low sales prices for our
common stock for the calendar quarters indicated as reported by theHigh | Low | |
| 2019 | ||
| First Quarter ended March 31, 2019 | $0.01 | $0.002 |
| Second Quarter ended June 30, 2019 | $0.08 | $0.004 |
| Third Quarter ended September 30, 2019 | $0.04 | $0.0042 |
| Fourth Quarter ended December 31, 2019 | $0.01 | $0.0014 |
| 2018 | ||
| First Quarter ended March 31, 2018 | $0.03 | $0.01 |
| Second Quarter ended June 30, 2018 | $0.03 | $0.01 |
| Third Quarter ended September 30, 2018 | $0.01 | $0.01 |
| Fourth Quarter ended December 31, 2018 | $0.01 | $0.01 |
| 2017 | ||
| First Quarter ended March 31, 2017 | $0.13 | $0.07 |
| Second Quarter ended June 30, 2017 | $0.17 | $0.08 |
| Third Quarter ended September 30, 2017 | $0.15 | $0.07 |
| Fourth Quarter ended December 31, 2017 | $0.07 | $0.01 |
High | Low | |||||||
2021 | ||||||||
First Quarter ended March 31, 2021 | $ | 2.2940 | $ | 0.3100 | ||||
Second Quarter ended June 30, 2021 | $ | 0.8700 | $ | 0.2900 | ||||
Third Quarter ended September 30, 2021 | $ | 0.3050 | $ | 0.1650 | ||||
Fourth Quarter ended December 31, 2021 | $ | 0.1980 | $ | 0.1128 | ||||
2020 | ||||||||
First Quarter ended March 31, 2020 | $ | 0.250 | $ | 0.170 | ||||
Second Quarter ended June 30, 2020 | $ | 0.230 | $ | 0.160 | ||||
Third Quarter ended September 30, 2020 | $ | 0.450 | $ | 0.180 | ||||
Fourth Quarter ended December 31, 2020 | $ | 0.410 | $ | 0.250 | ||||
2019 | ||||||||
First Quarter ended March 31, 2019 | $ | 1.00 | $ | 0. 200 | ||||
Second Quarter ended June 30, 2019 | $ | 8.00 | $ | 0. 400 | ||||
Third Quarter ended September 30, 2019 | $ | 4.00 | $ | 0. 420 | ||||
Fourth Quarter ended December 31, 2019 | $ | 1.00 | $ | 0. 140 | ||||
Holders
As of April 6, 2020,12, 2022, there were 18,982,290,068216,840,987 shares of our common stock outstanding, and approximately
Transfer Agent
Our Transfer Agent and Registrar for our
common stock isAs a “smaller reporting company”, as defined by the rules and regulations of the SEC, we are not required to provide this information.
ITEM 7. MAN
You should read the following discussion and analysis in conjunction with our financial statements, including the notes thereto contained in this Annual Report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of certain factors, including those set forth under “Risk“Risk Factors Associated with Our Business”Business” and elsewhere in this Annual Report.
Overview
Our objective is to become a significant leader in the rapidly growing, global e-cigarette segmentand e-liquid segments 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.premium, nicotine-based vapor products. 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 asand in more than 80 countries worldwide. Charlie’s primary international markets include the United Kingdom, Italy, Spain, Belgium,New Zealand, 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 (“
Operational Plan
Considering industry-specific hurdles, as well as the Share Exchange (defined below), our primary business was the development, marketing, salepotential for future regulatory changes, management has targeted opportunities for growth and distribution of all-natural, vitamin-enhanced drinks, including AquaBall® Naturally Flavored Water and Bazi® All Natural Energy (“
First, we plan to focus on increasingincrease the sales of our CBD relatedhemp-derived products, including topicals, tincturesingestibles and vaping liquids.disposable vapor devices. We feel there is a significant upside in the CBDhemp-derived products space, and we have begun to shift our focus on numerous vertical marketsin this business to the burgeoning market for the saleproducts containing compounds synthetically derived from hemp, including Delta-8-Tetrahydrocannabinol ("Delta-8-THC") and other synthetic tetrahydrocannabinol ("Synthetic THC") compounds. These product categories have grown rapidly, as they offer consumers a range of benefits across varying potencies and product formats. We have also recently allocated additional financial resources to increase e-commerce sales of certain of our isolate, full and broad-spectrumhemp-derived 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.
Secondly, we continue to see a significant opportunity for sales growth in international markets for nicotine e-liquids.our e-liquid and other vapor products. Presently, 25%approximately 17% of our e-liquidvapor product sales come from the international market and we are well positioned to increase those sales in the countries thatwhere we presently sell,already have presence, and in additional overseas markets, as we have already built an international distribution platform.
Most importantly, we feel that thetobacco and synthetically derived nicotine based flavored vapingvapor products will continue to beprovide a significant growth opportunity once alldomestically. During the rightful regulatory changes have been made.quarter ended March 31, 2021, we launched our synthetic nicotine (not derived from tobacco) Pacha Syn (formerly Pachamama Disposable) product line, which will provide access to additional sales channels and broaden our customer base. These innovative product formats currently represent Charlie’s most important, fastest-growing product category. We will continueare continuing with our plan to obtain marketing authorization for certain of our nicotine vapor products through the submissioncompletion of a Premarket Tobacco Application (“PMTA”), which is duewe submitted in MaySeptember 2020. We expectObtaining a marketing order from the cost associated withFDA would, we believe, help to remediate perceived health issues related to vaping, and further position the preparation and submission of these PMTAs will be approximately $4.4 million. In addition, we are evaluating the potential returns associated with obtaining marketing authorization for our other nicotine based vaping products after the May 2020 deadline.Company as a trusted, industry leader. We feel that a significant amountnumber of our competitors will not have the necessary resources and/or expertise to complete the extensive and costly PMTA process and that, once complete,authorized by the FDA, we will be able to benefit from beingsignificantly by emerging as one of only a select group of companies able to continue operating in the flavored nicotine productvapor products space. For more information, see the section titled “Government Regulations
Impact of COVID-19
The outbreak of a novel strain of coronavirus (“COVID-19”, as well asor, “Coronavirus”) has had, and continues to have, a negative impact on the global economy and the markets in which we operate. Beginning in March 2020, the Company transitioned nearly all employees to a remote working environment for their safety and to protect the integrity of Company operations. We have updated certain sales, accounting and administrative processes, and corresponding information technology platforms, in an effort to help facilitate the virtual work environment which still persists for some employees. During the year ended December 31, 2021, we engaged in periodic, informal testing of our business operations, and we do not believe that our financial position, work efficiency and overall operational integrity have been materially affected. However, we recognize that a certain degree of employee enthusiasm, teamwork, creativity, and support is normally generated by being present at a physical location, and we believe that prolonged remote working may have a negative impact over time on our business, and on employee productivity. Our Denver, CO office and Huntington Beach, CA warehouse locations have returned fully to on “premise status”, while our corporate headquarters in Costa Mesa, CA remains remote for some employees. We will continue to monitor the COVID-19 situation in all regions in which we operate and will maintain strict adherence to local health guidelines and mandates. We may need to take further actions that we determine are in the best interests of our employees or are required by federal, state, or local authorities.
Supply Chain
Our ability to manufacture products is dependent on the availability of certain raw materials and components that our contract manufacturers purchase from Europe and China. In February 2020, we started to experience disruptions across several key areas of our global supply chain. Our domestic and international contract manufacturers source many of our high-quality flavorings from suppliers located in Italy, a region that was severely affected by COVID-19-related restrictions throughout most of 2020. Mandated stay-at-home orders in this region ultimately caused increased manufacturing lead times and delayed customer order deliveries for certain of our products, resulting in revenue declines.
We have been successful in mitigating some of the supply chain risks through bulk purchases of certain flavorings and uncertainties described under “Risk Factors – Regulatorycomponents and Market Risks”.
Certain of our products are sourced from China and require delivery to our warehouse locations in the United States prior to shipment to customers. Although we currently use air freight for Chinese shipments, ongoing disruptions in the global supply chain could continue to affect the costs associated with such shipments and could put additional pressure on our sales and margins.
If a resurgence of COVID-19 and associated shutdowns were to occur in Europe or China, this would likely have an adverse effect on our ability to manufacture and sell our products due to related shortages of materials and components. Depending on the severity of any such future shutdowns, we could experience a materially diminished ability to produce products and be exposed to significantly longer lead times. This would result in delayed or reduced revenue from the affected products in production and potentially higher operating costs.
Sales and Marketing
Our sales and marketing efforts have also been directly and indirectly affected by COVID-19. Most of our sales through Charlie’s and Don Polly are to resellers of our products, typically distributors or brick and mortar retail locations. Stay-at-home mandates across the U.S. and internationally created a challenge for these customers to maintain continuity in their businesses, and therefore we experienced lower sales volumes in some regions. Periodic labor shortages, indirectly related to COVID-19, have also influenced our customers’ ability to operate their businesses effectively. We’ve since seen activity approach pre-pandemic levels, however a resurgence of COVID-19, causing subsequent shutdowns and labor shortages, could have a significant effect on our business.
Historically, most of our business-to-business sales and marketing efforts have been generated through industry events in both the vapor products and hemp-derived products spaces. During 2019, we also initiated a program of in-store marketing events to help facilitate relationship building and sell-through for our retail partners. Beginning in 2020, the suspension of certain trade shows and disruption of business travel weakened our new customer pipeline, which negatively affected our sales during the years ended December 31, 2021 and 2020. Though trade show activity has since rebounded, it remains uncertain how the effects of COVID-19 will persist and what effect they will have on our sales and marketing efforts. In response, we have shifted some of our focus to digital marketing campaigns aimed at customer engagement and education. We also continue to allocate additional resources towards certain key distributors and retail partners that are better positioned to interact directly with our consumers and to continue growing our brands.
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.
On March 11, 2020, the World Health Organization designated the ongoing and evolving COVID-19 outbreak as a resultpandemic. The outbreak has caused substantial disruption in international and U.S. economies and markets as it continues to evolve. 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.
Recent Developments
Resignation of Brandon Stump
On October 29, 2021, Brandon Stump resigned from his position as: (i) Chief Executive Officer and Chairman of the PMTA registration process. The $7,200,000 net income generated in 2018 does not include officer compensationBoard of Directors; and (ii) all positions held for the current CEOeach direct and COO, as the 2018 earnings were distributed as an equity transaction asindirect subsidiary of the Company was privately owned(each, a "Subsidiary"), including as an LLC.
In connection with Mr. Stump's resignation, the Company and Mr. Stump entered into a Securities Exchangean agreement regarding Mr. Stump's resignation (the "Termination Agreement"), which Termination Agreement is dated October 29, 2021. Pursuant to the Termination Agreement, in consideration for Mr. Stump agreeing to terminate his employment agreement with the Company, as amended and restated on February 12, 2020 (the "Employment Agreement"), and agreeing to certain restrictions and covenants, the Company will: (i) continue to pay Mr. Stump his base salary (as defined in the Employment Agreement), through April 22, 2022; (ii) pay Mr. Stump certain bonus compensation owed to Mr. Stump in an amount equal to $300,000, payable in installments of $75,000 on each of the former members (“
Reverse Stock Split
Our Board of units, with such units consistingDirectors approved a reverse stock split of an aggregate of (i) 15,655,538,349our authorized, issued, and outstanding 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 (“
March 2021 Private Placement
On March 19, 2021, the Company entered into Securities Purchase Agreements by and between the Company and certain family trusts in which Mr. Brandon Stump, the Company's former Chief Executive Officer and significant shareholder of the Company, and Mr. Ryan Stump, the Company's Chief Operating Officer, are trustees and beneficiaries (the "Purchase Agreements"), for the private placement of an aggregate of 13,963,047,7163,517,000 shares of common stock,its Common Stock, at a purchase price per share of $0.853 (the "Private Placement"), which Private Placement was consummated on March 22, 2021. The Private Placement resulted in gross proceeds to the Company of approximately $3.0 million. The Private Placement was undertaken pursuant to Rule 506 promulgated under the Securities Act of 1933, as amended, and was consummated in a transaction approved by the Company's independent directors in accordance with Rule 16b-3(d)(1) of the Securities Exchange Act of 1934, as amended.
Red Beard Holdings, LLC Note Payable
On April 1, 2020, the Company, Charlie's and its VIE, Don Polly, issued a secured promissory note (the "Red Beard Note") to certain individualsone of the Company's largest stockholders, Red Beard Holdings, LLC ("Red Beard") in lieuthe principal amount of common stock); (ii) 206,249 shares$750,000 (the "Principal Amount"), requiring a guaranteed minimum interest amount of $75,000 (“Minimum Interest”). The Red Beard Note is secured by all assets of the Company pursuant to the terms of a newly created classSecurity Agreement entered into by and between the Company and Red Beard (the "Red Beard Note Financing"). The Red Beard Note was subsequently amended on August 27, 2020, September 30, 2020, October 29, 2020, December 1, 2020, and January 19, 2021, ultimately increasing Principal Amount to $1.4 million and Minimum Interest to $150,000.
On March 24, 2021, the Company and Red Beard entered into a Satisfaction and Release (the "Red Beard Release"), pursuant to which the Company made a payment to Red Beard in the amount of Series A Convertible Preferred Stock, par value $0.001 per share (“
Small Business Administration Loan Programs
On April 30, 2020, Charlie's, a wholly owned subsidiary of the Company.
The Charlie's PPP Loan provided for working capital to CCD in connectionthe amount of $650,761. The Charlie's PPP Loan was set to mature on April 30, 2022 and accrued interest at a rate of 1.00% per annum. Payments of principal and interest were deferred for six months from the date of the Charlie's PPP Loan, or until November 30, 2020. Interest, however, continued to accrue during that time.
On April 14, 2020, Don Polly also obtained a loan pursuant to the PPP enacted under the CARES Act (the "Polly PPP Loan" and together with the Share Exchange, Charlie’s consummatedCharlie's PPP Loan, the "PPP Loans") from Community Banks of Colorado, a private offeringdivision of membership interestsNBH Bank (the "Polly Lender"). The Polly PPP Loan obtained by Don Polly provided for working capital to Don Polly in the amount of $215,600. The Polly PPP Loan was set to mature on April 14, 2022 and accrued interest at a rate of 1.00% per annum. Payments of principal and interest were deferred for six months from the date of the Polly PPP Loan, or until November 14, 2020. Interest continued to accrue during that resulted in gross proceedstime.
The aforementioned PPP Loans were made under the PPP enacted by Congress under the CARES Act. The CARES Act (including the guidance issued by SBA and U.S. Department of the Treasury) provides that all or a portion of the PPP Loans may be forgiven upon request from the respective borrower to Charlie’s of approximately $27.5 million (the “
On February 15, 2019, which19, 2021, Don Polly received notice from the Polly Lender, that the Polly PPP Loan was amended on April 16, 2019 (“
On March 17, 2021, Don Polly obtained a second draw PPP loan (“Polly PPP Loan 2”) under the CARES Act from Polly Lender. The Polly PPP Loan 2 obtained by Don Polly provided general working capital in the amount of $184,200. The Polly PPP Loan 2 was set to mature on March 17, 2026 and accrued interest at a rate of 1.00% per annum. Payments of principal and interest were deferred, however interest continued to accrue during that time.
On April 28, 2021, Charlie’s received notice from SBA Lender that the Charlie’s PPP Loan was fully repaid, and its promissory note was cancelled as a result of the Amendedloan forgiveness process set forth by the U.S. Small Business Administration. There is no further action required on the part of Charlie’s to satisfy this liability.
On November 9, 2021, Don Polly received notice from the Polly Lender, that the Polly PPP Loan 2 was fully repaid, and Restated Charter and the increase of our authorized common stock to 50.0 billion shares, all 1,396,305 outstanding shares of Series B Preferred automatically converted intoits promissory note was cancelled as a total of 13,963,047,716 shares of common stock in accordance with the Certificate of Designations, Preferences and Rightsresult of the Series B Convertible Preferred Stock.
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. The balance of principal and interest will be payable thirty years from the date of the EID Loan and interest will accrue at the rate of 3.75% per annum.
PMTA
During the quarter ended September 30, 2020, the FDA's Center for Tobacco Products informed us that our PMTA has received a valid submission tracking number, passed the FDA’s filing review phase, and recently entered the substantive review phase. To date, Charlie’s has invested over $4.4 million for our initial PMTA submission. We engaged a team of more than 200 professionals, including doctors, scientists, biostatisticians, data analysts, and numerous contract research organizations to create our comprehensive PMTA submission. During the quarter ended September 30, 2021, the FDA began issuing Marketing Denial Orders (“MDO”) for electronic nicotine delivery system (“ENDS”) products that lack evidence to demonstrate that permitting the marketing of such products would be appropriate for the protection of the public health. As of December 31, 2021, the Company had not received an MDO for any of its submissions. This news highlights our progress toward achieving full regulatory compliance and our objective of providing customers with a trusted product portfolio.
Basis of Presentation
The consolidated financial statements contained within this Annual Report and the disclosure in this Management’s Discussion and Analysis of Financial Condition and Results of Operations with respect to the years ended December 31, 20192021 and 20182020 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “
Results of Operations for the Year Ended December 31, 20192021 Compared to the Year Ended December 31, 20182020
For the years ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2021 | 2020 | Amount | Percentage | |||||||||||||
($ in thousands) | ||||||||||||||||
Revenues: | ||||||||||||||||
Product revenue, net | $ | 21,496 | $ | 16,692 | $ | 4,804 | 28.8 | % | ||||||||
Total revenues | 21,496 | 16,692 | 4,804 | 28.8 | % | |||||||||||
Operating costs and expenses: | ||||||||||||||||
Cost of goods sold - product revenue | 10,423 | 7,478 | 2,945 | 39.4 | % | |||||||||||
General and administrative | 8,750 | 10,873 | (2,123 | ) | -19.5 | % | ||||||||||
Sales and marketing | 1,734 | 1,733 | 1 | 0.1 | % | |||||||||||
Research and development | 24 | 3,378 | (3,354 | ) | -99.3 | % | ||||||||||
Total operating costs and expenses | 20,931 | 23,462 | (2,531 | ) | -10.8 | % | ||||||||||
Income (loss) from operations | 565 | (6,770 | ) | 7,335 | -108.3 | % | ||||||||||
Other income (expense): | ||||||||||||||||
Interest expense | (34 | ) | (134 | ) | 100 | -74.6 | % | |||||||||
Change in fair value of derivative liabilities | 3,545 | (300 | ) | 3,845 | -1281.7 | % | ||||||||||
Gain on debt extinguishment | 1,060 | - | 1,060 | 100 | % | |||||||||||
Other income | 14 | 17 | (3 | ) | -17.6 | % | ||||||||||
Total other income (loss) | 4,585 | (417 | ) | 5,002 | -1199.5 | % | ||||||||||
Income (loss) before income taxes | 5,150 | (7,187 | ) | 12,337 | -171.7 | % | ||||||||||
Income tax expense | (342 | ) | - | (342 | ) | 100 | % | |||||||||
Net income (loss) | $ | 4,808 | $ | (7,187 | ) | $ | 11,995 | -166.9 | % | |||||||
For the years ended | ||||
December 31, | Change | |||
($ in thousands) | 2019 | 2018 | Amount | Percentage |
| Revenues: | ||||
| Product revenue, net | $22,740 | $20,841 | $1,899 | 9% |
| Total revenues | 22,740 | 20,841 | 1,899 | 9% |
| Operating costs and expenses: | ||||
| Cost of goods sold - product revenue | 10,071 | 8,515 | 1,556 | 18% |
| General and administrative | 15,017 | 3,158 | 11,859 | 376% |
| Sales and marketing | 2,314 | 1,968 | 346 | 18% |
| Research and development | 1,102 | - | 1,102 | 100% |
| Total operating costs and expenses | 28,504 | 13,641 | 14,863 | 109% |
| (Loss) income from operations | (5,764) | 7,200 | (12,964) | -180% |
| Other income: | ||||
| Change in fair value of derivative liabilities | 3,618 | - | 3,618 | 100% |
| Total other income | 3,618 | - | 3,618 | 100% |
| Net (loss) income | $(2,146) | $7,200 | $(9,346) | -130% |
Revenue
Revenue for the year ended December 31, 20192021, increased approximately $1,899,000,$4,804,000, or 9%28.8%, to approximately $22,740,000,$21,496,000, as compared to approximately $20,841,000$16,692,000 for the year ended December 31, 20182020, due to a $888,000 decrease$4,420,000 increase in our nicotine-based product sales, offset by anand a $384,000 increase in sales fromof our newly launched CBD wellness products business of $2,765,000 and $22,000 in revenue from sales of Bazi.hemp-derived products. The decrease in salesincrease in our nicotine-based e-liquid flavorvapor product sales is directly related to the current regulatorylaunch of our Pacha Syn (formerly Pachamama Disposable) product line, which currently represents Charlie’s most important, fastest-growing product category. Pacha Syn Disposables became Charlie’s first-ever entrant into the rapidly expanding, disposable e-cigarette market and health related news storiesoffer users a variety of premium flavors containing synthetic nicotine (not derived from tobacco) in a compact, discrete format. Uncertainty surrounding the vaping industry.FDA’s application review timeline, following the PMTA submission deadline, affected buying patterns of tobacco-derived nicotine products in the domestic vape market as customers reduced inventories of non-PMTA submitted products. In December 2020, the Prevent All Cigarette Tracking Act (“PACT Act”) was signed into law which requires that the United States Postal Service ("USPS") promulgate regulations clarifying the applicability of the prohibition on delivery sales of cigarettes to ENDS products. The nicotine-based e-liquidresulting shipping and logistical challenges that ensued, affected industry-wide sales decline began late into consumers and smaller, single-location resellers.
During the quarter ended September 30, 2019March 31, 2021, we began to streamline our existing hemp-derived wellness product offering and we expect sales in future quarters to decline or at least remain at current levels untilpursue the regulatory environment is settled, and the recent outbreak of Coronavirus is brought under control in the markets where we participate,developing market for products containing synthetically-derived cannabinoids, including the U.S.Delta-8-THC and other international markets. AlthoughSynthetic THC compounds. The addition of these new product categories, coupled with a narrowed focus in our existing portfolio, resulted in higher sales velocity and overall growth compared to the year ended December 31, 2020. We view this market segment as having higher growth potential and better alignment with our existing sales channels, and therefore, we experienced a decline of our domestic nicotine-based e-liquid saleswill continue to develop and launch additional products in the United States, we currently see little effect on our international e-liquid sales and CBD product sales and expect growth in that area to resume once the recent outbreak of Coronavirus is brought under control.
Cost of Revenue
Cost of revenue, which consists of direct costs of materials, direct labor, third party subcontractor services, and other overhead costs increased approximately $1,556,000,$2,945,000 or 18%39.4%, to approximately $10,071,000,$10,423,000, or 44.3%48.5% of revenue, for the year ended December 31, 2019,2021, as compared to approximately $8,515,000,$7,478,000, or 40.9%44.8% of revenue, for the year ended December 31, 2018.2020. This 3%cost, as a percent increase in the cost of revenue, isincreased due to an increase in thea higher sales mix consisting of our Pacha Syn Disposable product line, which carries a lower margin per unit relative to distributors, marginally lower average wholesale prices, and lower fixed cost absorption, butour other vapor products. Cost of revenue was slightly offsetalso negatively affected by relatively stable manufacturing costs.
General and Administrative Expense
For the year ended December 31, 2019,2021, total general and administrative expense increaseddecreased approximately $11,859,000$2,123,000 to approximately $15,017,000$8,750,000, or 40.7% of revenue, as compared to approximately $3,158,000$10,873,000, or 65.1% of revenue, for the year ended December 31, 2018. Costs relating to the completion2020. This decrease is primarily comprised of the Share Exchange on April 26, 2019 accounted for a significant partreductions of the $11.9 million increase, including $5.1 millionapproximately $2,519,000 of non-cash stock-based compensation as well as $418,000 of salary and executive bonus accruals, $1.7 million of one-time employee cashbenefits expenses. The reduction in non-cash stock-based compensation and $150,000 of transaction related professional fees. The remaining $4.8 million increase is primarily due to PMTA consulting fees, ongoingthe forfeiture of stock awards by Brandon Stump and Ryan Stump pursuant to the adoption of the Amended Employment Agreements entered February 12, 2020, as well as the conclusion of the vesting period for shares of Common Stock awarded to several employees in conjunction with the Share Exchange in April 2019. The decrease in salary and benefits costs is the result of lower overall salary expenses, Paid-Time-Off benefits and employee bonuses. This overall decrease in total general and administrative expense was offset by increases of $442,000 in professional fees as well as $372,000 of other general administrative expenses. The increase in professional fees was largely the result of several internal projects largely focused on the creation of a solution “network” necessary to effectively meet the requirements of both the Consolidated Appropriations Act of 2021 and increased salariesthe PACT Act as well as costs associated with conducting business as a public company and certain step-up costs related to new business activities,corporate actions including the launch of CBD products and opening our Denver location. Management has begun the process of lowering costs wherever possible in light of the regulatory environmentReverse Split, completed June 16, 2021, and the effect on revenue from COVID 19.
Sales and Marketing Expense
For the year ended December 31, 2019,2021, total sales and marketing expense increased approximately $346,000, or 18%, to approximately $2,314,000$1,734,000 as compared to approximately $1,968,000$1,733,000 for the year ended December 31, 2018,2020, which was primarily due to enhanceda shift in spending on product sales support materials and other marketing efforts for the launchactivities in favor of our CBD wellness products.increased trade show attendance, as activity returned to pre-pandemic levels.
For the year ended December 31, 2019,2021, total research and development expense increaseddecreased approximately $1,102,000,$3,354,000, or 99.3%, to approximately $1,102,000$24,000 as compared to approximately $3,378,000 for the year ended December 31, 2020. During the year ended December 31, 2021, we incurred significantly less expense related to our PMTA submission, which resulted in lower overall research and development costs.
Income (Loss) from Operations
We generated income from operations of approximately $565,000 for the year ended December 31, 2021, as compared to loss from operations of approximately $6,770,000 for the year ended December 31, 2020. Net income (loss) is determined by adjusting income (loss) from operations by the following items:
● | Change in fair value of derivative liabilities. For the years ended December 31, 2021 and 2020, the gain (loss) in fair value of derivative liabilities was approximately $3,545,000 and ($300,000), respectively. The derivative liability is associated with the issuance of the Investor Warrants and the Placement Agent Warrants (see Note 3) in connection with the Share Exchange. The gain for the year ended December 31, 2021, reflects the effect of the decrease in stock price as of December 31, 2021 compared to December 31, 2020. During the year ended December 31, 2021, we experienced a substantial variation in trading volume for our stock, which may persist in the future. Due to the limited supply of shares currently freely trading, our stock price may experience volatility and therefore, considerable fluctuations in the value of our warrant derivative liability may occur in the future. We had warrants to purchase approximately 40,424,000 shares of common stock outstanding as of December 31, 2021. |
● | Interest Expense. For the years ended December 31, 2021 and 2020, we recorded interest expense related to notes payable of $34,000 and $134,000, respectively. |
● | Gain on debt extinguishment. For the years ended December 31, 2021, and 2020 we recorded a gain on debt extinguishment of $1,060,000 and $0, respectively, related to forgiveness of Paycheck Protection Program loans extended to Charlie’s and Don Polly. |
● | Other Income. For the years ended December 31, 2021 and 2020, we recorded other income related to interest and sublease income of $14,000 and $17,000, respectively. |
Income Tax Expense
The Company’s income tax expense was $342,000, or 6.6% of income before income taxes, for the year ended December 31, 2021. The Company’s income tax expense was $0 for the year ended December 31, 2018, which was primarily due to costs incurred with the PMTA registration process.
Net Income (Loss) from Operations
For the years ended December 31, 2019,2021, and 2020, we had a net income of $4,808,000 and net loss of $2,146,000 as compared to net income of $7,200,000 for the year ended December 31, 2018.
Effects of Inflation
Inflation has not had a material impact on our business.
Liquidity and Capital Resources
As of December 31, 2019,2021, we had negative working capital of approximately $1,566,000,$2,460,000, which consisted of current assets of approximately $5,611,000$7,994,000 and current liabilities of approximately $7,177,000.$5,534,000. This compares to negative working capital of approximately $704,000$6,020,000 at December 31, 2018.2020. The current liabilities, as presented in the consolidated balance sheet at December 31, 20192021 included elsewhere in this Annual Report, on Form 10-K, primarily include approximately $2,516,000$4,068,000 of accounts payable and accrued expense,expenses, approximately $91,000$238,000 of deferred revenue associated with product shipped but not yet received by customers, (see our revenue recognition policy under the “
Our cash and cash equivalents balance at December 31, 20192021 was approximately $2,448,000.
For the year ended December 31, 20192021, we used cash from operations of $2,036,000,$1,347,000, as compared to
For the year ended December 31, 20192021, we used cash for investment activities of $571,000$110,000 as compared to $16,000$169,000 for the year ended December 31, 2018. The cash used for investment activities is primarily used for the purchase of fixed assets and certain leasehold improvements for the buildout of our Don Polly operation.
For the year ended December 31, 2021, we generated cash from financing activities of $4,751,000$901,000 as compared to a usegenerated cash from financing activities of cash of $7,952,000$2,416,000 for the year ended December 31, 2018.2020. In 2019,the 2021 period, we generated financing cash from financing activities from the Charlie’s Financing, which was offset by Member distributions toPolly PPP Loan 2 and the former MembersPrivate Placement. We paid cash dividends of Charlie’s, as compared to$883,000 and notes payable of $1,400,000 during the 2018year ended December 31, 2021. In the 2020 period, during which we usedgenerated cash for Member distributions tofrom financing activities from the former MembersRed Beard Note, PPP Loans and EID Loan (as defined in Note 8 of Charlie’s. The Charlie’s Member distributions were all prior to or partItem 1, Part 1 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’sManagement’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 iswas required to apply for FDA approval to continue selling and marketing its products used for the vaporization of nicotine in the United States. Currently, a substantial portion of the Company’s sales are derived from products that are subject to approval by the FDA. There iswas significant cost associated with the application process and there can be no assurance the FDA will approve the application(s).previous and/or future application. In addition, the recent outbreak of Coronavirus in March 2020 has had a negative impact on the global economy and markets which could impact the Company’s supply chain and/or sales. For the year ended December 31, 20192021, the Company has incurred lossesgenerated income from operations of $5,764,000$565,000 and a consolidated net lossincome of approximately $2,146,000$4,808,000 and the Company has negative stockholders’ equity of $547,000.$3,131,000. During the year ended December 31, 2021, the Company’s working capital requirements changed significantly as inventory increased to $5.0 million, from $1.6 million as of December 31, 2020, and cash on hand decreased to approximately $0.9 million, from $1.4 million as of December 31, 2020. Though the Company’s balance sheet and overall performance generally improved during 2021, the issuance of one or several Marketing Denial Orders (“MDO”) from the FDA would increase the potential for inventory obsolescence and uncollectable accounts receivables. These regulatory risks, as well as other industry-specific challenges remain factors that raise substantial doubt about the Company’s ability to continue as a going concern. 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 and growth depend on ourits ability to increase revenues and continue ourits 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 sufficientdate, to meet our working capital requirements, to continue our sales and marketing efforts and complete the PMTA registration process. We are currently seeking termOn March 23, 2021,The Company closed a $3,000,000 capital raise through the private sale of 3,517,000 shares of its common stock to the Company’s founders Brandon Stump and Ryan Stump. The Company used the proceeds to fund future growth, increase working capital, retire outstanding debt, orand for other sources ofgeneral corporate purposes. However, the Company mayrequire additional financing in order to ensure that we have sufficient cash to operate for the next 12 months. If in the future our plansshould the FDA require additional testing for one, or assumptions change or prove to be inaccurate, or there is a significant change inseveral, of the regulatory environment or the recent outbreak of Coronavirus 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.Company’s PMTA submissions. There can be no assurance that such financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and, in ourthe Company’s best interests.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements other than operating lease commitments.
Critical Accounting Policies
Included below is a discussion of critical accounting policies used in the preparation of our financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates.
We believe that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.
The accounting policies identified as critical are as follows:
Revenue Recognition
The Company recognizes revenues in accordance with Accounting Standards Codification (“
ASC”) 606 – Contracts with Customers. Revenues are generated from contracts with customers that consist of sales to retailers and distributors. Contracts with customers are generally short term in nature with the delivery of product as a single performance obligation. Revenue from the sale of product is recognized at the point in time when the single performance obligation has been satisfied and control of the product has transferred to the customer. In evaluating the timing of the transfer of control of products to customers, The Company considers several indicators, including significant risks and rewards of products, the right to payment, and the legal title of the products. Based on the assessment of control indicators, sales are generally recognized when products are received by customers. Shipping generally occurs prior to the transfer of control to the customer and is therefore accounted for as a fulfillment expense. In circumstances where shipping and handling activities occur after the customer has obtained control of the product, the Company has elected to account for shipping and handling activities as a fulfillment cost rather than an additional promised service. Contract durations are generally less than one year, and therefore costs paid to obtain contracts, which generally consist of sales commissions, are recognized as expense in the period incurred. Revenue is measured by the transaction price, which is defined as the amount of consideration expected to be received in exchange for providing goods to customers. The transaction price is adjusted for estimates of known or expected variable consideration, which includes refunds and returns as well as incentive offers, volume rebates, and promotional discounts on current orders. Our volume rebates are short-term in nature and reset on a quarterly basis. Sales returns are generally not material to the financial statements, and do not comprise a significant portion of variable consideration. Estimates for sales returns are based on, among other things, an assessment of historical trends, information from customers, and anticipated returns related to current sales activity. These estimates are established in the period of sale and reduce revenue in the period of the sale. Variable consideration related to incentive offers and promotional programs are recorded as a reduction to revenue based on amounts the Company expects to collect. Estimates are regularly updated and the impact of any adjustments are recognized in the period the adjustments are identified. In many cases, key sales terms such as pricing and quantities ordered are established at the time an order is placed and incentives have very short-term durations.Amounts billed and due from customers are short term in nature and are classified as receivables since payments are unconditional and only the passage of time related to credit terms is required before payments are due. The Company does not grant payment financing terms greater than one year. Payments received in advance of revenue recognition are recorded as deferred revenue.
Accounts receivable is recorded at the invoiced amount and does not bear interest. We determine the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions and set up an allowance for doubtful accounts when collection is uncertain. Customers’ accounts are written off against the allowance when all attempts to collect have been exhausted. Recoveries of accounts receivable previously written off are recorded as income when received. As of December 31, 2019,2021, and 2018,2020, the allowance for bad debt totaled $639,000$109,000 and $151,000, respectively
Inventories
Inventories primarily consist of finished goods and are stated at the lower of cost (determined by the average cost method) or net realizable value. We calculate estimates of excess and obsolete inventories determined primarily by reviewing inventory on hand, historical sales activity, industry trends and expected net realizable value. As of December 31, 2019,2021, and 2018,2020, the reserve for excess and obsolete inventories totaled $83,000$156,000 and $74,000,$179,000, respectively.
Stock-Based Compensation
We account for all stock-based compensation using a fair value-based method. The fair value of equity-classified awards granted to employees is estimated on the date of the grant using the Black-Scholes option-pricing model, and theor it is based on valuation observed from publicly traded companies in a similar industry, often with a discount for lack of marketability applied. The related stock-based compensation expense is recognized over the vesting period during which an employee is required to provide service in exchange for the award.
Income taxes are computed under the liability method. This method requires the recognition of deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and are reflected in the consolidated financial statements in the period of enactment. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized.
Financial statement effects of a tax position are initially recognized when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that meets the more-likely-than-not threshold of being realized upon ultimate settlement with a taxing authority. We recognize potential accrued interest and penalties related to unrecognized tax benefits as income tax expense.
Not applicable.
ITEM 8. FINANCIALFINANCIAL STATEMENTS
The audited consolidated financial statements of Charlie’s Holdings, Inc., including the notes thereto, together with the report thereon of Squar MilnerBaker Tilly LLP, our independent registered public accounting firm (PCAOB ID: 23), are included in this Annual Report on Form 10-K as a separate section beginning on page F-1.
ITEM 9. CHANGESCHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLSCONTROLS AND PROCEDURES
(a)Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our Chief Executive OfficerPresident, the principal 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 “
Based on our evaluation, our Chief Executive OfficerPresident, the principal executive officer, and Chief Financial Officer concluded that, as of December 31, 2019,2021, 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 OfficerPresident, the principal executive officer, and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
(b)
Section 404(a) of the Sarbanes-Oxley Act of 2002 requires that management document and test the Company’s internal control over financial reporting and include in this Annual Report on Form 10-K a report on management's assessment of the effectiveness of our internal control over financial reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision of ourprincipal executive and financial officer,, we conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that evaluation, ourprincipal executive and financial officerconcluded that our internal control over financial reporting was not effective based on the material weakness indicated below:
ThisAnnual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financing reporting because we are not an “accelerated filer” or a “large accelerated filer”. Our management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Annual Report on Form 10-K.
(c) Changes in internal control over financial reporting.
There were no changes in our internal control over financial reporting identified in connection with the yearevaluation required by Rule 13a-15 of the Exchange Act that occurred during the period ended December 31, 2019,2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Although we have modified our workplace practices due to the Company took extensive measures towards remediating the material weaknesses disclosedCOVID-19 pandemic, resulting in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, and other periodic reports filed with the SEC. These measures include, among other things, completing the Share Exchange and the acquisitionsome of Charlie’s Chalk Dust, LLC as a wholly-owned subsidiary and Don Polly, LLC as a consolidated variable interest entity, the addition of a Chief Financial Officer, Chief Information Office and Corporate Controller, and additional hiring in the Company’s accounting department. The Company also employed the services of experience outside professionals in the areas of valuation, technical accounting support and legal representation. The Company believes these changes significantly improvedour employees working remotely since March 2020, this has not materially affected our internal controls over financial reportingreporting. We continue to monitor and is continuing to assess and test its improvedthe COVID-19 situation on our internal controls to ensure they are effectiveminimize the impact on their design and that all material weaknesses have been adequately addressed and remediated.
ITEM 10. DIRECTORS,DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
The Company’s Board of Directors (the “
Board”) and executive officers consist of the persons named in the table below. Each director serves for a one-year term, until his or her successor is elected and qualified, or until earlier resignation or removal. Our Bylaws provide that the authorized number of directors shall be fixed by the Board from time to time. The directors and executive officers are as follows:Name | Age | Position | ||
Henry Sicignano | 54 | President (Principal Executive Officer) | ||
Matthew P. Montesano | 36 | Chief Financial Officer | ||
Ryan Stump | 33 | |||
Chief Operating Officer and Director | ||||
Adam Mirkovich | 36 | Chief | ||
Scot Cohen | 52 |
Director | ||
Jeffrey Fox | ||
58 | Director | |
Edward Carmines | ||
67 | ||
Director | ||
The following biographical information regarding the foregoing directors and officers of the Company is presented below:
Henry Sicignano, President (Principal Executive Officer.
Matthew P. Montesano, Chief Financial Officer. Mr. Montesano was appointed as Chief Financial officer of the Jewish Enrichment Council.Company on May 10, 2021. Prior to his appointment, and since 2014, Mr. Cohen received a BachelorMontesano has served as Chief Financial Officer of Science degree from Ohio University in 1991.
Ryan Stump, Director and Chief Operating Officer.
Mr. Stump was appointed as a director and the Company’s Chief Marketing Officer on April 26, 2019 in connection with the Share Exchange. Mr. Stump has served as the Chief Operating Officer of Charlie’s since 2014, during which time he has been responsible for all global operations of Charlie’s. Prior to joining Charlie’s, Mr. Stump worked as an Associate Territory Manager and then as a Territory Manager for ConMed, a medical sales device company, from 2010 to 2013. Mr. Stump also co-founded and continues to be engaged with multiple companies, including The Ohio House since 2011, the Buckeye Recovery Network since 2017, and The Mend California since 2018. Mr. Stump earned a B.S. and B.A. in Sports Marketing and Marketing from DuquesneThe Board of Directors believes that Mr. Stump’s experience operating high growth companies, as well as entrepreneurial experience, is valuable to the Board as it manages the Company’s anticipated continued growth.
Adam Mirkovich, Chief Information Officer.
Mr. Mirkovich was appointed as the Company’s Chief Information Officer on May 20, 2019. Mr. Mirkovich has over a decade of experience managing supply chains for consumer products. Mr. Mirkovich has served as an independent management consultant specializing in building and optimizing value chains for startups and growth stage companies in the beverage, nicotine vape, and nutritional supplements industries since 2013. Prior to joining the Company, Mr. Mirkovich served as the Chief Operating Officer of Orchid Ventures, Inc. (CSE: ORCD), a multi-state premium cannabis vape company, from September 2018 to April 2019. From December 2014 to February 2016, Mr. Mirkovich served as the Director of Supply Chain and Operations at Space Jam Juice, LLC, a distributor of premium vapor products. From November 2010 to April 2013, Mr. Mirkovich served as the Product Lifecycle Management Program Manager for Niagara Bottling, LLC, a leading bottled water manufacturer. While there, he led the product revision, introduction, and discontinuance practices for customers’ private labeled water, flavored, and carbonated beverages. Prior to that, Mr. Mirkovich served as a member of the Supply Chain Logistics team at Niagara Bottling, providing strategic support of company expansion activities and tactical support of purchasing, production planning, and multi-region logistics in North American operations. Mr. Mirkovich earned a Bachelor of Science degree in Business Administration and Economics from Chapman University.Scot Cohen,Director. Mr. Cohen was appointed to the Board in March 2013 and is the Founder and Managing Partner of V3 Capital Partners, a private investment firm focused on early-stage companies primarily in the consumer products industry, and Co-Manager of Red Fortune Fund, a private equity fund based in Hong Kong. Mr. Cohen also is the Founder of Petro River Oil, LLC and Chairman of Petro River Oil Corp. (OTCBB: PTRC), a publicly traded oil and gas producer with assets in Kansas and Oklahoma, and Petro Spring, a global oil and gas technology solutions provider. Prior to creating V3 Capital Partners, Mr. Cohen was the Founder and Managing Partner at Iroquois Capital Opportunity Fund, a special situations private equity investment fund, and a Co-Founder of Iroquois Capital, a hedge fund with investments in small and micro-cap private and public companies. Mr. Cohen currently serves as a director on the Board of Directors of Wrap Technologies, Inc. (NASDAQ: WRTC), and is active in philanthropic activities with numerous charities including the Jewish Enrichment Council. Mr. Cohen received a Bachelor of Science degree from Ohio University in 1991.
The Board of Directors believes Mr. Cohen’s success with multiple private investment firms, his extensive contacts within the investment community, and his financial expertise are a valuable resource to the Company’s efforts to expand and implement its business plan.
Jeffrey Fox, Director. Mr. Fox was appointed to the Board effective July 16, 2019. He has been a leading business strategist, brand marketing authority and general management executive for some of the world's largest restaurant and consumer companies including roles as Chief Brand & Concept Officer for Pizza Hut, Co-founder of Collider LLC, a cultural marketing strategy firm, Managing Director of the California office of advertising agency Foote, Cone and Belding (FCB), various positions with the Yum! Brands and within Sony's interactive and PlayStation video game divisions, and Hill & Knowlton Public Relations. He is currently a member of the board of directors of Cici’s Pizza and Flix Brewhouse. Mr. Fox holds a bachelor's degree in Journalism from San Diego State University and received a master's degree in Mass Communications from California State University, Northridge.
The Board of Directors believes that Mr. Fox’s strong experience in brand building across several diverse Fortune 100 consumer product companies will be significantly valuable to the Company as it continues to rapidly grow its product offerings and launch new brands and products around the world.
Dr. Edward Carmines, Director.Dr. Carmines was appointed to the Board effective March 2, 2022.He is currently Chief Scientific Officer of Chemular, Inc., where he designs and directs scientific and regulatory programs for PMTAs for a host of contract clients across a wide range of tobacco product categories. He also currently serves as an Advisory Board Member of Sparq Life, Inc, focusing on the science of inhalation of non-tobacco products, and Principal for Carmines Consulting, LLC, where Dr. Carmines consults to the regulated tobacco industry in the field of toxicology and regulatory affairs. Previously, Dr. Carmines managed the safety of novel and oral tobacco products as a scientist with R.J. Reynolds Tobacco Co. From 1996-2009, Dr. Carmines served as a principal scientist for Philip Morris USA (Altria Client Services, Inc.), where he developed guidelines for safely testing cigarette ingredients and components based on the FDA Red Book. Dr. Carmines received a B.S. degree in Chemistry and a Ph.D. degree in Toxicology from the Medical College of Virginia (Virginia Commonwealth University).
The Board of Directors believes that Dr. Carmines extensive experience within the nicotine industry and navigating the regulatory process relating to the nicotine industry is significantly valuable to the Company due to the ongoing and evolving nature of the Company’s industry.
Other than as described above, there have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any director or nominee set forth above during the past ten years.
Corporate Governance
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers, directors, and persons who beneficially own more than ten percent of our
common stock to file reports of ownership and changes in ownership with the SEC. Officers, directors, and greater-than-ten-percent stockholders are also required by the SEC to furnish us with copies of all Section 16(a) forms that they file.Based solely upon a review of these forms that were furnished to us, we believe that eachnone of our officers and directors failed to timely file at least one report due under Section 16(a) during the year ended December 31, 2019.
Code of Ethics
We have adopted a Code of Ethics that applies to all of our directors, officers and employees, a copy of which is attached as an exhibit to our Annual Report on Form 10-K, filed with the SEC on April 1, 2019.
Board Leadership Structure
The Board does not have a policy regarding the separation of the roles of the Chief Executive Officer and Chair of the Board, as the Board believes it is in the best interest of the Company’sCompany and its stockholders to make that determination based on the position and director of the Company and the membership of the Board from time to time.
Board Role in Risk Assessment
Management, in consultation with outside professionals, as applicable, identifies risks associated with the Company’s operations, strategies and financial statements. In addition, risk assessments were also performed through periodic reports received by the Audit Committee from management, counsel and the Company’s independent registered public accountants relating to risk assessment and management. Audit Committee members met privately in executive sessions with representatives of the Company’s independent registered public accountants during and prior to the year ended December 31, 2019.2021. The Board also provides risk oversight through its periodic reviews of the financial and operational performance of the Company.
Director Nominations
The Board nominates directors for election at the Company’s annual meeting of stockholders and appoints new directors to fill vacancies when they arise, and has the responsibility to identify, evaluate and recruit qualified candidates to the Board for such nomination or appointment.
The Board of Directors identifies director nominees by first considering those current members of the Board who are willing to continue service. Current members of the Board with skills and experience that are relevant to our business and who are willing to continue service are considered for re-nomination, balancing the value of continuity of service by existing members of the Board with that of obtaining a new perspective. Nominees for director are selected by a majority of the members of the Board. Although the Company does not have a formal diversity policy, in considering the suitability of director nominees, the Board considers such factors as it deems appropriate to develop a Board that is diverse in nature and comprised of experienced and seasoned advisors. Factors considered by the Board include judgment, knowledge, skill, diversity, integrity, experience with businesses and other organizations of comparable size, including experience in the software and/or technology industries, software, intellectual property, business, finance, administration or public service, the relevance of a candidate’s experience to our needs and experience of other Board members, experience with accounting rules and practices, the desire to balance the considerable benefit of continuity with the periodic injection of the fresh perspective provided by new members, and the extent to which a candidate would be a desirable addition to the Board and any committees of the Board.
A stockholder who wishes to recommend a prospective nominee for the Board may notify the Secretary of the Company in writing with any supporting material the stockholder considers appropriate. Nominees recommended by stockholders are considered in the same way as nominees suggested from other sources.
In addition, the Company’s Bylaws contain provisions that address the process by which a stockholder may nominate an individual to stand for election to the Board at the Company’s annual meeting of stockholders. In order to nominate a candidate for director, a stockholder must give timely notice in writing to the Secretary of the Company and otherwise comply with the provisions of the Company’s Bylaws. Information required by the Company’s Bylaws to be in the notice include: the name, contact information and share ownership information for the candidate and the person making the nomination, and other information about the nominee that must be disclosed in proxy solicitations under Section 14 of the Exchange Act and its related rules and regulations. The Board may also require any proposed nominee to furnish such other information as may reasonably be required by the Board to determine the eligibility of such proposed nominee to serve as director of the Company. The recommendation should be sent to: Secretary, Charlie’s Holdings, Inc., 1007 Brioso Drive, Costa Mesa, California 92627.
Board of Directors;Attendance at Meetings
The Board held five13 meetings and acted by unanimous written consent three7 times during the year ended December 31, 2019.2021. Each director attended at least 75% of Board meetings during the year ended December 31, 2019.2021. We have no formal policy with respect to the attendance of Board members at annual meetings of shareholders, but encourage all incumbent directors and director nominees to attend each annual meeting of shareholders.
Board Committees and Charters
As of December 31, 2019,2021, the Board had a standing Audit Committee. Currently, the Board does not have an active compensation committee or nominating and corporate governance committee. Instead, the full Board currently administers the duties of each of these committees, and will likely do so for the foreseeable future. Written charters for each of the Board’s active committees are available on the Company’s website at
Audit Committee
As of December 31, 2019,2021, the Audit Committee consisted of Messrs. Cohen (Chair) and Fox. The Audit Committee met twofour times during the year ended December 31, 2019.
The Audit Committee assisted the Board in fulfilling its legal and fiduciary obligations in matters involving the Company’s accounting, auditing, financial reporting, internal control and legal compliance functions by approving the services performed by the Company’s independent accountants and reviewing their reports regarding the Company’s accounting practices and systems of internal accounting controls. The Audit Committee was responsible for the appointment, compensation, retention and oversight of the independent accountants and for ensuring that the accountants are independent of management.
Compensation Committee
As noted above, the Board currently does not have an active compensation committee. Instead, thethe full Board currently administers the duties that are typically allocated to the compensation committee, and will likely do so for the foreseeable future.
As noted above, the Board currently does not have an active nominating and corporate governance committee. Instead, thethe full Board currently administers the duties that are typically allocated to the nominating and corporate governance committee, and will likely do so for the foreseeable future.
ITEM 11. EXECUTIVEEXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation paid to the following persons for our fiscal years ended December 31, 20192021 and 2018:
(a) | our principal executive officer; |
(b) | our most highly compensated executive officers who were serving as an executive officer at the end of the fiscal year ended December 31, |
(c) | any additional individuals who would have been considered Named Executive Officers, but for the fact that they were not serving in such capacity at the end of our most recently completed fiscal year. |
Name and Principal Position | Year | Salary ($) | Bonus ($) | Option Awards ($) (1) | Total ($) |
Brandon Stump (2) | 2019 | $333,330(3) | $497,000 | $– | $830,330 |
| Chief Executive Officer and Chair of the Board | |||||
David Allen (4) | 2019 | $93,750 | $– | $43,500 | $137,250 |
| Chief Financial Officer | |||||
Ryan Stump (5) | 2019 | $333,330(3) | $497,000 | $– | $830,330 |
| Chief Operating Officer and Director | |||||
Former Named Executive Officers | |||||
Robert Van Boerum (6) | 2019 | $67,500 | $– | $– | $67,500 |
| Former Principal Executive Officer and Principal Financial Officer | 2018 | $103,654 | $9,517 | $– | 113,171 |
Name and Principal Position | Year | Salary ($) | Bonus ($) | Equity Awards ($) (1) | Total ($) | ||||||||||||
Henry Sicignano (2) | 2021 | $ | 145,000 | $ | 8,000 | $ | 65,000 | $ | 218,000 | ||||||||
President | 2020 | $ | - | $ | - | $ | - | $ | - | ||||||||
Matthew P. Montesano (3) | 2021 | $ | 234,000 | $ | 45,000 | $ | - | $ | 270,000 | ||||||||
Chief Financial Officer | 2020 | $ | 200,000 | $ | 45,000 | $ | - | $ | 245,000 | ||||||||
Ryan Stump | 2021 | $ | 476,000 | $ | 100,000 | $ | - | $ | 576,000 | ||||||||
Chief Operating Officer and Director | 2020 | $ | 382,000 | $ | - | $ | - | $ | 382,000 | ||||||||
Former Named Executive Officers | |||||||||||||||||
Brandon Stump (4) | 2021 | $ | 476,000 | $ | 250,000 | $ | - | $ | 726,000 | ||||||||
Former Chief Executive Officer and Chair of the Board | 2020 | $ | 382,000 | $ | – | $ | - | $ | 382,000 | ||||||||
David Allen (5) | 2021 | $ | 57,000 | $ | 30,000 | $ | - | $ | 87,000 | ||||||||
Chief Financial Officer | 2020 | $ | 122,000 | $ | 20,000 | $ | - | $ | 142,000 | ||||||||
(1) | The amounts in the |
(2) | Mr. |
(3) | Mr. Montesano was appointed as Chief Financial Officer of the Company |
(4) | Mr. |
(5) | Mr. |
Outstanding Equity Awards at Fiscal Year-End 2019
The following table sets forth all equity awards held by our Named Executive Officers at December 31, 2019:
| Name | Number of Securities Underlying Unexercised Options and Warrants (#) Exercisable | Number of Securities Underlying Unexercised Options and Warrants (#) Unexercisable | Exercise Price ($) | Expiration Date |
| Brandon Stump | – | – | – | – |
| David Allen | – | 15,000,000(1) | $0.0044313 | 10/28/2029 |
| Ryan Stump | – | – | – | – |
| Former Named Executive Officers | ||||
| Robert VanBoreum | – | – | – | – |
Name | Number of Securities Underlying Unexercised Options and Warrants (#) Exercisable | Number of Securities Underlying Unexercised Options and Warrants (#) Unexercisable | Exercise Price ($) | Expiration Date | ||||||||||||
Henry Sicignano President | - | - | - | - | ||||||||||||
Ryan Stump Chief Operating Officer | – | – | – | – | ||||||||||||
Matthew Montesano Chief Financial Officer | 333,333 | 166,667 | $ | 0.44313 | 10/28/29 | |||||||||||
Former Named Executive Officers | ||||||||||||||||
Brandon Stump Former Chief Executive Officer and Chairman of the Board | – | – | – | – | ||||||||||||
David Allen Former Chief Financial Officer and Board Member | 100,000 | – | $ | 0.44313 | 05/02/22 | |||||||||||
Executive Compensation Arrangements
Employment Agreements
Brandon Stump
(Former CEO). On April 26, 2019, in connection with the Share Exchange and his appointment as Chief Executive Officer, the Company and Mr. Brandon Stump entered into an employment agreement (the “B. Stump Employment Agreement”) pursuant to which (i) Mr. Stump serves as the Company’s Chief Executive Officer, initially for a term of three years, renewable for one-year periods thereafter; (ii) Mr. Stump is subject to a non-competition requirement for three years after his termination; (iii) Mr. Stump is subject to a non-solicitation requirement for one year after his termination, and be entitled to receive the following compensation for his services as Chief Executive Officer: (a) an annual base salary of $500,000, which shall increase on an annual basis by an amount not less than $25,000 per year, as determined by the Compensation Committee of the Company’s Board, (b) an annual cash bonus of up to $750,000 per year, which cash bonus will be determined based on the Company’s achievement of audited gross revenue targets of $35.0 million per year, as more particularly set forth in the B. Stump Employment Agreement, (c) certain milestone based bonuses, (d) an annual award of shares of common stock having an aggregate value equal to one-half of Mr. Stump’s annual base salary in effect for such year, which shares shall vest quarterly in equal amounts over a three year period commencing on the issuance date, (e) participation in the Company’s retirement plan, if any, (f) reimbursement of all reasonable business-related expense incurred by Mr. Stump, (e) full health insurance coverage for he and his dependents, and at least $5.0 million of life insurance, (g) 21 paid vacation days per year, and (h) an automobile allowance of $750 per month.The B. Stump Employment Agreement was 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 have been deferred, resulting in the accrual of such bonuses on the books and records of the Company. All other terms of the B. Stump Employment Agreement remain in full force and effect at this time.
The B. Stump Employment Agreement. However,Agreement was amended on February 12, 2021. The terms of the amendment are identical to the terms of the Amended Employment Agreement set forth under “Ryan Stump”.
On October 29, 2021, Brandon Stump resigned from his position as: (i) Chief Executive Officer, Chair of the Board of Directors, and a member of the Board of Directors of the Company; and (ii) all positions held for each direct and indirect subsidiary of the Company (each, a "Subsidiary"), including as a member of the Board of Directors of each Subsidiary. In connection with Mr. Stump's resignation, the Company and each of Mr. Stump are currently negotiating proposed amendmentsentered into an agreement regarding Mr. Stump's resignation (the "Resignation Agreement"), which Resignation Agreement is dated October 29, 2021. Pursuant to the Resignation Agreement, in consideration for Mr. Stump agreeing to terminate the B. Stump Employment Agreement, including modifyingand agreeing to certain restrictions and covenants, the Company will: (i) continue to pay Mr. Stump his base salary (as defined in the B. Stump Employment Agreement), through April 22, 2022; (ii) pay Mr. Stump certain bonus amounts and equity awards that may be issuedcompensation owed to Mr. Stump for performance duringin an amount equal to $300,000, payable in installments of $75,000 on each of November 1, 2021, December 1, 2021, January 1, 2022, and February 1, 2022; and (iii) continue to make available to Mr. Stump certain employee benefits offered by the year ended December 31, 2019.
Ryan Stump
. On April 26, 2019, in connection with the Share Exchange and his appointment as Chief Operating Officer, the Company and Mr. Ryan Stump entered into an employment agreement (the “R. Stump Employment Agreement”), pursuant to which (i) Mr. Stump serves as the Company’s Chief Operating Officer for a term of three years, renewable for one-year periods thereafter, during which time he shall report to the Company’s Chief Executive Officer; (ii) Mr. Stump is subject to a non-competition requirement for three years after his termination; (iii) Mr. Stump is subject to a non-solicitation requirement for one year after his termination, and be entitled to receive the following compensation for his services as Chief Operating Officer: (a) an annual base salary of $500,000, which shall increase on an annual basis by amount that is not less than $25,000 per year, as determined by the Compensation Committee of the Company’s Board, (b) an annual cash bonus of up to $750,000 per year, which cash bonus will be determined based on the Company’s achievement of a gross revenue target of $35.0 million per year, as more particularly set forth in the R. Stump Employment Agreement, (c) certain milestone based bonuses, (d) an annual award of shares of Common Stock having an aggregate value equal to one-half of Mr. Stump’s annual base salary in effect for such year, which shares shall vest quarterly in equal amounts over a three year period commencing on the issuance date, (e) participation in the Company’s retirement plan, if any, (f) reimbursement of all reasonable business-related expense incurred by Mr. Stump, (e) full health insurance coverage for he and his dependents, and at least $5.0 million of life insurance, (g) 21 paid vacation days per year, and (h) an automobile allowance of $750 per month.The Company may terminate the R. Stump Employment Agreement in the event of Mr. Stump’s death or disability, or for Cause, as defined in the R. Stump Employment Agreement;
provided, however, that at no time may the Company terminate him without Cause. Mr. Stump may terminate the R. Stump Employment Agreement at any time for any reason. In the event that his employment is terminated by him without Good Reason, as defined in the R. Stump Employment Agreement, or by the Company for Good Cause as a result of a Change in Control, he shall be entitled to the following compensation: (i) any earned but unpaid salary through the termination date, (ii) unpaid and unreimbursed expense, (iii) earned but unpaid bonuses, and (iv) any accrued vacation days;provided, however, that in the event that the R. Stump Employment Agreement is terminated by Mr. Stump for any reason, he shall also be entitled to one year’s severance, consisting of one year’s base salary, milestone bonuses and certain other benefits. In the event that his employment is terminated by the Company without Cause or he terminates it for Good Reason, as defined in the R. Stump Employment Agreement, then Mr. Stump shall be entitled to the following compensation: (i) all amounts due to him through the termination date, (ii) full vesting of any and all previously granted equity-based incentive awards, and (iii) health insurance coverage for a period of 18 months after the termination date. In addition, effective upon a Change in Control, regardless of whether the R. Stump Employment Agreement is terminated, his base salary for the year in which the Change in Control occurred and any years thereafter shall automatically increase by 20% and the milestone bonuses shall automatically decrease by 30%.On February 12, 2020, the Board of Directors (the “Board”) of the Company, entered into a form of Amended and Restated Employment Agreement with Mr. Stump (the “Amended Employment Agreement”) effective February 12, 2020.
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 have been deferred, resulting in the footnotesaccrual of such bonuses on the books and records of the Company. All other terms of the respective Employment Agreements for Messrs. Stump and Stump will remain in full force and effect subject to further review by the Board as it deems necessary and appropriate.
Henry Sicignano. On April 1, 2021,the Board of Directors of the Company entered into an Employment Agreement (the "Agreement") with Henry Sicignano III, MBA, pursuant to which the Company appointed Mr. Sicignano to serve as President of the Company. Pursuant to the Summary Compensation table above, during the year ended December 31, 2019,Agreement, Mr. Sicignano will serve as President for an initial period of two years, renewable on an annual basis unless earlier terminated by the Company accrued expense for amounts payable ator Mr. Sicignano. Mr. Sicignano was awarded 1,500,000 restricted shares (subject to forfeiture) (“Restricted Shares”) of the time pursuantCompany. Mr. Sicignano will have all the rights of a shareholder of the Company with respect to voting the 1,500,000 restricted shares awarded under this grant and share adjustments, receipt of dividends (if any) and distributions (if any) on such shares. Restricted Shares will be subject to forfeiture in 750,000 share increments on April 1, 2022and April 1, 2023, and will also be subject to additional forfeiture-release features set forth in Addendum A to the R. Stump Employment Agreement. However, the Company and each of Mr. Stump are currently negotiating proposed amendments to the R. Stump Employment Agreement including modifying bonus amounts and equity awards that may be issued to Mr. Stump for performance duringof Henry Sicignano, III, included in the year ended December 31, 2019.
Director Compensation
The Company’s Director Compensation Plan currently provides that non-employee directors receive (a) a $60,000 annual retainer, payable in equal monthly installments in cash and (b) reimbursement for expenses related to Board meeting attendance and committee participation. In addition, directors receive a one-time grant of an option to purchase 25 million shares of the Company’s common stock at an exercise price equal to the closing price of the Company’s common stock on the date of issuance, as reported on the OTC PinkOTCQB Venture Market. Directors that were also employees of the Company did not receive additional compensation for serving on the Board.
The following table discloses certain information concerning the compensation of the Company’s non-employee directors for the year ended December 31, 2019:
| Name | Fees Earned or Paid in Cash ($) | Option Awards ($) (1) | Total ($) |
| Scot Cohen (2) | $– | $– | $– |
| Jeff Fox (3) | $35,000 | $72,500(4) | $107,500 |
Name | Fees Earned or Paid in Cash ($) | Equity Awards ($) (1) | Total ($) | |||||||||
Scot Cohen | $ | 30,000 | $ | – | $ | 30,000 | ||||||
Jeff Fox | $ | 110,000 | $ | 12,775 | $ | 122,775 | ||||||
Keith Stump (2) | $ | – | – | – | ||||||||
David Allen (3) | $ | 90,000 | $ | – | $ | 90,000 | ||||||
Edward Carmines (4) | $ | – | $ | – | $ | – | ||||||
(1) | The amounts in the |
(2) | Mr. |
(3) | Mr. Allen resigned from his position as a member of the Board of Directors on October 29, 2021. Mr. Allen’s compensation excludes compensation earned during 2021 as the Company’s former Chief Financial Officer. |
(4) | Dr. Carmines was appointed to the Company’s Board of Directors on March 2, 2022 and did not receive any compensation |
Outstanding Equity Awards as of December31, 2019
The following table sets forth all equity awards held by our Named Executive Officers at December 31, 2019:
| Name | Number of Securities Underlying Unexercised Options and Warrants (#) Exercisable | Number of Securities Underlying Unexercised Options and Warrants (#) Unexercisable | Exercise Price ($) | Expiration Date |
| Brandon Stump | – | – | – | – |
| David Allen | – | 15,000,000(1) | $0.0044313 | 10/28/2029 |
| Ryan Stump | – | – | – | – |
| Former Named Executive Officers | ||||
| Robert VanBoreum | – | – | – | – |
Name | Number of Securities Underlying Unexercised Options and Warrants (#) Exercisable | Number of Securities Underlying Unexercised Options and Warrants (#) Unexercisable | Exercise Price ($) | Expiration Date | ||||||||||||
Henry Sicignano President | – | – | – | – | ||||||||||||
Ryan Stump Chief Operating Officer | – | – | – | – | ||||||||||||
Matthew Montesano Chief Financial Officer | 333,333 | 166,667 | $ | 0.44313 | 10/28/29 | |||||||||||
Former Named Executive Officers | ||||||||||||||||
Brandon Stump Former Chief Executive Officer and Chairman of the Board | – | – | – | – | ||||||||||||
David Allen Former Chief Financial Officer and Board Member | 100,000 | – | $ | 0.44313 | 05/02/22 | |||||||||||
Equity Compensation Plan Information
The following table includes information as of December 31, 20192021 for our equity compensation plans:
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||||
(a) | (b) | (c) | ||||||||||
Equity compensation plans approved by stockholders | 8,872,937 | $ | 0.5417 | 2,765,876 | ||||||||
Equity compensation plans not approved by stockholders | – | $ | – | – | ||||||||
Total | 8,872,937 | $ | 0.5417 | 2,765,876 | ||||||||
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
(a) | (b) | (c) | |
| Equity compensation plans approved by stockholders | 801,324,826 | $0.0044313 | 367,754,205 |
| Equity compensation plans not approved by stockholders | – | $– | – |
| Total | 801,324,826 | $0.0044313 | 367,754,205 |
2013 Stock Incentive Plan. The 2013 Stock Incentive Plan (the “2013 Plan”) was adopted by the Company’s Board of Directors on December 31, 2013. The 2013 Plan initially reserved for issuance 20.00.2 million shares of common stock for issuance to all employees (including, without limitation, officers and directors who are also employees) of the Company or any subsidiary of the Company (each a “Subsidiary”), any non-employee director, consultants and independent contractors of the Company or any Subsidiary, and any joint venture partners (including, without limitation, officers, directors and partners thereof) of the Company or any Subsidiary. Awards under the 2013 Plan may be made in the form of: (i) incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, once the 2013 Plan has been approved by a majority of the Company’s stockholders; (ii) stock options that do not qualify as incentive stock options; and/or (iii) awards of shares that are subject to certain restrictions specified in the 2013 Plan. On May 8, 2019, the Board of Directors authorized increasing the number of shares reserved for issuance under the plan to a total of 65.00.65 million shares of common stock and to ratify the issuance of any and all awards made prior to that date, subject to stockholder approval.
During the year ended December 31, 2018, the Company did not issue any restricted stock awards pursuant to the 2013 Plan; however, the Company issued an aggregate total of 34,652,903346,529 stock option awards pursuant to the 2013 Plan during the 2018 fiscal year.
Subsequent to the year ended December 31, 2018, on May 16, 2019, the Board approved an amendment to all of the outstanding stock options held by Mr. Sherman that were issued under the 2013 Plan, in the aggregate amount of 35,971,988,359,720, to extend the expiration date of such stock options by five years.
As of the date of the Share Exchange, April 26, 2019, a total of approximately 91.7 million awards were issued under 2013 Plan, consisting entirely of outstanding stock options. As of December 31, 2019,2021, approximately 61.80.6 million of these stock options remain vested and exercisable.
The Company will not grant any additional awards or shares of common stock under the Prior Plan beyond those that are currently outstanding.
2019 Omnibus Incentive Plan
. The 2019 Omnibus Incentive Plan (the “2019 Plan”) was adopted by the Company’s Board of Directors on May 8, 2019, subject to stockholder approval and registration or qualification of the shares subject to the 2019 Plan with the federal and state securities authorities. The 2019 Plan reserved for issuance approximately 1.1 billion shares of common stock for issuance to all employees (including, without limitation, officers and directors who are also employees) of the Company or any Subsidiary, any non-employee director, consultants and independent contractors of the Company or any Subsidiary, and any joint venture partners (including, without limitation, officers, directors and partners thereof) of the Company or any Subsidiary. Awards under the 2019 Plan may be made in the form of: (i) incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, once the 2019 Plan has been approved by a majority of the Company’s stockholders; (ii) stock options that do not qualify as incentive stock options; and/or (iii) awards of shares that are subject to certain restrictions specified in the 2019 Plan.On December 22, 2021, our Board of Directors unanimously adopted resolutions by written consent approving an amendment to increase the number of shares of Common Stock available for issuance under the 2019 Plan by 15.0 million shares, from 11,072,542 to 26,072,542 shares (the “Plan Amendment”). Furthermore, the Company received written consents approving the 2019 Plan Amendment from holders of approximately 50.3% of our outstanding voting securities. In accordance with Rule 14c of the Securities Exchange Act of 1934, Our Board of Directors’ authority to implement the 2019 Plan Amendment became effective February 28, 2022, twenty calendar days after notification of our shareholders. The 2019 Plan Amendment will allow the Company to maintain a sufficient number of available shares for future grants under the 2019 Plan.
As of December 31, 2019,2021, there were a total of 739,500,0007,122,937 stock options issuedoutstanding pursuant to the 2019 Plan, none5,376,277 of which have vested.
Post-Employment Compensation, Pension Benefits, Nonqualified Deferred Compensation
There were no post-employment compensation, pension or nonqualified deferred compensation benefits earned by the Named Executive Officers during the year ended December 31, 2019.2021.
ITEM 12. SECURITYSECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The Company currently has two classes of voting securities issued and outstanding: (i)
common stock and (ii) Series A Preferred. The following tables contain the beneficial ownership of our outstanding voting securities owned by:(i) | Each of our officers and directors; |
(ii) | All officer and directors as a group; and |
(iii) | Each person known by us to beneficially own five percent or more of the outstanding shares of our Series A Preferred and common |
Percent ownership is calculated based on 204,561141,123 shares of Series A Preferred and 18,973,827,540216,840,987 shares
For purposes of this section, beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage of ownership by that person in each table below, shares of voting common stock subject to rights held by that person to acquire such shares currently or within 60 days are deemed outstanding. Such shares are not deemed outstanding for the purpose of computing the percentage of ownership by any other person.
Beneficial Ownership of Series A Preferred
Name and Address (1) | Series A Convertible Preferred Stock | % Ownership of Class |
| Executive Officers and Directors | ||
| Scot Cohen | ||
| Director | 3,750 | 1.8% |
| Keith Stump | ||
| Director | 3,000 | 1.5% |
| Total Officers and Directors | 6,750 | 3.3% |
| Greater Than 5% Stockholders | ||
Red Beard Holdings, LLC (2) | ||
| 17595 Harvard Avenue, Suite C511 | ||
| Irvine, California 92614 | 33,750 | 16.4% |
Iroquois Capital Management, LLC (3) | ||
| 125 Park Avenue, 25th Floor | ||
| New York, New York 10017 | 32,813 | 15.9% |
Hudson Bay Capital Management, LP (4) | ||
| 777 Third Avenue, 30th Floor | ||
| New York, New York 10017 | 11,250 | 5.5% |
SDS Capital Partners II, LLC (5) | ||
| 500 Summer Street, Suite 405 | ||
| Stamford, Connecticut 06901 | 11,250 | 5.5% |
Altium Growth Fund, LP (6) | ||
| 551 Fifth Avenue, 19th Floor | ||
| New York, New York 10176 | 11,025 | 5.3% |
Name and Address (1) | Series A Convertible Preferred Stock | % Ownership of Class | |||
Executive Officers and Directors | |||||
Scot Cohen | |||||
Director | 3,750 | 2.7 | % | ||
Keith Stump | |||||
Former Director | 3,000 | 2.1 | % | ||
Total Officers and Directors | 6,750 | 4.8 | % | ||
Greater Than 5% Stockholders | |||||
Red Beard Holdings, LLC (2) | |||||
17595 Harvard Avenue, Suite C511 | |||||
Irvine, California 92614 | 33,750 | 23.9 | % | ||
Hudson Bay Capital Management, LP (3) | |||||
777 Third Avenue, 30th Floor | |||||
New York, New York 10017 | 10,450 | 7.4 | % | ||
Empery Asset Management, LP (4) | |||||
1 Rockefeller Plaza, Suite 1205 | |||||
New York, New York | 16,875 | 12.0 | % | ||
Altium Growth Fund, LP (5) | |||||
551 Fifth Avenue, 19th Floor | |||||
New York, New York 10176 | 11,025 | 7.8 | % | ||
(1) | Each of the Company’s officers and directors who will not hold shares of Series A Preferred were excluded from this table. Unless otherwise indicated, the address for each stockholder is 1007 Brioso Drive, Costa Mesa, California 92627. |
(2) | Based on Company records as of |
(3) | |
Based on Company records as of | |
(4) | Based on Company records as of |
(5) | Based on Company records as of |
Beneficial Ownership of Common Stock
Name, Address and Title (if applicable) (1) | Shares of Common Stock | Shares Issuable Upon Conversion of Preferred A Stock (2) | Shares Issuable upon Exercise of Warrants (3) | Shares Issuable upon Exercise of Vested Stock Options | Total Number of Shares Beneficially Owned | % Ownership of Class |
Brandon Stump | ||||||
| Chief Executive Officer and Director | 9,379,218,889 | - | - | - | 9,379,218,889 | 49.54% |
| Ryan Stump | ||||||
| Chief Operating Officer and Director | 4,019,665,353 | 4,019,665,353 | 21.2% | |||
| David Allen | ||||||
| Chief Financial Officer | - | - | - | - | - | 0.0% |
| Adam Mirkovich | ||||||
| Chief Information Officer | - | - | - | - | - | 0.0% |
Scot Cohen (4) | ||||||
| Director | 81,240,266 | 84,625,280 | 56,416,355 | 7,244,826 | 229,526,727 | 1.2% |
| Keith Stump | ||||||
| Director | 93,086,946 | 67,700,224 | 45,133,084 | - | 205,920,254 | 1.1% |
Executive Officers and Directors, as a group (6 persons) | 13,573,211,454 | 152,325,504 | 101,549,439 | 7,244,826 | 13,834,331,223 | 72.19% |
Greater Than 5% Stockholders | ||||||
Vincent C. Smith (5) | ||||||
| 17595 Harvard Avenue, Suite C511 | ||||||
| Irvine, California 92614 | 2,216,559,416 | 761,627,520 | 513,130,526 | - | 3,491,317,462 | 18.4% |
Red Beard Holdings, LLC (6) | ||||||
| 17595 Harvard Avenue, Suite C511 | ||||||
| Irvine, California 92614 | 2,152,825,308 | 761,627,520 | 513,130,526 | - | 3,427,583,354 | 18.1% |
Iroquois Capital Management, LLC (7) | ||||||
| 125 Park Avenue, 25th Floor | ||||||
| New York, New York 10017 | 500,232,693 | 740,471,200 | 493,643,101 | - | 1,734,346,994 | 9.1% |
Name, Address and Title (if applicable) (1) | Shares of Common Stock | Shares Issuable Upon Conversion of Preferred A Stock (2) | Shares Issuable upon Exercise of Warrants (3) | Shares Issuable upon Exercise of Vested Stock Options | Total Number of Shares Beneficially Owned | % Ownership of Class | ||||||||||||||||||
Brandon Stump | ||||||||||||||||||||||||
Former Chief Executive Officer and Director | 64,754,089 | - | - | - | 64,754,089 | 29.9 | % | |||||||||||||||||
Ryan Stump | ||||||||||||||||||||||||
Chief Operating Officer and Director | 27,751,754 | - | - | - | 27,751,754 | 12.8 | % | |||||||||||||||||
Henry Sicignano | ||||||||||||||||||||||||
President | 8,000,001 | - | - | - | 8,000,001 | 3.7 | % | |||||||||||||||||
Matthew Montesano | ||||||||||||||||||||||||
Chief Financial Officer | 1,975,409 | - | - | 333,334 | 2,308,743 | 1.1 | % | |||||||||||||||||
David Allen | ||||||||||||||||||||||||
Former Chief Financial Officer and Director | 300,000 | - | - | 100,000 | 400,000 | 0.2 | % | |||||||||||||||||
Adam Mirkovich | ||||||||||||||||||||||||
Chief Information Officer | 473,100 | - | - | 66,666 | 539,766 | 0.2 | % | |||||||||||||||||
Scot Cohen (4) | ||||||||||||||||||||||||
Director | 1,179,935 | 846,246 | 564,164 | 72,448 | 2,662,793 | 1.2 | % | |||||||||||||||||
Jeff Fox | ||||||||||||||||||||||||
Director | 650,000 | - | - | 250,000 | 900,000 | 0.4 | % | |||||||||||||||||
Dr. Edward Carmines | ||||||||||||||||||||||||
Director | 400,000 | - | - | - | 400,000 | 0.2 | % | |||||||||||||||||
| Keith Stump | ||||||||||||||||||||||||
| Former Director | 2,435,030 | 676,995 | 451,331 | 333,334 | 3,896,690 | 1.8 | % | |||||||||||||||||
| Executive Officers and Directors, as a group (10 persons) | 107,919,318 | 1,523,241 | 1,015,494 | 1,155,782 | 111,613,836 | 50.6 | % | |||||||||||||||||
| Greater Than 5% Stockholders | ||||||||||||||||||||||||
| Vincent C. Smith (5) | ||||||||||||||||||||||||
| 17595 Harvard Avenue, Suite C511 | ||||||||||||||||||||||||
| Irvine, California 92614 | 40,765,596 | 7,595,929 | 4,400,476 | - | 52,762,001 | 23.1 | % | |||||||||||||||||
| Red Beard Holdings, LLC (6) | ||||||||||||||||||||||||
| 17595 Harvard Avenue, Suite C511 | ||||||||||||||||||||||||
| Irvine, California 92614 | 40,128,254 | 7,595,929 | 4,400,476 | - | 52,124,659 | 22.8 | % | |||||||||||||||||
| Iroquois Capital Management, LLC (7) | ||||||||||||||||||||||||
| 125 Park Avenue, 25th Floor | ||||||||||||||||||||||||
| New York, New York 10017 | 15,976,531 | - | 4,936,431 | - | 20,912,962 | 9.4 | % | |||||||||||||||||
(1) | Unless otherwise indicated, the address for each stockholder is 1007 Brioso Drive, Costa Mesa, California 92627. |
(2) | Pursuant to the Certificate of Designation of the Series A Preferred (“ Series A COD”), shares of Series A Preferred may not be converted or exercised, as applicable, to the extent that the holder and its affiliates would own more than 4.99% (or 9.99% upon the election of any holder of Series A Preferred) of the Company’s outstanding common stock after such conversion (the “Series A Ownership Limitation”);provided, however, that any holder of shares of Series A Preferred may waive the Conversion Limitation upon 61 days written notice to theCompany. The Series A COD also entitles each share of Series A Preferred to vote, on an as converted basis, along with the commonOwnership percentages in this table were calculated in accordance with Section 13(d) of the Exchange Act, and do not reflect any adjustments due to the Series A Ownership Limitation or the Series A Voting Limitation. |
(3) | Certain of the warrants included in this table are subject to blockers that prevent a holder from exercising Investor Warrants or Placement Agent Warrants in the event that such exercise would result in the holder and its affiliates beneficially owning in excess of 4.99% of the Company’s issued and outstanding common stock immediately thereafter, which limit may be increased to 9.99% at the election of the holder (the “Warrant Exercise Limitation”).Ownership percentages in this table were calculated in accordance with Section 13(d) of the Exchange Act, and do not reflect any adjustments due to the Warrant Exercise Limitation. |
(4) | Includes securities held by V3 Capital Partners and the Scot Jason Cohen Foundation. Mr. Cohen is the Managing Partner of V3 Capital Partners and an officer of the Scot Jason Cohen Foundation, and has dispositive and/or voting power over these shares. |
(5) | Includes securities held by LB 2, LLC (“ LB 2”) and Red Beard, |
(6) | Based on Company records and ownership information from Amendment No. 5 to Schedule 13D filed by Vincent C. Smith on |
(7) | Based on Company records and ownership information from Schedule 13G filed by Iroquois Capital Management, LLC (“ Iroquois Capital Management”), Mr. Richard Abbe and Ms. Kimberly Page on |
ITEM 13. CER
Certain Relationships and Related Transactions
On November 19, 2019, Charlie’s entered into commercial lease for the Company’s corporate headquarters in Costa Mesa, California (the “Lease”) with Brandon Stump, Ryan Stump and Keith Stump. 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 monthmonth-to-month basis, has beenwas then formalized on November 1, 2019 to have a term of five years and a base rent rate of $22,940 per month, which rate is subject to annual adjustments based on the consumer price index, as may be mutually agreed upon by the parties to the Lease. The terms of the Lease were negotiated and approved by the independent members of the Board, and executed by Mr. Allen, the Company’s then Chief Financial Officer after reviewing a detailed analysis of comparable properties and rent rates compiled by an independent, third-party consultant.
On January 10, 2020, Bellerose CBD Trade Co. (“Bellerose”), an entity controlled by Brandon Stump, the Company’s former Chief Executive Officer, and Ryan Stump, the Company’s Chief Operating Officer, subleased 656 square feet from Don Polly within Don Polly’s warehouse located at 1288 S. Broadway, Denver, Colorado (the “Sublease”), for use as a retail sales location for Bellerose’s operations. Subsequent to entering into Sublease, Don Polly completed certain leasehold improvements to which Bellerose reimbursed Don Polly $25,396 for modifications that affected the subleased space. The Sublease had a base rent rate of $1,154 per month and was terminated on January 27, 2022. For the fiscal year ended December 31, 2021, Don Polly received $13,848 of lease income pursuant to the Sublease, as well as $18,362 of income from the sale of Don Polly Products to Bellerose.
See “Executive Compensation” and “Director Compensation” for information regarding compensation of directors and executive officers.
Employment Agreements
We have entered into employment agreements with our executive officers. For more information regarding these agreements, see “Executive Compensation — Narrative to Summary Compensation Table and Outstanding Equity Awards at 20192021 Fiscal Year End”.
Independent Directors
The Board has determined that Messrs. Cohen, Fox and FoxCarmines may be considered independent directors as defined by the rules and regulations of the Nasdaq Stock Market.
In addition, the Board has determined that Mr. Cohen satisfies the definition of an “audit committee financial expert” under SEC rules and regulations. This designation does not impose any duties, obligations or liabilities on Mr. Cohen that are greater than those generally imposed on them as members of the Audit Committee and the Board, and his designation as an audit committee financial expert does not affect the duties, obligations or liability of any other member of the Audit Committee or the Board.
ITEM 14. PR
On November 1, 2020, the years ended December 31, 2019 and 2018,Company was notified that the audit practice of Squar Milner, LLP (“
2019 | 2018 | |
Audit Fees (1) | $165,500 | $101,000 |
Audit-Related Fees (2) | $- | $- |
Tax Fees (3) | $- | $- |
All Other Fees (4) | $- | $- |
| Total | $165,500 | $101,000 |
2021 | 2020 | |||||||
Audit Fees (1) | $ | 157,350 | $ | 140,000 | ||||
Audit-Related Fees (2) | $ | - | $ | 7,500 | ||||
Tax Fees (3) | $ | - | $ | - | ||||
All Other Fees | $ | - | $ | - | ||||
Total | $ | 157,350 | $ | 147,500 | ||||
(1) | Audit services in | |
(2) | Audit-related fees | |
(3) | For permissible professional services related to income tax return preparation and compliance. | |
ITEM 15. EXHIBITS,EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
Exhibit No. | Description | |
Amended and Restated Bylaws of Charlie's Holdings, Inc., incorporated by reference from Exhibit 3.1 to the Current Report on Form 8-K filed on September 11, 2019. | ||
Certificate of | ||
Certificate of Designations, Preferences and Rights of the Series A Convertible Preferred Stock, dated April 25, 2019, incorporated by reference to Exhibit 3.7 to the Current Report on Form 8-K, filed April 30, 2019. | ||
Certificate of Designations, Preferences and Rights of the Series B Convertible Preferred Stock, dated April 26, 2019, incorporated by reference to Exhibit 3.9 to the Current Report on Form 8-K, filed April 30, 2019. | ||
Form of Investor Warrant, dated April 26, 2019, incorporated by reference to Exhibit 3.8 to the Current Report on Form 8-K, filed April 30, 2019. | ||
Debt Conversion Agreement by and between True Drinks Holdings, Inc. and Red Beard, LLC, dated April 26, 2019, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed April 30, 2019. | ||
Form of Exchange Agreement, dated April 26, 2019, incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed April 30, 2019. | ||
Form of Registration Rights Agreement, dated April 26, 2019, incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K, filed April 30, 2019. | ||
Engagement Letter by and between True Drinks Holdings, Inc., Charlie’s Chalk Dust LLC and Katalyst Securities LLC, dated February 15, 2019, incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K, filed April 30, 2019. |
Amendment to Engagement Letter, dated April 16, 2019, incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K, filed April 30, 2019. |
Subscription Agreement, dated April 26, 2019, incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K, filed April 30, 2019. | ||
Employment Agreement by and between True Drinks Holdings, Inc. and Brandon Stump, dated April 26, 2019, incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K, filed April 30, 2019. | ||
Employment Agreement by and between True Drinks Holdings, Inc. and Ryan Stump, dated April 26, 2019, incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K, filed April 30, 2019. |
License Agreement by and between the Company and Don Polly, LLC, dated June 5, 2019, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed June 11, 2019. | ||
Services Agreement by and between the Company and Don Polly, LLC, dated June 5, 2019, incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed June 11, 2019. | ||
Commercial Lease Agreement, by and between Charlie’s Chalk Dust, LLC and Brandon Stump, Ryan Stump and Keith Stump, dated November 19, 2019, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed November 22, 2019. | ||
Promissory Note issued to Red Beard Holdings, LLC dated April 8, 2020, | ||
Security Agreement by and among the Company and Red Beard Holdings, LLC dated April 8, 2020, | ||
Amendment No. 1 to Secured Promissory Note and Security Agreement, by and among the Company and Red Beard Holdings, LLC, dated August 27, 2020, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed September 1, 2020. | ||
Amendment No. 2 to Secured Promissory Note and Security Agreement, by and among the Company and Red Beard Holdings, LLC, dated September 30, 2020, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed October 2, 2020. | ||
Amendment No. 3 to Secured Promissory Note and Security Agreement, by and among the Company and Red Beard Holdings, LLC, dated October 29, 2020, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed November 3, 2020. | ||
Amendment No. 4 to Secured Promissory Note and Security Agreement, by and among the Company and Red Beard Holdings, LLC, executed as of December 12, 2020 but effective as of December 1, 2020, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed December 15, 2020. | ||
Amendment No. 5 to Secured Promissory Note and Security Agreement, by and among the Company and Red Beard Holdings, LLC, dated January 19, 2021 and effective as of January 1, 2021, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed January 20, 2021. | ||
Satisfaction and Release, incorporated by reference to Exhibit 10.46 to the Annual Report on Form 10-K, filed April 5, 2021. | ||
Employment Agreement, dated April 1, 2021, by and between Charlie's Holdings, Inc. and Henry Sicignano, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed April 6, 2021. | ||
Form of Dividend Exchange and Waiver, dated May 25, 2021, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed May 26, 2021. | ||
Letter Agreement between Charlie's Holdings, Inc. and Brandon Stump, dated October 29, 2021, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed November 3, 2021. | ||
2019 Omnibus Equity Incentive Plan, as amended, incorporated by reference to Appendix B to the Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on May 28, 2019 | ||
Code of Ethics filed with Form 10-K on March 31, 2011 and incorporated herein by reference. | ||
Board Charter filed with Form 10-K on March 31, 2011 and incorporated herein by reference. | ||
Subsidiaries of | ||
Consent of Squar Milner LLP, dated June 26, 2018, filed herewith. | ||
Certification of Principal Executive Officer as Required by Rule 13a-14(a)/15d-14, filed herewith. | ||
Certification of Principal Financial Officer as Required by Rule 13a-14(a)/15d-14, filed herewith. | ||
Certification of Principal Executive Officer as Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code, filed herewith. | ||
Certification of Principal Financial Officer as Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code, filed herewith. | ||
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
101.SCH | Inline XBRL Taxonomy Extension Schema | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
ITEM 16. FORMFORM 10-K SUMMARY
None.
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.
Date: April | CHARLIE’S HOLDINGS, INC. | ||||
By: | /s/ | ||||
Henry Sicignano President (Principal Executive Officer) | |||||
/s/ | |||||
Matthew P. Montesano Chief Financial Officer (Principal Financial and Accounting Officer) | |||||
In accordance with the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ Henry Sicignano | President (Principal Executive Officer) | April 12, 2022 | ||
/s/ Matthew P. Montesano | Chief Financial Officer (Principal Financial | April 12, 2022 | ||
/s/ Ryan Stump Ryan Stump | Chief Operating Officer and Director | April 12, 2022 | ||
/s/ Scot Cohen Scot Cohen | Director | April 12, 2022 | ||
/s/ Jeffrey Fox Jeffrey Fox | Director | April 12, 2022 | ||
/s/ Edward Carmines | Director | April 12, 2022 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors
Charlie’s Holding,Holdings, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Charlie’s Holdings, Inc. and its subsidiaries (the Company) as of December 31, 20192021 and 2018,2020, the related consolidated statements of operations, changes in stockholders’stockholders' equity (deficit) and cash flows for each of the years then ended, and the related notes to the consolidated financial statements (collectively referred to as the "consolidated financial statements)statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192021 and 2018,2020, and the results of theirits operations and theirits cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’sCompany's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, on April 26, 2019, the Company entered into a securities exchange agreement withhas continued to experience financial, supply chain and regulatory issues. These matters raise substantial doubt about the former members of Charlie’s Chalk Dust, LLC (“CCD”) (a predecessor entity) and changed its nameCompany’s ability to Charlie’s Holdings, Inc. Such agreement was accounted forcontinue as a reverse recapitalization,going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Critical AuditMatter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Fair Value of Derivative Liabilities
Critical Audit Matter Description
As described in Note 10 to the consolidated financial statements, the Company previously issued warrants to purchase approximately 40 million shares of common stock. The warrants have a 5-year term and an exercise price of $0.44313, subject to adjustment for anti-dilution events. The Company is required to assess the fair value of warrant liabilities at each reporting period and recognize any change in the fair value as items of other income or expense, and accordingly uses various inputs to measure the historical financial statementsoutstanding warrants on a recurring basis to determine the fair value of the Company reflect thoseliability. The fair value of CCD priorthe warrant liabilities was approximately $899,000 as of December 31, 2021.
We identified the fair value estimation of derivative liabilities as a critical audit matter because auditing the Company's subsequent accounting for the derivative liabilities was complex due to the securities exchange agreement,significant judgment required in the fair value measurement of the warrants and related changes in fair value recorded in other income or expense. The Company estimated the combined company for all periods following such agreement.
How We Addressed the Matter in Our Audit
The primary procedures we performed to address this critical audit matter included:
● | Obtaining an understanding and evaluating the design effectiveness of controls over the Company's accounting for the derivative liabilities. |
● | Obtaining an understanding of management's review of the key assumptions and inputs utilized in the estimate of the fair value of the warrants. |
● | Testing of the Company's subsequent accounting for the derivative liabilities and the related estimate of fair value of the warrants included, among other procedures, evaluating the Company's selection of the valuation methodology and significant assumptions used by the Company. |
● | Evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. |
● | Testing the appropriateness of the key assumptions by evaluating the appropriateness of the Company's estimates of its volatility, market risk free rate and the probability of an anti-dilution triggering event, as well as its analysis of the equity volatilities of comparable guideline public companies. |
● | Utilizing a valuation specialist with specialized skill and knowledge to assist in our evaluation of the methodology used by the Company and the appropriateness of significant assumptions, including independent recalculation and comparison to the Company’s valuation. |
/s/ Squar MilnerBaker Tilly US LLP
We have served as the Company’sCompany's auditor since 2018.
Irvine, California
April 12, 2022
CHARLIE’S HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31, | December 31, | |||||||
2021 | 2020 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 866 | $ | 1,422 | ||||
Accounts receivable, net | 1,368 | 1,258 | ||||||
Inventories, net | 5,005 | 1,593 | ||||||
Prepaid expenses and other current assets | 755 | 450 | ||||||
Total current assets | 7,994 | 4,723 | ||||||
Non-current assets: | ||||||||
Property, plant and equipment, net | 431 | 531 | ||||||
Right-of-use asset, net | 755 | 1,200 | ||||||
Other assets | 68 | 71 | ||||||
Total non-current assets | 1,254 | 1,802 | ||||||
TOTAL ASSETS | $ | 9,248 | $ | 6,525 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 4,068 | $ | 2,525 | ||||
Derivative liability | 899 | 4,444 | ||||||
Lease liabilities | 329 | 456 | ||||||
Notes payable, current portion | 0 | 1,400 | ||||||
Dividends payable | 0 | 1,650 | ||||||
Deferred revenue | 238 | 268 | ||||||
Total current liabilities | 5,534 | 10,743 | ||||||
Non-current liabilities: | ||||||||
Notes payable, net of current portion | 150 | 1,016 | ||||||
Lease liabilities, net of current portion | 433 | 762 | ||||||
Total non-current liabilities | 583 | 1,778 | ||||||
Total liabilities | 6,117 | 12,521 | ||||||
COMMITMENTS AND CONTINGENCIES (see Note 12) | ||||||||
Stockholders' equity (deficit): | ||||||||
Convertible preferred stock ($0.001 par value); 1,800,000 shares authorized | ||||||||
Series A, 300,000 shares designated, 141,873 and 203,811 shares issued and outstanding as of December 31, 2021 and 2020, respectively | 0 | 0 | ||||||
Series B, 1,500,000 shares designated, 0 shares issued and outstanding as of December 31, 2021 and 2020, respectively | 0 | 0 | ||||||
Common stock ($0.001 par value); 500,000,000 shares authorized; 210,890,930 shares and 189,907,526 shares issued and outstanding as of December 31, 2021 and 2020, respectively | 211 | 190 | ||||||
Additional paid-in capital | 7,775 | 3,477 | ||||||
Accumulated deficit | (4,855 | ) | (9,663 | ) | ||||
Total stockholders' equity (deficit) | 3,131 | (5,996 | ) | |||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | $ | 9,248 | $ | 6,525 | ||||
December 31, | December 31, | |
2019 | 2018 | |
| ASSETS | ||
| Current assets: | ||
| Cash | $2,448 | $304 |
| Accounts receivable, net | 918 | 711 |
| Inventories, net | 1,516 | 658 |
| Prepaid expenses and other current assets | 729 | 427 |
| Total current assets | 5,611 | 2,100 |
| Non-current assets: | ||
| Property, plant and equipment, net | 543 | 45 |
| Right-of-use asset, net | 1,623 | - |
| Other assets | 71 | 42 |
| Total non-current assets | 2,237 | 87 |
| TOTAL ASSETS | $7,848 | $2,187 |
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||
| Current liabilities: | ||
| Accounts payable and accrued expenses | $2,516 | $1,216 |
| Derivative liability | 4,144 | - |
| Lease liabilities | 426 | - |
| Deferred revenue | 91 | 180 |
| Total current liabilities | 7,177 | 1,396 |
| Non-current liabilities: | ||
| Lease liabilities, net of current portion | 1,218 | - |
| Total non-current liabilities | 1,218 | - |
| Total liabilities | 8,395 | 1,396 |
| COMMITMENTS AND CONTINGENCIES (see Note 12) | ||
| Stockholders' equity (deficit): | ||
| Convertible preferred stock ($0.001 par value); 1,800,000 shares authorized | ||
| Series A, 300,000 shares designated, 204,561 and 0 shares issued and outstanding as of December 31, 2019 and 2018, respectively | - | - |
| Series B, 1.5 million shares designated, 0 and 1.4 million shares issued and outstanding as of December 31, 2019 and 2018, respectively | - | 1 |
| Common stock ($0.001 par value); 50 billion shares authorized; 18.974 billion shares and 141 million shares issued and outstanding as of December 31, 2019 and 2018, respectively | 18,974 | 141 |
| Additional paid-in capital | (17,045) | - |
| Retained earnings (accumulated deficit) | (2,476) | 649 |
| Total stockholders' equity (deficit) | (547) | 791 |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | $7,848 | $2,187 |
The accompanying notes are an integral part of these consolidated financial statements.
CHARLIE’S HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
December 31, | ||||||||
2021 | 2020 | |||||||
Revenues: | ||||||||
Product revenue, net | $ | 21,496 | $ | 16,692 | ||||
Total revenues | 21,496 | 16,692 | ||||||
Operating costs and expenses: | ||||||||
Cost of goods sold - product revenue | 10,423 | 7,478 | ||||||
General and administrative | 8,750 | 10,873 | ||||||
Sales and marketing | 1,734 | 1,733 | ||||||
Research and development | 24 | 3,378 | ||||||
Total operating costs and expenses | 20,931 | 23,462 | ||||||
Income (loss) from operations | 565 | (6,770 | ) | |||||
Other income (expense): | ||||||||
Interest expense | (34 | ) | (134 | ) | ||||
Change in fair value of derivative liabilities | 3,545 | (300 | ) | |||||
Gain on debt extinguishment | 1,060 | 0 | ||||||
Other income | 14 | 17 | ||||||
Total other income (loss) | 4,585 | (417 | ) | |||||
Income (loss) before income taxes | 5,150 | (7,187 | ) | |||||
Income tax expense | (342 | ) | 0 | |||||
Net income (loss) | $ | 4,808 | $ | (7,187 | ) | |||
Net earnings (loss) per share | ||||||||
Basic | $ | 0.02 | $ | (0.04 | ) | |||
Diluted | $ | 0.01 | $ | (0.04 | ) | |||
Weighted average number of common shares outstanding | ||||||||
Basic | 203,589,531 | 189,844,867 | ||||||
Diluted | 237,686,875 | 189,844,867 | ||||||
For the years ended | ||
December 31, | ||
2019 | 2018 | |
| Revenues: | ||
| Product revenue, net | $22,740 | $20,841 |
| Total revenues | 22,740 | 20,841 |
| Operating costs and expenses: | ||
| Cost of goods sold - product revenue | 10,071 | 8,515 |
| General and administrative | 15,017 | 3,158 |
| Sales and marketing | 2,314 | 1,968 |
| Research and development | 1,102 | - |
| Total operating costs and expenses | 28,504 | 13,641 |
| (Loss) income from operations | (5,764) | 7,200 |
| Other income: | ||
| Change in fair value of derivative liabilities | 3,618 | - |
| Total other income | 3,618 | - |
| Net (loss) income | (2,146) | 7,200 |
| Deemed dividend on Series A preferred stock | (1,650) | - |
| Net (loss) earnings applicable to common stockholders | $(3,796) | $7,200 |
Net (loss) earnings per share applicable to common stockholders | ||
| Basic | $(0.00) | $0.05 |
| Diluted | $(0.00) | $0.00 |
| Weighted average shares used in computing basic earnings per share | 10,648,129,286 | 141,040,886 |
| Weighted average shares used in computing diluted earnings per share | 10,648,129,286 | 14,104,089,886 |
The accompanying notes are an integral part of these consolidated financial statements.
CHARLIE’S HOLDINGS, INC.
CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS’STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands)
Series A Convertible Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders' Equity | ||||||||||||||||||||||||
Shares | Par value | Shares | Par value | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
Balance at January 1, 2020 | 204 | $ | 0 | 172,982 | $ | 173 | $ | 1,756 | $ | (2,476 | ) | $ | (547 | ) | ||||||||||||||
Conversion of Series A convertible preferred stock | 0 | 0 | 16,925 | 17 | (17 | ) | 0 | 0 | ||||||||||||||||||||
Reclassification of liability awards to equity | - | 0 | - | 0 | 1,638 | 0 | 1,638 | |||||||||||||||||||||
Accrue dividends payable on Series A convertible preferred stock | - | 0 | - | 0 | (1,650 | ) | 0 | (1,650 | ) | |||||||||||||||||||
Stock compensation | 0 | 0 | 0 | 0 | 1,750 | 0 | 1,750 | |||||||||||||||||||||
Net loss | - | 0 | - | 0 | 0 | (7,187 | ) | (7,187 | ) | |||||||||||||||||||
Balance at December 31, 2020 | 204 | 0 | 189,907 | 190 | 3,477 | (9,663 | ) | (5,996 | ) | |||||||||||||||||||
Issuance of common stock to related parties for cash | 0 | 0 | 3,517 | 3 | 2,997 | 0 | 3,000 | |||||||||||||||||||||
Conversion of Series A convertible preferred stock | (62 | ) | 0 | 13,977 | 14 | (14 | ) | 0 | 0 | |||||||||||||||||||
Issuance of common stock for dividend payment | 0 | 0 | 1,736 | 2 | 768 | 0 | 770 | |||||||||||||||||||||
Accrue dividends payable on Series A convertible preferred stock | - | 0 | - | 0 | (3 | ) | 0 | (3 | ) | |||||||||||||||||||
Stock compensation | 0 | 0 | 1,750 | 2 | 550 | 0 | 552 | |||||||||||||||||||||
Fraction shares adjustment due to reverse split | 0 | - | 3 | - | - | - | - | |||||||||||||||||||||
Net income | - | 0 | - | 0 | 0 | 4.808 | 4,808 | |||||||||||||||||||||
Balance at December 31, 2021 | 142 | $ | 0 | 210,890 | $ | 211 | $ | 7,775 | $ | (4,855 | ) | $ | 3,131 | |||||||||||||||
Series A | Series B | Total Stockholders' | |||||||
Convertible Preferred Stock | Convertible Preferred Stock | Common Stock | Additional | Retained | Equity | ||||
Shares | Par value | Shares | Par value | Shares | Par value | Paid-in Capital | Earnings | (Deficit) | |
| Balance at January 1, 2018 | - | $- | 1,396 | $1 | 141,041 | $141 | $- | $1,401 | $1,543 |
| Cash distributions to CCD Members | - | - | - | - | - | - | - | (7,952) | (7,952) |
| Net income | - | - | - | - | - | - | - | 7,200 | 7,200 |
| Balance at December 31, 2018 | - | - | 1,396 | 1 | 141,041 | 141 | - | 649 | 791 |
| Effect of reverse merger | - | - | - | - | 2,377,530 | 2,378 | (2,378) | - | - |
| Conversion of Series A convertible preferred stock | (2) | - | - | - | 38,081 | 38 | (38) | - | - |
| Conversion of Series B convertible preferred stock | - | - | (1,396) | (1) | 13,963,048 | 13,963 | (13,962) | - | - |
| Issuance of preferred stock, 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 compensation | - | - | - | - | 902,662 | 903 | 2,916 | - | 3,819 |
| Net income | - | - | - | - | - | - | - | (2,146) | (2,146) |
| Balance at December 31, 2019 | 204 | $- | - | $- | 18,973,828 | $18,974 | $(17,045) | $(2,476) | $(547) |
The accompanying notes are an integral part of these consolidated financial statements.
CHARLIE’S HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the years ended | ||||||||
December 31, | ||||||||
2021 | 2020 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net income (loss) | $ | 4,808 | $ | (7,187 | ) | |||
Reconciliation of net income (loss) to net cash used in operating activities: | ||||||||
Provision for bad debt expense | 109 | 60 | ||||||
Depreciation and amortization | 210 | 181 | ||||||
Change in fair value of derivative liabilities | (3,545 | ) | 300 | |||||
Amortization of operating lease right-of-use asset | 445 | 423 | ||||||
Stock based compensation | 552 | 3,072 | ||||||
Gain from debt extinguishment | (1,060 | ) | 0 | |||||
Subtotal of non-cash charges | (3,289 | ) | 4,036 | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (219 | ) | (400 | ) | ||||
Inventories | (3,412 | ) | (77 | ) | ||||
Prepaid expenses and other current assets | (305 | ) | 279 | |||||
Other assets | 3 | 0 | ||||||
Accounts payable and accrued expenses | 1,553 | 325 | ||||||
Deferred revenue | (30 | ) | 177 | |||||
Lease liabilities | (456 | ) | (426 | ) | ||||
Net cash used in operating activities | (1,347 | ) | (3,273 | ) | ||||
Cash Flows from Investing Activities: | ||||||||
Purchase of property, plant and equipment | (110 | ) | (169 | ) | ||||
Net cash used in investing activities | (110 | ) | (169 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Proceeds from issuance of common stock to related parties | 3,000 | 0 | ||||||
Proceeds from issuance of notes payable | 184 | 2,416 | ||||||
Repayment of notes payable | (1,400 | ) | 0 | |||||
Dividend payment | (883 | ) | 0 | |||||
Net cash provided by financing activities | 901 | 2,416 | ||||||
Net decrease in cash | (556 | ) | (1,026 | ) | ||||
Cash, beginning of the year | 1,422 | 2,448 | ||||||
Cash, end of the year | $ | 866 | $ | 1,422 | ||||
Supplemental disclosure of cash flow information | ||||||||
Cash paid for interest | $ | 150 | $ | 0 | ||||
Cash paid for income taxes | $ | 0 | $ | 0 | ||||
Supplemental disclosure of cash flow information | ||||||||
Conversion of Series A convertible preferred stock | $ | 14 | $ | 17 | ||||
Issuance of common stock for dividend payment | $ | 770 | $ | 0 | ||||
Accrued dividends payable on Series A convertible preferred stock | $ | 0 | $ | 1,650 | ||||
Reclassification of liability awards to equity | $ | 0 | $ | 1,638 | ||||
For the years ended | ||
December 31, | ||
2019 | 2018 | |
| Cash Flows from Operating Activities: | ||
| Net (loss) income | $(2,146) | $7,200 |
| Reconciliation of net (loss) income to net cash (used in) provided by operating activities: | ||
| Bad debt expense | 573 | 93 |
| Depreciation and amortization | 73 | 18 |
| Change in fair value of derivative liabilities | (3,618) | - |
| Amortization of operating lease right-of-use asset | 190 | - |
| Stock based compensation | 3,819 | - |
| Subtotal of non-cash charges | 1,037 | 111 |
| Changes in operating assets and liabilities: | ||
| Accounts receivable | (780) | 129 |
| Inventories | (858) | (291) |
| Prepaid expenses and other current assets | (302) | 14 |
| Other assets | (29) | (5) |
| Accounts payable and accrued expenses | 1,300 | 394 |
| Deferred revenue | (89) | 65 |
| Lease liabilities | (169) | - |
| Net cash (used in) provided by operating activities | (2,036) | 7,617 |
| Cash Flows from Investing Activities: | ||
| Purchase of property, plant and equipment | (571) | (16) |
| Net cash used in investing activities | (571) | (16) |
| Cash Flows from Financing Activities: | ||
| Proceeds from issuance of common stock and warrants in a private offering, net | 23,160 | - |
| Cash distributions to CCD Members | (18,409) | (7,952) |
| Net cash provided by (used in) financing activities | 4,751 | (7,952) |
| Net increase (decrease) in cash | 2,144 | (351) |
| Cash, beginning of the year | 304 | 655 |
| Cash, end of the year | $2,448 | $304 |
| Supplemental disclosure of cash flow information | ||
| Cash paid for interest | $- | $- |
| Cash paid for income taxes | $- | $- |
| Supplemental disclosure of cash flow information | ||
| Effect of reverse merger | $2,378 | $- |
| Conversion of Series B convertible preferred stock | $13,963 | $- |
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.premium, nicotine-based vapor products. The Company’s products are produced domestically through contract manufacturers for sale by select distributors, specialty retailers and third-partythird-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,New Zealand, 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’sCompany's former Chief Executive Officer and current Chief Operating Officer, respectively, and a consolidated variable interest for which the Company is the primary beneficiary (“Don Polly”), of certain premium vapor, tinctureingestible and topical products containing hemp-derived cannabidiol (“CBD”). and other compounds derived from hemp. Our CBD basedhemp-based products are produced, marketed and sold through, Don Polly, and the Company currently intends to develop and launch additional products containing hemp-derived CBDcannabinoids in the future.
In addition to Don Polly, we are also the holding company for two wholly-owned subsidiaries,wholly-own Charlie’s Chalk Dust, LLC (“
The Company's Common Stock, par value $0.001 per share (“
Reverse Stock Split
The Company’s Board of 13,963,047,716Directors approved a reverse stock split of the Company’s authorized, issued and outstanding 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 PreferredCommon Stock, par value $0.001 per share, (“
Basis of Presentation
The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “
SEC”).Going Concern Uncertainty Regarding the Legal and Regulatory Environment, Liquidity and Management’sManagement’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 iswas required to apply for obtain approval from the United States Food and Drug Administration ("FDA approval") to continue selling and marketing itscertain of products used for the vaporization of nicotine in the United States. Currently, a substantial portion of the Company’s sales are derived from products that are subject to approval by the FDA. There iswas significant cost associated with the application process and there can be no assurance the FDA will approve the application(s).previous and/or future application. In addition, the recent outbreak of Coronaviruscoronavirus (“COVID-19”) in March 2020 has had a negative impact on the global economy and markets which could impacthas impacted the Company’s supply chain and/orand sales. For the year ended December 31, 2019 2021, the Company has incurred lossesgenerated income from operations of $5,764,000approximately $0.6 million and a consolidated net lossincome of approximately $2,146,000 and the$4.8 million. The Company has negativea stockholders’ equity of $547,000.approximately $3.1 million as of December 31, 2021. During the year ended December 31, 2021, the Company’s working capital requirements changed significantly as inventory increased to $5.0 million, from $1.6 million as of December 31, 2020, and cash on hand decreased to approximately $0.9 million, from $1.4 million as of December 31, 2020. Though the Company’s balance sheet and overall performance generally improved during 2021, the issuance of one or several Marketing Denial Orders (“MDO”) from the FDA would increase the potential for inventory obsolescence and uncollectable accounts receivables. These regulatory risks, as well as other industry-specific challenges remain factors that raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to the carrying amount and classification of recorded assets and liabilities should the Company be unable to continue operations.
Management's plans depend on its ability to increase revenues and continue its business development efforts, including the expenditure of approximately $4,400,000 to date, to complete the Premarket Tobacco Application (“PMTA”) registration process. On March 23, 2021,The Company does not anticipate thatclosed a $3,000,000 capital raise through the private sale of 3,517,000 shares of its current cash position will be sufficientcommon stock to meet itsthe Company’s founders Brandon Stump and Ryan Stump. The Company has used the proceeds to fund future growth, increase working capital, requirements, to continue its salesretire outstanding debt, and marketing efforts and completefor other general corporate purposes. However, the PMTA registration process. The Company is currently seeking term debt or other sources ofmayrequire additional financing in order to ensure that it have sufficient cash to operate for the next 12 months. If in the future should the plansFDA require additional testing for one, or assumptions change or prove to be inaccurate, or there is a significant change inseveral, of the regulatory environment or the recent outbreak of Coronavirus continues to impact the global economy, the Company will need to raise additional funds through public or private debt or equity offerings, financings, corporate collaborations, or other means.Company’s PMTA submissions. There can be no assurance that such financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and, in itsthe Company’s 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 other ENDS 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.
On March 11, 2020, the World Health Organization designated the ongoing and evolving COVID-19 outbreak as a pandemic. The outbreak has caused and continues to cause a substantial disruption in international and U.S. economies and markets. The outbreak is having a temporary adverse impact on our industry as well as our business, with regards to certain supply chain disruptions and sales volume. While the disruption from COVID-19 is currently expected to be temporary, there is uncertainty around the duration. The impact from COVID-19 has affected our supply chain, and if disruptions from the COVID-19 outbreak are prolonged, it will continue to have an adverse impact on our business.
NOTE 2– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company Charlie’s Holdings, Inc.,and its two2 100% wholly owned subsidiaries, Charlie’s Chalk Dust, LLC and Bazi, Inc, and Don Polly, LLC, a consolidated variable interest for which the Company is the primary beneficiary (see Note 7).beneficiary. All inter-company balances and transactions have been eliminated in consolidation.
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 expenses during the reporting periods. Actual results could differ from those estimates.
Fair Value of Financial Instruments
U.S. GAAP requires disclosing the fair value of financial instruments to the extent practicable for financial instruments which are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement.
In assessing the fair value of financial instruments, the Company uses a variety of methods and assumptions, which are based on estimates of market conditions and risks existing at the time. The fair value of derivative liabilities was estimated using a Monte Carlo simulation method, based on both observable and unobservable inputs. For certain instruments, including cash and cash equivalents, accounts receivable, accounts payable, warrant liability and accrued expenses, it was estimated that the carrying amount approximated fair value because of the short maturities of these instruments.
Revenue Recognition
The Company recognizes revenues in accordance with Accounting Standards Codification (“
ASCIn circumstances where shipping and handling activities occur after the customer has obtained control of the product, the Company has elected to account for shipping and handling activities as a fulfillment cost rather than an additional promised service. Contract durations are generally less than one year and, therefore, costs paid to obtain contracts, which generally consist of sales commissions, are recognized as expenses in the period incurred. Revenue is measured by the transaction price, which is defined as the amount of consideration expected to be received in exchange for providing goods to customers. The transaction price is adjusted for estimates of known or expected variable consideration, which includes refunds and returns as well as incentive offers, volume rebates and promotional discounts on current orders. Our volume rebates are short-term in nature and reset on a quarterly basis. Estimates for sales returns are based on, among other things, an assessment of historical trends, information from customers, and anticipated returns related to current sales activity. These estimates are established in the period of sale and reduce revenue in the period of the sale. Variable consideration related to incentive offers and promotional programs are recorded as a reduction to revenue based on amounts the Company expects to collect. Estimates are regularly updated and the impact of any adjustments are recognized in the period the adjustments are identified. In many cases, key sales terms such as pricing and quantities ordered are established at the time an order is placed and incentives have very short-term durations.
Amounts billed and due from customers are short term in nature and are classified as receivables since payments are unconditional and only the passage of time related to credit terms is required before payments are due. The Company does not grant payment financing terms greater than one year. Payments received in advance of revenue recognition are recorded as deferred revenue.
Cash and Cash Equivalents
The Company considers all liquid investments purchased with original maturities of ninety days or less to be cash equivalents.
AccountsReceivable
Accounts receivable isare recorded at the invoiced amount and does do not bear interest. We determine the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions and set upestablish an allowance for doubtful accounts when collection is uncertain. Customers’ accounts are written off against the allowance when all attempts to collect have been exhausted. Recoveries of accounts receivable previously written off are recorded as income when received. As of December 31, 2019 2021 and 2018,2020, the allowance for bad debt totaled $639,000$109,000 and $151,000,$355,000, respectively.
Inventories primarily consist of finished goods and are stated at the lower of cost (determined by the average cost method) or net realizable value. We calculate estimates of excess and obsolete inventories determined primarily by reviewing inventory on hand, historical sales activity, industry trends and expected net realizable value. As of December 31, 2019 2021 and 2018,2020, the reserve for excess and obsolete inventories totaled $83,000$156,000 and $74,000,$179,000, respectively.
Plant, Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are provided for using the straight-line method, in amounts sufficient to charge the cost of depreciable assets to operations over their estimated service lives. Repairs and maintenance costs are charged to operations as incurred.
Costs for capital assets not yet placed into service are capitalized as construction in progress on the consolidated balance sheets and will be depreciated once placed into service.
The Company assesses its long-lived assets for impairment whenever facts and circumstances indicate that the carrying amounts may not be fully recoverable. To analyze recoverability, the Company projects undiscounted net future cash flows over the remaining lives of such assets. If these projected undiscounted net future cash flows are less than the carrying amounts, an impairment loss would be recognized, resulting in a write-down of the assets with a corresponding charge to earnings. The impairment loss is measured based upon the difference between the carrying amounts and the fair values of the assets.
Leases
Subsequent to the adoption of the new leasing standard on January 1, 2019, the Company recognizes a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. The Company determines whether an arrangement is, or contains a lease at contract inception. Operating leases with a duration greater than one year are included in right-of-use assets, lease liabilities, and lease liabilities, net of current portion in the Company’s consolidated balance sheets. Right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the net present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date. The incremental borrowing rate represents the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company considers a lease term to be the noncancelable period that it has the right to use the underlying asset.
The operating lease right-of-use assets also include any lease payments made and exclude lease incentives. Lease expense is recognized on a straight-line basis over the expected lease term. Variable lease expenses are recorded when incurred.
Stock-Based Compensation
We account for all stock-based compensation using a fair value-based method. The fair value of equity-classified awards granted to employees is estimated on the date of the grant using the Black-Scholes option-pricing model and the related stock-based compensation expense is recognized over the vesting period during which an employee is required to provide service in exchange for the award.
We measure the fair value of liability-classified awards using a Monte Carlo valuation model. Compensation cost is recognized over the service period and is remeasured at each reporting period through settlement.Income taxes
Income taxes are computed under the liability method. This method requires the recognition of deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and are reflected in the consolidated financial statements in the period of enactment. A valuation allowance is recorded when it is more likely than not that some, or all of the deferred tax assets will not be realized.
Financial statement effects of a tax position are initially recognized when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. A tax position that meets the more-likely-than-notmore-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that meets the more-likely-than-notmore-likely-than-not threshold of being realized upon ultimate settlement with a taxing authority. We recognize potential accrued interest and penalties related to unrecognized tax benefits as income tax expense.
Research and development
We expense the cost of research and development as incurred. Research and development expenses include costs incurred in funding research and development activities, license fees, and other external costs. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity is performed or when the goods have been received, rather than when payment is made.
Segments
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business in one1 operating segment.
The following tabledisaggregatestable disaggregates revenue from our single operating segment by geographic market and customer type for the periods ending December 31, 2019 2021 and 2018,2020, respectively:
December 31, 2021 | December 31, 2020 | |||||||
Geographic Market | ||||||||
International | 17 | % | 19 | % | ||||
United States | 83 | % | 81 | % | ||||
Customer Type | ||||||||
Retailer | 38 | % | 43 | % | ||||
Distribution | 62 | % | 57 | % | ||||
December 31, 2019 | December 31, 2018 | |
| Geographic Market | ||
| International | 24.0% | 28.0% |
| United States | 76.0% | 72.0% |
| Customer Type | ||
| Retailers | 36.0% | 45.0% |
| Distributors | 64.0% | 55.0% |
Recently Issued Accounting Pronouncements
Measurement of Credit Losses on Financial Accounting Standards Board (“
In FebruaryJune 2016 the FASB issued ASU 2016-02, Leases (Topic 842)2016-13, Measurement of Credit Losses on Financial Instruments, which supersedes current guidance requiring recognition of credit losses when it is probable that a loss has been incurred. The standard requires the establishment of an allowance for estimated credit losses on financial assets, including trade and other receivables, at each reporting date. The ASU will result in orderearlier recognition of allowances for losses on trade and other receivables and other contractual rights to increase transparency and comparability among organizations by, among other provisions, recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. For public companies, ASU 2016-02 wasreceive cash. This standard is effective for fiscal years, beginning after December 15, 2018 (includingand interim periods within those periods) using a modified retrospective approachfiscal years, beginning after December 15, 2022. Early adoption is permitted. The Company does not believe the impact of adopting this standard will be material to its consolidated financial statements and early adoption was permitted. related disclosures.
Income Taxes
In transition, entities may also elect a package of practical expedients that must be applied in its entirety to all leases commencing before the adoption date, unless the lease is modified, and permits entities to not reassess (a) the existence of a lease, (b) lease classification or (c) determination of initial direct costs, as of the adoption date, which effectively allows entities to carryforward accounting conclusions under previous U.S. GAAP. In July 2018, December 2019, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities an optional transition method to apply the guidance under Topic 842 as of the adoption date, rather than as of the earliest period presented. The Company adopted Topic 842 on January 1, No.2019 using the optional transition method to apply the new guidance as of January 1, 2019, rather than as of the earliest period presented, and elected the package of practical expedients described above. Based on the analysis, on January 1, 2019, the Company recorded right of use assets of approximately $81,000 and lease liability of approximately $81,000.
Debt – Debt with conversion and Other Options
In August 2020, the FASB issued ASU No.2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. The ASU is effective for the Company on December 1, 2022, Early adoption is permitted, but no earlier than December 1, 2021. The Company elected to early adopt this guidance on January 1, 2022 and there will be no impact on its consolidated financial statements and related disclosures.
Earnings per Share
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. This ASU will be effective for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. The Company does not believe the impact of adopting this standard will be material to its consolidated financial statements and related disclosures.
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 December 31, 2019 (amount2021 and 2020 (amounts in thousands):
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 |
Fair Value at December 31, 2021 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Liabilities: | ||||||||||||||||
Derivative liability - Warrants | 899 | 0 | 0 | 899 | ||||||||||||
Total liabilities | $ | 899 | $ | 0 | $ | 0 | $ | 899 | ||||||||
Fair Value at December 31, 2020 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Liabilities: | ||||||||||||||||
Derivative liability - Warrants | 4,444 | 0 | 0 | 4,444 | ||||||||||||
Total liabilities | $ | 4,444 | $ | 0 | $ | 0 | $ | 4,444 | ||||||||
There were no transfers between Level 1,2 or 3 during the yearyears ended December 31, 2019.
The following table presents changes in Level 3 liabilities measured at fair value for the yearyears ended December 31, 2019.2021 and 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(amounts in thousands).
Derivative liability - Warrants | ||||
Balance at January 1, 2020 | $ | 4,144 | ||
Change in fair value | 300 | |||
Balance at December 31, 2020 | 4,444 | |||
Change in fair value | (3,545 | ) | ||
Balance at December 31, 2021 | $ | 899 | ||
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 December 31, 20192021 and 2020 is as follows:
For the years ended | ||||||||
December 31, | ||||||||
2021 | 2020 | |||||||
Exercise price | $ | 0.4431 | $ | 0.4431 | ||||
Contractual term (years) | 6.00 | 6.00 | ||||||
Volatility (annual) | 85.0 | % | 75.0 | % | ||||
Risk-free rate | 0.9 | % | 0.5 | % | ||||
Dividend yield (per share) | 0 | % | 0 | % | ||||
On April 26, 2019 (the “Closing Date”), the Company entered into a Securities Exchange Agreement (“Share Exchange”) with each of the former members (“Members”) of Charlie’s, and certain direct investors in the Company (“Direct Investors”), pursuant to which the Company acquired all outstanding membership interests of Charlie’s beneficially owned by the Members in exchange for the issuance by the Company of units. Immediately prior to, and in connection with, employment agreementsthe Share Exchange, Charlie’s consummated a private offering of membership interests that resulted in net proceeds to Charlie’s of approximately $27.5 million (the “Charlie’s Financing”). In conjunction with its CEO and COO,the Share Exchange, the Company issued market condition awards contingent uponto holders of its Series A Convertible Preferred Stock (“Series A Preferred”) warrants to purchase an aggregate of 31,028,996 shares of Common Stock (the “Investor Warrants”) and to its placement agent Katalyst Securities LLC warrants to purchase an aggregate of 9,308,699 shares of Common Stock (the “Placement Agent Warrants”). Both the achievementInvestor Warrants and Placement Agent Warrants have a five-year term and a strike price of certain market capitalization targets. The awards$0.44313 per share. Due to the exercise features of these warrants, they are subjectnot considered to a three-year service vesting period. The awards are settleable in a variable number of common shares based on defined percentages ofbe indexed to the Company's total shares determined by market capitalization targetsCompany’s own stock and are therefore classified as liabilitiesnot afforded equity treatment in accordance with ASC 718. TheTopic 815, Derivatives and Hedging (“ASC 815”). In accordance with ASC 815, the Company has recorded the Investor Warrants and Placement Agent Warrants as derivative instruments on its consolidated balance sheet. ASC 815 requires derivatives to be recorded on the balance sheet as an asset or liability and to be measured at fair value. Changes in fair value ofare reflected in the awards is remeasured atCompany’s earnings for 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
NOTE 54 - PROPERTY AND EQUIPMENT
Property and Equipment detail as of December 31, 2019 2021, and 20182020 are as follows (amount(amounts in thousands):
December 31, | December 31, | |
2019 | 2018 | |
| Machinery and equipment | $96 | $64 |
| Trade show booth | 171 | 144 |
| Office equipment | 118 | 26 |
| Leasehold improvements | 440 | 20 |
825 | 254 | |
| Accumulated depreciation | (282) | (209) |
$543 | $45 |
December 31, 2021 | December 31, 2020 | Estimated Useful Life (in Years) | |||||||
Machinery and equipment | $ | 42 | $ | 38 | 5 | ||||
Trade show booth | 171 | 171 | 5 | ||||||
Office equipment | 511 | 405 | 5 | ||||||
Leasehold improvements | 380 | 380 | Lesser of lease term or estimated useful life | ||||||
| 1,104 | 994 | ||||||||
Accumulated depreciation | (673 | ) | (463 | ) | |||||
| $ | 431 | $ | 531 | ||||||
Depreciation and amortization expense totaled $73,000$210,000 and $18,000,$181,000, respectively, during the years ended December 31, 2019 2021, and 2018.
NOTE 65 - CONCENTRATIONS
Vendors
The Company’s concentration of purchases are as follows:
For the year ended | ||
December 31, | ||
2019 | 2018 | |
| Vendor A | 57% | 74% |
| Vendor B | 16% | 15% |
For the years ended | ||||||||
December 31, | ||||||||
2021 | 2020 | |||||||
Vendor A | 31 | % | 25 | % | ||||
Vendor B | 0 | 27 | % | |||||
Vendor C | 0 | 26 | % | |||||
Vendor D | 0 | 12 | % | |||||
Vendor E | 42 | % | 0 | |||||
During the year ended December 31, 2019, 2021, purchases from two2 vendors represented 73%73% of total inventory purchases. During the year ended December 31,, 2018, 2020, purchases from two4 vendors represented 89%90% of total inventory purchases.
As of December 31, 2019 2021, and 2018,2020, amounts owed to these vendors totaled $58,000$1,494,000 and $654,000$270,000 respectively, which are included in accounts payable in the accompanying condensed consolidated balance sheets.
Accounts Receivable
The Company’s concentration of accounts receivable are as follows:
December 31, | ||
2019 | 2018 | |
| Customer A | 18% | 6% |
For the years ended | ||||||||
December 31, | ||||||||
2021 | 2020 | |||||||
Customer A | 0 |
| 17 | % | ||||
Customer B | 0 | 10 | % | |||||
Customer C | 27 | % | 0 |
| ||||
NaN customer made up more than 10%27% of net accounts receivable at December 31,, 2019. 2021 and 2 customers accounted for 27% of net accounts receivable at December 31, 2020. Customer C owed the Company a total of $454,000, representing 27% of net receivables at December 31, 2021. Customer A owed the Company a total of $211,000,$210,000, representing 23%17% of net receivables. receivables at December 31, 2020. Customer B owed the Company a total of $127,000, representing 10% of net receivables at December 31, 2020. No customer exceeded 10% of total net sales for the years ended December 31, 2019 2021 and 2018,2020, respectively.
NOTE 7 6– DON POLLY, LLC.
Don Polly, LLC is a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, a former and current executive officer of the Company’s Chief Executive Officer and Chief Operating Officer,Company, respectively, and a consolidated variable interest for which the Company is the primary beneficiary. Don Polly formulates, sells and distributes the Company’s CBDhemp-derived product lines.
We evaluate our ownership, contractual and other interests in entities that are not wholly-owned to determine if these entities are variable interest entities (“
VIEs”), and, if so, whether we are the primary beneficiary of the VIE. In determining whether we are the primary beneficiary of a VIE and therefore required to consolidate the VIE, we apply a qualitative approach that determines whether we have bothDon 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,agreement; therefore, as the Company receives 100% of the net income or incurs 100% of the net loss of the VIE, no non-controlling interests are recorded.
NOTE 8 7– ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of December 31, 2019 2021, and 20182020 are as follows (amount(amounts in thousands):
December 31, | December 31, | |||||||
2021 | 2020 | |||||||
Accounts payable | $ | 2,476 | $ | 629 | ||||
Accrued compensation | 902 | 1,420 | ||||||
| Accrued income taxed | 342 | 0 | ||||||
Other accrued expenses | 348 | 476 | ||||||
| $ | 4,068 | $ | 2,525 | |||||
NOTE 8– NOTES PAYABLE
Red Beard Holdings, LLC Note Payable
On April 1, 2020, the Company, Charlie's and its VIE, Don Polly, issued a secured promissory note (the "RedBeard Note") to one of the Company's largest stockholders, Red Beard Holdings, LLC ("Red Beard") in the principal amount of $750,000 (the "Principal Amount"), requiring a guaranteed minimum interest amount of $75,000 (“Minimum Interest”). The Red Beard Note is secured by all assets of the Company pursuant to the terms of a Security Agreement entered into by and between the Company and Red Beard (the "Red Beard Note Financing"). The Red Beard Note was subsequently amended on August 27, 2020, September 30, 2020, October 29, 2020, December 1, 2020, and January 19, 2021, ultimately increasing Principal Amount to $1,400,000 and Minimum Interest to $150,000.
On March 24, 2021, the Company and Red Beard entered into a Satisfaction and Release (the "Red Beard Release"), pursuant to which the Company made a payment to Red Beard in the amount of $1,550,000 in exchange for an acknowledgment of satisfaction and full release of the Company by Red Beard from liability and obligations arising under the Red Beard Note.
December 31, | December 31, | |
2019 | 2018 | |
| Accounts payable | $673 | $901 |
| Accrued compensation | 1,635 | 288 |
| Insurance payable | - | 20 |
| Other accrued expenses | 208 | 7 |
$2,516 | $1,216 |
Small Business Administration Loan Programs
On April 30, 2020, Charlie's, a wholly owned subsidiary of the Company, received approval to enter into a U.S. Small Business Administration ("SBA") Promissory Note (the " Charlie's PPP Loan") with TBK Bank, SSB (the "SBA Lender"), pursuant to the Paycheck Protection Program ("PPP") of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") as administered by the SBA (the "PPP Loan Agreement").
The Charlie's PPP Loan provides for working capital to CCD in the amount of $650,761. The Charlie's PPP Loan matures on April 30, 2022 and accrues interest at a rate of 1.00% per annum. Per the PPP Loan Agreement, payments of principal and interest were deferred for six months from the date of the Charlie's PPP Loan, or until November 30, 2020. Interest, however, continued to accrue during this time. Charlie’s was notified by SBA Lender that all payments, including principal and interest, on all PPP loans issued by the bank have been deferred indefinitely in order to allow borrowers adequate time to apply for forgiveness.
On April 14, 2020, Don Polly also obtained a loan pursuant to the PPP enacted under the CARES Act (the "Polly PPP Loan" and together with the Charlie's PPP Loan, the "PPPLoans") from Community Banks of Colorado, a division of NBH Bank (the "Polly Lender"). The Polly PPP Loan obtained by Don Polly provides for working capital to Don Polly in the amount of $215,600. The Polly PPP Loan matures on April 14, 2022 and accrues interest at a rate of 1.00% per annum. Payments of principal and interest were deferred for six months from the date of the Polly PPP Loan, or until November 14, 2020. Interest, however, continued to accrue during this time.
The aforementioned PPP Loans were made under the PPP enacted by Congress under the CARES Act. The CARES Act (including the guidance issued by SBA and U.S. Department of the Treasury) provides that all or a portion of the PPP Loans may be forgiven upon request from the respective borrower to the SBA Lender or the Polly Lender, as the case may be, subject to requirements in the PPP Loans and under the CARES Act.
On February 19, 2021, Don Polly received notice from the Polly Lender, that the Polly PPP Loan was fully repaid, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the U.S. Small Business Administration. There is no further action required on the part of Don Polly to satisfy this liability. For the period ended March 31, 2021, the Company recorded a debt extinguishment gain of approximately $217,000, including principal and accrued interest, which is reflected in the other income section of the Company’s consolidated statements of operations.
On March 17, 2021, Don Polly obtained a second draw PPP loan (“Polly PPP Loan 2”) under the CARES Act from Polly Lender. The Polly PPP Loan 2 obtained by Don Polly provided general working capital in the amount of $184,200. The Polly PPP Loan 2 matures on March 17, 2026 and accrued interest at a rate of 1.00% per annum. Payments of principal and interest were deferred, however interest continued to accrue.
During the year ended December 31, 2021, Charlie’s received notice from SBA Lender that the Charlie’s PPP Loan was fully repaid, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the U.S. Small Business Administration. There is no further action required on the part of Charlie’s to satisfy this liability.
During the year ended December 31, 2021, Don Polly received notice from the Polly Lender, that the Polly PPP Loan 2 was fully repaid, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the U.S. Small Business Administration. There is no further action required on the part of Don Polly to satisfy this liability.
During the year ended December 31, 2021, the Company recorded a debt extinguishment gain of approximately $1,060,000, including principal and accrued interest, which is reflected in the other income section of the Company’s consolidated statements of operations.
On June 24, 2020, SBA authorized (under Section 7(b) of the Small Business Act, as amended) an Economic Injury Disaster Loan (“EID Loan”) to Don Polly in the amount of $150,000. Installment payments, including principal and interest of $731 monthly, will begin twelve months from the date of the EID Loan. The balance of principal and interest will be payable thirty years from the date of the EID Loan and interest will accrue at the rate of 3.75% per annum.
The following summarizes the Company’s notes payable maturities as of December 31, 2021 (amounts in thousands):
Remaining months Ending December 31, 2021 | $ | - | ||
Year Ending December 31, 2022 | 0 | |||
Year Ending December 31, 2023 | 0 | |||
Year Ending December 31, 2024 | 0 | |||
Year Ending December 31, 2025 | 0 | |||
Thereafter | 150 | |||
Total | $ | 150 |
NOTE 9– EARNING EARNINGS (LOSS) PER SHARE BASIC AND FULLY DILUTED
Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the reporting period. Diluted earnings (loss) per common share is computed similar to basic earnings (loss) per common share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock. Diluted weighted average common shares include common stock potentially issuable under the Company’s convertible preferred stock, warrants and vested and unvested stock options.
For the years ended December 31, 2021, and 2020, net income (loss) is adjusted for gain (loss) from changes in the fair value of warrant liabilities.
The following table sets forth the computation of earnings (loss) per share (in thousands)(amounts in thousands, except share and per share amounts):
For the years ended | ||
December 31, | ||
2019 | 2018 | |
| Net (loss) earnings applicable to common shareholders- basic | $(3,796) | $7,200 |
| Net (loss) earnings applicable to common shareholders - diluted | $(3,796) | $7,200 |
| Weighted average shares outstanding - basic | 10,648,129 | 141,041 |
| Series B convertible preferred shares | - | 13,963,048 |
| Weighted average shares outstanding - diluted | 10,648,129 | 14,104,089 |
For the years ended | ||||||||
December 31, | ||||||||
2021 | 2020 | |||||||
Net income (loss) - basic | $ | 4,808 | $ | (7,187 | ) | |||
Reversal of gain due to change in fair value of warrant liability | (3,545 | ) | 0 | |||||
Net income (loss) - diluted | $ | 1,263 | $ | (7,187 | ) | |||
Weighted average shares outstanding - basic | 203,589,531 | 189,844,867 | ||||||
Diluted stock options | 168,309 | 0 | ||||||
Diluted warrants | 1,912,544 | 0 | ||||||
Diluted preferred shares | 32,016,491 | 0 | ||||||
Weighted average shares outstanding - diluted | 237,686,875 | 189,844,867 | ||||||
Basic earnings (loss) per share | $ | 0.02 | $ | (0.04 | ) | |||
Diluted earnings (loss) per share | $ | 0.01 | $ | (0.04 | ) | |||
The following securities were not included in the diluted net earnings (loss) per share calculation because their effect was anti-dilutive as of the periods presented (in(amounts in thousands):
For the years ended | ||||||||
December 31, | ||||||||
2021 | 2020 | |||||||
Options | 6,955 | 7,503 | ||||||
Series A convertible preferred shares | 0 | 55,643 | ||||||
Warrants | 38,425 | 40,338 | ||||||
Total | 45,380 | 103,484 | ||||||
For the years ended | ||
December 31, | ||
2019 | 2018 | |
| Options | 801,325 | 85,991 |
| Series A convertible preferred shares | 4,616,268 | - |
| Warrants | 4,033,769 | - |
| Total | 9,451,362 | 85,991 |
NOTE 10– STOCKHOLDERS’ EQUITY
Series A Preferred hasShare Dividend & Share Waiver
On April 25, 2020, the Company was required to pay aone-time dividend equal to eight percent (8%) of the stated value of $100 per share (the “
On August 13, 2020, the Company received a formal notice of the Company’s outstanding securities. At December 31, 2019, there weredefault from a totalholder of 204,561 shares ofits Series A Preferred outstanding.
On April 21, 2021, the Company shall not take the following actions without obtaining the prior consentissued a waiver and exchange agreement (“Waiver Agreement”) to shareholders of at least a majority of the holders of the outstandingits Series A Preferred voting separately as a single class: (i) amend the Company’s Amended and Restated Articles of Incorporation or bylaws, or file a certificate of designation or certificate of amendment to any series of preferred stock ifshares (“Stock Payees”) requesting such action would adversely affect the holdersStock Payee's respective amount of the Series A Preferred, (ii) increase or decreasedividend payment (each individual Stock Payee's respective amount the authorized number"Stock Payee Indebtedness") to be paid in the form of shares of Series A Preferred, (iii) create or authorize any series of stock that ranks senior to, or on parity with, the Series A Preferred, (iv) purchase, repurchase or redeem any shares of junior stock, or (v) pay dividends on any junior or parity stock . Furthermore, so long as at least 25% of the Series A Preferred remain outstanding, holders of the Series A Preferred (other than the Direct Investors) shall have a right to appoint two members to the Company’s Board of Directors, and the Board shall not consist of more than five members, unless the holders of a majority of the outstanding Series A Preferred have consented to an increase in such number.
On May 25, 2021, the Company entered into a Dividend Conversion Price. The term Dividend Conversion Price shall mean 90% ofWaiver and Exchange Agreement (the “Exchange Agreement”), between the VWAP of the Corporation’s Common Stock for the five (5) Trading Days prior to the Dividend Payment Date, as adjusted for any stock dividend, stock split, stock combination or other similar transaction during such five (5) Trading Day period. “Equity Conditions” means that each of the following conditions is satisfied: (i) the number of authorized but unissued and otherwise unreserved shares of Common Stock is sufficient for such issuance; (ii) such shares of Common Stock are registered for resale by the Holders and may be sold by the Holders pursuant to an effective registration statement or all such shares may be sold without volume restrictions pursuant to Rule 144 under the 1933 Act;(iii) the Common Stock is listed or quoted (and is not suspended from trading) on an Eligible Market; (iv) the average daily dollar value of shares of Common Stock traded on the Eligible Market for the ten (10) Trading Days prior to the Dividend Payment Date is greater than $500,000; and (v) such issuance would be permitted in full without violation Section 4(e) below or the rules or regulations of any Eligible Market.
During the year ended December 31, 2021, the Company incurred an additional $3,000 dividend payment in order to fully satisfy the Series A Preferred dividend.
As of December 31, 2021, all dividend liability has been satisfied, which is reflected on the Company’s consolidated balance sheet.
Conversion of Series A Preferred Shares
For the year ended December 31, 2021, the Company issued approximately 13,977,000 shares of Common Stock upon conversion of 61,937 shares of Series A Preferred. For the year ended December 31, 2020, the Company issued approximately 16,925,000 shares of Common Stock upon conversion of 750 shares of Series A Preferred.
March 2021 Private Placement
On March 19, 2021, the Company entered into Securities Purchase Agreements by and between the Company and certain family trusts in which Mr. Brandon Stump and Mr. Ryan Stump, the Company's former Chief Executive Officer and Chief Operating Officer, respectfully, are trustees and beneficiaries (the "Purchase Agreements"), for issuance from 7.0 billionthe private placement of an aggregate of 3,517,000 shares of its common stock, par value $0.001 ("Common Stock"), at a purchase price per share of $0.853 (the "Private Placement"), which Private Placement was consummated on March 22, 2021. The Private Placement resulted in gross proceeds to 50.0 billion shares.
NOTE 11– STOCK OPTIONS
The True Drinks Holdings, Inc. 2013 Stock Incentive Plan (the “
Prior Plan”) was first approved in December2013and was approved by a majority of the stockholders in OctoberThe 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 “
2019Plan”), and the 2019 Plan was subsequently approved by holders of a majority of our outstanding voting securities on the same date. The 2019 Plan will supersede and replace the Prior Plan and no new awards will be granted under the Prior Plan. Any awards outstanding under the Prior Plan on the date of stockholder approval of the 2019 Plan will remain subject to the terms in the Prior Plan, including those granted under the Prior Plan Amendment, and any shares subject to outstanding awards under the Prior Plan that subsequently expire, terminate, or are surrendered or forfeited for any reason without issuance of shares will automatically become available for issuance under the 2019 Plan. Up toOn December 22, 2021, our Board of Directors unanimously adopted resolutions by written consent approving an amendment to increase the number of shares of Common Stock available for issuance under the 2019 Plan by 15.0 million shares, from 11,072,542 to 26,072,542 shares (the “Plan Amendment”). Furthermore, the Company received written consents approving the 2019 Plan Amendment from holders of approximately 50.3% of our outstanding voting securities. In accordance with Rule 14c of the Securities Exchange Act of 1934, Our Board of Directors’ authority to implement the 2019 Plan Amendment became effective February 28, 2022, twenty calendar days after notification of our shareholders. The 2019 Plan Amendment will allow the Company to maintain a sufficient number of available shares for future grants under the 2019 Plan.
Non-Qualified Stock Options
The following table summarizes stock option activities during the year ended December 31, 20192021 and 2020 (all option amounts are in thousands):
Stock Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value | |
| Outstanding at January 1, 2019 | 85,991 | $0.02 | 1.12 | $- |
| Options granted | 788,882 | 0.02 | 9.49 | - |
| Options forfeited/expired | (73,548) | 0.02 | - | - |
| Outstanding at December 31, 2019 | 801,325 | $0.01 | 9.41 | $- |
| Options vested and exercisable at December 31, 2019 | 61,825 | $0.02 | 4.47 | $- |
Stock Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding at January 1, 2020 | 8,013 | $ | 0.54 | 8.5 | $ | 0 | ||||||||||
Options granted | 50 | 0.44 | 10.0 | - | ||||||||||||
Options forfeited/expired | (560 | ) | 0.63 | - | - | |||||||||||
Outstanding at December 31, 2020 | 7,503 | 0.54 | 8.5 | $ | - | |||||||||||
Options granted | 80 | 0.44 | 10.0 | - | ||||||||||||
Options forfeited/expired | (460 | ) | 0.44 | - | - | |||||||||||
Outstanding at December 31, 2021 | 7,123 | $ | 0.54 | 7.5 | $ | 0 | ||||||||||
Options vested and exercisable at December 31, 2021 | 5,376 | $ | 0.57 | 7.3 | $ | 0 | ||||||||||
During the year ended December 31, 2019, the Company modified 49.4 million option to extend its maturity date. All options were fully vested as of the modification date. The Company accounted for the modification as a Type I (probable-to-probable) modification. Any additional compensation related to this modification was considered immaterial.
For the years ended | ||||||||
December 31, | ||||||||
2021 | 2020 | |||||||
Exercise price | $ | 0.4431 | $ | 0.4431 | ||||
Contractual term (years) | 6.00 | 6.00 | ||||||
Volatility (annual) | 85.0 | % | 75.0 | % | ||||
Risk-free rate | 0.9 | % | 0.5 | % | ||||
Dividend yield (per share) | 0 | % | 0 | % | ||||
During the year ended December 31, 2020, the Company modified 0.6 million options to accelerate certain employees’ option grants to allow the employee to exercise or receive the award. The Company accounted for the modification as a Type III (improbable-to-probable) modification. The Company recognized approximately $79,000 of additional compensation expense related to this modification during the year ended December 31, 2020.
As of December 31, 2019, 2021, there was approximately $1.0 million$40,000 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 2.52.7 years. For the year ended December 31, 20192021, and 2020, the Company recorded compensation expense of $178,000$151,000 and $590,000, respectively, related to the issuance of stock options.
Common Stock Awards
On April 26, 2019, in connection with employment agreements with its Chief Executive Officer and Chief Operating Officer, the Company issued market condition awards contingent upon the achievement of certain market capitalization targets. The awards are subject to a three-year service vesting period. The awards are settleable in a variable number of common shares based on defined percentages of the Company's total shares determined by market capitalization targets and are, therefore, classified as liabilities in accordance with ASC 718. The fair value of the awards is remeasured at each reporting period until settlement. Compensation cost is attributed over the period encompassing the derived service period and the explicit service period. The fair value of the market condition awards on the termination date of February 12, 2020, was approximately $1,638,000. The market condition awards were valued using a Monte Carlo simulation technique, a risk-free interest rate of 1.44% and a volatility of 75% based on volatility over 3 years using daily stock prices. For the year ended December 31, 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 year ended December 31, 2020.
On February 12, 2020, the Company, entered into a form of Amended and Restated Employment Agreement (together the “Amended Employment Agreements”) with both the Company’s Chief Executive Officer and Chief Operating Officer. The terms of the Amended Employment Agreements have been amended as follows: (i) the annual equity awards based upon, among other conditions, the Company’s market capitalization and a percentage of base salary have been eliminated; however, the awards based on financial milestones remain in full force and effect; and (ii) payment of the 2019 bonuses has been deferred, resulting in the accrual of such bonuses on the books and records of the Company. All other terms of the respective Employment Agreements will remain in full force and effect subject to further review by the Board of Directors as it deems necessary and appropriate.
On April 26, 2019, as additional consideration for advisory services provided in connection with the Charlie’s Financing and the Share Exchange (see Note 3 above), the Company issued an aggregate of 9.0 million shares of common stock (the “Advisory Shares”), including to a member of the Company’s Board of Directors, pursuant to a subscription agreement. The fair value of a share of common stock was $0.32 which is based upon a valuation prepared by the Company on the date of the Share Exchange. The Company recorded stock-based compensation of approximately $2.9 million on the grant date.
Prior to the Share Exchange, Charlie’s employees held Member units, which were automatically converted into 71,000 shares of common stock and 69,815 shares of Series B Preferred (or 6.98 million shares of common stock equivalents) due to the effect of the Share Exchange. The 7.1 million shares of common stock vested over a two-year period. The fair value of a share of common stock was $0.32 which is based upon a valuation prepared by the Company on the date of the Share Exchange. The Company recorded stock-based compensation of approximately $376,000 and $1,128,000 during the years ended December 31, 2021, and 2020, respectively.
On April 1, 2021, the Board of Directors of the Company entered into an Employment Agreement (the "Agreement") with Henry Sicignano III, MBA, pursuant to which the Company appointed Mr. Sicignano to serve as President of the Company. Pursuant to the Agreement, Mr. Sicignano will serve as President for an initial period of two years, renewable on an annual basis unless earlier terminated by the Company or Mr. Sicignano. Mr. Sicignano was awarded 1,500,000 restricted shares (subject to forfeiture) (“Restricted Shares”) of the Company. Mr. Sicignano will have all the rights of a shareholder of the Company with respect to voting the 1,500,000 restricted shares awarded under this grant and share adjustments, receipt of dividends (if any) and distributions (if any) on such shares. Restricted Shares will be subject to forfeiture in 750,000 share increments on April 1, 2022, and April 1, 2023, and will also be subject to additional forfeiture-release features set forth in Addendum A to the Employment Agreement of Henry Sicignano, III, included in the Company’s 8-K filed April 6, 2021. The grant date fair value of the 1,500,000 restricted shares was approximately $65,000.
On November 1, 2021 (“Grant Date”) the Company granted to Jeff Fox, an Independent Director, 250,000 shares of Common Stock of the Company (“Fox Shares”) pursuant to the 2019 Plan. The grant of the Fox Shares was made in consideration for services rendered by Mr. Fox to the Company. Mr. Fox will have all the rights of a shareholder of the Company with respect to voting the 250,000 restricted shares awarded under this grant and share adjustments, receipt of dividends (if any) and distributions (if any) on such shares. Fox Shares will be subject to forfeiture in 125,000 share increments until the first to occur of the following: (i) each anniversary of the Grant Date; (ii) the event of a change in control of the Company; or (iii) the death, disability, or retirement of Mr. Fox. The fair value of the 250,000 restricted shares was approximately $12,775.
On March 2, 2022, the Company granted approximately 5.8 million restricted stock awards (“RSAs”) to employees, officers and directors of the Company pursuant to the 2019 Plan, as amended. The RSAs will be subject to a vesting schedule and will have all the rights of a shareholder of the Company with respect to voting, share adjustments, receipt of dividends (if any) and distributions (if any) on such shares.
The Company recorded total stock-based compensation expense of approximately $552,000 and $3,072,000 during the years ended December 31, 2021, and 2020, respectively.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space under agreements classified as operating leases that expire on various dates through 2024. All of the Company’s lease liabilities result from the lease of its headquarters in Costa Mesa, California, which expires in 2024, its warehouse in Santa Ana, California, which expiresexpired 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, the Company’s former Chief Executive Officer, RyanAt December 31, 2019, 2021, the Company had operating lease liabilities of approximately $1,644,000$762,000 and right of use assets of approximately $1,623,000,$755,000, which were included in the consolidated balance sheet.
The following summarizes quantitative information about the Company’s operating leases (amount(amounts in thousands):
For the years ended | ||||||||
December 31, | ||||||||
2021 | 2020 | |||||||
Operating leases | ||||||||
Operating lease cost | $ | 566 | $ | 597 | ||||
Variable lease cost | 0 | 0 | ||||||
Operating lease expense | 566 | 597 | ||||||
Short-term lease rent expense | 0 | 0 | ||||||
Total rent expense | $ | 566 | $ | 597 | ||||
For the years ended | ||||||||
December 31, | ||||||||
2021 | 2020 | |||||||
Operating cash flows from operating leases | $ | 456 | $ | 423 | ||||
Weighted-average remaining lease term – operating leases (in years) | 2.38 | 2.99 | ||||||
Weighted-average discount rate – operating leases | 12.0 | % | 12.0 | % | ||||
Maturities of our operating leases, excluding short-term leases, are as follows:
Year Ending December 31, 2022 | 399 | |||
Year Ending December 31, 2023 | 275 | |||
Year Ending December 31, 2024 | 206 | |||
Total | 880 | |||
Less present value discount | (118 | ) | ||
Operating lease liabilities as of December 31, 2021 | $ | 762 |
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.
NOTE 13-13- INCOME TAXES
The Company was classified as a partnership through the Closing Date, and therefore, not subject to entity level tax. After the Closing Date, the Company is taxed as a C corporation and files a consolidated return with True Drinks,Charlie’s Holdings, Inc.
The table below presents the components of the provision for income taxes. The Company's provision is driven primarily current year operating income, nontaxable derivative fair value adjustments, and state taxes (in thousands).
As of December 31, | ||||||||
2021 | 2020 | |||||||
Current | ||||||||
US Federal | $ | 110 | $ | 0 | ||||
US State | 232 | 0 | ||||||
Total current provision | 342 | 0 | ||||||
Deferred | ||||||||
US Federal | 0 | 0 | ||||||
US State | 0 | 0 | ||||||
Total deferred benefit | 0 | 0 | ||||||
Total provision for income taxes | $ | 342 | $ | 0 | ||||
The tax effects of temporary differences and tax loss and credit carry forwardscarryovers that give rise to significant portions of deferred tax assets and liabilities at December 31, 20192021 and 2020 are comprised of the following (in thousands):
As of December 31, | ||
2019 | 2018 | |
| Deferred tax assets: | ||
| Bad Debt | 133 | - |
| Inventory | 9 | - |
| Lease liability | 385 | - |
| Stock compensation | 349 | - |
| Transaction costs | 808 | - |
| Net operation loss | 698 | - |
| Derivatives | 268 | - |
| Total deferred income tax assets | 2,650 | - |
| Deferred income tax liabilities: | ||
| ROU assets | (384) | - |
| Fixed assets | (20) | - |
| Total deferred income tax liabilities | (404) | - |
| Net deferred income tax assets | 2,246 | - |
| Valuation allowance | (2,246) | - |
| Deferred tax asset, net of allowance | (0) | $- |
As of December 31, | ||||||||
2021 | 2020 | |||||||
Deferred tax assets: | ||||||||
Bad Debt | $ | 47 | $ | 119 | ||||
Inventory | 43 | 48 | ||||||
Accrued Expenses | 222 | 16 | ||||||
Lease liability | 208 | 341 | ||||||
Stock compensation | 255 | 201 | ||||||
Transaction costs | 0 | 0 | ||||||
Net operating loss carryovers | 1,224 | 1,835 | ||||||
Other | 9 | 3 | ||||||
Contribution | 0 | 1 | ||||||
Derivatives | 56 | 287 | ||||||
Total deferred income tax assets | 2,064 | 2,851 | ||||||
Deferred income tax liabilities: | ||||||||
ROU assets | (206 | ) | (336 | ) | ||||
Fixed assets | (18 | ) | (56 | ) | ||||
Total deferred income tax liabilities | (224 | ) | (359 | ) | ||||
Net deferred income tax assets | 1,840 | 2,459 | ||||||
Valuation allowance | (1,840 | ) | (2,459 | ) | ||||
Deferred tax asset, net of allowance | $ | 0 | $ | 0 | ||||
The Company has not performed a detailed analysis to determine the realizability of the NOL under Section 382 of the IRC..
At December 31, 2021, the Company had federal and state net operating loss carryovers for income tax purposes of approximately $4.2 million and $6.1 million, respectively. The Federal net operating losses can be carried forward indefinitely but are limited to offsetting only 80% of taxable income each year. The state net operating losses expire at various dates through 2041, if not utilized beforehand.
The utilization of net operating loss carryforwards and research tax credit carryovers could be subject to annual limitations under Section 382 and 383 of the Internal Revenue Code of 1986, and similar state tax provisions, due to ownership change limitations that they may nothave occurred previously or that could occur in the future. These ownership changes limit the amount of net operating loss carryforwards and other deferred tax assets that can be realized.
A reconciliation of the statutory income tax rates and the Company's effective tax rate is reconciled with actual tax expense (benefit)for the years ended December 31, 2021, and December 31, 2020, are as follows:
(in thousands) | As of December 31, | |
2019 | 2018 | |
| Current | ||
| US Federal | $- | $- |
| US State | - | - |
| Total current provision | - | - |
| Deferred | ||
| US Federal | 1,331 | - |
| US State | 443 | - |
| Total deferred benefit | 1,774 | - |
| Change in valuation allowance | (1,745) | - |
| Total provision for income taxes | $29 | $- |
Year ended December 31, 2021 | Year ended December 31, 2020 | |||||||
Statutory federal income tax rate | 21.0 | % | 21.0 | % | ||||
Non-taxed loss from VIE | 0.0 | % | 0.0 | % | ||||
State taxes, net of federal tax benefit | 3.3 | % | 5.1 | % | ||||
Stock compensation | 10.1 | % | (3.5 | )% | ||||
Permanent Items | (4.3 | )% | (0.1 | % ) | ||||
Section 382 NOL Adjustments | 3.1 | % | 0.0 | % | ||||
Derivatives | (11.1 | )% | (0.7 | )% | ||||
Return to provision adjustments | (2.2 | )% | (19.8 | )% | ||||
Other | (1.3 | )% | 0.0 | % | ||||
Change in valuation allowance | (12.0 | )% | (2.0 | % ) | ||||
Income taxes provision (benefit) | 6.6 | % | 0.0 | % | ||||
ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-notmore-likely-than-not to be sustained upon examination by taxing authorities. AsThe following table summarizes the activity related to the Company’s gross unrecognized tax benefits at the beginning and end of the years ended December 31, 2019, 2021, and 2018, there were noDecember 31, 2020 (in thousands):
Year ended December 31, 2021 | Year ended December 31, 2020 | |||||||
Gross unrecognized tax benefits at the beginning of the year | $ | 0 | $ | 0 | ||||
Increases related to current year positions | 0 | 0 | ||||||
Increases related to prior year positions | 32 | 0 | ||||||
Decreases related to prior year positions | 0 | 0 | ||||||
Expiration of unrecognized tax benefits | 0 | 0 | ||||||
Gross unrecognized tax benefits at the end of the year | $ | 32 | $ | 0 | ||||
The unrecognized tax benefit amounts are reflected in the determination of the Company’s deferred tax assets. If recognized, none of these amounts would affect the Company’s effective tax rate, since it would be offset by an equal corresponding adjustment in the deferred tax asset valuation allowance. The Company does not foresee material changes to its liability for uncertain tax positions. benefits within the next twelve months.
The Company’sCompany policy for recordingis to recognize interest and penalties associated withrelated to uncertain tax positions is to record such expense as a component of income tax expense. There were no amounts accrued for penalties or interest during the year ended As of December 31, 2019. Management is currently unaware2021, and December 31, 2020, the Company had 0 accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s statement of any issues under review that could result in significant payments, accruals or material deviationsoperations.
The Company’s tax years from its position.
NOTE 14-14- SUBSEQUENT EVENTS
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, respectively.
The Note requires the payment of principal and guaranteed interest in the amount of at least $75,000$90,000 on or before the earlier date of (i) a Liquidity Event, as defined under the terms of the Note; or (ii) October 1, 2020. September 28, 2022. The Company intends to use the proceeds from the Note Financing for general corporate purposes, and its working capital requirements, pending the availability of long-term working capital.alternative debt financing.
The Company has evaluated events subsequent to December 31, 2021, to assess the need for potential recognition or disclosure in this report. Such events were evaluated through April 12, 2022. Based upon this evaluation, other than as set forth above, there were no items requiring disclosure.