Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
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[X]
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For
the fiscal year ended December 31, 2020
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or
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file No.
001-32420
CHARLIE’S HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Nevada
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84-1575085
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(State or Other Jurisdiction of Incorporation or
Organization)
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(IRS Employer Identification No.)
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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:
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Title of Each Class
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Name of Each Exchange on Which
Registered
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Common Stock ($0.001 par value)
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OTC Markets
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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.
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Large accelerated filer
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[ ]
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Accelerated filer
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[ ]
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Non-accelerated filer
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[X]
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Smaller reporting company
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[X]
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Emerging growth company
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[ ]
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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, 2020 was approximately $36,082,430 based on a
closing market price of $0.019 per share, as reported on the OTC
Pink Marketplace.
There were 19,638,493,279 shares of the registrant’s common stock
outstanding as of March 23, 2021.
CHARLIE’S HOLDINGS,
INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2020
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains “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”,
“intends”, “expects”, “may”,
“will”, “should”, “plan”,
“projected”, “contemplates”,
“anticipates”, “estimates”
“predicts”, “potential”,
“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”.
PART
I
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 “Charlie’s”
and “CCD” refer to Charlie’s Chalk Dust, LLC,
a California limited liability company and wholly-owned subsidiary
of the Company, and “Don Polly” refers to Don Polly, LLC, a Nevada limited
liability company that is owned by entities controlled by Brandon
Stump and Ryan Stump, the Company’s Chief Executive Officer
and Chief Operating Officer, respectively, and a consolidated
variable interest for which the Company is the primary
beneficiary.
On
April 26, 2019, the Company (then known as True Drinks Holdings,
Inc.), entered into a Securities Exchange Agreement with each of
the members of Charlie’s on that date (the
“Charlie’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 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.
Together, Brandon Stump and Ryan Stump, the founders of
Charlie’s and the Company’s newly appointed Chief
Executive Officer and Chief Operating Officer, respectively, own
approximately 50% 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 segment of the broader nicotine related products
industry. Through Charlie’s, we formulate, market and
distribute branded e-cigarette liquid for use in both open and
closed consumer e-cigarette and vaping systems. Charlie’s
products are produced domestically through contract manufacturers
for sale through select distributors, specialty retailers and
third-party online resellers throughout the United States, as well
as over 80 countries worldwide. Charlie’s primary
international markets include the United Kingdom, Italy, Spain,
Belgium, Australia, Sweden and Canada. In June 2019, we launched
distribution, through Don Polly, of certain premium vapor, tincture
and topical products containing hemp-derived cannabidiol
(“CBD”) and we
currently intend to develop and launch additional products
containing hemp-derived CBD in the future. Prior to the Share Exchange, our primary business
was the development, marketing, sale and distribution of
all-natural, vitamin-enhanced drinks, including AquaBall®
Naturally Flavored Water and Bazi® All Natural Energy
(“Bazi”). At this time, we do not intend to
continue sales of these products in their current
form.
We intend to expand our operations and seek
revenue and profit growth by increasing the sales of our branded
e-cigarette liquid through the registration of certain of our
products with the Food and Drug Administration
(“FDA”)
and expanding sales territories (both
domestic and international), as well as from our recently launched
sales and distribution of hemp-derived CBD
products.
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 “Charlie’s Product
Line” or
“Charlie’s
Products”.
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 differing 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. 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
(“PG”), vegetable glycerin
(“VG”) or polyethylene glycol 400. VG imparts
sweetness and produces vapor clouds, while PG produces more
“throat hit”, which simulates the feeling of smoking.
Our proprietary brands of e-liquids are manufactured by ISO Class 7
certified manufacturers in the United States, which helps ensure
their purity and quality.
Charlie’s
e-liquid products are produced under seven 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.
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Campfire™
. Outdoors and Smores flavor inspired
by camp vibes.
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, which now includes seven flavors packaged in
10ml, 30ml and 60ml bottles. During the third quarter of 2019, we
launched NIC salt extensions of the Black, Gold and White Label
Charlie’s Chalk Dust brands and will continue to evaluate the
launch of additional products in this category as demand continues
to grow.
Don 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 (“CBD”), non-THC, wellness products. In June
2019, we introduced, through Don Polly, full-spectrum hemp extract
and CBD isolate wellness products across a variety of formats and
with different strengths. Our initial launch consisted of six
vapor, eight tincture and two topical product variations. The newly
released products were launched under the Pachamama™ brand by
way of a licensing agreement between Don Polly and Charlie’s,
entered on April 25, 2019 (the "Licensing
Agreement"). In the near term,
we expect to continue expanding the hemp-derived CBD-based products
line to include additional CBD isolate products and
Tetrahydrocannabinol (“THC”)-
free, broad spectrum hemp extract products currently in
development.
Don
Polly is owned by two limited liabilities companies, of which one
is wholly-owned by Brandon Stump, the Company’s Chief
Executive Officer, and the other is wholly-owned by Ryan Stump, the
Company’s Chief Operating Officer. Pursuant to the Licensing
Agreement, 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 CBD
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. In addition, good
manufacturing practices and quality control parameters are of the
utmost importance to the Don Polly Products, which contribute to
the differentiation of the Don Polly Products in the CBD product
industry. The Don Polly Products consist of both full and
broad-spectrum, as well as isolate CBD products across three
categories including vapor, ingestibles, and topicals.
Pachamama™ CBD products sold by Don Polly are currently
available in the U.S., Mexico, U.K., Australia and Switzerland, and
we expect to continue expanding both our domestic and international
distribution efforts.
Isolate CBD Products
Our CBD
isolate products contain a minimum purity of 99% isolate crystals,
tested by independent, third-party facilities to ensure it is free
of pesticides and heavy metals. Vape, as a CBD delivery method, has
grown in popularity due to the high level of bioavailability and
reported therapeutic responses. In response to demand for CBD
infused e-liquids from our existing distribution channels, we
launched the Don Polly Vape Product Line and Don Polly Isolate
Products. The Don Polly Vape Product Line is currently available in
30ml plastic bottles across three flavors (Minty Mango, Grape Berry
and Strawberry Watermelon) and two strengths (250mg and 500mg). We
are continuing to research and develop isolate products in an
effort to further build out Don Polly’s overall product
portfolio.
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. The tincture offering
includes six flavors (the Natural, Green Tea Echinacea, Goji Cacao,
Black Pepper Turmeric, Ylang Ylang Holy Basil and Kava Kava
Valerian) available in 30ml bottle sizes and both 750mg and 1750mg
strengths. Our current topical product offering includes the
Athletic Rub, available in a two ounce jar and 500mg strength. This
product has become one of our most popular full spectrum offerings.
Additionally, Don Polly released the first tapioca-based Vegan Gel
Caps in May 2020 available in both a 30-count jar and a two-count
sachet, in order to accommodate consumer demand for alternative
delivery methods for full spectrum products. We plan on continuing
to research, develop, and launch products in these
categories.
Broad Spectrum CBD Products
In
addition to isolate and full spectrum CBD products, we believe
broad spectrum hemp-derived CBD products can be developed to
provide the same benefits of full spectrum CBD products. 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 the same level of quality and
nutrients we value in our full spectrum products, without the
concern of consuming the minimal amount 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 currently offered in a 50ml size.
As with the full spectrum and isolate categories, our Research and
Development team is continually investigating product offerings to
support and enhance the broad spectrum portfolio.
Manufacturing and Distribution
Manufacturing
Charlie’s
Product Line. We work closely with
contract manufacturing partners in the United States, Ireland and
Scotland to manufacture our products. Our e-liquid and NIC salts
products are manufactured to meet our proprietary formula
specifications in facilities that are ISO Class 7
certified, which helps
ensure their purity and quality. In 2020, we added an
additional supplier and sourced over 90% of our finished goods from
three manufacturers in the United States. While we have developed
long-standing relationships with our manufacturing sources and take
great care to ensure that they share our commitment to quality, we
do not have any long-term term contracts with these parties for the
production of our product lines. We maintain redundancies in our
supply chain and are aware of several alternative sources for our
products.
Don
Polly Product Line. Our hemp-derived,
CBD-based Don Polly Products are manufactured with contract
manufacturers to meet our formula specifications. While we do not
have any long-term contracts with these parties, we are
strengthening our supplier partnerships as well as identifying
additional supplier and contract manufacturing
opportunities.
Distribution
Charlie’s
Product Line. Once manufactured,
Charlie’s Products are directly distributed throughout the
United States and in more than 80 countries, primarily the
United Kingdom, Italy, Spain, Belgium, Australia, Sweden and
Canada. We
distribute our products to more than 2,200 specialty retailers
through direct sales and to distributors and wholesalers both in
the United States and internationally. Retailers of our
products include specialty retailers throughout the United States
and in 80 other countries. We also distribute our
products on a very limited basis through convenience stores and gas
stations. With respect to products that we sell through
third-party distributors and wholesalers, we typically sell our
products to these customers for their re-sale. In select markets we
maintain exclusive arrangements with distributors and, when
warranted, will memorialize these agreements contractually.
Don Polly Product
Line. Don Polly Products are
currently distributed to over 650 distribution and retail accounts
in the United States, Mexico, the United Kingdom, Switzerland and
Australia. Like the Charlie’s Product Line, we will sell Don
Polly Products directly to retailers, as well as through the use of
distributors, third-party wholesalers and independent brokers. We
currently sell direct-to-consumer through a newly developed
e-commerce platform.
Online Sales
Charlie’s
Product Line and Don Polly Product Line. Currently, we do not currently sell our Charlie's
Products directly. However, we market Charlie's Products and sell
branded merchandise through our website, www.charlieschalkdust.com.
The Don Polly Product Line is offered for sale directly to
consumers under our Pachamama brand through our in-house,
e-commerce platforms on our websites www.enjoypachamama.com
and www.donpolly.com.
Sales and Marketing
Charlie’s and Don Polly
Product Lines. We have an
experienced, 10-person sales team, based in the United States, that
promotes our Charlie’s and Don Polly Products globally. Don
Polly has also engaged with several independent brokers to help
pursue mass channel retail. Salespeople seek to form long-term
“360” collaborative relationships with their clients,
partnering with them on sell-through efforts, providing access to
our marketing and creative teams and advising and educating them on
the Charlie’s and Don Polly Product Lines as well as other
industry-related issues. Currently, we advertise our products
primarily through direct customer engagement through social media
channels, print media, directed internet marketing, industry
tradeshows and collaborative events with retail partners.
Historically, participation at industry-specific tradeshows played
a large role in our marketing and distribution strategy. However,
in 2018 we began allocating resources to collaborative events, and
our marketing team is now focusing its efforts on fostering
relationships with key distributors and retailers by launching
customer-specific marketing campaigns, in-person visits to new
customer accounts and other forms of direct customer engagement. In
2020, approximately 20% of our sales were to customers outside of
the United States.
We
intend to strategically expand our advertising activities in 2021
and 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 proprietary e-cigarette
liquids from a variety of sources, in accordance with our
formulations and quality specifications. We source our proprietary
e-liquids from multiple ISO Class 7 certified manufacturers in the
United States, which helps ensure their purity and quality. In an
effort to maintain consistency across our supply chain, we directly
purchase certain product packaging and are responsible for managing
various third-party supplier relationships.
Don Polly Product
Line. For our full and
broad-spectrum CBD products, we currently source the individual
components and CBD from several suppliers. Each are 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, 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 the components are readily
available from other suppliers on the market. However, given the
rapid growth of the vaping, e-cigarette and CBD 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 industry. Some
identifiable competitors of Charlie's include Naked100, Savage,
Humble, and Beard. Other brands such as Juul, Vuse, Group Mark Ten,
Green Smoke, Blu, Vaporfi, Njoy, Logic, V2, and Apollo all
participate in a different segment of the electronic cigarette
market which appeals to current smokers and recently-converted
electronic cigarette users.
In the
e-liquid space, new brands and products emerge frequently due to
low barriers to entry, despite the need to conform with FDA
guidelines. Companies that produce electronic cigarettes and
vaporizers, including Vaporfi, Atmos and Njoy, carry their own
flavor lines for the refillable market. More recently, the
emergence of disposable vape products from companies such as Puff
Bar have become popular in the market. Other brands like Mount
Baker Vapor focus on wide variety of choice and value, while other
brands 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 to try and 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 the ability to differentiate
tobacco products.
We
also compete against “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 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 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 tobacco may be better
positioned than small competitors like us to capture a larger share
of the electronic cigarette market.
Don Polly Product
Line. The market for CBD-based
hemp products is rapidly growing and is highly competitive. The
competition consists of publicly and privately-owned companies,
which tend to be highly fragmented in terms of both geographic
market coverage and products offered. With the Company’s
leading brand status, innovation capabilities, existing sales and
marketing platform, established distribution channels and
high-quality manufacturing, Management believes the Company is
well-positioned to capitalize on favorable long-term trends in the
hemp-based, CBD wellness products segment.
Intellectual Property
Patents 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. Charlie's is currently
active in exploring several long-term licensing arrangements with
several well-known industry participants. The goal of such
relationships is to acquire additional revenue streams as well as
to introduce the Charlie’s Chalk Dust and Pachamama™
brands to a wider consumer base.
Don Polly Product
Line. On April 25, 2019, the
Company and Charlie’s entered into the License Agreement with
Don Polly. As previously noted, Don Polly is classified as a
variable interest entity for which the Company is the primary
beneficiary, and is owned by entities controlled by Brandon Stump
and Ryan Stump, the Company’s Chief Executive Officer and
Chief Operating Officer, respectively. Pursuant to the License
Agreement, Charlie’s provides Don Polly with a limited right
and license to use certain of Charlie’s intellectual property
rights, including certain trademarks, copyrights and original
artwork, in connection with certain of Don Polly’s branded
CBD products. In exchange for such license, Don Polly (i) pays
Charlie’s monthly royalties amounting to 75% of its net
profits, (ii) uses its best efforts to market, promote and
advertise its products, (iii) provides Charlie’s with most
favored nations pricing in the event that Charlie’s wishes to
sell products sold by Don Polly, (iv) provide Charlie’s with
the exclusive right of first refusal to purchase Don Polly,
including all of its assets and liabilities, for a purchase price
of $111,618 on or before December 31, 2025, and (v) will not
license any intellectual property from any other source other than
Charlie’s in connection with its design, manufacture,
advertisement, promotion distribution and sale of CBD infused
products within the agreed upon territory. The License Agreement
will continue in perpetuity unless terminated in accordance with
its terms.
Concurrently 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 requires 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 Premarket Tobacco Application
(“PMTA”)
and receipt of a marketing
authorization order; (2) submission of a substantial equivalence
report and receipt of a substantial equivalence order; or (3)
submission of a request for an exemption from substantial
equivalence requirements and receipt of a substantial equivalence
exemption determination. The Company cannot predict if any of the
products in the Charlie's Product Line, all of which would be
considered “non-grandfathered”, will receive the
required premarket approval from the FDA.
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 corporation
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 could continue to be marketed until the
May 12, 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, following the May 12, 2020
deadline.
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 guidance documents.
As
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 on certain of its
products. Such products would be afforded a similar grace period to
be marketed while the FDA reviews any applications that were
submitted.
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 alternative 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-liquid 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-liquid
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 Cigarette Tracking Act (“PACT Act”). 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.
At present, the Federal Cigarette Labeling
and Advertising Act (which
governs how cigarettes can be advertised and marketed)
does not apply to electronic cigarettes. The application of this
federal law to electronic cigarettes would have a
material adverse effect on our business, results of operations and
financial condition.
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.
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.
Canada
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-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 Canada Consumer Product Safety
Act and
the Consumer Packaging and
Labelling Act.
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 (“2018 Farm
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 CBD
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. For the year ended December 31, 2020, research and
development costs primarily consisted of testing and development
fees related to the Company’s PMTA submissions.
For
the years ended December 31, 2020 and 2019, Charlie’s
recorded research and development expense of $3,377,600 and
$1,102,000, respectively.
Employees
We
had 45 full-time employees across Charlie’s Holdings Inc.,
Charlie’s Chalk Dust LLC and Don Polly LLC as of March 23,
2021. We believe that we maintain a good working relationship with
our employees, and we have not experienced any labor disputes. None
of our employees are represented by labor unions.
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 on www.charliesholdings.com,
as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.
ITEM 1A. RISK
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, 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 $16.7
million during the year ended December 31, 2020 and $22.7 million
for the year ended December 31, 2019, there can be no guarantee
that the Company will continue to grow revenue or achieve positive
cash flow in the future.
Our operating results in the past will not reflect our operating
results in the future, which makes it difficult to evaluate our
future business, prospects, and forecast revenue.
Until
recently, our business was comprised primarily of the development,
marketing, sale and distribution of all-natural, vitamin-enhanced
drinks. As a result of our decision to consummate the Share
Exchange, our future revenue will substantially differ from past
revenue, and our operating results will vary significantly compared
to past operating results. It is too early to predict whether
consumers will accept, and continue to use on a regular basis, our
new products, due in part to the fact that we have had limited
recent operating history as a combined entity with Charlie’s.
Factors that will significantly affect our operating results
include, without limitation, the following:
●
the expected increase in revenue due to the addition of those
products developed and marketed by Charlie’s prior to the
Share Exchange, as well as any products that we may release in the
future, to our revenue stream;
●
our decision in early 2018 to discontinue the production and sale
of AquaBall®, that in the year ended December 31, 2018,
contributed approximately $1,767,802 in revenue;
●
our previous sole reliance on sales of Bazi®, that in the
years ended December 31, 2019 and 2018, contributed approximately
$22,207 and $179,250 in revenue to the Company, respectively;
and
●
the restructuring of substantially all of our previously
outstanding debt and shares of Preferred Stock on
April 26, 2019, in connection with the
Share Exchange.
Our cash resources are currently insufficient to submit each of our
anticipated PMTA applications with the FDA, and otherwise satisfy
our projected short-term liquidity and capital
requirements.
As of December 31, 2020, we had negative working
capital of approximately $6,020,000, which consisted of current
assets of approximately $4,723,000 and current liabilities of
approximately $10,743,000. In addition, the cost associated
with the preparation and submission of Premarket Tobacco
Applications ("PMTAs") with
the FDA is approximately $4.4 million to date. As a result, in
March 2021 we issued shares of the Company’s common stock
worth $3 million, which provided additional financing in order to
reduce debt, further invest in the
PMTA application process, and otherwise carry out our business
plan. There can be no assurance that the Company will not require
additional financing in the future, or that the financing will be
available on acceptable terms, or at all, and there can be no
assurance that any such arrangement, if required or otherwise
sought, would be available on terms deemed to be commercially
acceptable and in our best interests.
The failure of the Company to pay a required one-time dividend on
its Series A Preferred, or obtain a waiver of such payment or
consent to amend the Series A Preferred to allow the Company to pay
such dividend in shares of its Common Stock, may have a material
adverse effect on the Company’s financial
condition.
The
Company was required to pay a one-time dividend equal to eight
percent (8%) of the stated value of its Series A Preferred, equal
to $1,650,000 (“Dividend
Amount”), which Dividend Amount was required to be
paid in cash on or before April 25, 2020. The Company failed to pay
the required dividend and has requested that holders of more than
50% of the Series A Preferred issued and outstanding
(“Required
Holders”) consent to an amendment to the Series A
Preferred to allow the Company to pay such Dividend Amount in
shares of the Company’s Common Stock. To date, the Company
has not obtained such consent from the Required Holders. In the
event the Company is unable to obtain consents from the Required
Holders to pay the Dividend Amount in shares of Common Stock in
lieu of cash, or does not otherwise pay such Dividend Amount in
cash or obtain a waiver, any claims asserted by the holders of the
Series A Preferred could have a material adverse effect on the
Company’s financial condition.
On
August 13, 2020, the Company received a formal notice of default
from a holder of its Series A Preferred requesting full payment of
dividends due and payable with respect to the Series A Preferred
held by such holder on or before August 23, 2020
(“Dividend
Default”). As disclosed, the aggregate amount of
dividends due and payable to holders of the Series A Preferred is
$1,650,000.
Our auditors have issued a going concern opinion on our financial
statements as of December 31, 2020
Our financial statements have been prepared
assuming that the Company will continue as a going concern, which
contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company operates
in a rapidly changing legal and regulatory environment; new laws
and regulations or changes to existing laws and regulations could
significantly limit the Company’s ability to sell its
products, and/or result in additional costs. Additionally, the
Company is required to apply for FDA approval to continue selling
and marketing its products used for the vaporization of nicotine in
the United States. There is significant cost associated with the
application process and there can be no assurance the FDA will
approve the application(s). In addition, the recent outbreak of a
novel strain of COVID-19 (“Coronavirus”) which was identified in Wuhan, China
around December 2019 and continues to spread globally, has had a
negative impact on the global economy and markets which could
impact the Company’s supply chain and/or sales. For the year
ended December 31, 2020 the Company has incurred losses from
operations of $6,770,000 and a consolidated net loss of
approximately $7,187,000 and the Company has negative
stockholders’ equity of $5,996,000. These factors raise
substantial doubt about the Company’s ability to continue as
a going concern. The financial statements do not include any
adjustments to the carrying amount and classification of recorded
assets and liabilities should the Company be unable to continue
operations.
Our business is difficult to evaluate because we have recently
significantly modified our product offerings and customer
base.
As
a result of the Share Exchange, we have recently modified our
operations, engaging in the sale of new products in a new market
through new distributors and new lines of business. There is a risk
that we will be unable to successfully integrate the newly acquired
businesses with our current structure. Our estimates of capital,
personnel and equipment required for our newly acquired businesses
are based on the historical experience of management and businesses
they are familiar with. Our management has limited direct
experience in operating a business of our current size, as well as
one that is publicly traded.
Our products could fail to attract or retain users or generate
revenue and profits.
As
a result of the Share Exchange, our customer base has changed
significantly. Our ability to develop, increase, and engage our new
customer base and to increase our revenue depends heavily on our
ability to continue to evolve our existing products and to create
successful new products, both independently and in conjunction with
developers or other third parties. We may introduce significant
changes to our existing products or acquire or introduce new and
unproven products, including using technologies with which we have
little or no prior development or operating experience. If new or
enhanced products fail to engage our customers, or if we are
unsuccessful in our monetization efforts, we may fail to attract or
retain customers or to generate sufficient revenue, operating
margin, or other value to justify our investments, and our business
may be adversely affected.
Our significant stockholders may have certain personal interests
that may affect the Company.
Together,
Brandon Stump and Ryan Stump, the founders of Charlie’s and
our Chief Executive Officer and Chief Operating Officer,
respectively, collectively own approximately 39% of our issued and
outstanding voting securities as a result of the Share
Exchange. As a result, Ryan Stump and Brandon Stump have the
ability to exert influence over both the actions of our Board of
Directors, the outcome of issues requiring approval by our
stockholders, as well as the execution of management’s plans.
This concentration of ownership may have effects such as delaying
or preventing a change in control of the Company that may be
favored by other stockholders or preventing transactions in which
stockholders might otherwise recover a premium for their shares
over current market prices.
We will need to hire additional qualified accounting and
administrative personnel in order to remediate material weaknesses
in our internal control over financial accounting, and we will need
to expend additional resources and efforts to establish and
maintain the effectiveness of our internal control over financial
reporting and our disclosure controls and procedures.
As a public company, we are subject to the
reporting requirements of the Securities Exchange Act of 1934, as
amended (the “Exchange
Act”), and the
Sarbanes-Oxley Act of 2002. Our management is required to evaluate
and disclose its assessment of the effectiveness of our internal
control over financial reporting as of each year-end, including
disclosing any “material weakness” in our internal
control over financial reporting. A material weakness is a control
deficiency, or combination of control deficiencies, that results in
more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or
detected. As a result of its assessment, management has determined
that there were material weaknesses due to the lack of segregation
of duties and sufficient internal controls (including
technology-based general controls) that encompass our Company as a
whole with respect to entity and transactions level controls in
order to ensure complete documentation of complex and non-routine
transactions and adequate financial reporting. If we continue to
experience material weaknesses in our internal controls or fail to
maintain or implement required new or improved controls, such
circumstances could cause us to fail to meet our periodic reporting
obligations or result in material misstatements in our financial
statements, or adversely affect the results of periodic management
evaluations and, if required, annual auditor attestation
reports.
Due
to these material weaknesses, management concluded that, as of
December 31, 2020 and 2019, our internal control over financial
reporting was ineffective. Management also concluded that our
disclosure controls and procedures were ineffective as of December
31, 2020 and 2019, as well as for the quarters ended September 30,
2020, June 30, 2020 and March 31, 2020. These weaknesses were first
identified in our Annual Report on Form 10-K for the year ended
December 31, 2012. In 2018, we reduced our staff to one
employee, and outsourced our accounting and financial
functions, further exacerbating our weaknesses in our
internal control over financial reporting and our disclosure
controls and procedures. Although the number of employees has grown
as a result of the Share Exchange and the addition of
Charlie’s operations, including the hiring of a new Chief
Executive Officer, Chief Financial Officer and additional
accounting and information technology staff, no assurances can be
provided that we will have sufficient resources to resolve these
material weaknesses. These weaknesses have the
potential to adversely impact our financial reporting
process and our financial reports. We will need to hire additional
qualified accounting and administrative personnel in order to
resolve these material weaknesses.
The loss of one or more of our key personnel or our failure to
attract and retain other highly qualified personnel in the future,
could harm our business.
We
currently depend on the continued services and performance of key
members of our management team, in particular, Brandon Stump and
Ryan Stump, Charlie’s founders and our Chief Executive
Officer and Chief Operating Officer, respectively, and David Allen,
our Chief Financial Officer. If we cannot call upon them
or other key management personnel for any reason, our operations
and development could be harmed. We have not yet developed a
succession plan. Furthermore, as we grow, we will be required to
hire and attract additional qualified professionals such as
accounting, legal, finance, production, market and sales experts.
We may not be able to locate or attract qualified individuals for
such positions, which will affect our ability to grow and expand
our business.
We rely on contractual arrangements with Don Polly, our
consolidated variable interest entity for our CBD-related
business operations, which may not be as effective as direct
ownership in providing operational control.
We
have relied and expect to continue to rely on contractual
arrangements with Don Polly and its shareholders, consisting of
entities controlled by Brandon Stump and Ryan Stump, for the
operation of our CBD-related operations. These contractual
arrangements may not be as effective as direct ownership in
providing us with control over our consolidated variable interest
entity. For example, Don Polly and its shareholders could breach
their contractual arrangements with us by, among other things,
failing to conduct their operations, including maintaining our
website and using the domain names and trademarks, in an acceptable
manner or taking other actions that are detrimental to our
interests.
If we had direct ownership of Don Polly, we would
be able to exercise our rights as a shareholder to effect changes
in the board of directors of Don Polly, which in turn could
implement changes, subject to any applicable fiduciary obligations,
at the management and operational level. However, under the current
contractual arrangements, we rely on the performance by Don Polly,
and its shareholders of their obligations under the contracts. The
shareholders of Don Polly may not act in the best interests of our
Company or may not perform their obligations under these contracts.
Such risks exist throughout the period in which we intend to
operate our business through the contractual arrangements with Don
Polly. Therefore, our contractual arrangements with Don Polly, our
consolidated variable interest entity ("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 VIE, are held by
entities controlled by Brandon Stump, our Chief Executive Officer,
and Ryan Stump, our Chief Operating Officer. Their interests in Don
Polly may differ from the interests of our company as a whole.
These shareholders may breach, or cause Don Polly to breach, the
existing contractual arrangements we have with them and Don Polly,
which would have a material adverse effect on our ability to
effectively control Don Polly and receive economic benefits from
it. For example, the shareholders may be able to cause our
agreements with Don Polly to be performed in a manner adverse to us
by, among other things, failing to remit payments due under the
contractual arrangements to us on a timely basis. We cannot assure
you that when conflicts of interest arise, any or all of these
shareholders will act in the best interests of our Company or such
conflicts will be resolved in our favor.
Currently,
we do not have any arrangements to address potential conflicts of
interest between these shareholders and the Company. If we cannot
resolve any conflict of interest or dispute between us and the
shareholders of Don Polly, we would have to rely on legal
proceedings, which could result in the disruption of our business
and subject us to substantial uncertainty as to the outcome of any
such legal proceedings.
We have no commercial manufacturing capacity and rely on
third-party contract manufacturers to produce commercial quantities
of our products.
We
do not have the facilities, equipment or personnel to manufacture
commercial quantities of our products and therefore must rely on
qualified third-party contract manufactures with appropriate
facilities and equipment to contract manufacture commercial
quantities of products. Any performance failure on the part of our
contract manufacturers could delay commercialization of any of our
products, depriving us of potential product revenue.
Failure
by our contract manufacturers to achieve and maintain high
manufacturing standards could result in product recalls or
withdrawals, delays or failures in testing or delivery, cost
overruns or other problems that could materially adversely affect
our business. Contract manufacturers may encounter difficulties
involving production yields, quality control and quality assurance.
If for some reason our contract manufacturers cannot perform as
agreed, we may be required to replace them. Although we believe
there are a number of potential replacements, we may incur added
costs and delays in identifying and obtaining any such
replacements.
The
inability of a manufacturer to ship orders of our products in a
timely manner or to meet quality standards could cause us to miss
the delivery date requirements of our customers for those items,
which could result in cancellation of orders, refusal to accept
deliveries or a reduction in purchase prices, any of which could
have a material adverse effect as our revenue would decrease and we
would incur net losses as a result of sales of the product, if any
sales could be made.
We are subject to cyber-security risks, including those related to
customer, employee, vendor or other company data and including in
connection with integration of acquired businesses and
operations.
We
use information technologies to securely manage operations and
various business functions. We rely on various technologies, some
of which are managed by third parties, to process, transmit and
store electronic information, and to manage or support a variety of
business processes and activities, including reporting on our
business and interacting with customers, vendors and employees. In
addition, we collect and store certain data, including proprietary
business information, and may have access to confidential or
personal information that is subject to privacy and security laws,
regulations and customer-imposed controls. Our systems are subject
to repeated attempts by third parties to access information or to
disrupt our systems. Despite our security design and controls, and
those of our third-party providers, we may become subject to system
damage, disruptions or shutdowns due to any number of causes,
including cyber-attacks, breaches, employee error or malfeasance,
power outages, computer viruses, telecommunication or utility
failures, systems failures, service providers, natural disasters or
other catastrophic events. It is possible for such vulnerabilities
to remain undetected for an extended period. We may face other
challenges and risks as we upgrade and standardize our information
technology systems as part of our integration of acquired
businesses and operations. We have contingency plans in place to
prevent or mitigate the impact of these events, however, these
events could result in operational disruptions or the
misappropriation of sensitive data, and depending on their nature
and scope, could lead to the compromise of confidential
information, improper use of our systems and networks, manipulation
and destruction of data, defective products, production downtimes
and operational disruptions and exposure to liability. Such
disruptions or misappropriations and the resulting repercussions,
including reputational damage and legal claims or proceedings, may
adversely affect our results of operations, cash flows and
financial condition, and the trading price of our Common
Stock.
This risk is enhanced in certain jurisdictions
with stringent data privacy laws. For example, California recently
adopted the California Consumer Privacy Act of 2018
(“CCPA”), which provides new data privacy rights
for consumers and new operational requirements for businesses. The
CCPA includes a statutory damages framework and private rights of
action against businesses that fail to comply with certain CCPA
terms or implement reasonable security procedures and practices to
prevent data breaches. The CCPA went into effect in January
2020.
The business that we conduct outside the 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, may adversely
affect our business.
In
the event of a pandemic, epidemic or outbreak of an infectious
disease, our business may be adversely affected. In December 2019,
a novel strain of COVID-19 was identified in Wuhan, China which
continues to spread globally to, among other countries, the United
States. Such events may result in a period of business and travel
disruption, and in reduced sales and operations, any of which could
materially affect our business, financial condition and results of
operations. For example, the spread of COVID-19 in the United
States has resulted in travel restrictions impacting our sales
professionals and is causing disruptions to our manufacturing
supply chain. These conditions have begun to negatively affect our
sales and revenue, specifically relating to our CBD products,
although the magnitude of such a negative impact cannot be
determined at this time. However, if repercussions of the outbreak
are prolonged, it will have a further adverse impact on our
business.
The
outbreak and persistence of COVID-19 in international markets that
we have targeted for our international expansion have also delayed
the preparation for and launch of such expansion efforts. The
spread of COVID-19 has resulted in the inability of certain of our
products being delivered and distributed to the overseas markets on
a timely basis. If there were a shortage or halt in distribution of
our products, the cost of these materials or components may
increase which could harm our ability to provide our products on a
timely and cost-effective basis.
The
extent to which COVID-19 impacts our business will depend on future
developments, which are highly uncertain and cannot be predicted.
The Company will continue to closely monitor new information as it
emerges and adjust our operations and sales
accordingly.
Regulatory and Market Risks
Our business is primarily involved in the sales of products that
contain nicotine and/or CBD, which faces significant regulation and
actions that may have a material adverse effect on our
business.
As
a result of the Share Exchange, our current business is primarily
involved in the sale of products that contain nicotine and/or
CBD. The general market in which our products are sold faces
significant governmental and private sector actions, including
efforts aimed at reducing the incidence of use in minors and
efforts seeking to hold the makers and sellers of these products
responsible for the adverse health effects associated with them.
More broadly, new regulatory actions by the FDA and other federal,
state or local governments or agencies, may impact the consumer
acceptability of or access to our products, including regulations
promulgated by the FDA which will require us to file PMTA(s) for
any of our products that are identified as “Deemed Tobacco
Products” by the FDA that we intend to market and sell after
September 9, 2020. See "-The regulation of tobacco products by the
FDA in the United States and the issuance of Deeming Regulations
may materially adversely affect the Company." Additionally, on
January 2, 2020 the FDA issued an enforcement policy
effectively banning the sale of flavored cartridge-based
e-cigarettes marketed primarily by large manufacturers in the
United States without prior authorization from the FDA. According
to the FDA, it is expected that the new policy will have minimal
impact on small manufacturers, such as vape shops, that sell
non-cartridge based products. We believe that any ban on
flavored e-cigarettes, or similar enforcement action by the FDA,
would have a significant adverse impact on Charlie’s
products, which would, in turn, have a material adverse impact on
our overall business material.
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.
The regulation of tobacco products by the FDA in the United States
and the issuance of Deeming Regulations may materially adversely
affect the Company.
The
“Deeming Regulations” issued by the FDA in May 2016
require any e-liquid, e-cigarettes, and other vaping products
considered to be Deemed Tobacco Products that were not commercially
marketed as of the grandfathering date of February 15, 2007, to
obtain premarket approval by the FDA before any new e-liquid or
other vaping products can be marketed in the United States.
However, any Deemed Tobacco Products such as certain products from
our Charlie's Chalk Dust and Pachamama product lines that were on
the market in the United States prior to August 8, 2016 have a
grace period to continue to market such products, ending on
September 9, 2020 whereby a premarket application, likely though
the PMTA pathway, must be completed and filed with the FDA. Upon
submission of a PMTA, products would then be able to be marketed
pending the FDA’s review of the submission. Without obtaining
marketing authorization by the FDA prior to September 9, 2020 or
having submitted a PMTA by such date, non-authorized products would
be required to be removed from the market in the United States
until such authorization could be obtained, although such products
may continue to be sold if a PMTA is pending as of the September 9,
2020 deadline.
As at
the date of this Report, we have submitted PMTAs for certain of our
traditional nicotine vapor products, including, but not limited to
menthol and/or tobacco products with the assistance of Avail,
pursuant to the terms of the Avail Agreement. We estimate the cost
associated with these PMTAs to be approximately $4.4 million in
total. We are also evaluating the potential market perception and
clinical studies that may be required in connection with each PMTA.
If we do not submit a PMTA for any Charlie’s products
considered to be Deemed Tobacco Products prior to the lapse of the
grace period or if any PMTA submitted by the Company is denied, we
will be required to cease the marketing and distribution of such
Charlie’s products, which, in turn, would have a material
adverse effect on the Company’s business, results of
operations and financial condition. Furthermore, there can be no
assurance that if the Company were to complete a PMTA for any of
the affected Charlie's products, that any application would be
approved by the FDA.
Certain of our products contain nicotine, which is considered to be
a highly addictive substance.
Certain
of our products contain nicotine, a chemical found in cigarettes,
e-cigarettes, certain other vapor products and other tobacco
products, which is considered to be highly addictive. The Family
Smoking Prevention and Tobacco Control Act empowers the FDA to
regulate the amount of nicotine found in vapor products, but may
not require the reduction of nicotine yields of a vapor product to
zero. Any FDA regulation may require us to reformulate, recall and
or discontinue certain of the products we may sell from time to
time, which may have a material adverse effect on our ability to
market our products and have a material adverse effect on our
business, financial condition, results of operations, cash flows
and or future prospects.
Recent bans on the sales of flavored e-cigarettes directly impacts
the markets in which we may sell Charlie’s products, and
significant increases in state and local regulation of Charlie's
products have been proposed or enacted and are likely to continue
to be proposed or enacted in numerous jurisdictions.
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. There has
been increasing activity on the state and local levels with respect
to scrutiny of Charlie's products, and many states, provinces, and
some cities have passed laws restricting or banning the sale of
e-cigarettes and certain other nicotine vaporizer products,
including flavored e-liquids. State and local governmental bodies
across the U.S. have indicated Charlie's products may become
subject to new laws and regulations at the state and local levels.
Further, some states and cities, have enacted regulations that
require obtaining a tobacco retail license in order to sell
electronic cigarettes and vaporizer products. If one or more states
from which we generate or anticipate generating significant sales
of Charlie's products bring actions to prevent us from selling
Charlie's products unless we obtain certain licenses, approvals or
permits, and if we are 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 us, then we may be required to cease sales and
distribution of our products to those states, which could have a
material adverse effect on our business, results of operations and
financial condition.
Certain states and cities have already restricted the use of
electronic cigarettes and vaporizer products in smoke-free venues,
imposed excise taxes, or limited sales of flavored Charlie's
products. Additional city, state or federal regulators,
municipalities, local governments and private industry may enact
additional rules and regulations restricting electronic cigarettes
and vaporizer products. Because of these restrictions, our
customers may reduce or otherwise cease using Charlie's products,
which could have a material adverse effect on our business, results
of operations and financial condition. Changes to the application
of existing laws and regulations, and/or the implementation of any
new laws or regulations that may be adopted in the future, at a
federal, state, or local level, directly or indirectly implicating
or banning flavored e-cigarette liquid and products used for the
vaporization of nicotine would materially limit our ability to sell
such products, result in additional compliance expenses, and
require us to change our labeling and methods of distribution, any
of which would have a material adverse effect on our business,
results of operations and financial condition.
There is substantial concern regarding the effect of long-term use
of vaping products. Despite the recent outbreak of vaping-related
lung injuries, the medical profession does not yet definitively
know the cause of such injuries. Should vapor products, such as
Charlie’s products, be determined conclusively to pose
long-term health risks, including a risk of vaping-related lung
injury, our business will be negatively impacted.
Because
vapor products have been developed and commercialized recently, the
medical profession has not yet had a sufficient period of time to
fully realize the long-term health effects attributable to vapor
product use. On November 8, 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 Charlie’s products, could
decline, which could have a material adverse effect on our
business, results of operations and financial
condition.
The market for vapor products is a niche market, subject to a great
deal of uncertainty, and is still evolving.
Vapor
products, having recently been introduced to market, are still at
an early stage of development, represent a niche market, are
evolving rapidly and are characterized by an increasing number of
market entrants. Our future sales and any future profits are
substantially dependent upon the widespread acceptance and use of
vapor products. Rapid growth in the use of, and interest in, vapor
products is recent, and may not continue on a lasting basis. The
demand and market acceptance for these products is subject to a
high level of uncertainty. Therefore, we are subject to all of the
business risks associated with a new enterprise in a niche market,
including risks of unforeseen capital requirements, failure of
widespread market acceptance of vapor products, in general or,
specifically our products, failure to establish business
relationships and competitive disadvantages as against larger and
more established competitors.
Possible yet unanticipated changes in federal and state law could
cause any of our current products, as well as products that we
intend to launch, containing hemp-derived CBD oil to be
illegal, or could otherwise prohibit, limit or restrict any of our
products containing CBD.
We recently launched and commenced distribution of
certain premium vapor products containing hemp-derived CBD,
and we currently intend to develop and launch additional products
containing hemp-derived CBD in the future. Until 2014, when 7 U.S.
Code §5940 became federal law as part of the Agricultural Act
of 2014 (the “2014 Farm
Act”), products
containing oils derived from hemp, notwithstanding a minimal or
non-existing THC content, were classified as Schedule I illegal
drugs. The 2014 Farm Act expired on September 30, 2018, and was
thereafter replaced by the Agricultural Improvement Act of 2018 on
December 20, 2018 (the “2018 Farm
Act”), which amended
various sections of the U.S. Code, thereby removing hemp, defined
as cannabis with less than 0.3% THC, from Schedule 1 status under
the Controlled Substances Act, and legalizing the cultivation and
sale of industrial-hemp at the federal level, subject to compliance
with certain federal requirements and state law, amongst other
things. THC is the psychoactive component of plants in the cannabis
family generally identified as marihuana or marijuana. There is no
assurance that the 2018 Farm Act will not be repealed or amended
such that our products containing hemp-derived CBD would once again
be deemed illegal under federal law.
The
2018 Farm Act delegates the authority to the states to regulate and
limit the production of hemp and hemp derived products within their
territories. Although many states have adopted laws and regulations
that allow for the production and sale of hemp and hemp derived
products under certain circumstances, no assurance can be given
that such state laws may not be repealed or amended such that our
intended products containing hemp-derived CBD would once again be
deemed illegal under the laws of one or more states now permitting
such products, which in turn would render such intended products
illegal in those states under federal law even if the federal law
is unchanged. In the event of either repeal of federal or of state
laws and regulations, or of amendments thereto that are adverse to
our intended products, we may be restricted or limited with respect
to those products that we may sell or distribute, which could
adversely impact our intended business plan with respect to such
intended products.
Additionally,
the FDA has indicated its view that certain types of products
containing CBD may not be permissible under the FDCA. The
FDA’s position is related to its approval of Epidiolex, a
marijuana-derived prescription medicine to be available in the
United States. The active ingredient in Epidiolex is CBD. On
December 20, 2018, after the passage of the 2018 Farm 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-liquids similar to those developed and sold by us,
from both retail and online providers. We face competition from
direct and indirect competitors, which arguably
includes “big tobacco”, “big
pharma”, and other known and established or yet to be
formed vapor product manufacturing companies, each of whom
pose a competitive threat to our current business and future
prospects. We compete against “big tobacco”, who
offers not only conventional tobacco cigarettes and electronic
cigarettes, but also smokeless tobacco products such as
“snus” (a form of moist ground smokeless tobacco that
is usually sold in sachet form that resembles small tea bags),
chewing tobacco and snuff. “Big tobacco” has nearly
limitless resources, global distribution networks in place and a
customer base that is fiercely loyal to their brands. Furthermore,
we believe that “big tobacco” is likely to devote more
attention and resources to developing and offering electronic
cigarettes or other vapor products as the market for electronic
cigarettes grows. Because of their well-established sales and
distribution channels, marketing depth, financial resources, and
proven expertise navigating complex regulatory landscapes,
“big tobacco” is better positioned than small
competitors like us to capture a larger share of the vapor
markets. We also face competition from companies in the vapor
market that are much larger, better funded, and more established
than us.
Companies
with greater capital and research capabilities could re-formulate
existing products or formulate new products that could gain wide
marketplace acceptance, which could have a depressive effect on our
future sales. In addition, aggressive advertising and promotion by
our competitors may require us to compete by lowering prices
because we do not have the resources to engage in marketing
campaigns against these competitors, and the economic viability of
our operations likely would be diminished.
Adverse publicity associated with our products or ingredients, or
those of similar companies, could adversely affect our sales and
revenue.
Adverse
publicity concerning any actual or purported failure by us to
comply with applicable laws and regulations regarding any aspect of
our business could have an adverse effect on the public perception
of the Company. This, in turn, could negatively affect our ability
to obtain financing, endorsers and attract distributors or
retailers for our products, which would have a material adverse
effect on our ability to generate sales and revenue.
Our
distributors’ and customers’ perception of the safety
and quality of our products or even similar products distributed by
others can be significantly influenced by national media attention,
publicized scientific research or findings, product liability
claims and other publicity concerning our products or similar
products distributed by others. Adverse publicity, whether or not
accurate, that associates consumption of our products or any
similar products with illness or other adverse effects, will likely
diminish the public’s perception of our products. Claims that
any products are ineffective, inappropriately labeled or have
inaccurate instructions as to their use, could have a material
adverse effect on the market demand for our products, including
reducing our sales and revenue.
Our products may not meet health and safety standards or could
become contaminated.
We
have adopted various quality, environmental, health and safety
standards. We do not have control over all of the third parties
involved in the manufacturing of our products and their compliance
with government health and safety standards. Even if our
products meet these standards, they could otherwise become
contaminated. A failure to meet these standards or contamination
could occur in our operations or those of our manufacturers,
distributors or suppliers. This could result in expensive
production interruptions, recalls and liability claims. Moreover,
negative publicity could be generated from false, unfounded or
nominal liability claims or limited recalls. Any of these failures
or occurrences could negatively affect our business and financial
performance.
The sale of our products involves product liability and related
risks that could expose us to significant insurance and loss
expense.
We
face an inherent risk of exposure to product liability claims if
the use of our products results in, or is believed to have resulted
in, illness or injury. Our products contain combinations of
ingredients, and there is little long-term experience with the
effect of these combinations. In addition, interactions of these
products with other products, prescription medicines and
over-the-counter drugs have not been fully explored or understood
and may have unintended consequences. While our third-party
manufacturers perform tests in connection with the
formulations of our products, these tests are not designed to
evaluate the inherent safety of our products.
Any
product liability claim may increase our costs and adversely
affect our revenue and operating income. Moreover, liability claims
arising from a serious adverse event may increase our costs
through higher insurance premiums and deductibles and may make
it more difficult to secure adequate insurance coverage in the
future. In addition, our product liability insurance may fail
to cover future product liability claims, which, if adversely
determined, could subject us to substantial monetary
damages.
The success of our business will depend upon our ability to create
and expand our brand awareness.
The
market we compete in is highly competitive, with many well-known
brands leading the industry. Our ability to compete effectively and
generate revenue will be based upon our ability to create and
expand awareness of our products distinct from those of our
competitors. It is imperative that we are able to convey to
consumers the benefits of our products. However, advertising
and packaging and labeling of such products will be limited by
various regulations. Our success will be dependent upon our
ability to convey to consumers that our products are superior to
those of our competitors.
We must develop and introduce new products to succeed.
Our
industry is subject to rapid change. New products are constantly
introduced to the market. Our ability to remain competitive depends
in part on our ability to enhance existing products, to develop and
manufacture new products in a timely and cost-effective manner, to
accurately predict market transitions, and to effectively market
our products. Our future financial results will depend to a great
extent on the successful introduction of several new products. We
cannot be certain that we will be successful in selecting,
developing, manufacturing and marketing new products or in
enhancing existing products.
The
success of new product introductions depends on various factors,
including, without limitation, the following:
●
proper
new product selection;
●
successful sales and marketing efforts;
●
timely delivery of new products;
●
availability of raw materials;
●
pricing of raw materials;
●
regulatory allowance of the products; and
●
customer acceptance of new products.
If we are not able to adequately protect our intellectual property,
then we may not be able to compete effectively, and we
may not be profitable.
Our
existing proprietary rights may not afford remedies and
protections necessary to prevent infringement, reformulation,
theft, misappropriation and other improper use of our products by
competitors. We own the formulations for our products and we
consider these product formulations our critical proprietary
property, which must be protected from competitors. We do not
currently have any patents for our product formulations. Although
trade secret, trademark, copyright and patent laws generally
provide a certain level of protection, and we attempt to protect
ourselves through contracts with manufacturers of our products, we
may not be successful in enforcing our rights. In addition,
enforcement of our proprietary rights may require lengthy and
expensive litigation. We have attempted to protect some of the
trade names and trademarks used for our products by registering
them with the 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.
Risks Related to Our Common Stock
A limited trading market currently exists for our securities, and
we cannot assure you that an active market will ever develop, or if
developed, will be sustained.
There
is currently a limited trading market for our Common Stock on the
OTC Pink Marketplace and an active trading market for our Common
Stock may not develop. Consequently, we cannot assure you when and
if an active-trading market in our shares will be established, or
whether any such market will be sustained or sufficiently liquid to
enable holders of shares of our Common Stock to liquidate their
investment in our Company. If an active public market should
develop in the future, the sale of unregistered and restricted
securities by current stockholders may have a substantial impact on
any such market.
Sales of a
substantial number of shares of our Common Stock, or the perception
that such sales may occur, may adversely impact the price of our
Common Stock.
Sales of a substantial number of shares of our
Common Stock in the public market could occur at any time. These
sales, or the perception that such sales may occur, may adversely
impact the price of our Common Stock, even if there is no
relationship between such sales and the performance of our
business. As of December 31, 2020, we had
18,990,752,596 shares of Common Stock outstanding, as well as
outstanding options to purchase an aggregate of
750,293,786 shares of our Common Stock at a weighted average
exercise price of $0.0044313 per share, up to
5,564,295,545 shares of Common Stock
issuable upon conversion of outstanding shares of Series A
Preferred and outstanding warrants to purchase up to an aggregate
of 4,033,769,340 shares of our Common Stock at a weighted average
exercise price of $0.0044313 per share. The exercise and/or
conversion of such outstanding derivative securities may result in
further dilution to our stockholders.
If we issue additional shares of Common Stock in the future, it
will result in the dilution of our existing
stockholders.
Our
Charter currently authorizes the issuance of up to 50.0 billion
shares of Common Stock, of which approximately 18.991 billion
shares are currently issued and outstanding. In addition, we have
reserved approximately 10.3 billion shares for issuance upon
conversion and/or exercise of our outstanding shares of Series A
Preferred, warrants and stock options, as well as for issuance as
awards under our 2019 Omnibus Incentive Plan. The issuance of any
additional shares of our Common Stock, including those shares
issuable upon conversion and/or exercise of our outstanding
derivative securities, will result in significant dilution to our
stockholders and a reduction in value of our outstanding Common
Stock. Further, any such issuance may result in a change of control
of our corporation.
Holders of Series A Convertible Preferred have substantial rights
and ranks senior to our Common Stock.
Our
Common Stock ranks junior as to dividend rights, redemption rights,
conversion rights and rights in any liquidation, dissolution or
winding-up of the Company to the Series A Preferred. Upon
liquidation, dissolution or winding-up of the Company, the holders
of the Series A Preferred are entitled to a liquidation preference
equal to the original purchase price of Series A Preferred prior to
and in preference to any distribution to the holders of our Common
Stock. In addition, the holders of the Series A Preferred are also
entitled to an annual 8% dividend payable in cash or shares of our
Common Stock. Such rights could cause dilution of our Common Stock
or limit our cash.
Our outstanding
Series A Preferred contains anti-dilution provisions that, if
triggered, could cause substantial dilution to our then-existing
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 Stock or grant any rights to purchase our
Common Stock or other securities convertible into our Common Stock
for a per share price less than the then existing conversion price
of the Series A Preferred, an adjustment to the then current
conversion price would occur. This reduction in the conversion
price could result in substantial dilution to our then-existing
holders 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.
The price of our securities could be subject to wide fluctuations
and your investment could decline in value.
The
market price of the securities of a company such as ours with
little name recognition in the financial community can be subject
to wide price swings. The market price of our Common Stock may be
subject to wide changes in response to quarterly variations in
operating results, announcements of new products by us or our
competitors, reports by securities analysts, volume trading, or
other events or factors. In addition, the financial markets have
experienced significant price and volume fluctuations for a number
of reasons, including the failure of certain companies to meet
market expectations. These broad market price swings, or any
industry-specific market fluctuations, may adversely affect the
market price of our securities.
Companies
that have experienced volatility in the market price of their stock
have been the subject of securities class action litigation. If we
were to become the subject of securities class action litigation,
it could result in substantial costs and a significant diversion of
our management’s attention and resources.
Because
our Common Stock may be classified as “penny stock”,
trading may be limited, and the share price could decline.
Moreover, trading of our Common Stock, if any, may be limited
because broker-dealers would be required to provide their customers
with disclosure documents prior to allowing them to participate in
transactions involving our Common Stock. These disclosure
requirements are burdensome to broker-dealers and may discourage
them from allowing their customers to participate in transactions
involving our Common Stock.
We have issued Preferred Stock with rights senior to our Common
Stock, and may issue additional Preferred Stock in the
future.
Our
Charter authorizes the issuance of up to
5.0 million shares of Preferred Stock without stockholder
approval and on terms established by our 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 Stock
in the future in order to consummate a financing or other
transaction, in lieu of the issuance of shares of our Common
Stock. The rights and preferences of any such class or series
of Preferred Stock would be established by our Board of Directors
in its sole discretion and may have dividend, voting, liquidation
and other rights and preferences that are senior to the rights of
the Common Stock.
Our Amended and Restated Bylaws designate courts within the state
of Nevada as the sole and exclusive forum for certain types of
actions and proceedings that may be initiated by our stockholders,
which could limit our stockholders’ ability to obtain a
favorable judicial forum for disputes with us or our directors,
officers, employees or agents.
Our Amended and Restated Bylaws
(“Bylaws”) require that, to the fullest extent
permitted by law, and unless the Company consents in writing to the
selection of an alternative forum, a state court located within the
State of Nevada (or, if no state court located within the State of
Nevada has jurisdiction, the federal district court for the
District of Nevada), will, to the fullest extent permitted by law,
be the sole and exclusive forum for each of the
following:
●
any derivative action or proceeding brought on behalf of the
Company;
●
any action asserting a claim of breach of a fiduciary duty owed by
any director or officer or other employee of the Company to the
Company or the Company’s stockholders;
●
any action asserting a claim against the Company or any director or
officer or other employee of the Company arising pursuant to any
provision of the Nevada Revised Statutes or the Company’s
Amended and Restated Articles of Incorporation, as amended, or the
Amended and Restated Bylaws; or
●
any action asserting a claim against the Company or any director or
officer or other employee of the Company governed by the internal
affairs doctrine.
Because the applicability of the exclusive forum
provision is limited to the extent permitted by law, we believe
that the exclusive forum provision would not apply to suits brought
to enforce any duty or liability created by the Exchange Act, or
any other claim for which the federal courts have exclusive
jurisdiction, and that federal courts have concurrent jurisdiction
over all suits brought to enforce any duty or liability created by
the Securities Act of 1933, as amended (“Securities
Act”). We note that there
is uncertainty as to whether a court would enforce the provision
and that investors cannot waive compliance with the federal
securities laws and the rules and regulations thereunder. Although
we believe this provision benefits us by providing increased
consistency in the application of Nevada law in the types of
lawsuits to which it applies, the provision may have the effect of
discouraging lawsuits against our directors and
officers.
You may not be able to hold our securities in your regular
brokerage account.
In
the case of publicly-traded companies, it is common for a broker to
hold securities on your behalf, in “street name”
(meaning the broker is shown as the holder on the issuer’s
records and then you show up on the broker’s records as the
person the broker is holding for). Due to regulatory uncertainties,
certain brokers may not agree to hold securities of companies whose
products include hemp-derived CBD for their customers, meaning that
you may not be able to take advantage of the convenience of having
all your holdings reflected in one place.
You should not rely on an investment in our Common Stock for the
payment of cash dividends.
Because
of our previous significant operating losses and because we intend
to retain future profits, if any, to expand our business, we have
never paid cash dividends on our Common Stock and do not anticipate
paying any cash dividends in the foreseeable future. You should not
make an investment in our Common Stock if you require dividend
income. Any return on investment in our Common Stock would only
come from an increase in the market price of our stock, which is
uncertain and unpredictable.
ITEM 1B. UNRESOLVED
STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Facilities
The
Company leases office space that expires on various dates through
2024. All of the Company’s lease liabilities result from the
lease of its warehouse in Santa Ana, California, which expires 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. Management believes that the
Company's sites are adequate to support the business and suitable
for present purposes, and the properties and equipment have been
well maintained.
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 million per
occurrence and $2.0 million in annual aggregate coverage. The Don
Polly policy provided for a general liability limit of $5.0 million
per occurrence and $5.0 million in annual aggregate coverage. We
also maintain Director's and Officer's insurance.
ITEM 3. LEGAL
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. Other than as set
forth below, there are no additional pending or threatened legal
proceedings at this time.
C.H. Robinson Worldwide, Inc. v. True Drinks,
Inc. On September 5, 2018, C.H. Robinson Worldwide
(“Robinson”)
filed a complaint against True Drinks, Inc. in the California
Superior Court for the County of Orange located in Santa Ana,
California alleging open book account, account stated, reasonable
value of services received, agreement, and unjust enrichment
related to shipping services provided by Robinson. Robinson has
asserted $121,743 in damages plus interest, attorney’s fees
and costs. On November 13, 2020 the Company (formerly True Drinks
Holdings, Inc.) and Robinson reached a Settlement Agreement and
Mutual Release (“Settlement
Agreement”) by which the Company agreed to pay the
total sum of $50,000 in two equal installments of $25,000. The
first payment was to be due on or before November 19, 2020 and the
second payment was to be due on or before December 17, 2020. The
Company has satisfied its obligations set forth in the Settlement
Agreement and has been relieved of any future liability in this
matter.
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is traded on the OTC Pink Marketplace under the
symbol “CHUC”. Prior to July 3, 2019, our common stock
was traded on the OTC Pink Marketplace under the symbol
“TRUU”.
The following table sets forth high and low sales
prices for our common stock for
the calendar quarters indicated as reported by the OTC Pink
Marketplace. These prices represent quotations between dealers
without adjustment for retail markup, markdown, or commission and
may not represent actual transactions.
|
|
High
|
Low
|
|
2020
|
|
|
|
First
Quarter ended March 31, 2020
|
$0.0025
|
$0.0017
|
|
Second
Quarter ended June 30, 2020
|
$0.0023
|
$0.0016
|
|
Third
Quarter ended September 30, 2020
|
$0.0045
|
$0.0018
|
|
Fourth
Quarter ended December 31, 2020
|
$0.0041
|
$0.0025
|
|
|
|
|
|
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
|
Holders
At March 23, 2021,
there were 19,638,493,279 shares of our common
stock outstanding, and approximately 437 stockholders of record.
At March 23, 2021, there were 190,690 shares of our
Series A Preferred outstanding held by 107 stockholders of
record.
Transfer Agent
Our Transfer Agent and Registrar for our
common stock is Equiniti Stock
Transfer located in Denver, Colorado.
ITEM 6. SELECTED FINANCIAL DATA
As
a “smaller reporting company”, as defined by the rules
and regulations of the SEC, we are not required to provide this
information.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Factors Associated with Our Business” and
elsewhere in this Annual Report.
Overview
Our objective is to become a significant leader in
the rapidly growing, global e-cigarette segment of the broader
nicotine related products industry. Through Charlie’s, we
formulate, market and distribute branded e-cigarette liquid for use
in both open and closed e-cigarette and vaping systems.
Charlie’s products are mostly produced domestically through
contract manufacturers for sale through select distributors,
specialty retailers and third-party online resellers throughout the
United States, as well as more than 80 countries worldwide.
Charlie’s primary international markets include the United
Kingdom, Italy, Spain, Belgium, Australia, Sweden and Canada. In
June 2019, we launched distribution, through Don Polly, of certain
premium vapor, tincture and topical wellness products containing
hemp-derived cannabidiol (“CBD”) and we currently intend to develop and
launch additional products containing hemp-derived CBD in the
future.
Industry Specific Challenges
Beginning in late
2019, our industry experienced significant news stories and health
alerts related to flavored nicotine vaping, leading to some states
banning the sale of flavored nicotine products and causing the Food
and Drug Administration (“FDA”) to review its policies on
controlling the sale of these products. Initial research indicated
that a vitamin E acetate related compound could be causing the
health-related issues. On November 8, 2019, officials at the
Centers for Disease Control and Prevention (“CDC”) reported a breakthrough in
the investigation into the outbreak of vaping-related lung
injuries. The CDC's
principal deputy director, Dr. Anne Schuchat, in fact stated that
"vitamin E acetate is a known additive used to dilute liquid in
e-cigarettes or vaping products that contain THC”,
suggesting the possible culprit for the series of lung
injuries across the U.S. All of Charlie's e-liquid products are
tested by third party laboratories which have confirmed that none
of our products contain any vitamin E acetate or
Tetrahydrocannabinol
(“THC”).
However,
these developments have had a negative effect on our sales since
mid-September 2019 (see further discussion below) and therefore, in
response to these developments and while government regulators are
formulating future polices, management has adopted the following
plan of operation.
First, we plan to increase the sales of our CBD
related products, including topicals and ingestibles. We feel there
is a significant upside in the CBD space, and we have begun to
focus on numerous vertical markets for the sale of our isolate,
full and broad-spectrum products. These vertical markets include,
but aren't limited to the medical and wellness markets. We have also dedicated an
internal team as well as additional financial resources to increase
direct-to-consumer e-commerce sales of CBD
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 20% of our vapor product sales come from
the international market and we are well positioned to increase
those sales in the countries that we presently sell, and in
additional overseas markets, as we have already built an
international distribution platform.
Most
importantly, we feel that the e-liquid and other vapor products
will continue to be a significant growth opportunity, once all the
rightful regulatory changes have been made. We are continuing with
our plan to obtain marketing authorization for certain of our
products through the completion of a Premarket Tobacco Application
("PMTA"), which we
submitted in September 2020. Obtaining a marketing order from the
United States Food and Drug Administration (“FDA”) would, in our opinion, help to
remediate the disruption caused by any perceived health issues
related to vaping, and further position the Company as a trusted,
industry leader. We feel that a significant amount of our
competitors will not have the resources and/or expertise to
complete the extensive and costly PMTA process and that once
complete, we will be able to benefit from being one of only a
select group of companies operating in the flavored vapor products
space.
Impact of COVID-19
The outbreak of a novel strain of COVID-19
(“Coronavirus”) which was identified in Wuhan, China
around December 2019, has had a negative impact on the global
economy and the 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 in which we now operate. During 2020, 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 fully returned to on
premise status, while our corporate headquarters in Costa Mesa, CA
remains remote for most employees. We will continue to monitor the
COVID-19 situation in all regions we operate and will maintain
strict adherence to local health guidelines and mandates. We may
have to take further actions that we determine are in the best
interests of our employees or as 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
though bulk purchases of certain flavorings and components and
adjusting the production allocation amongst our contract
manufacturers. Shifting production to contract manufacturers in
regions with fewer restrictions and/or an enhanced ability to
procure larger supplies of raw materials has helped alleviate
disruptions in our supply chain.
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 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 significant challenge for these customers
to maintain continuity in their businesses, and therefore we
experienced lower sales volumes as a result. However, customers for
our vapor products have proven to be more resilient during these
challenging times and have been able to maintain more consistent
performance. The Company did experience increased order volume for
CBD wellness products through its ecommerce platform because of
consumers seeking alternative means to purchase our
products.
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. Beginning in 2019, we also initiated
a program of in-store marketing events to help facilitate
relationship building and sell-through for our retail partners.
With the suspension of all trade shows and most business travel,
our new customer pipeline has been negatively impacted, which has
negatively affected and may continue to negatively affect our sales
in the coming quarters. In response, we have shifted 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
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. In addition, the
Company is presently seeking to obtain marketing authorization for
certain of its nicotine-based e-liquid products. Our PMTA
applications were submitted in September 2020 on a timely basis,
which if approved, will allow the Company to continue to sell its
products in the United States. The Company is also seeking
additional financing to support potential future PMTA related
expenses and general working capital. There is no assurance that
regulatory approval to sell our products will be granted or that we
can raise the additional financing required, and if not, this could
have a significant impact on our sales.
On
March 11, 2020, the World Health Organization designated the
ongoing and evolving COVID-19 outbreak as a pandemic. The outbreak
has caused substantial disruption in international and U.S.
economies and markets as it continues to spread. The outbreak is
having a temporary adverse impact on our industry as well as our
business, with regards to certain supply chain disruptions and
sales volume. While the disruption from COVID-19 is currently
expected to be temporary, there is uncertainty around the
duration.
Recent Developments
Share Exchange
On April 26, 2019 (the “Closing
Date”), we entered into a
Securities Exchange Agreement with each of the former members
(“Members”) of Charlie’s, and certain direct
investors in the Company (“Direct
Investors”), pursuant to
which we acquired all outstanding membership interests of
Charlie’s beneficially owned by the Members in exchange for
the issuance by the Company of units, with such units consisting of
an aggregate of (i) 15,655,538,349 shares of common stock on an
as-converted basis (which includes the issuance of an aggregate of
1,396,305 shares of a newly created class of Series B Convertible
Preferred Stock, par value $0.001 per share
(“Series B
Preferred”), convertible
into an aggregate of 13,963,047,716 shares of common stock, issued
to certain individuals in lieu of common stock); (ii) 206,249
shares of a newly created class of Series A Convertible Preferred
Stock, par value $0.001 per share (“Series A
Preferred”), convertible
into an aggregate of 4,654,349,239 shares of common stock; and
(iii) warrants to purchase an aggregate of 3,102,899,493 shares of
common stock (the “Investor
Warrants”) (the
“Share Exchange”). As a result of the Share Exchange,
Charlie’s became a wholly owned subsidiary of the
Company.
Immediately prior to, and in connection with, the
Share Exchange, Charlie’s consummated a private offering of
membership interests that resulted in gross proceeds to
Charlie’s of approximately $27.5 million (the
“Charlie’s
Financing”). Katalyst
Securities LLC (“Katalyst”) acted as the sole placement agent in
connection with the Charlie’s Financing pursuant to an
Engagement Letter entered into by and between Katalyst,
Charlie’s and the Company on February 15, 2019, which was
amended on April 16, 2019 (“Amended Engagement
Letter”). As
consideration for its services in connection with the
Charlie’s Financing and Share Exchange, the Company issued to
Katalyst and its designees five-year warrants to purchase an
aggregate of 930,869,848 shares of common stock at a price of
$0.0044313 per share (the “Placement Agent
Warrants”). The Placement
Agent Warrants have substantially the same terms as those set forth
in the Investor Warrants.
As additional consideration for advisory services
provided in connection with the Charlie’s Financing and the
Share Exchange, the Company issued an aggregate of 902.7 million
shares of Common Stock (the “Advisory
Shares”), including to a
member of the Company’s Board of Directors, pursuant to a
subscription agreement. The fair value of a share of common stock
was $0.0032 which is based upon a valuation prepared by the Company
on the date of the Share Exchange.
The Share Exchange resulted in a change of control of the Company,
with the Members and Direct Investors owning approximately 86.1% of
the Company’s outstanding voting securities immediately after
the Share Exchange, and the Company’s current stockholders
beneficially owning approximately 13.9% of the issued and
outstanding voting securities, which includes the Advisory Shares.
Following the Share Exchange, Ryan Stump and Brandon Stump, the
founders of Charlie’s and the Company’s Chief Executive
Officer and Chief Operating Officer, respectively, held in excess
of 50% of the Company’s issued and outstanding voting
securities.
Following
the consummation of the Share Exchange, the business operations of
the Company consist of those of Charlie’s, which is
principally engaged in formulating, marketing and distributing
branded e-cigarette liquid and other products for use in
nicotine-only e-cigarette and vaping systems.
Launch of CBD Products
In
June 2019, we introduced, through Don Polly, full-spectrum hemp
extract and CBD isolate wellness products across a variety of
formats and with different strengths. Our initial launch consisted
of six vapor, eight tincture and two topical product variations.
The newly released products were launched under the
Pachamama™ brand by way of a licensing agreement between Don
Polly and Charlie’s, entered on April 25, 2019. In the near
term, we expect to expand the hemp-derived CBD-based products line
to include additional CBD isolate products and THC-free, broad
spectrum hemp extract products currently in
development.
Pachamama™
CBD products are currently available in the U.S., Mexico, U.K.,
Switzerland and Australia, and we expect to continue expanding both
our domestic and international distribution efforts.
Filing of Amended and Restated Charter; Automatic Conversion of
Series B Preferred
On June 28, 2019, we amended and restated our
Articles of Incorporation (the “Amended and Restated
Charter”) to (i) change
our corporate name to Charlie’s Holdings, Inc. and (ii)
increase the number of shares authorized as common stock from 7.0
billion to 50.0 billion shares. The Amended and Restated Charter
was approved by our Board of Directors and holders of a majority of
our outstanding voting securities on May 8, 2019, and the Amended
and Restated Charter was filed with the State of Nevada on June 28,
2019.
As
a result of the filing of the Amended 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 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.
Default on Payment of Dividend
The
Company was required to pay a one-time dividend equal to eight
percent (8%) of the stated value of its Series A Preferred, equal
to $1,650,000 (“Dividend
Amount”), which Dividend Amount was required to be
paid in cash on or before April 25, 2020. The Company failed to pay
the required dividend and has requested that holders of more than
50% of the Series A Preferred issued and outstanding
(“Required
Holders”) consent to an amendment to the Series A
Preferred to allow the Company to pay such Dividend Amount in
shares of the Company’s Common Stock. To date, the Company
has not obtained such consent from the Required Holders. In the
event the Company is unable to obtain consents from the Required
Holders to pay the Dividend Amount in shares of Common Stock in
lieu of cash, or does not otherwise pay such Dividend Amount in
cash or obtain a waiver, any claims asserted by the holders of the
Series A Preferred could have a material adverse effect on the
Company’s financial condition.
On
August 13, 2020, the Company received a formal notice of default
from a holder of its Series A Preferred requesting full payment of
dividends due and payable with respect to the Series A Preferred
held by such holder on or before August 23, 2020
(“Dividend
Default”). As disclosed, the aggregate amount of
dividends due and payable to holders of the Series A Preferred is
$1,650,000.
Small Business Administration Loan Programs
On April 30, 2020,
Charlie's, a wholly owned subsidiary of the Company, received
approval to enter into a U.S. Small Business Administration
("SBA")
Promissory Note (the " Charlie's
PPP Loan") with TBK Bank, SSB
(the "SBA
Lender"), pursuant to the
Paycheck Protection Program ("PPP")
of the Coronavirus Aid, Relief, and Economic Security Act (the
"CARES
Act") as administered by
the SBA (the "PPP
Loan Agreement").
The Charlie's PPP Loan provides for working capital to CCD in the
amount of $650,761. The Charlie's PPP Loan will mature on April 30,
2022 and will accrue interest at a rate of 1.00% per annum.
Payments of principal and interest will be deferred for six months
from the date of the Charlie's PPP Loan, or until November 30,
2020. Interest, however, will continue to accrue during this
time.
On April 14, 2020, Don
Polly also obtained a loan pursuant to the PPP enacted under the
CARES Act (the "Polly
PPP Loan" and together with the
Charlie's PPP Loan, the "PPP
Loans")) from Community
Banks of Colorado, a division of NBH Bank (the "Polly
Lender"). The Polly PPP Loan
obtained by Don Polly provides for working capital to Don Polly in
the amount of $215,600. The Polly PPP Loan will mature on April 14,
2022 and will accrue interest at a rate of 1.00% per annum.
Payments of principal and interest will be deferred for six months
from the date of the Polly PPP Loan, or until November 14, 2020.
Interest, however, will continue to accrue during this
time.
The aforementioned PPP Loans were made under the PPP enacted by
Congress under the CARES Act. The CARES Act (including the guidance
issued by SBA and U.S. Department of the Treasury) provides that
all or a portion of the PPP Loans may be forgiven upon request from
the respective borrower to the SBA Lender or the Polly Lender, as
the case may be, subject to requirements in the PPP Loans and under
the CARES Act.
On
February 19, 2021 Don Polly received notice from the Polly Lender,
that its 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.
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 Submission
During
the quarter ended September 30, 2020, the United States Food and
Drug Administration's ("FDA") 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.
This news highlights our progress toward achieving full regulatory
compliance and our goal of providing customers with a trusted
product portfolio. We are confident that during the substantive
review phase of the PMTA process, the FDA will recognize that our
submission is both distinguished and suitable for
approval.
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"), which Note is
secured by all assets of the Company pursuant to the terms of a
Security Agreement entered into by and between the Company and Red
Beard (the "Red Beard Note
Financing").
The Red
Beard Note required the payment of the Principal Amount and
guaranteed minimum interest in the amount of $75,000 on or before
the earlier date of (i) a Liquidity Event, as defined under the
terms of the Red Beard Note; or (ii) October 1, 2020. In addition, if there
was an occurrence of an event of default, then, in addition to the
guaranteed minimum interest, the Principal Amount and unpaid
interest and unpaid other amounts under the Red Beard Note shall,
at the election of the Red Beard in its sole and absolute
discretion, bear interest at the lesser of a rate equal to 20% per
annum or the maximum default rate. Such interest would accrue daily
commencing on occurrence of such event of default until payment in
full of the Principal Amount, together with all accrued and unpaid
interest and other amounts which may become due hereunder, has been
made.
On
August 27, 2020, the Company’s Board of Directors, entered
into Amendment No. 1 to Secured Promissory Note and Security
Agreement (“Amended Red
Beard Note”), by and between the Company and Red
Beard. Pursuant to the Amended Red Beard Note, the terms of the Red
Beard Note held by Red Beard were amended as follows (i) the
Principal Amount under the Red Beard Note was increased from
$750,000 to $1,400,000 and (ii) the guaranteed minimum interest due
upon maturity of the Red Beard Note was increased from $75,000 to
$100,000. All other terms of the respective Red Beard Note remain
in full force and effect.
On
September 30, 2020, the Company’s Board of Directors entered
into Amendment No. 2 to Secured Promissory Note and Security
Agreement (“Second Amended
Red Beard Note”), by and between the Company and Red
Beard. The Red Beard Note, as amended by Amendment 1, was further
amended by the Second Amended Red Beard Note to amend the
definition of the “Maturity Date” in the Red Beard Note
to mean November 1, 2020.
On
October 29, 2020, the Company entered into Amendment No. 3
("Third Amended Red Beard
Note"), by and between the Company and Red Beard. The terms
of the Second Amended Red Beard Note held by Red Beard have been
amended to revise the maturity date from November 1, 2020 to
December 1, 2020. Furthermore, Red Beard has agreed to waive
certain rights upon the occurrence of an Event of Default, as
defined in the Amended Red Beard Note, which was triggered by the
Company’s receipt of that certain notice of default, dated
August 13, 2020, from certain holders of the Company’s Series
A Preferred.
On
December 1, 2020, the Company entered into Amendment No. 4 to
Secured Promissory Note and Security Agreement (“Fourth Amended Red Beard Note”),
by and between the Company and Red Beard. The Fourth Amended Red
Beard Note was retroactively effective as of December 1, 2020,
therefore avoiding an event of default. The terms of the Third
Amended Red Beard Note have been amended to revise the maturity
date from December 1, 2020 to January 1, 2021, and the guaranteed
minimum interest has been increased from $100,000 to
$125,000.
On
January 19, 2021, the Company entered into Amendment No. 5 to
Secured Promissory Note and Security Agreement (“Fifth Amended Red Beard
Note”), by and between the Company and Red Beard. The
Fifth Amended Note is retroactively effective as of January 1,
2020. The terms of the Amended Note held by Red Beard have been
amended to revise the maturity date from January 1, 2021 to
February 15, 2021, and the guaranteed minimum interest has been
increased from $125,000 to $150,000. Pursuant to the Fifth Amended
Red Beard Note, Red Beard agreed to waive its rights to declare a
default under the Red Beard Note due to the Dividend
Default.
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 $1.55 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.
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, 2020 and 2019 have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (the
“SEC”). In the opinion of the Company, all
adjustments, including normal recurring adjustments necessary to
present fairly the financial position, results of operations, and
cash flows of the Company for the interim period have been
included.
The
Share Exchange is accounted for as a reverse recapitalization under
U.S. GAAP because the primary assets of the Company were nominal
following the close of the Share Exchange. Charlie’s was
determined to be the accounting acquirer based upon the terms of
the Share Exchange and other factors including: (i) Charlie’s
stockholders and other persons holding securities convertible,
exercisable or exchangeable directly or indirectly for
Charlie’s membership units now own approximately 32%, on a
fully diluted basis, of the Company’s outstanding securities
immediately following the effective time of the Share Exchange,
(ii) individuals associated with Charlie’s now hold a
majority of the seats on the Company’s Board of Directors and
(iii) Charlie’s management holds all key positions in the
management of the combined Company.
The
disclosures in this Annual Report with respect to the years ended
December 31, 2020 and 2019, including the consolidated financial
statements contained herein, are based on Charlie’s
historical financial statements and the Company’s financial
activity beginning April 26, 2019, as adjusted, to give effect to
Charlie’s reverse recapitalization of the Company and the
Charlie’s Financing. In addition, from the period April 26,
2019 until December 2020, there were minimal costs and revenue
associated with the Bazi product line which are included in the
consolidated financial statements. We do not intend to continue to
produce and sell the Bazi product line, and these costs and
expenses are nominal and will continue to be so in the future. The
operating results of Don Polly for the year ended December 31, 2020
are also included.
Historical
financial information presented prior to April 26, 2019 is that of
Charlie’s only, while financial information presented after
April 26, 2019 includes Charlie’s, Don Polly, Bazi Drinks and
the Company, which includes the transactions associated with the
Share Exchange and Charlie’s Financing completed prior to the
Share Exchange, along with ongoing corporate costs.
Results of Operations for the Year Ended December 31, 2020 Compared
to the Year Ended December 31, 2019
|
|
For the
years ended
|
|
|
|
|
|
December
31,
|
Change
|
||
|
|
2020
|
2019
|
Amount
|
Percentage
|
|
($ in thousands)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
Product
revenue, net
|
$16,692
|
$22,740
|
$(6,048)
|
-26.6%
|
|
Total
revenues
|
16,692
|
22,740
|
(6,048)
|
-26.6%
|
|
Operating costs and expenses:
|
|
|
|
|
|
Cost
of goods sold - product revenue
|
7,478
|
10,071
|
(2,593)
|
-25.7%
|
|
General
and administrative
|
10,873
|
15,017
|
(4,144)
|
-27.6%
|
|
Sales
and marketing
|
1,733
|
2,314
|
(581)
|
-25.1%
|
|
Research
and development
|
3,378
|
1,102
|
2,276
|
206.5%
|
|
Total
operating costs and expenses
|
23,462
|
28,504
|
(5,042)
|
-17.7%
|
|
Loss
from operations
|
(6,770)
|
(5,764)
|
(1,006)
|
17.5%
|
|
Other income (expense):
|
|
|
|
|
|
Interest
expense
|
(134)
|
-
|
(134)
|
100%
|
|
Change
in fair value of derivative liabilities
|
(300)
|
3,618
|
(3,918)
|
-108.3%
|
|
Other
income
|
17
|
-
|
17
|
100%
|
|
Total
other income (expense)
|
(417)
|
3,618
|
(4,035)
|
-111.5%
|
|
Net loss
|
$(7,187)
|
$(2,146)
|
$(5,041)
|
234.9%
|
Revenue
Revenue for the year ended December 31, 2020
decreased approximately $6,048,000, or 26.6%, to approximately
$16,692,000, as compared to approximately $22,740,000 for the year
ended December 31, 2019 due to a $5,604,000 decrease in our
nicotine-based product sales, and a $422,000 decrease in sales of
our CBD wellness products. Sales discounts, key accounts
participating in volume-based rebate programs, and a relatively
larger provision for returns generally contributed to a decrease in
net sales. Specifically, the decrease in our nicotine-based
e-liquid flavor sales is directly related to the current regulatory
and health related news stories surrounding the vaping
industry. The nicotine based
e-liquid sales decline began late in the quarter ended September
30, 2019 and we expect sales in future quarters to be affected
until the regulatory environment becomes clear. Uncertainty
surrounding the FDA’s application review timeline, following
the PMTA submission deadline, has continued to affect buying
patterns in the domestic vape market as customers reduce
inventories of non-PMTA submitted products. In addition, in late
February 2020, sales of our vapor products and CBD wellness
products began to experience a decrease as the effects of the
global COVID-19 pandemic caused disruptions in the global economy,
including mandatory closures of and restrictions placed on retail
locations carrying our products.
Cost of Revenue
Cost of
revenue, which consists of direct costs of materials, direct labor,
third party subcontractor services, and other overhead costs
decreased approximately $2,593,000, or 25.7%, to approximately
$7,478,000, or 44.8% of revenue, for the year ended December 31,
2020, as compared to approximately $10,071,000, or 44.3% of
revenue, for the year ended December 31, 2019. This cost, as a percent of revenue, remained
relatively unchanged due to a favorable mix of higher margin sales
for both Charlie’s and Don Polly, but was marginally offset
by a higher provision for obsolescence.
General and Administrative Expense
For the year ended
December 31, 2020, total general and administrative expense
decreased approximately $4,144,000 to approximately $10,873,000, or
65.1% of revenue, as compared to approximately $15,017,000, or
66.0% of revenue, for the year ended December 31, 2019. This
decrease is comprised of reductions of approximately $3,906,000 of
non-cash stock-based compensation, employee bonuses and certain other transaction
related costs, as well as $946,000 of other general and
administrative expenses. The reduction in transaction related costs
includes $2,437,000 of employee bonuses, $1,063,000 in non-cash,
stock-based compensation, and $406,000 of other costs, including
legal and consulting fees, most of which were linked to the Share
Exchange in April 2019. Other fluctuations in general and
administrative costs netted out to a reduction of approximately
$946,000, largely consisting of a reduced provision for bad debt,
product testing fees and general travel expenses. The decrease was
offset by an increase of approximately $708,000 in salary costs,
primarily due to a higher average headcount year over year, as well
as the addition of salaries for our CEO and COO who, prior to the
Share Exchange, did not receive annual salaries from
Charlie’s.
During
the year ended December 31, 2020, we routinely evaluated our
business forecast on a quarterly basis, and periodically made
necessary changes in order to align our cost structure with revenue
production. Mid-year headcount adjustments across several
departments and intermittent salary reductions for highly
compensated employees accounted for the majority of intentional
cost cuts. We believe with our current staff, business processes
and system infrastructure, we can achieve our operational plan in
the coming quarters as well as retain the ability to swiftly adjust
our cost structure to accommodate any further changes in Company
performance.
Sales and Marketing Expense
For
the year ended December 31, 2020, total sales and marketing expense
decreased approximately $581,000, or 25.1%, to approximately
$1,733,000 as compared to approximately $2,314,000 for the year
ended December 31, 2019, which was primarily due to lower
commissions paid for reduced sales, curtailed spending on key
marketing programs, and a decrease in trade show travel due to
uncertainty in the global economy resulting from effects of
COVID-19.
Research and Development Expense
For
the year ended December 31, 2020, total research and development
expense increased approximately $2,276,000, or 206.5%, to
approximately $3,378,000 as compared to approximately $1,102,000
for the year ended December 31, 2019, which was primarily due to
costs incurred with the PMTA registration process.
Loss from Operations
We
had a net loss from operations of approximately $6,770,000 for the
year ended December 31, 2020 as compared to net loss from
operations of approximately $5,764,000 for the year ended December
31, 2019. Net loss is determined by adjusting income from
operations by the following items:
●
Change
in fair value of derivative liabilities. For the year ended
December 31, 2020 and 2019, the (loss)/gain in fair value of
derivative liabilities was ($300,000) and $3,618,000, respectively.
The derivative liability is associated with the issuance of the
Investor Warrants and the Placement Agent Warrants in connection
with the Share Exchange. The loss for the year ended December 31,
2020 reflects the effect of the increase in stock price as of
December 31, 2020 compared to December 31, 2019. We had warrants to
purchase approximately 4,034 million shares of common stock
outstanding as of December 31, 2020.
●
Interest
Expense. For the year ended
December 31, 2020 and 2019, we recorded interest expense related to
notes payable of $134,000 and $0, respectively.
●
Other
Income. For the year ended
December 31, 2020 and 2019, we recorded other income related to
interest and sublease income of $17,000 and $0,
respectively.
Net Loss
For
the years ended December 31, 2020 and 2019, we had a net loss of
$7,187,000 and $2,146,000, respectively.
Effects of Inflation
Inflation
has not had a material impact on our business.
Liquidity and Capital Resources
As
of December 31, 2020, we had negative working capital of
approximately $6,020,000, which consisted of current assets of
approximately $4,723,000 and current liabilities of approximately
$10,743,000. This compares to negative working capital of
approximately $1,566,000 at December 31, 2019. The current
liabilities, as presented in the condensed consolidated balance
sheet at December 31, 2020 included elsewhere in this Report
primarily include approximately $2,525,000 of accounts payable and
accrued expenses, approximately $268,000 of deferred revenue
associated with product shipped but not yet received by customers,
approximately $456,000 of lease liabilities, notes payable of
$1,400,000, dividends payable of $1,650,000 and $4,444,000 of
derivative liability associated with the Investor and Placement
Agent Warrants (the derivative liability of $4,444,000 is included
in determining the negative working capital of $6,020,000 but is
not expected to use any cash to ultimately satisfy the
liability).
Our
cash and cash equivalents balance at December 31, 2020 was
approximately $1,422,000.
For the year ended December 31, 2020 we used cash
from operations of $3,273,000, as compared to $2,036,000 for the year ended December 31, 2019.
This increase in the cash used by operations is due primarily to a
net loss in 2020 of $7,187,000 compared to net loss of $2,146,000
in 2019 along with an increase in accounts
receivable.
For the year ended December 31, 2020 we used cash
for investment activities of $169,000 as compared to
$571,000 for the year ended December
31, 2019. For the year ended December 31, 2020, the cash used for
investment activities was primarily for the ongoing development and
configuration of enterprise resource planning software. For the
year ended December 31, 2019, the cash used for investment
activities was 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, 2020 we generated cash from financing
activities of $2,416,000 as compared to generated cash from
financing activities of $4,751,000 for the year ended December 31,
2019. In the 2020 period, we generated cash from financing
activities from the Red Beard Note, PPP Loans and EID Loan (as
defined in Note 8 of Item 1, Part 1 of this Report). In the 2019
period, we generated cash from financing activities from the
Charlie’s Financing, which was offset by Member distributions
(as defined in Note 1 of Item 1, Part 1 of this Report) to the
former Members of Charlie’s. The Charlie’s Member
distributions were all prior to or part of the Share Exchange and
no further distributions will be made as Charlie’s is now a
wholly-owned subsidiary of the Company.
Going Concern Uncertainty Regarding the Legal and Regulatory
Environment, Liquidity and Management’s plan of
operation
Our
financial statements have been prepared assuming that the Company
will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal
course of business. The Company operates in a rapidly changing
legal and regulatory environment; new laws and regulations or
changes to existing laws and regulations could significantly limit
the Company’s ability to sell its products, and/or result in
additional costs. Additionally, the Company is required to apply
for FDA approval to continue selling and marketing its products
used for the vaporization of nicotine in the United States. There
is significant cost associated with the application process and
there can be no assurance the FDA will approve the application(s).
In addition, the recent outbreak of 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, 2020, the Company has incurred losses from
operations of $6,770,000 and a consolidated net loss of
approximately $7,187,000 and the Company has negative
stockholders’ equity of $5,996,000. These factors raise
substantial doubt about the Company’s ability to continue as
a going concern. The financial statements do not include any
adjustments to the carrying amount and classification of recorded
assets and liabilities should the Company be unable to continue
operations.
Our
plans and growth depend on our ability to increase revenues and
continue our business development efforts, including costs beyond
the approximately $4,400,000 already expensed to complete our PMTA
registration process. We currently do not anticipate that our
current cash position will be sufficient to meet our working
capital requirements, to continue our sales and marketing efforts
and complete the PMTA registration process. We are currently
seeking term debt or other sources of financing in order to ensure
that we have sufficient cash to operate for the next 12 months
(refer to Note 14 – Subsequent Events). If in the future our
plans or assumptions change or prove to be inaccurate, or there is
a significant change in the regulatory environment or the recent
outbreak of COVID-19 continues to impact the global economy, we
will need to raise additional funds through public or private debt
or equity offerings, financings, corporate collaborations, or other
means. There can be no assurance that such financing will be
available on acceptable terms, or at all, and there can be no
assurance that any such arrangement, if required or otherwise
sought, would be available on terms deemed to be commercially
acceptable and in our best interests.
Off-Balance Sheet Arrangements
The
Company has no off-balance sheet arrangements other than operating
lease commitments.
Critical Accounting Policies
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, 2020, and 2019, the allowance for bad debt totaled
$355,000 and $639,000, 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, 2020, and 2019, the reserve for excess and
obsolete inventories totaled $179,000 and $83,000,
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 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 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.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM 8. FINANCIAL STATEMENTS
The
audited consolidated financial statements of Charlie’s
Holdings, Inc., including the notes thereto, together with the
report thereon of Baker Tilly LLP, our independent registered
public accounting firm, are included in this Annual Report on Form
10-K as a separate section beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and
Procedures.
Our management, with the participation of our
Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures pursuant to
Rule 13a-15 under the Securities Exchange Act of 1934, as amended
(the “Exchange
Act”) as of the end of
the period covered by this Annual Report on Form 10-K. In designing
and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives. In addition, the design
of disclosure controls and procedures must reflect the fact that
there are resource constraints and that management is required to
apply its judgment in evaluating the benefits of possible controls
and procedures relative to their costs.
Based
on our evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of December 31, 2020, our
disclosure controls and procedures are designed at a reasonable
assurance level and are effective to provide reasonable assurance
that information we are required to disclose in reports that we
file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and that such
information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required
disclosure.
(b) Management’s
Annual Report on Internal Control over Financial
Reporting.
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 our principal 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, our
principal
executive and financial officer concluded that our internal control over financial
reporting was effective as of December 31,
2020.
As of December 31, 2019 we determined that we
lacked segregation of duties, stemming from our early stage status
and limited capital resources to hire additional financial and
administrative staff. We lacked sufficient internal controls
(including IT and general controls) that encompass our Company as a
whole with respect to entity and transactions level controls in
order to ensure complete documentation of complex and non-routine
transactions and adequate financial reporting. During 2020, we hired additional qualified
accounting department employees, strengthened IT and general
controls, and began the process of preparing the required Sarbanes
Oxley 404A internal testing.
This
Annual 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.
During the year ended December 31, 2020, the
Company took extensive measures towards remediating the material
weaknesses disclosed 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, additional hiring in the accounting department to ensure
appropriate segregation of duties, strengthening its controls over
IT reporting and management, and the ongoing refinement of our
enterprise resource planning system. We determined that
the design of internal control over financial statement processes
is effective in relation to identified inherent risks for all
significant processes, based on review of controls in whole, and
testing of each control individually for effectiveness in meeting
control objectives. As a result, it has been determined that there
were no material weaknesses of internal control over financial
reporting for the year ended December 31, 2020.
ITEM 9B. OTHER
INFORMATION
None.
PART III
ITEM 10. 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
|
|
Brandon Stump (1)
|
|
35
|
|
Chair and Chief Executive Officer (Principal Executive
Officer)
|
|
Scot Cohen
|
|
51
|
|
Director
|
|
Jeffrey Fox (2)
|
|
57
|
|
Director
|
|
Keith Stump (3)
|
|
59
|
|
Director
|
|
Ryan Stump (4)
|
|
31
|
|
Chief Operating Officer and Director
|
|
David Allen (5)
|
|
66
|
|
Chief Financial Officer and Secretary (Principal Financial
Officer)
|
|
Adam Mirkovich (6)
|
|
35
|
|
Chief Information Officer
|
|
(1)
|
Mr. Stump was appointed to serve as a director and the
Company’s Chief Executive Officer on April 26, 2019, in
connection with the Share Exchange, effective immediately following
Mr. Van Boerum’s resignation as Principal Executive Officer.
The Company’s Board appointed Brandon Stump as Chair on May
8, 2019.
|
|
|
|
|
(2)
|
Mr. Fox was appointed to the Company’s Board on July 16,
2019.
|
|
|
|
|
(3)
|
Mr. Stump was appointed to the Company's Board on June 7,
2019.
|
|
|
|
|
(4)
|
Mr. Stump was appointed to serve as a director and the
Company’s Chief Operating Officer on April 26, 2019, in
connection with the Share Exchange.
|
|
|
|
|
(5)
|
Mr. Allen was appointed to serve as the Company’s Chief
Financial Officer on April 26, 2019, in connection with the Share
Exchange, effective immediately following Mr. Van Boerum’s
resignation as Principal Financial Officer.
|
|
|
|
|
(6)
|
Mr. Mirkovich was appointed to serve as the Company’s Chief
Information Officer on May 20, 2019.
|
Brandon
Stump and Ryan Stump are brothers, and Keith Stump is their father.
Other than with the respect to the Stumps, there are no familial
relationships between any of the Company’s executive officers
and directors listed above.
The
following biographical information regarding the foregoing
directors and officers of the Company is presented
below:
Brandon Stump, Chair and
Chief Executive Officer. Mr.
Stump was appointed as a director and Chief Executive Officer of
the Company on April 26, 2019 in connection with the Share
Exchange. The Board appointed Mr. Stump as Chair on May 8, 2019.
Mr. Stump is a co-founder of Charlie’s, and has served as the
Chief Executive Officer of Charlie’s since its inception in
2014. Prior to co-founding Charlie’s, Mr. Stump
co-founded his first business, the Ohio House in 2011, with his
brother Ryan Stump. Since then, he has gone on to co-found both The
Chadwick House and Buckeye Recovery Network, both established in
2017, as well as The Mend California, established in 2018. These
programs provide a continuum of care and services to men and women
from around the country in promoting emotional, physical and
spiritual development.
As
a co-founder of Charlie’s, the Board of Directors believes
that Mr. Stump’s substantial entrepreneurial, marketing,
sales and industry experience provide the Board with valuable
expertise that makes him a significant contributor to the
Company’s continued growth in revenue and entering into new
markets for its products.
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, 2017. 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.
Keith Stump,
Director. Mr. Stump has over 35 years of sales and
management experience. He joined Charlie’s in January 2018 as
a Strategic Advisor, where he has predominantly focused on sales,
marketing and scaling the business, including through
organizational alignments, process improvement,
leadership/management training and development. Prior to joining
Charlie’s, Mr. Stump served as a partner and Vice President
of Sales in Blue Technologies, Inc., an office technology and
Managed IT Service provider headquartered in Cleveland, Ohio, which
he co-founded in 1995. While at Blue Technologies, Inc., Mr. Stump
was responsible for the sales performance of the company’s
five divisions, along with operational oversight. His duties
included P&L responsibility for all product divisions,
leadership training and development, new product and service
offerings, enterprise account selling, amongst other duties. Mr.
Stump was instrumental in helping Blue Technologies, Inc. become
one of the Top 10 Konica Minolta providers in the country, as well
as one of the Top 75 Office Technologies Dealers in the United
States. Mr. Stump serves on several not-for-profit boards, which
serve those in recovery from addiction and developmental
disabilities.
The
Board of Directors believes that Mr. Stump’s sales,
marketing, management experience and industry experience, as well
as entrepreneurial experience, is an asset to the Board as it
manages the Company’s strategic objectives.
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 Duquesne University
The
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.
David Allen, Chief
Financial Officer and Secretary. Mr. Allen was appointed as the
Company’s Chief Financial Officer on April 26, 2019, upon
consummation of the Share Exchange. Mr. Allen brings over 22 years
of experience as a Chief Financial Officer of public companies.
From September 2018 to May 2019, Mr. Allen served as Chief
Financial Officer of Iconic Brands, Inc. (OTCQB: ICNB). Prior to
that, from December 2014 to January 2018, Mr. Allen served as the
Chief Financial Officer of WPCS International, Inc., a design-build
engineering firm focused on the deployment of wireless networks and
related services. WPCS International was listed on Nasdaq, and Mr.
Allen oversaw its financial reporting obligations and SEC
compliance. From 2004 to 2017, Mr. Allen served as Chief Financial
Officer of Bailey’s Express, Inc., a privately held trucking
corporation, which filed for Chapter 11 bankruptcy in July 2017; he
currently serves as the Chapter 11 Plan Administrator for the
bankruptcy case. From June 2006 to June 2013, Mr. Allen served as
the Chief Financial Officer and Executive Vice President of
Administration at Converted Organics, Inc., a company organized to
convert food waste into organic fertilizer. At Converted Organics,
he was responsible for SEC reporting, audit, insurance and taxes.
In June 2019, Mr. Allen was appointed to the Board of Directors and
serves as the Audit Committee Chairman of MariMed, Inc. (OTC:
MRMD). Mr. Allen is currently an Assistant Professor of Accounting
at Southern Connecticut State University, a position he has held
since 2017, and for the 12 years prior to that he was an Adjunct
Professor of Accounting at SCSU and Western Connecticut State
University. Mr. Allen is a licensed CPA and holds a
Bachelor’s Degree in Accounting and a Master’s Degree
in Taxation from Bentley College.
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.
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 each of our officers and directors failed to timely
file at least one report due under Section 16(a) during the year
ended December 31, 2020.
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’s 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.
Upon
consummation of the Share Exchange, Mr. Brandon Stump was appointed
as a director and the Company’s Principal Executive Officer,
and shortly thereafter was appointed by the Board to serve as
Chair. The Board felt that this was in the best interest of the
Company and its stockholders due to Mr. Stump’s knowledge and
experience in the vapor market as well as the fact that he is the
co-founder and Chief Executive Officer of Charlie’s. As of
December 31, 2020, Mr. Stump continues to serve both as the
Company’s Chief Executive Officer and as Chair of the
Board.
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, 2020. 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 five meetings
and acted by unanimous written consent three times
during the year ended December 31, 2020. Each director attended at
least 75% of Board meetings during the year ended December 31,
2020. 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, 2020, 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 www.charliesholdings.com
under “Investors/Corporate
Governance”.
Audit Committee
As of
December 31, 2020, the Audit Committee consisted of Messrs. Cohen
(Chair) and Fox. The Audit Committee
met four times during the year ended December 31,
2020.
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, the
full Board currently administers the duties that are typically
allocated to the compensation committee, and will likely do so for
the foreseeable future.
Nominating and Corporate Governance Committee
As
noted above, the Board currently does not have an active nominating
and corporate governance committee. Instead, the 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. EXECUTIVE
COMPENSATION
Summary Compensation Table
The
following table sets forth the compensation paid to the following
persons for our fiscal years ended December 31, 2020 and
2019:
|
(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, 2020 and 2019 who had total compensation exceeding $100,000
(together, with the principal executive officer, the
“Named Executive
Officers”);
and
|
|
|
|
|
(c)
|
any additional individuals who would have been considered Named
Executive Officers, but for the fact that they were not serving in
such capacity at the end of our most recently completed fiscal
year.
|
|
Name and Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Option Awards
($) (1)
|
Total
($)
|
|
|
|
|
|
|
|
|
Brandon Stump (2)
|
2020
|
$381,855
|
$–
|
$–
|
$381,855
|
|
Chief Executive Officer and Chair of the Board
|
2019
|
$333,330
|
$497,000
|
$–
|
$830,330
|
|
David Allen (3)
|
2020
|
$122,115
|
$20,000
|
$–
|
$142,115
|
|
Chief Financial Officer
|
2019
|
$93,750
|
$–
|
$43,500
|
$137,250
|
|
Ryan Stump (4)
|
2020
|
$381,817
|
$–
|
$–
|
$381,817
|
|
Chief Operating Officer and Director
|
2019
|
$333,330
|
$497,000
|
$–
|
$830,330
|
|
Former Named Executive Officers
|
|
|
|
|
|
|
Robert
Van Boerum (5)
|
2020
|
$24,525
|
$–
|
$–
|
$24,525
|
|
Consultant
|
2019
|
$67,500
|
$–
|
$–
|
$67,500
|
|
(1)
|
The amounts in the “Option Awards” columns do not
represent any cash payments actually received by the individuals
listed in the table with respect to any of such stock options
awarded to them during the year ended December 31, 2020.
Rather, the amounts represent the aggregate grant date fair value
of options awards to the individuals listed in the table during the
years ended December 31, 2019 and 2020, computed in accordance with
the Financial Accounting Standards Board’s Accounting
Standards Codification Topic 718, Compensation – Stock
Compensation.
|
|
|
|
|
(2)
|
Mr. Stump was appointed to serve as the Company’s Chief
Executive Officer and as a director on April 26, 2019, in
connection with the Share Exchange, effective immediately following
Mr. Van Boerum’s resignation as Principal Executive
Officer.
|
|
|
|
|
(3)
|
Mr. Allen was appointed to serve as the Company’s Chief
Financial Officer on April 26, 2019, in connection with the Share
Exchange, effective immediately following Mr. Van Boerum’s
resignation as Principal Financial Officer.
|
|
|
|
|
(4)
|
Mr. Stump was appointed to serve as the Company’s Chief
Operating Officer and as a director on April 26, 2019, in
connection with the Share Exchange.
|
|
|
|
|
(5)
|
Mr. Van Boerum was appointed to serve as the Company’s
Principal Executive Officer and Principal Financial Officer
effective May 15, 2018, and resigned from such positions on April
26, 2019, effective upon consummation of the Share
Exchange.
|
Outstanding Equity Awards at Fiscal Year-End 2020
The
following table sets forth all equity awards held by our Named
Executive Officers at December 31, 2020:
|
Name
|
Number of Securities Underlying Unexercised Options and
Warrants
(#) Exercisable
|
Number of Securities
Underlying Unexercised Options and Warrants
(#) Unexercisable
|
Exercise
Price
($)
|
Expiration
Date
|
|
Brandon
Stump
|
–
|
–
|
–
|
–
|
|
David
Allen
|
|
|
|
|
|
Ryan
Stump
|
–
|
–
|
–
|
–
|
|
Former Named Executive Officers
|
|
|
|
|
|
Robert
VanBoreum
|
|
|
|
|
Executive Compensation Arrangements
Employment Agreements
Brandon
Stump. 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 Company may terminate the B. Stump Employment
Agreement in the event of Mr. Stump’s death or disability, or
for Cause, as defined in the B. Stump Employment Agreement;
provided,
however, that at no time may
the Company terminate him without Cause. Mr. Stump may terminate
the B. 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 B. 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 B. 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 his employment is
terminated by the Company without Cause or Mr. Stump terminates it
for Good Reason, as defined in the B. Stump Employment Agreement,
then he 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 B. 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%.
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 both Brandon Stump and Ryan Stump, the Company’s Chief
Executive Officer and Chief Operating Officer, respectively
(together the “Amended
Employment Agreements”) 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 accrual 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.
Director Compensation
The
Company’s Director Compensation Plan currently provides that
non-employee directors receive (a) a $60,000 annual retainer,
payable in equal monthly installments in cash and (b) reimbursement
for expenses related to Board meeting attendance and committee
participation. In addition, directors receive a one-time grant of
an option to purchase 25 million shares of the Company’s
common stock at an exercise price equal to the closing price of the
Company’s common stock on the date of issuance, as reported
on the OTC Pink Market. Directors that were also employees of the
Company did not receive additional compensation for serving on the
Board.
The
following table discloses certain information concerning the
compensation of the Company’s non-employee directors for the
year ended December 31, 2020:
|
Name
|
Fees Earned or
Paid in Cash
($)
|
Option
Awards
($) (1)
|
Total
($)
|
|
Scot
Cohen (2)
|
$–
|
$–
|
$–
|
|
Jeff
Fox
|
$60,000
|
$–
|
$60,000
|
|
(1)
|
The amounts in the “Option Awards” columns do not
represent any cash payments actually received by the individuals
listed in the table with respect to any of such stock options
awarded to them during the year ended December 31, 2020.
Rather, the amounts represent the aggregate grant date fair value
of options awards to the individuals listed in the table during the
year ended December 31, 2020, computed in accordance with the
Financial Accounting Standards Board’s Accounting Standards
Codification Topic 718, Compensation – Stock
Compensation.
|
|
|
|
|
(2)
|
Mr. Cohen did not receive any compensation from the Company in
connection with his service on the Company’s Board of
Directors during the year ended December, 31 2020.
|
|
|
|
|
|
|
Outstanding Equity Awards as of December 31, 2020
The
following table sets forth all equity awards held by our Named
Executive Officers at December 31, 2020:
|
Name
|
Number of Securities Underlying Unexercised Options and
Warrants
(#) Exercisable
|
Number of Securities
Underlying Unexercised Options and Warrants
(#) Unexercisable
|
Exercise
Price
($)
|
Expiration
Date
|
|
Brandon
Stump
|
–
|
–
|
–
|
–
|
|
David
Allen
|
5,000,000
|
–10,000,000
|
$–0.0044313
|
–10/28/2029
|
|
Ryan
Stump
|
–
|
–
|
–
|
–
|
|
Former Named Executive Officers
|
|
|
|
|
|
Robert
VanBoreum
|
3,172,294
|
3,172,294
|
$0.02
|
05/20/2024
|
Equity Compensation Plan Information
The
following table includes information as of December 31, 2020 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
|
750,293,786
|
$0.0044313
|
367,754,205
|
|
|
|
|
|
|
Equity
compensation plans not approved by stockholders
|
–
|
$–
|
–
|
|
|
|
|
|
|
Total
|
750,293,786
|
$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 20.0 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 65.0 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 34,652,903 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, 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, 2020, approximately 56.6 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.
As of
December 31, 2020, there were a total of 693,666,666 stock options
outstanding pursuant to the 2019 Plan, 300,333,336 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, 2020.
ITEM 12. SECURITY
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
stock.
|
Percent ownership is calculated based on
190,690 shares of Series A
Preferred and
19,638,493,279 shares common
stock outstanding as of March
23, 2021.
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
|
2.0%
|
|
Keith Stump
|
|
|
|
Director
|
3,000
|
1.6%
|
|
Total Officers and Directors
|
6,750
|
3.5%
|
|
Greater Than 5% Stockholders
|
|
|
|
Red Beard Holdings,
LLC (2)
|
|
|
|
17595
Harvard Avenue, Suite C511
|
|
|
|
Irvine,
California 92614
|
33,750
|
17.7%
|
|
Iroquois Capital Management,
LLC (3)
|
|
|
|
125
Park Avenue, 25th Floor
|
|
|
|
New
York, New York 10017
|
32,813
|
17.2%
|
|
Hudson Bay Capital Management,
LP (4)
|
|
|
|
777
Third Avenue, 30th Floor
|
|
|
|
New
York, New York 10017
|
10,450
|
5.5%
|
|
SDS Capital Partners II,
LLC (5)
|
|
|
|
500
Summer Street, Suite 405
|
|
|
|
Stamford,
Connecticut 06901
|
11,250
|
5.9%
|
|
Altium Growth Fund,
LP (6)
|
|
|
|
551
Fifth Avenue, 19th Floor
|
|
|
|
New
York, New York 10176
|
11,025
|
5.8%
|
|
(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 March
23, 2021. Mr. Smith is a
manager of Red Beard, and has dispositive power and voting power
over the securities reported herein.
|
|
|
|
|
(3)
|
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 May 24, 2019. Mr. Abbe shares
authority and responsibility for the investments made on behalf of
Iroquois Master Fund with Ms. Kimberly Page, each of whom is a
director of the Iroquois Master Fund. As such, Mr. Abbe and Ms.
Page may each be deemed to be the beneficial owner of the shares of
Series A Preferred reported herein.
|
|
|
|
|
(4)
|
Based on Company records as of March 23, 2021. Sander Gerber,
Authorized Signor for Hudson Bay Capital Management, LP may be
deemed to be the beneficial owner of all shares of common stock
underlying the common stock held by Hudson Bay Capital Management,
LP.
|
|
|
|
|
(5)
|
Based on Company records as of March 23, 2021. Steve Derby,
Managing Member of SDS Capital Partners II, LLC may be deemed to be
the beneficial owner of all shares of common stock underlying the
common stock held by SDS Capital Partners II, LLC.
|
|
|
|
|
(6)
|
Based on Company records as of March
23, 2021. Jacob Gottlieb, Chief
Executive Officer of Altium Growth Fund, LP may be deemed to be the
beneficial owner of all shares of common stock underlying the
common stock held by Altium Growth Fund, LP.
|
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
|
6,381,616,617
|
-
|
-
|
-
|
6,381,616,617
|
32.5%
|
|
Ryan Stump
|
|
|
|
|
|
|
|
Chief Operating Officer and Director
|
2,734,978,608
|
-
|
-
|
-
|
2,734,978,608
|
13.9%
|
|
David Allen
|
|
|
|
|
|
|
|
Chief Financial Officer
|
30,000,000
|
-
|
-
|
5,000,000
|
35,000,000
|
0.2%
|
|
Adam Mirkovich
|
|
|
|
|
|
|
|
Chief Information Officer
|
810,000
|
-
|
-
|
3,333,333
|
4,143,333
|
0.0%
|
|
Scot Cohen (4)
|
|
|
|
|
|
|
|
Director
|
202,632,203
|
84,625,280
|
56,416,355
|
7,244,826
|
350,918,664
|
1.8%
|
|
Keith Stump
|
|
|
|
|
|
|
|
Director
|
213,086,946
|
67,700,224
|
45,133,084
|
16,666,667
|
342,586,921
|
1.7%
|
|
Executive Officers and
Directors, as a group (6
persons)
|
9,563,124,374
|
152,325,504
|
101,549,439
|
32,244,826
|
9,849,244,143
|
49.4%
|
|
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
|
16.7%
|
|
Red Beard Holdings, LLC (6)
|
|
|
|
|
|
|
|
17595
Harvard Avenue, Suite C511
|
|
|
|
|
|
|
|
Irvine,
California 92614
|
4,012,825,315
|
761,627,520
|
513,130,526
|
-
|
5,287,583,361
|
25.3%
|
|
Iroquois Capital Management, LLC (7)
|
|
|
|
|
|
|
|
125
Park Avenue, 25th Floor
|
|
|
|
|
|
|
|
New
York, New York 10017
|
514,000,002
|
740,471,200
|
493,643,101
|
-
|
1,748,114,303
|
8.4%
|
|
(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 the
Company.
The Series A COD also entitles each share of Series A
Preferred to vote, on an as converted basis, along with the common
stock; provided,
however, that the Series A
Preferred may not be voted to the extent that the holder and its
affiliates would control more than 9.99% of the Company’s
voting power (the “Series A Voting
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 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 Holdings, LLC
(“Red
Beard”), based on Company
records and ownership information from Amendment No. 5 to Schedule
13D filed by Vincent C. Smith on April 25, 2016. Mr. Smith is
manager of LB 2 and Red Beard. As such, Mr. Smith has dispositive
power and voting power over, and may be deemed to be the beneficial
owner of the securities held by each of these
entities.
|
|
(6)
|
Based on Company records and ownership information from Amendment
No. 5 to Schedule 13D filed by Vincent C. Smith on April 25,
2016. Mr. Smith is a manager of Red Beard, and has dispositive
power and voting power over the securities reported
herein.
|
|
(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 May 24, 2019. Mr. Abbe shares
authority and responsibility for the investments made on behalf of
Iroquois Master Fund with Ms. Kimberly Page, each of whom is a
director of the Iroquois Master Fund. As such, Mr. Abbe and Ms.
Page may each be deemed to be the beneficial owner of all shares of
common stock underlying the common stock held by Iroquois Master
Fund.
|
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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-month
basis, was then formalized on November 1, 2019 to have a term of
five years and a base rent rate of $22,940 per month, which rate is
subject to annual adjustments based on the consumer price index, as
may be mutually agreed upon by the parties to the Lease. The terms
of the Lease were negotiated and approved by the independent
members of the Board, and executed by Mr. Allen, the
Company’s Chief Financial Officer after reviewing a detailed
analysis of comparable properties and rent rates compiled by an
independent, third-party consultant.
Director
and Executive Officer Compensation
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 2020 Fiscal Year End”.
Independent Directors
The
Board has determined that Messrs. Cohen and Fox 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. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
On November 1, 2020, the Company was notified that
the audit practice of Squar Milner, an independent register public
accounting firm, was combined with Baker Tilly US, LLP
(“Baker
Tilly”) in a transaction
pursuant to which Squar Milner combined its operations with Baker
Tilly and certain of the professional staff and partners of Squar
Milner joined Baker Tilly either as employees or partners of Baker
Tilly. The following table presents approximate aggregate fees and
other expenses for professional services rendered by Baker Tilly,
our independent registered public accounting firm, for the audit of
the Company’s annual financial statements for the years ended
December 31, 2020 and 2019 and fees and other expenses for other
services rendered during those periods.
|
|
2020
|
2019
|
|
|
|
|
|
Audit Fees (1)
|
$140,000
|
$165,500
|
|
Audit-Related Fees (2)
|
$7,500
|
$-
|
|
Tax Fees (3)
|
$-
|
$-
|
|
All Other Fees
|
$-
|
$-
|
|
Total
|
$147,500
|
$165,500
|
|
(1)
|
Audit services in 2020 and 2019 consisted of the audit of our
annual consolidated financial statements, and other services
related to filings and filed by us and our subsidiaries, and other
pertinent matters.
|
|
|
|
|
(2)
|
Audit-related fees consist of fees billed for services that are
normally provided by our independent registered public accountants
in connection with registration statements and other regulatory
filings that are reasonably related to the performance of the audit
or review of our consolidated financial statements but are not
reported under “Audit Fees.”
|
|
|
|
|
(3)
|
For permissible professional services related to income tax return
preparation and compliance.
|
|
|
|
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
|
Exhibit
No
|
|
Description
|
|
|
Agreement and Plan of Merger among Bazi International, Inc., Bazi
Acquisition Sub, Inc., GT Beverage Company, Inc. and MKM Capital
Advisors, LLC dated as of June 7, 2012, incorporated herein by
reference from Exhibit 2.1 to the Current Report on Form 8-K filed
on June 21, 2012.
|
|
|
|
Articles of Incorporation, incorporated herein by reference from
Exhibit 3.01 to Form SB-2 filed on February 27, 2001.
|
|
|
|
Certification of Amendment to the Articles of Incorporation
incorporated herein by reference from Exhibit 3.1.1 to
Form 10-QSB filed on November 14, 2003.
|
|
|
|
Amended and Restated Articles of Incorporation of Charlie’s
Holdings, Inc., incorporated by reference from Exhibit 3.1 to the
Current Report on Form 8-K filed July 2, 2019.
|
|
|
|
Amended and Restated By-laws, incorporated herein by reference from
Exhibit 3.2 to Form 10-KSB filed on March 3,
2005.
|
|
|
|
Amendment to the Amended and Restated Bylaws of Bazi International,
Inc., incorporated herein by reference from Exhibit 3.1 to the
Current Report on Form 8-K filed on October 17, 2012.
|
|
|
|
Amended and Restated Articles of Incorporation incorporated herein
by reference from Exhibit 3.1 to the Current Report on Form 8-K
filed on August 2, 2010.
|
|
|
|
Certification of Amendment to the Article of Incorporation
incorporated herein by reference from Exhibit 3.1 to the Current
Report on Form 8-K on filed May 20, 2011.
|
|
|
|
Certificate of Amendment to the Articles of Incorporation,
incorporated herein by reference from Exhibit 3.1 to the Current
Report on Form 8-K filed on January 22, 2013.
|
|
|
|
Certificate of Amendment to the Articles of Incorporation of True
Drinks Holdings, Inc., dated February 6, 2014, incorporated
herein by reference from Exhibit 3.1 to the Current Report on Form
8-K filed on February 6, 2014.
|
|
|
|
Certificate of Amendment to the Articles of Incorporation of True
Drinks Holdings, Inc., dated June 10, 2015, incorporated
herein by reference from Exhibit 3.1 to the Current Report on Form
8-K filed on June 25, 2015.
|
|
|
|
Amended and Restated By-laws, incorporated herein by reference from
Exhibit 3.2 to the Quarterly Report on Form 10-Q filed on
August 13, 2015.
|
|
|
|
Certificate of Amendment to the Articles of Incorporation of True
Drinks Holding, Inc. dated December 30, 2015, incorporated herein
by reference from Exhibit 3.1 to the Current Report on Form 8-K,
filed on January 7, 2016.
|
|
|
|
Certificate of Amendment of the Articles of Incorporation of True
Drinks Holding, Inc. dated November 13, 2018, incorporated herein
by reference from Exhibit 3.1 to the Quarterly Report on Form 10-Q
filed on November 20, 2018.
|
|
|
|
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 Designation, Preferences, Rights and Limitations of
Series A Convertible Preferred Stock of Bazi International, Inc.,
incorporated herein by reference from Exhibit 4.2 to the Current
Report on Form 8-K filed on October 17, 2012.
|
|
|
|
Certificate of Withdrawal of the Series A Convertible Preferred
Stock of True Drinks Holdings, Inc., dated February 18,
2015, incorporated by reference from Exhibit 3.3 to the
Current Report on Form 8-K filed on February 23, 2015.
|
|
|
|
Certificate of Designation, Preferences, Rights, and Limitations of
Series B Convertible Preferred Stock of True Drinks Holdings, Inc.,
incorporated by reference from Exhibit 3.1 to the Current Report on
Form 8-K, filed November 26, 2013.
|
|
|
|
First Amended and Restated Certificate of Designation, Preferences,
Rights and Limitations of the Series B Convertible Preferred Stock
of True Drinks Holdings, Inc., dated February 18, 2015,
incorporated by reference from Exhibit 3.2 to the Current Report on
Form 8-K filed on February 23, 2015.
|
|
|
Certificate of Designation, Preferences, Rights and Limitations of
the Series C Convertible Preferred Stock of True Drinks Holdings,
Inc., dated February 18, 2015, incorporated by reference from
Exhibit 3.1 to the Current Report on Form 8-K filed on February 23,
2015.
|
|
|
|
First Amended and Restated Certificate of Designation, Preferences,
Rights and Limitations of the Series C Convertible Preferred Stock
of True Drinks Holdings, Inc., dated March 26, 2015, incorporated
by reference from Exhibit 4.1 to the Current Report on Form 8-K
filed on April 1, 2015.
|
|
|
Second Amended and Restated Certificate of Designation,
Preferences, Rights and Limitations of the Series B Convertible
Preferred Stock of True Drinks Holdings, Inc., dated August 12,
2015, incorporated herein by reference from Exhibit 3.1 to the
Current Report on Form 8-K filed August 18, 2015.
|
|
|
|
Amendment No. 1 to the Second Amended and Restated Certificate of
Designation, Preferences, Rights and Limitations of the Series C
Convertible Preferred Stock of True Drinks Holdings, Inc., dated
November 24, 2015, incorporated herein by reference from Exhibit
4.1 to the Current Report on Form 8-K filed December 1,
2015.
|
|
|
|
Third Amended and Restated Certificate of Designation, Preferences,
Rights and Limitations of the Series C Convertible Preferred Stock
of True Drinks Holdings, Inc., dated April 12, 2016, incorporated
herein by reference from Exhibit 4.1 to the Current Report on Form
8-K filed April 19, 2016.
|
|
|
|
Certificate of Designation, Preferences, Rights and Limitations of
the Series D Convertible Preferred Stock of True Drinks Holdings,
Inc., dated January 24, 2017, incorporated herein by reference from
Exhibit 4.1 to the Current Report on Form 8-K filed February 15,
2017.
|
|
|
|
Second Amended and Restated Certificate of Designation,
Preferences, Rights and Limitations of the Series B Convertible
Preferred stock, dated April 26, 2019, incorporated by reference to
Exhibit 3.1 to the Current Report on Form 8-K, filed April 30,
2019.
|
|
|
|
Fourth Amended and Restated Certificate of Designation,
Preferences, Rights and Limitations of the Series C Convertible
Preferred stock, dated April 26, 2019, incorporated by reference to
Exhibit 3.2 to the Current Report on Form 8-K, filed April 30,
2019.
|
|
|
|
First Amended and Restated Certificate of Designation, Preferences,
Rights and Limitations of the Series D Convertible Preferred stock,
dated April 26, 2019, incorporated by reference to Exhibit 3.3 to
the Current Report on Form 8-K, filed April 30, 2019.
|
|
|
|
Certificate of Withdrawal of the Series B Convertible Preferred
Stock, dated April 26, 2019, incorporated by reference to Exhibit
3.4 to the Current Report on Form 8-K, filed April 30,
2019.
|
|
|
|
Certificate of Withdrawal of the Series C Convertible Preferred
Stock, dated April 26, 2019, incorporated by reference to Exhibit
3.5 to the Current Report on Form 8-K, filed April 30,
2019.
|
|
|
|
Certificate of Withdrawal of the Series D Convertible Preferred
Stock, dated April 26, 2019, incorporated by reference to Exhibit
3.6 to the Current Report on Form 8-K, filed April 30,
2019.
|
|
|
|
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.
|
|
|
|
Employment agreement with Dan Kerker, incorporated by reference to
Exhibit 10.4 filed with the Annual Report on Form 10-K, filed April
5, 2013.
|
|
|
|
Employment agreement with Kevin Sherman, incorporated by reference
from Exhibit 10.3 filed with the Annual Report on Form 10-K, filed
March 31, 2014.
|
|
|
|
Form of Securities Purchase Agreement, incorporated by reference
from Exhibit 10.1 to the Current Report on Form 8-K, filed November
26, 2013.
|
|
|
|
2013 Stock Incentive Plan, incorporated by reference from Exhibit
10.17 to the Annual Report on Form 10-K, filed March 31,
2014.
|
|
|
|
Form of Securities Purchase Agreement, dated February 20,
2015, incorporated by reference from Exhibit 10.1 to the
Current Report on Form 8-K, filed February 23, 2015.
|
|
|
|
Form of Amendment No. 1 to Securities Purchase Agreement,
dated March 27, 2015, incorporated by reference from
Exhibit 10.1 to the Current Report on Form 8-K filed on April
1, 2015.
|
|
|
Form of Common Stock Purchase Warrant, dated February 20,
2015, incorporated by reference from Exhibit 10.2 to the
Current Report on Form 8-K, filed February 23, 2015.
|
|
|
|
Form of Registration Rights Agreement, dated February 20,
2015, incorporated by reference from Exhibit 10.3 to the
Current Report on Form 8-K, filed February 23, 2015.
|
|
|
|
Form of Indemnification Agreement, dated February 20,
2015, incorporated by reference from Exhibit 10.4 to the
Current Report on Form 8-K, filed February 23, 2015.
|
|
|
|
Form of Note Exchange Agreement, dated March 27, 2015, incorporated
by reference from Exhibit 10.2 to the Current Report on Form
8-K filed on April 1, 2015.
|
|
|
Form of Securities Purchase Agreement, dated August 13, 2015
incorporated by reference from Exhibit 10.1 to the Current Report
on Form 8-K, filed August 18, 2015.
|
|
|
|
Form of Common Stock Purchase Warrant, dated August 13, 2015
incorporated by reference from Exhibit 10.2 to the Current Report
on Form 8-K, filed August 18, 2015.
|
|
|
|
Form of Registration Rights Agreement, dated August 13, 2015,
incorporated by reference from Exhibit 10.3 to the Current Report
on Form 8-K, filed August 18, 2015.
|
|
|
|
Form of Senior Subordinated Secured Promissory Note, incorporated
by reference from Exhibit 10.1 to the Current Report on Form 8-K,
filed September 11, 2015.
|
|
|
|
Form of Warrant, incorporated by reference from Exhibit 10.2 to the
Current Report on Form 8-K, filed September 11, 2015.
|
|
|
|
Employment Agreement, by and between the Company and Robert Van
Boerum, dated September 9, 2015, incorporated by reference from
Exhibit 10.3 to the Current Report on Form 8-K, filed September 11,
2015.
|
|
|
|
Senior Secured Promissory Note, dated October 9, 2015, incorporated
by reference from Exhibit 10.2 to the Current Report on Form 8-K,
filed October 27, 2015.
|
|
|
|
Personal Guaranty Warrant, dated October 9, 2015, incorporated by
reference from Exhibit 10.3 to the Current Report on Form 8-K,
filed October 27, 2015.
|
|
|
|
Amendment No.1 to Securities Purchase Agreement, dated October 16,
2015, incorporated by reference from Exhibit 10.4 to the Current
Report on Form 8-K, filed October 27, 2015.
|
|
|
|
Amendment No. 1 to Registration Rights Agreement, dated October 16,
2015, incorporated by reference from Exhibit 10.5 to the Current
Report on Form 8-K, filed October 27, 2015.
|
|
|
|
Form of Securities Purchase Agreement, incorporated by reference
from Exhibit 10.1 to the Current Report on Form 8-K, filed December
1, 2015.
|
|
|
|
Form of Warrant, incorporated by reference from Exhibit 10.2 to the
Current Report on Form 8-K, filed December 1, 2015.
|
|
|
|
Form of Registration Rights Agreement, incorporated by reference
from Exhibit 10.3 to the Current Report on Form 8-K, filed December
1, 2015.
|
|
|
|
Employment Agreement, by and between True Drinks Holdings, Inc. and
Kevin Sherman, dated November 25, 2015, incorporated by reference
from Exhibit 10.4 to the Current Report on Form 8-K, filed December
1, 2015.
|
|
|
|
Form of Note Exchange Agreement, incorporated by reference to the
Annual Report on Form 10-K, filed March 31, 2017.
|
|
|
|
Form of Securities Purchase Agreement, incorporated by reference
from Exhibit 10.1 to the Current Report on Form 8-K, filed April
19, 2016.
|
|
|
|
Form of Warrant, incorporated by reference from Exhibit 10.2 to the
Current Report on Form 8-K, filed April 19, 2016.
|
|
|
|
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, incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K, filed on April 14, 2020).
|
|
|
|
Security Agreement by and among the Company and Red Beard Holdings,
LLC dated April 8, 2020, incorporated by reference to Exhibit 10.2
to the Current Report on Form 8-K, filed April 14,
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
|
|
|
|
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 True Drinks Holdings, Inc., incorporated by
reference from Exhibit 21.1 to the Annual Report on Form 10-K,
filed April 2, 2015.
|
|
|
|
Consent of Baker Tilly US, LLP, dated April 2, 2021, 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
|
|
XBRL Instance Document
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase
|
ITEM 16. FORM 10-K
SUMMARY
None.
SIGNATURES
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 2, 2021
|
|
CHARLIE’S HOLDINGS, INC.
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Brandon
Stump
|
|
|
|
|
Brandon Stump
Chief Executive Officer and Chair of the Board
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/
David Allen
|
|
|
|
|
David Allen
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
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/ Brandon
Stump
Brandon Stump
|
|
Chief Executive Officer and Director
(Principal Executive Officer)
|
|
April 2, 2021
|
|
|
|
|
|
|
|
/s/ David
Allen
David Allen
|
|
Chief Financial Officer and Secretary
(Principal Financial Officer and Principal Accounting
Officer)
|
|
April 2, 2021
|
|
|
|
|
|
|
|
/s/ Ryan
Stump
Ryan Stump
|
|
Chief Operating Officer and Director
|
|
April 2, 2021
|
|
|
|
|
|
|
|
/s/ Scot
Cohen
Scot Cohen
|
|
Director
|
|
April 2, 2021
|
|
|
|
|
|
|
|
/s/ Jeffrey
Fox
Jeffrey Fox
|
|
Director
|
|
April 2, 2021
|
|
|
|
|
|
|
|
/s/ Keith
Stump
Keith Stump
|
|
Director
|
|
April 2, 2021
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Stockholders and the Board of Directors
Charlie’s 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, 2020 and 2019, the related consolidated
statements of operations, stockholders' equity (deficit) and cash
flows for the years then ended, and the related notes to the
consolidated financial statements (collectively, the financial
statements). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 2020 and 2019, and the results of its
operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the
United States of America.
Going Concern Uncertainty
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
Note 1 to the financial statements, the Company has suffered
recurring losses from operations, negative operating cash flows,
and its total liabilities exceed its total assets. In addition, the
Company operates in a rapidly changing legal and regulatory
environment; new laws and regulations or changes to existing laws
and regulations could significantly limit the Company’s
ability to sell its products, and/or result in additional costs.
Additionally, the Company was required to apply for FDA approval to
continue selling and marketing its products used for the
vaporization of nicotine in the United States. There can be no
assurance the FDA will approve the application(s) and the Company
could incur additional cost in its attempt to gain FDA approval.
These matters raise substantial doubt about the Company’s
ability to continue as a going concern. Management’s plans in
regard to these matters are described in Note 1. The financial
statements do not include any adjustments that might result from
the outcome of these uncertainties.
Basis for Opinion
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the Company’s 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 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 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 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 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 financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
F-1
Critical Audit Matter
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
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 – Refer to Note 10 to
the Financial Statements
Critical Audit Matter Description
As described in Note 10 to the consolidated financial statements,
pursuant to the Share Exchange on April 26, 2019, the Company
issued warrants to purchase approximately 4 billion shares of
common stock, consisting of the Investor Warrants issued to the new
investors and the Direct Investors, and warrants issued to a
placement agent. The warrants have a 5-year term and an exercise
price of $0.0044313, subject to adjustment for anti-dilution
events. Due to the exercise features of these warrants, they are
not considered to be indexed to the Company’s own stock and
are therefore not afforded equity treatment in accordance with ASC
Topic 815, Derivatives and Hedging (“ASC 815”). ASC 815
requires the Company 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.
In accordance with ASC Topic 820, Fair Value Measurements and
Disclosures ("ASC 820"), the Company uses various inputs to measure
the outstanding warrants on a recurring basis to determine the fair
value of the liability. ASC 820 also establishes a hierarchy
categorizing inputs into three levels used to measure and disclose
fair value, giving highest priority to quoted prices available in
active markets and the lowest priority to unobservable inputs. The
Company has classified the derivative liabilities within the Level
3 category of the fair value hierarchy, and both observable and
unobservable inputs were used to determine the fair value of the
liability.
Auditing the Company's subsequent accounting for the derivative
liabilities was complex due to the 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 fair value of the warrants using a Monte Carlo
simulation model, which included several assumptions involving
estimates of the Company's equity volatility, market risk free
rate, and the probability of an anti-dilution triggering
event.
How We Addressed the Matter in Our Audit
We obtained an understanding and evaluated the design effectiveness
of controls over the Company's accounting for the derivative
liabilities. This process included obtaining an understanding of
management's review of the key assumptions and inputs utilized in
the estimate of the fair value of the warrants.
Our audit 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, and evaluating the completeness
and accuracy of the underlying data supporting the significant
assumptions and estimates. Specifically, when assessing the key
assumptions, we evaluated 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. In addition, we involved 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/ Baker Tilly US LLP
We have served as the Company's auditor since 2018.
Irvine, California
April 2, 2021
CHARLIE’S HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
|
|
December 31,
|
December 31,
|
|
|
2020
|
2019
|
|
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash
|
$1,422
|
$2,448
|
|
Accounts
receivable, net
|
1,258
|
918
|
|
Inventories,
net
|
1,593
|
1,516
|
|
Prepaid
expenses and other current assets
|
450
|
729
|
|
Total
current assets
|
4,723
|
5,611
|
|
|
|
|
|
Non-current
assets:
|
|
|
|
Property,
plant and equipment, net
|
531
|
543
|
|
Right-of-use
asset, net
|
1,200
|
1,623
|
|
Other
assets
|
71
|
71
|
|
Total
non-current assets
|
1,802
|
2,237
|
|
|
|
|
|
TOTAL ASSETS
|
$6,525
|
$7,848
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable and accrued expenses
|
$2,525
|
$2,516
|
|
Derivative
liability
|
4,444
|
4,144
|
|
Lease
liabilities
|
456
|
426
|
|
Notes
payable
|
1,400
|
-
|
|
Dividends
payable
|
1,650
|
-
|
|
Deferred
revenue
|
268
|
91
|
|
Total
current liabilities
|
10,743
|
7,177
|
|
|
|
|
|
Non-current
liabilities:
|
|
|
|
Notes
payable, net of current portion
|
1,016
|
-
|
|
Lease
liabilities, net of current portion
|
762
|
1,218
|
|
Total
non-current liabilities
|
1,778
|
1,218
|
|
|
|
|
|
Total
liabilities
|
12,521
|
8,395
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (see Note 14)
|
|
|
|
|
|
|
|
Stockholders'
equity (deficit):
|
|
|
|
Convertible
preferred stock ($0.001 par value); 1,800,000 shares
authorized
|
|
|
|
Series
A, 300,000 shares designated, 203,811 and 204,561 shares issued and
outstanding as of December 31, 2020 and 2019,
respectively
|
-
|
-
|
|
Series
B, 1.5 million shares designated, 0 shares issued and outstanding
as of December 31, 2020 and 2019, respectively
|
-
|
-
|
|
Common stock
($0.001 par value); 50 billion shares authorized; 18,991 million
shares and 18,974 million shares issued and outstanding as of
December 31, 2020 and 2019, respectively
|
18,991
|
18,974
|
|
Additional
paid-in capital
|
(15,324)
|
(17,045)
|
|
Accumulated
deficit
|
(9,663)
|
(2,476)
|
|
Total
stockholders' deficit
|
(5,996)
|
(547)
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
$6,525
|
$7,848
|
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)
|
|
For the years ended
|
|
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
Revenues:
|
|
|
|
Product
revenue, net
|
$16,692
|
$22,740
|
|
Total
revenues
|
16,692
|
22,740
|
|
Operating costs and expenses:
|
|
|
|
Cost
of goods sold - product revenue
|
7,478
|
10,071
|
|
General
and administrative
|
10,873
|
15,017
|
|
Sales
and marketing
|
1,733
|
2,314
|
|
Research
and development
|
3,378
|
1,102
|
|
Total
operating costs and expenses
|
23,462
|
28,504
|
|
Loss
from operations
|
(6,770)
|
(5,764)
|
|
Other income (expense):
|
|
|
|
Interest
expense
|
(134)
|
-
|
|
Change
in fair value of derivative liabilities
|
(300)
|
3,618
|
|
Other
income
|
17
|
-
|
|
Total
other income (expense)
|
(417)
|
3,618
|
|
Net loss
|
$(7,187)
|
$(2,146)
|
|
|
|
|
|
Net
loss per share, basic and diluted
|
$(0.00)
|
$(0.00)
|
|
Weighted
average number of common shares outstanding
|
18,984,487,000
|
10,648,129,000
|
The accompanying notes are an integral part of these consolidated
financial statements.
CHARLIE’S HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(DEFICIT)
(in
thousands)
|
|
Series A
|
Series B
|
|
|
Additional
|
|
Total
Stockholders'
|
||
|
|
Convertible Preferred Stock
|
Convertible Preferred Stock
|
Common Stock
|
Paid-in
|
Accumulated
|
Equity
|
|||
|
|
Shares
|
Par value
|
Shares
|
Par value
|
Shares
|
Par value
|
Capital
|
Deficit
|
(Deficit)
|
|
Balance at January 1, 2019
|
-
|
$-
|
1,396
|
$1
|
141,041
|
$141
|
$-
|
$649
|
$791
|
|
Effect
of reverse merger
|
-
|
-
|
-
|
-
|
2,377,530
|
2,378
|
(2,378)
|
-
|
-
|
|
Conversion
of Series 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)
|
|
Conversion
of Series A convertible preferred stock
|
-
|
-
|
-
|
-
|
16,925
|
17
|
(17)
|
-
|
-
|
|
Reclassification
of liability awards to equity
|
-
|
-
|
-
|
-
|
-
|
-
|
1,638
|
-
|
1,638
|
|
Accrue
dividends payable on Series A convertible preferred
stock
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,650)
|
-
|
(1,650)
|
|
Stock
compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
1,750
|
-
|
1,750
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(7,187)
|
(7,187)
|
|
Balance at December 31, 2020
|
204
|
$-
|
-
|
$-
|
18,990,753
|
$18,991
|
$(15,324)
|
$(9,663)
|
$(5,996)
|
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,
|
|
|
|
2020
|
2019
|
|
Cash Flows from Operating Activities:
|
|
|
|
Net loss
|
$(7,187)
|
$(2,146)
|
|
Reconciliation
of net loss to net cash used in operating activities:
|
|
|
|
Provision for bad
debt expense
|
60
|
573
|
|
Depreciation and
amortization
|
181
|
73
|
|
Change in fair
value of derivative liabilities
|
300
|
(3,618)
|
|
Amortization of
operating lease right-of-use asset
|
423
|
190
|
|
Stock based
compensation
|
3,072
|
3,819
|
|
Subtotal of
non-cash charges
|
4,036
|
1,037
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
(400)
|
(780)
|
|
Inventories
|
(77)
|
(858)
|
|
Prepaid
expenses and other current assets
|
279
|
(302)
|
|
Other
assets
|
-
|
(29)
|
|
Accounts
payable and accrued expenses
|
325
|
1,300
|
|
Deferred
revenue
|
177
|
(89)
|
|
Lease
liabilities
|
(426)
|
(169)
|
|
Net
cash used in operating activities
|
(3,273)
|
(2,036)
|
|
Cash Flows from Investing Activities:
|
|
|
|
Purchase
of property, plant and equipment
|
(169)
|
(571)
|
|
Net
cash used in investing activities
|
(169)
|
(571)
|
|
Cash Flows from Financing Activities:
|
|
|
|
Proceeds
from issuance of common stock and warrants in a private offering,
net
|
-
|
23,160
|
|
Proceeds
from issuance of notes payable
|
2,416
|
-
|
|
Cash
distributions to CCD Members
|
-
|
(18,409)
|
|
Net
cash provided by financing activities
|
2,416
|
4,751
|
|
Net
(decrease) increase in cash
|
(1,026)
|
2,144
|
|
|
|
|
|
Cash,
beginning of the year
|
2,448
|
304
|
|
Cash, end of the year
|
$1,422
|
$2,448
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
Cash
paid for interest
|
$-
|
$-
|
|
Cash
paid for income taxes
|
$-
|
$-
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
Conversion
of Series A convertible preferred stock
|
$17
|
$-
|
|
Reclassification
of liability awards to equity
|
$1,638
|
$-
|
|
Accrue
dividends payable on Series A convertible preferred
stock
|
$1,650
|
$-
|
|
Effect
of reverse merger
|
$-
|
$2,378
|
|
Conversion
of Series B convertible preferred stock
|
$-
|
$1
|
The accompanying notes are an integral part of these 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. The Company’s
products are produced domestically through contract manufacturers
for sale by select distributors, specialty retailers and
third-party online resellers throughout the United States, as well
as over 80 countries worldwide. The Company’s primary
international markets include the United Kingdom, Italy, Spain,
Belgium, Australia, Sweden and Canada. In June 2019, The Company
launched distribution, through Don Polly, a Nevada limited
liability company that is owned by entities controlled by
Brandon and Ryan Stump, the Company’s Chief Executive Officer
and Chief Operating Officer, respectively, and a consolidated
variable interest for which the Company is the primary
beneficiary (“Don
Polly”), of certain
premium vapor, ingestible and topical products containing
hemp-derived cannabidiol (“CBD”). Our CBD based products are produced,
marketed and sold through, Don Polly, and the Company currently
intends to develop and launch additional products containing
hemp-derived CBD in the future.
In addition to Don Polly, we are also the holding
company for two wholly-owned subsidiaries, Charlie’s Chalk
Dust, LLC (“Charlie’s”
or “CCD”), which activity includes production and
sale of our branded nicotine-based e-cigarette liquid, and Bazi,
Inc., which activity includes sales of all-natural energy drink
Bazi® All Natural Energy. At this time, we do not intend to
continue sales of the Bazi product in its current
form.
The Company's Common Stock, par value $0.001 per
share (the "Common
Stock"), trades under the
symbol "CHUC" on the OTC: PINK market.
Acquisition of True Drinks Holdings, Inc.
On April 26, 2019 (the “Closing
Date”), we entered into a
Securities Exchange Agreement with each of the former members
(“Members”) of Charlie’s, and certain direct
investors in the Company (“Direct
Investors”), pursuant to
which we acquired all outstanding membership interests of
Charlie’s beneficially owned by the Members in exchange for
the issuance by the Company of units, with such units consisting of
an aggregate of (i) 15,655,538,349 shares of Common Stock on an
as-converted basis (which includes the issuance of an aggregate of
1,396,305 shares of a newly created class of Series B Convertible
Preferred Stock, par value $0.001 per share
(“Series B
Preferred”), convertible
into an aggregate of 13,963,047,716 shares of Common Stock, issued
to certain individuals in lieu of Common Stock); (ii) 206,249
shares of a newly created class of Series A Convertible Preferred
Stock, par value $0.001 per share (“Series A
Preferred”), convertible
into an aggregate of 4,654,349,239 shares of Common Stock; and
(iii) warrants to purchase an aggregate of 3,102,899,493 shares of
Common Stock (the “Investor
Warrants”) (the
“Share Exchange”). As a result of the Share Exchange,
Charlie’s became a wholly owned subsidiary of the
Company.
Immediately prior to, and in connection with, the
Share Exchange, Charlie’s consummated a private offering of
membership interests that resulted in net proceeds to
Charlie’s of approximately $27.5 million (the
“Charlie’s
Financing”). Katalyst
Securities LLC (“Katalyst”) acted as the sole placement agent in
connection with the Charlie’s Financing pursuant to an
Engagement Letter entered into by and between Katalyst,
Charlie’s and the Company on February 15, 2019. As
consideration for its services in connection with the
Charlie’s Financing and the Share Exchange, the Company
issued to Katalyst and its designees five-year warrants to purchase
an aggregate of 930,869,848 shares of Common Stock at a price of
$0.0044313 per share (the “Placement Agent
Warrants”). The Placement
Agent Warrants have substantially the same terms as those set forth
in the Investor Warrants.
As
additional consideration for advisory services provided in
connection with the Charlie’s Financing and the Share
Exchange, the Company issued an aggregate of 902.7 million shares
of Common Stock (the “Advisory Shares”), including to a
member of the Company’s Board of Directors, pursuant to a
subscription agreement. The fair value of a share of common stock
was $0.0032 which is based upon a valuation prepared by the Company
on the date of the Share Exchange.
The
Share Exchange resulted in a change of control of the Company, with
the Members and Direct Investors owning approximately 86.1% of the
Company’s outstanding voting securities immediately after the
Share Exchange, and the Company’s current stockholders
beneficially owning approximately 13.9% of the issued and
outstanding voting securities, which includes the Advisory Shares.
Following the Share Exchange, Ryan Stump and Brandon Stump, the
founders of Charlie’s and the Company’s Chief Executive
Officer and Chief Operating Officer, respectively, held in excess
of 50% of the Company’s issued and outstanding voting
securities.
The Share Exchange is accounted for as a reverse
recapitalization in accordance with accounting principles generally
accepted in the United States (“U.S. GAAP”) because the primary assets of the Company
were nominal at the consummation of the Share Exchange.
Charlie’s was determined to be the accounting acquirer based
upon the terms of the Share Exchange and other factors including:
(i) Charlie’s stockholders and other persons holding
securities convertible, exercisable or exchangeable directly or
indirectly for Charlie’s membership units now own
approximately 49%, on a fully diluted basis, of the Company’s
outstanding securities immediately following the effective time of
the Merger, (ii) individuals associated with Charlie’s now
hold a majority of the seats on the Company’s Board of
Directors and (iii) Charlie’s management holds all key
positions in the management of the combined Company. Accordingly,
the historical financial statements of True Drinks were replaced by
the Company's historical financial statements including the
comparative prior periods. All references in the consolidated
financial statements to the number of shares and per-share amounts
of Common Stock have been retroactively restated to reflect the
exchange rate.
Basis of Presentation
The consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities
and Exchange Commission (the “SEC”). The financial information contained in
the consolidated financial statements and footnotes are based on
Charlie’s historical financial statements and the
Company’s financial activity beginning April 26, 2019, as
adjusted, to give effect to Charlie’s reverse
recapitalization of the Company and the Charlie’s Financing
completed prior to the Share Exchange. In addition, from the period
April 26, 2019 until December 31, 2019, there were minimal costs
and revenue associated with the Bazi product line which are
included in the interim condensed consolidated financial
statements. As noted above, we do not intend to continue to produce
and sell the Bazi product line in its current form, and these costs
and expenses are nominal and will continue to be so in the future.
The operating results of Don Polly are also
included.
Historical
financial information presented prior to April 26, 2019 is that of
Charlie’s only, while financial information presented after
April 26, 2019 includes Charlie’s, Don Polly, Bazi Drinks and
the Company, which includes the transactions associated with the
share exchange and private placement transaction along with ongoing
corporate costs.
Going Concern Uncertainty Regarding the Legal and Regulatory
Environment, Liquidity and Management’s plan of
operation
The accompanying financial statements have been
prepared assuming that the Company will continue as a going
concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The
Company operates in a rapidly changing legal and regulatory
environment; new laws and regulations or changes to existing laws
and regulations could significantly limit the Company’s
ability to sell its products, and/or result in additional costs.
Additionally, the Company is required to obtain approval from the
United States Food and Drug Administration ("FDA") to continue selling and marketing its products
used for the vaporization of nicotine in the United States. The
Company has incurred significant costs associated with the
application process and there can be no assurance that additional
costs will not arise, or that the FDA will approve the
application(s). In addition, the recent outbreak of coronavirus
(“COVID-19”) in March 2020 has had a negative impact
on the global economy and markets which has impacted the
Company’s supply chain and sales. For the year ended December
31, 2020, the Company has incurred losses from operations of
approximately $6.8 million and a consolidated net loss of
approximately $7.2 million. The Company has a stockholders’
deficit of approximately $6.0 million as of December 31, 2020 and
the Company’s liabilities exceed its assets. These factors
raise substantial doubt about the Company’s ability to
continue as a going concern. The financial statements do not
include any adjustments to the carrying amount and classification
of recorded assets and liabilities should the Company be unable to
continue operations.
Management's plans depend on its ability to
increase revenues and continue its business development efforts,
including costs beyond the approximately $4,400,000 already
expensed to complete our Premarket Tobacco Application
(“PMTA”)
registration process. The Company does
not anticipate that its current cash position will be sufficient to
meet its working capital requirements, to continue its sales and
marketing efforts and complete the PMTA registration process. The
Company is currently seeking debt and/or equity financing in order
to ensure that it has sufficient cash to operate for the next 12
months (refer to Note 14 – Subsequent Events). There can be
no assurance that such financing will be available on acceptable
terms, or at all, and there can be no assurance that any such
arrangement, if required or otherwise sought, would be available on
terms deemed to be commercially acceptable and in the
Company’s best interests.
Risks and Uncertainties
The Company operates in an environment that is
subject to rapid changes and developments in laws and regulations
that could have a significant impact on the Company’s ability
to sell its products. Beginning in September 2019, certain states
temporarily banned the sale of flavored e-cigarettes, and several
states and municipalities are considering implementing similar
restrictions. Federal, state, and local governmental bodies across
the United States have indicated that flavored e-cigarette liquid,
vaporization products and certain other consumption accessories may
become subject to new laws and regulations at the federal, state
and local levels. The application of any new laws or regulations
that may be adopted in the future, at a federal, state, or local
level, directly or indirectly implicating flavored e-cigarette
liquid and products used for the vaporization of nicotine could
significantly limit the Company’s ability to sell such
products, result in additional compliance expenses, and/or require
the Company to change its labeling and/or methods of distribution.
Any ban of the sale of flavored e-cigarettes directly limits the
markets in which the Company may sell its products. In the event
the prevalence of such bans and/or changes in laws and regulations
increase across the United States, or internationally, the
Company’s business, results of operations and financial
condition could be adversely impacted. In addition, the Company is presently seeking to
obtain marketing authorization for certain of its nicotine-based
e-liquid products. Our applications were submitted in September
2020 on a timely basis, which if approved, will allow the Company
to continue to sell its approved products in the United States. The
Company is also seeking additional financing to support potential
future PMTA related expenses and general working capital. There is
no assurance that regulatory approval to sell our products will be
granted or that we can raise the additional financing required, and
if not, this could have a significant impact on our
sales.
On
March 11, 2020, the World Health Organization designated the
ongoing and evolving COVID-19 outbreak as a pandemic. The outbreak
has caused substantial disruption in international and U.S.
economies and markets as it continues to spread. The outbreak is
having a temporary adverse impact on our industry as well as our
business, with regards to certain supply chain disruptions and
sales volume. While the disruption from COVID-19 is currently
expected to be temporary, there is uncertainty around the
duration. The financial impact from COVID-19 has caused a
decline in sales, and if disruptions from the COVID-19 outbreak are
prolonged, it will continue to have an adverse impact on our
business.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Principles of Consolidation
As
noted above, the consolidated financial statements include the
accounts of the Company, Charlie’s Holdings, Inc., its two
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. 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. For certain
instruments, including cash and cash equivalents, accounts
receivable, accounts payable, 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 (“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 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.
Accounts Receivable
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, 2020 and 2019, the allowance for bad debt totaled
$355,000 and $639,000, 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, 2020 and 2019, the reserve for excess and
obsolete inventories totaled $179,000 and $83,000,
respectively.
Plant, Property and Equipment
Property
and equipment are stated at cost. Depreciation and amortization are
provided for using straight-line methods, 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 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.
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 one operating
segment.
The
following table disaggregates revenue from our single operating
segment by geographic market and customer type for the periods
ending December 31, 2020 and 2019, respectively:
|
|
December 31,
2020
|
December 31,
2019
|
|
Geographic Market
|
|
|
|
International
|
19%
|
24.0%
|
|
United
States
|
81%
|
76.0%
|
|
|
|
|
|
Customer Type
|
|
|
|
Retailer
|
43%
|
36.0%
|
|
Distribution
|
57%
|
64.0%
|
Recently Issued Accounting Pronouncements
Measurement of Credit Losses on Financial Instruments
In June
2016 the FASB issued ASU 2016-13, Measurement of Credit Losses on
Financial Instruments, which supersedes current guidance requiring
recognition of credit losses when it is probable that a loss has
been incurred. The standard requires the establishment of an
allowance for estimated credit losses on financial assets,
including trade and other receivables, at each reporting date. The
ASU will result in earlier recognition of allowances for losses on
trade and other receivables and other contractual rights to receive
cash. This standard is effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15,
2022. Early adoption is permitted. The Company does not believe the
impact of adopting this standard will be material to its
consolidated financial statements and related
disclosures.
Improvements to Non-Employee Share-Based Payment
Accounting
In
June 2018, the FASB issued ASU 2018-07 “Improvements to
Non-employee Share-Based Payment Accounting”, which
simplifies the accounting for share-based payments granted to
non-employees for goods and services. Under the ASU, most of the
guidance on such payments to non-employees would be aligned with
the requirements for share-based payments granted to employees. The
amendments are effective for fiscal years beginning after December
15, 2019, and interim periods within fiscal years beginning after
December 15, 2020. The Company has early adopted the new standard
effective January 1, 2019 and the adoption of this standard did not
have a material impact on the Company’s consolidated
financial statements.
Income Taxes
In
December 2019, the FASB issued ASU No. 2019-12, “Income Taxes
(Topic 740): Simplifying the Accounting for Income Taxes
(“ASU 2019-12”), which is intended to simplify various
aspects related to accounting for income taxes. ASU
2019-12 removes certain exceptions to the general principles
in Topic 740 and also clarifies and amends existing guidance to
improve consistent application. This guidance is effective for
fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2020, with early adoption permitted.
The Company is currently evaluating the impact of this standard on
its consolidated financial statements and related
disclosures.
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
is currently evaluating the impact of this standard on 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, 2020 and 2019 (amount in thousands):
|
|
Fair
Value at December 31, 2020
|
|||
|
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|
Liabilities:
|
|
|
|
|
|
Derivative
liability - Warrants
|
4,444
|
-
|
-
|
4,444
|
|
Total
liabilities
|
$4,444
|
$-
|
$-
|
$4,444
|
|
|
|
|
|
|
|
|
Fair
Value at December 31, 2019
|
|||
|
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|
Liabilities:
|
|
|
|
|
|
Derivative
liability - Warrants
|
4,144
|
-
|
-
|
4,144
|
|
Total
liabilities
|
$4,144
|
$-
|
$-
|
$4,144
|
There
were no transfers between Level 1, 2 or 3 during the years ended
December 31, 2020 and 2019.
The
following table presents changes in Level 3 liabilities measured at
fair value for the year ended December 31, 2020 and 2019. Both
observable and unobservable inputs were used to determine the
fair value of positions that the Company has classified within
the Level 3 category. Unrealized gains and losses associated
with liabilities within the Level
3 category include changes in fair value that were
attributable to both observable (e.g., changes in market interest
rates) and unobservable (e.g., changes in unobservable long- dated
volatilities) inputs (amount in
thousands).
|
|
Derivative
liability - Warrants
|
|
Balance
at January 1, 2019
|
$-
|
|
Addition
|
7,762
|
|
Change
in fair value
|
(3,618)
|
|
Balance
at December 31, 2019
|
4,144
|
|
Change
in fair value
|
300
|
|
Balance
at December 31, 2020
|
$4,444
|
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, 2020 and 2019 is as follows:
|
|
December
31,
|
December
31,
|
|
|
2020
|
2019
|
|
Exercise
price
|
$0.0044
|
$0.0044
|
|
Contractual
term (years)
|
3.32
|
4.32
|
|
Volatility
(annual)
|
75.0%
|
70.0%
|
|
Risk-free
rate
|
0.2%
|
1.7%
|
|
Dividend
yield (per share)
|
0%
|
0%
|
NOTE 4 - PROPERTY AND EQUIPMENT
Property and
Equipment detail as of December 31, 2020 and 2019 are as follows
(amount in thousands):
|
|
December
31,
|
December
31,
|
|
|
|
2020
|
2019
|
Estimated
Useful Life
|
|
Machinery
and equipment
|
$38
|
$96
|
5
years
|
|
Trade
show booth
|
233
|
171
|
5
years
|
|
Office
equipment
|
552
|
118
|
5
years
|
|
Leasehold
improvements
|
171
|
440
|
Lesser
of lease term or estimated useful life
|
|
|
994
|
825
|
|
|
Accumulated
depreciation
|
(463)
|
(282)
|
|
|
|
$531
|
$543
|
|
Depreciation and
amortization expense totaled $181,000 and $73,000, respectively, during the years ended
December 31, 2020 and 2019.
NOTE 5 - CONCENTRATIONS
Vendors
The
Company’s concentration of purchases are as
follows:
|
|
For the year
ended
|
|
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
Vendor
A
|
25%
|
57%
|
|
Vendor
B
|
27%
|
16%
|
|
Vendor
C
|
26%
|
0%
|
|
Vendor
D
|
12%
|
0%
|
During
the year ended December 31,
2020, purchases from four vendors represented 90% of total
inventory purchases. During the year ended December 31, 2019,
purchases from two vendors represented 73% of total inventory
purchases.
As of
December 31, 2020 and 2019, amounts owed to these vendors totaled
$270,000 and $58,000
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,
|
|
|
|
2020
|
2019
|
|
Customer
A
|
-
|
23%
|
|
Customer
B
|
17%
|
-
|
|
Customer
C
|
10%
|
-
|
Two
customers made up more than 27% of net accounts receivable at
December 31, 2020 and one customer accounted for 23% of net
accounts receivable at December 31, 2019. Customer B owed the
Company a total of $210,000, representing 17% of net receivables at
December 31, 2020. Customer C owed the Company a total of $127,000,
representing 10% of net receivables at December 31, 2020. Customer
A owed the Company a total of $211,000, representing 23% of net
receivables at December 31, 2019. No customer exceeded 10% of total
net sales for the years ended December 31, 2020 and 2019,
respectively.
NOTE 6 – DON POLLY, LLC.
Don
Polly, LLC is a Nevada limited liability company that is owned
by entities controlled by Brandon and Ryan Stump, the
Company’s Chief Executive Officer and Chief Operating
Officer, respectively, and a consolidated variable interest
for which the Company is the primary beneficiary. Don Polly
formulates, sells and distributes the Company’s CBD product
lines.
We evaluate our ownership, contractual and other
interests in entities that are not wholly-owned to determine if
these entities are variable interest entities
(“VIEs”), and, if so, whether we are the primary
beneficiary of the VIE. In determining whether we are the
primary beneficiary of a VIE and therefore required
to consolidate the VIE, we apply a qualitative
approach that determines whether we have both (1) the power to
direct the activities of the VIE that most significantly impact the
VIE’s economic performance and (2) the obligation to absorb
losses of, or the rights to receive benefits from, the VIE that
could potentially be significant to that VIE. We continuously
perform this assessment, as changes to existing relationships or
future transactions may result in the consolidation or
deconsolidation of a VIE. Effective April 25, 2019, we
consolidated the financial statements of Don Polly and it is
considered a VIE of the Company. Since the Company has been
determined to be the primary beneficiary of Don Polly, we have
included Don Polly’s assets, liabilities, and operations in
the accompanying consolidated financial statements of the
Company.
Don
Polly operates under exclusive licensing and service contracts with
the Company whereby the Company receives 75% of net income from the
licensing agreement and 25% of net income from the service
agreement, therefore, as the Company receives 100% of the net
income or incurs 100% of the net loss of the VIE, no
non-controlling interests are recorded.
NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable
and accrued expenses as of December 31, 2020 and 2019 are as
follows (amount in thousands):
|
|
December
31,
|
December
31,
|
|
|
2020
|
2019
|
|
Accounts
payable
|
$629
|
$673
|
|
Accrued
compensation
|
1,420
|
1,635
|
|
Other
accrued expenses
|
476
|
208
|
|
|
$2,525
|
$2,516
|
NOTE 8 – NOTES PAYABLE
Red Beard Holdings, LLC Note Payable
On
April 1, 2020, the Company, Charlie's and its VIE, Don Polly,
issued a secured promissory note (the "Red Beard Note") to one of the
Company's largest stockholders, Red Beard Holdings, LLC
("Red Beard") in the
principal amount of $750,000 (the "Principal Amount"), which Note is
secured by all assets of the Company pursuant to the terms of a
Security Agreement entered into by and between the Company and Red
Beard (the "Red Beard Note
Financing").
The Red
Beard Note required the payment of the Principal Amount and
guaranteed minimum interest in the amount of $75,000 on or before
the earlier date of (i) a Liquidity Event, as defined under the
terms of the Red Beard Note; or (ii) October 1, 2020. In addition, if there
was an occurrence of an event of default, then, in addition to the
guaranteed minimum interest, the Principal Amount and unpaid
interest and unpaid other amounts under the Red Beard Note shall,
at the election of the Red Beard in its sole and absolute
discretion, bear interest at the lesser of a rate equal to 20% per
annum or the maximum default rate. Such interest would accrue daily
commencing on occurrence of such event of default until payment in
full of the Principal Amount, together with all accrued and unpaid
interest and other amounts which may become due hereunder, has been
made.
On
August 27, 2020, the Company’s Board of Directors, entered
into Amendment No. 1 to Secured Promissory Note and Security
Agreement (“Amended Red
Beard Note”), by and between the Company and Red
Beard. Pursuant to the Amended Red Beard Note, the terms of the Red
Beard Note held by Red Beard were amended as follows (i) the
Principal Amount under the Red Beard Note was increased from
$750,000 to $1,400,000 and (ii) the guaranteed minimum interest due
upon maturity of the Red Beard Note was increased from $75,000 to
$100,000. All other terms of the respective Red Beard Note remain
in full force and effect.
On
September 30, 2020, the Company’s Board of Directors entered
into Amendment No. 2 to Secured Promissory Note and Security
Agreement (“Second Amended
Red Beard Note”), by and between the Company and Red
Beard. The Red Beard Note, as amended by Amendment 1, was further
amended by the Second Amended Red Beard Note to amend the
definition of the “Maturity Date” in the Red Beard Note
to mean November 1, 2020.
On
October 29, 2020, the Company entered into Amendment No. 3
("Third Amended Red Beard
Note"), by and between the Company and Red Beard. The terms
of the Second Amended Red Beard Note held by Red Beard have been
amended to revise the maturity date from November 1, 2020 to
December 1, 2020. Furthermore, Red Beard has agreed to waive
certain rights upon the occurrence of an Event of Default, as
defined in the Amended Red Beard Note, which was triggered by the
Company’s receipt of that certain notice of default, dated
August 13, 2020, from certain holders of the Company’s Series
A Preferred.
On
December 1, 2020, the Company entered into Amendment No. 4 to
Secured Promissory Note and Security Agreement (“Fourth Amended Red Beard Note”),
by and between the Company and Red Beard. The Fourth Amended Red
Beard Note was retroactively effective as of December 1, 2020,
therefore avoiding an event of default. The terms of the Third
Amended Red Beard Note have been amended to revise the maturity
date from December 1, 2020 to January 1, 2021, and the guaranteed
minimum interest has been increased from $100,000 to
$125,000.
On
January 19, 2021, the Company entered into Amendment No. 5 to
Secured Promissory Note and Security Agreement (“Fifth Amended Red Beard
Note”), by and between the Company and Red Beard. The
Fifth Amended Note is retroactively effective as of January 1,
2020. The terms of the Amended Note held by Red Beard have been
amended to revise the maturity date from January 1, 2021 to
February 15, 2021, and the guaranteed minimum interest has been
increased from $125,000 to $150,000. Pursuant to the Fifth Amended
Red Beard Note, Red Beard agreed to waive its rights to declare a
default under the Red Beard Note due to the Dividend
Default.
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 $1.55 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.
The
Company used the proceeds from the Red Beard Note Financing for
general corporate purposes, and its working capital requirements,
pending availability of long-term investment
capital.
Small Business Administration Loan Programs
On April 30, 2020,
Charlie's, a wholly owned subsidiary of the Company, received
approval to enter into a U.S. Small Business Administration
("SBA")
Promissory Note (the " Charlie's
PPP Loan") with TBK Bank, SSB
(the "SBA
Lender"), pursuant to the
Paycheck Protection Program ("PPP")
of the Coronavirus Aid, Relief, and Economic Security Act (the
"CARES
Act") as administered by
the SBA (the "PPP
Loan Agreement").
The Charlie's PPP Loan provides for working capital to CCD in the
amount of $650,761. The Charlie's PPP Loan will mature on April 30,
2022 and will accrue interest at a rate of 1.00% per annum. Per the
PPP Loan Agreement , payments of principal and interest were
deferred for six months from the date of the Charlie's PPP Loan, or
until November 30, 2020. Interest, however, has continued to accrue
during this time. Charlie’s was notified by SBA Lender that
all payments, including principal and interest, on all PPP loans
issued by the bank have been deferred indefinitely in order to
allow borrowers adequate time to apply for forgiveness.
Charlie’s has applied for forgiveness and is currently
awaiting a response. The Company will continue to accrue interest
expense relating to Charlie’s PPP Loan, however there is no
anticipated future effect on cash at this time.
On April 14, 2020, Don
Polly also obtained a loan pursuant to the PPP enacted under the
CARES Act (the "Polly
PPP Loan" and together with the
Charlie's PPP Loan, the "PPP
Loans")) from Community
Banks of Colorado, a division of NBH Bank (the "Polly
Lender"). The Polly PPP Loan
obtained by Don Polly provides for working capital to Don Polly in
the amount of $215,600. The Polly PPP Loan will mature on April 14,
2022 and will accrue interest at a rate of 1.00% per annum.
Payments of principal and interest will be deferred for six months
from the date of the Polly PPP Loan, or until November 14, 2020.
Interest, however, will continue to accrue during this
time.
The aforementioned PPP Loans were made under the PPP enacted by
Congress under the CARES Act. The CARES Act (including the guidance
issued by SBA and U.S. Department of the Treasury) provides that
all or a portion of the PPP Loans may be forgiven upon request from
the respective borrower to the SBA Lender or the Polly Lender, as
the case may be, subject to requirements in the PPP Loans and under
the CARES Act.
On
February 19, 2021 Don Polly received notice from the Polly Lender,
that its 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.
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.
The following summarizes the Company’s note payable
maturities as of December 31, 2020 (amount in
thousands):
|
Year
Ended December 31, 2021
|
$1,400
|
|
Year
Ended December 31, 2022
|
874
|
|
Year
Ended December 31, 2023
|
5
|
|
Year
Ended December 31, 2024
|
5
|
|
Year
Ended December 31, 2025
|
5
|
|
Thereafter
|
127
|
|
Total
|
$2,416
|
NOTE 9 – LOSS PER SHARE BASIC AND FULLY DILUTED
Basic
earnings per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the
reporting period. Diluted earnings per common share is computed
similar to basic earnings per common share except that it reflects
the potential dilution that could occur if dilutive securities or
other obligations to issue common stock were exercised or converted
into common stock. Diluted weighted average common shares include
common stock potentially issuable under the Company’s
convertible preferred stock, warrants and vested and unvested stock
options.
The
following securities were not included in the diluted net earnings
per share calculation because their effect was anti-dilutive as of
the periods presented (in thousands):
|
|
For the
years ended
|
|
|
|
December
31,
|
|
|
|
2020
|
2019
|
|
Options
|
750,294
|
801,325
|
|
Series
A convertible preferred shares
|
5,564,296
|
4,616,268
|
|
Warrants
|
4,033,769
|
4,033,769
|
|
Total
|
10,348,359
|
9,451,361
|
NOTE 10 – STOCKHOLDERS’ EQUITY
Series A Preferred
On April 25, 2019, in connection with the Share
Exchange, the Company filed the Certificate of Designation,
Preferences and Rights of the Series A Convertible Preferred Stock
(the “Series A
COD”), with the Nevada
Secretary of State of the State, designating 300,000 shares of its
preferred stock as Series A Convertible Preferred Stock. Each share
of Series A Preferred has a stated value of $100 per share (the
“Series A Stated
Value”). The Series A
Preferred rank senior to all of the Company’s outstanding
securities. At December 31, 2020 and 2019, there were a total of
203,811 and 204,561 shares of Series A Preferred outstanding,
respectively.
The Series A Preferred provides the holders with
the right to receive a one-time dividend payment equal to 8% of the
Series A Stated Value (the “Series A
Dividend”), which Series
A Dividend shall be paid by the Company on the earlier to occur of
(i) when declared at the election of the Company, (ii) one year
from the date of issuance, or (iii) when a holder elects to convert
its shares of Series A Preferred into common
stock.
Each share of Series A Preferred is convertible,
at the option of the holder, into that number of shares of common
stock equal to the Series A Stated Value, plus all accrued but
unpaid dividends, divided by $0.044313, which conversion rate is
subject to adjustment in accordance with the terms of the Series A
COD. Holders of Series A Preferred are prohibited from converting
Series A Preferred into common stock if, as a result of such
conversion, the holder, together with its affiliates, would own
more than 4.99% (or 9.99% upon the election of the holder prior to
the issuance of the Series A Preferred) of the total number of
shares of common stock then issued and outstanding. Each share of
Series A Preferred is convertible at the option of the Company, at
the same conversion rate set forth above, at such time, if ever,
that the Company’s common stock is listed on the Nasdaq Stock
Market and the Company has paid the Series A Dividend. In addition,
upon the occurrence of a Bankruptcy Event (as defined in the Series
A COD), the Company shall be required to redeem, in cash, all
outstanding shares of Series A Preferred at a price equal to the
conversion amount; provided,
however, that holders of the
Series A Preferred shall have the right to waive, in whole or in
part, such right to receive payment upon the occurrence of a
Bankruptcy Event.
Holders
of the Series A Preferred are entitled to vote on an as-converted
basis along with holders of the Company’s common stock on all
matters presented to the Company’s stockholders;
provided, however, that the number of votes that any holder,
together with its affiliates, may exercise in connection with all
of the Company securities held by such holder shall not exceed
9.99% of the voting power of the Company. In addition, pursuant to
the Series A COD, the Company shall not take the following actions
without obtaining the prior consent of at least a majority of the
holders of the outstanding 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 if such action would adversely affect the holders of the
Series A Preferred, (ii) increase or decrease the authorized number
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.
Conversion of Preferred Shares
For
the year ended December 31, 2020 the Company issued approximately
16,925,000 common stock conversion shares as 750 shares of Series A
preferred were converted into common shares. For the year ended
December 31, 2019 the Company issued approximately 38,081,000
common stock conversion shares as 1,687 shares of Series A
preferred were converted into common shares.
Series A Preferred Share Dividend
On
April 25, 2020, the Company was required to pay a one-time dividend
equal to eight percent (8%) of the stated value of its Series A
Preferred, equal to $1,650,000 (“Dividend Amount”), which Dividend
Amount was required to be paid in cash on or before April 25, 2020.
As of December 31, 2020, the Company has not paid the Dividend
Amount to holders of its Series A Preferred and has reflected the
liability on its consolidated balance sheet.
On
August 13, 2020, the Company received a formal notice of default
from a holder of its Series A Preferred requesting full payment of
dividends due and payable with respect to the Series A Preferred
held by such holder on or before August 23, 2020 (“Dividend Default”). As
disclosed, the aggregate amount of dividends due and payable to
holders of the Series A Preferred is $1,650,000.
Series B Preferred
On April 26, 2019, in connection with the Share
Exchange, the Company filed the Certificate of Designation,
Preferences and Rights of the Series B Convertible Preferred Stock
(the “Series B
COD”), with the Secretary
of State of the State of Nevada, designating 1.5 million shares of
its preferred stock as Series B Preferred. At the time of the
filing of the Series B COD, the Series B Preferred ranked junior to
the Series A Preferred and senior to all of the Company’s
other outstanding securities.
The Series B Preferred was structured to act as a
common stock equivalent, and, on June 28, 2019, the Company amended
and restated its Articles of Incorporation (the
“Amended and Restated
Charter”) to (i) change
our corporate name to Charlie’s Holdings, Inc. and (ii)
increase the number of shares authorized as common stock from 7.0
billion to 50.0 billion shares. The Amended and Restated Charter
was approved by our Board of Directors and holders of a majority of
our outstanding voting securities on May 8, 2019, and the Amended
and Restated Charter was filed with the State of Nevada on June 28,
2019. As a result of the filing of the Amended 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 into a total of 13,963,047,716 shares of
common stock in accordance with the Series B
COD.
At
December 31, 2020 and 2019, no
shares of Series B Preferred were outstanding.
Prior
to the filing of the Amended and Restated Charter, holders of the
Series B Preferred were entitled to vote on an as-converted basis
along with holders of the Company’s common stock on all
matters presented to the Company’s stockholders. In addition,
pursuant to the Series B COD, the Company was not permitted to take
the following actions without obtaining the prior consent of at
least 50% of the holders of the outstanding Series B Preferred,
voting separately as a single class: (i) amend the provisions of
the Series B COD so as to adversely affect holders of the Series B
Preferred, (ii) increase the authorized number of shares of Series
B Preferred, or (iii) effect any distribution with respect to
junior stock, unless the Company also provides such distribution to
holders of the Series B Preferred.
Common Stock
On
June 28, 2019, the Company filed the Amended and Restated Charter
to change the name of the Company to “Charlie’s
Holdings, Inc.”, as well as to increase the number of shares
of the Company’s common stock authorized for issuance from
7.0 billion shares to 50.0 billion shares.
Warrants
On April 26, 2019, pursuant to the Share Exchange
as described in Notes 1 and 3, the Company issued warrants to purchase approximately 4
billion shares of common stock, consisting of the Investor Warrants
issued to the new investors and the Direct Investors, and the
Placement Agent Warrants issued to Katalyst. The warrants have a
5-year term and an exercise price of $0.0044313, subject to
adjustment for anti-dilution events. Due to the exercise features
of these warrants they are not indexed to the Company’s own
stock and are therefore not afforded equity treatment in accordance
with ASC Topic 815, Derivatives and Hedging
(“ASC 815”). ASC 815 requires the Company 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 (see Note 3).
NOTE 11 – STOCK-BASED COMPENSATION
The True Drinks
Holdings, Inc. 2013 Stock Incentive Plan (the
“Prior
Plan”) was first
approved in December 2013 and was approved by a majority of the
stockholders in October 2014. The Prior Plan originally authorized
20.0 million shares of common stock for issuance as equity-based
awards, which amount was increased to 120.0 million in January 2018
by authorization of the Board of Directors at that time (the
“Prior
Plan Amendment”). As of the
date of the Share Exchange, April 26, 2019, a total of
approximately 91.7 million awards were issued under the Prior Plan
and the Prior Plan Amendment, consisting entirely of outstanding
stock options. As of December 31, 2020, approximately 56.6 million
of these stock options remain vested and exercisable under this
plan.
The Company will not grant any additional awards or shares of
common stock under the Prior Plan beyond those that are currently
outstanding.
On
May 8, 2019, our Board of Directors approved the Charlie’s
Holdings, Inc. 2019 Omnibus Incentive Plan (the “2019
Plan”), and the 2019
Plan was subsequently approved by holders of a majority of our
outstanding voting securities on the same date. The 2019 Plan will
supersede and replace the Prior Plan and no new awards will
be granted under the Prior Plan. Any awards outstanding under the
Prior Plan on the date of stockholder approval of the 2019 Plan
will remain subject to the terms in the Prior Plan, including those
granted under the Prior Plan Amendment, and any shares subject to
outstanding awards under the Prior Plan that subsequently expire,
terminate, or are surrendered or forfeited for any reason without
issuance of shares will automatically become available for issuance
under the 2019 Plan. Up to 1,107,254,205 stock options may be
granted under the 2019 Plan. The shares of common stock issuable
under the 2019 Plan will consist of authorized and unissued shares,
treasury shares, and shares purchased on the open market or
otherwise.
Non-Qualified Stock Options
The
following table summarizes stock option activities during the year
ended December 31, 2020 and 2019 (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
|
1.1
|
$-
|
|
Options
granted
|
788,882
|
0.02
|
9.5
|
-
|
|
Options
forfeited/expired
|
(73,548)
|
0.02
|
-
|
-
|
|
Outstanding
at December 31, 2019
|
801,325
|
$0.01
|
9.4
|
$-
|
|
Options
granted
|
5,000
|
0.00
|
10.0
|
-
|
|
Options
forfeited/expired
|
(56,031)
|
0.01
|
-
|
-
|
|
Outstanding
at December 31, 2020
|
750,294
|
$0.01
|
8.5
|
$-
|
|
Options
vested and exercisable at December 31, 2020
|
356,960
|
$0.01
|
8.0
|
$-
|
During the year ended December 31, 2020 and 2019,
the Company granted 5.0 million and 788.9 million options
under the
2019 Plan, respectively. The fair value of the option on the grant
date was approximately $5,400 and $1.1 million, respectively based
on the following weighted average assumptions:
|
|
For the
years ended
|
|
|
|
December
31,
|
|
|
|
2020
|
2019
|
|
Exercise
price
|
$0.0044
|
$0.0044
|
|
Expected
term (years)
|
6.00
|
5.79
|
|
Volatility
(annual)
|
75.0%
|
70.0%
|
|
Risk-free
rate
|
0.5%
|
1.7%
|
|
Dividend
yield (per share)
|
0%
|
0%
|
During
the year ended December 31, 2020, the Company modified 61.7 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.
During
the year ended December 31, 2019, the Company modified 49.4 million
options to extend their 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 expense related to this modification was considered
immaterial.
As of
December 31, 2020, there was approximately $254,000 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 2.8
years. For the year ended December 31,
2020 and 2019, the Company recorded a compensation expense of
$590,000 and $178,000, 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 and
2019, the Company recorded an expense of $1,322,000 and $316,000,
respectively, for these awards. In addition, as these market awards
were eliminated during the first quarter of 2020 (see paragraph
below), the Company reversed the entire compensation liability of
$1,638,000 to Additional Paid In Capital during the 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 1 above), the Company
issued an aggregate of 902.7 million shares of common stock (the
“Advisory
Shares”), including to a
member of the Company’s Board of Directors, pursuant to a
subscription agreement. The fair value of a share of common stock
was $0.0032 which is based upon a valuation prepared by the Company
on the date of the Share Exchange. The Company recorded stock-based
compensation of approximately $2.9 million on the grant
date.
Prior to the Share Exchange, Charlie’s
employees held Member units, which were automatically converted
into 7.1 million shares of common stock and 69,815 shares of Series
B Preferred (or 698.1 million shares of common stock equivalents)
due to the effect of the Share Exchange. The 705.3 million shares
of common stock will vest over a two-year period. The fair value of
a share of common stock was $0.0032 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
$1,128,000 and $752,000
during the year ended
December 31, 2020 and 2019, respectively.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Leases
The
Company leases office space under agreements classified as
operating leases that expire on various dates through 2024. All of
the Company’s lease liabilities result from the lease of its
headquarters in Costa Mesa, California, which expires in 2024, its
warehouse in Santa Ana, California, which expires in 2021, its
office and warehouse in Denver, Colorado, which expires in 2022,
and its warehouse space in Huntington Beach, California, which
expires in 2022. Such leases do not require any contingent rental
payments, impose any financial restrictions, or contain any
residual value guarantees. Certain of the Company’s leases
include renewal options and escalation clauses; renewal options
have not been included in the calculation of the lease liabilities
and right of use assets as the Company is not reasonably certain to
exercise the options. Variable expenses generally represent the
Company’s share of the landlord’s operating expenses.
The Company does not act as a lessor or have any leases classified
as financing leases.
The Company excludes short-term leases having
initial terms of 12 months or less from Topic 842 as an accounting
policy election and recognizes rent expense on a straight-line
basis over the lease term. The Company entered into a
commercial lease for the Company’s corporate headquarters
(the “Lease”)
in Costa Mesa, California with Brandon Stump, Ryan Stump and Keith
Stump, the Company’s Chief Executive Officer, Chief Operating
Officer and member of the Board. Messrs. Stump, Stump and Stump
purchased the property that is the subject of the Lease in July
2019. The Lease, which was effective as of September 1, 2019, on a
month to month basis, was then formalized on November 1, 2019 to
have a term of five years and a base rent rate of $22,940 per
month, which rate is subject to annual adjustments based on the
consumer price index, as may be mutually agreed upon by the parties
to the Lease. The terms of the Lease were negotiated and approved
by the independent members of the Board, and executed by Mr. David
Allen, the Company’s Chief Financial Officer after reviewing
a detailed analysis of comparable properties and rent rates
compiled by an independent, third-party consultant. The total amount paid to related parties for the
year ended December 31, 2020 and 2019 was $233,264 and $115,000,
respectively.
At
December 31, 2020, the Company had operating lease liabilities of
approximately $1.2 million and right of use assets of approximately
$1.2 million, which were included in the consolidated balance
sheet.
The
following summarizes quantitative information about the
Company’s operating leases (amount in
thousands):
|
|
For the
years ended
|
|
|
|
December
31,
|
|
|
|
2020
|
2019
|
|
Operating
leases
|
|
|
|
Operating
lease cost
|
$597
|
$271
|
|
Variable
lease cost
|
-
|
-
|
|
Operating
lease expense
|
597
|
271
|
|
Short-term
lease rent expense
|
-
|
-
|
|
Total
rent expense
|
$597
|
$271
|
|
|
For the
years ended
|
|
|
|
December
31,
|
|
|
|
2020
|
2019
|
|
Operating
cash flows from operating leases
|
$423
|
$169
|
|
Weighted-average
remaining lease term – operating leases (in
years)
|
2.99
|
3.80
|
|
Weighted-average
discount rate – operating leases
|
12.00%
|
12.00%
|
Maturities
of our operating leases, excluding short-term leases, are as
follows:
|
Year
Ended December 31, 2021
|
$577
|
|
Year
Ended December 31, 2022
|
399
|
|
Year
Ended December 31, 2023
|
275
|
|
Year
Ended December 31, 2024
|
206
|
|
Total
|
1,457
|
|
Less
present value discount
|
(239)
|
|
Operating
lease liabilities as of December 31, 2020
|
$1,218
|
Legal proceedings
From time to time, the Company may be involved in
various claims and counterclaims and legal actions arising in the
ordinary course of business. Other than as set
forth below, there are no additional pending or threatened legal
proceedings at this time.
C.H. Robinson Worldwide, Inc.
v. True Drinks, Inc. On
September 5, 2018, C.H. Robinson Worldwide
(“Robinson”) filed a complaint against True Drinks,
Inc. in the California Superior Court for the County of Orange
located in Santa Ana, California alleging open book account,
account stated, reasonable value of services received, agreement,
and unjust enrichment related to shipping services provided by
Robinson. Robinson has asserted $121,743 in damages plus interest,
attorney’s fees and costs. On November 13, 2020 the Company
and Robinson reached a Settlement Agreement and Mutual Release
(“Settlement
Agreement”) by which the
Company agreed to pay the total sum of $50,000 in two equal
installments of $25,000. The first payment was to be due on or
before November 19, 2020 and the second payment was to be due on or
before December 17, 2020. The Company has satisfied its obligations
set forth in the Settlement Agreement and has been relieved of any
future liability in this matter.
NOTE 13- 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, Inc.
The tax
effects of temporary differences and tax loss and credit carry
forwards that give rise to significant portions of deferred tax
assets and liabilities at December 31, 2020 and 2019 are comprised
of the following (in thousands):
|
|
As of December 31,
|
|
|
|
2020
|
2019
|
|
Deferred
tax assets:
|
|
|
|
Bad
Debt
|
$82
|
$133
|
|
Inventory
|
39
|
9
|
|
Accrued
Expenses
|
16
|
-
|
|
Lease
liability
|
294
|
385
|
|
Stock
compensation
|
201
|
349
|
|
Transaction
costs
|
-
|
808
|
|
Net
operation loss
|
1,577
|
698
|
|
Contribution
|
1
|
-
|
|
Derivatives
|
287
|
268
|
|
Total
deferred income tax assets
|
2,496
|
2,650
|
|
|
|
|
|
Deferred
income tax liabilities:
|
|
|
|
ROU
assets
|
(292)
|
(384)
|
|
Fixed
assets
|
(67)
|
(20)
|
|
Other
|
5
|
|
|
Total
deferred income tax liabilities
|
(354)
|
(404)
|
|
|
|
|
|
Net
deferred income tax assets
|
2,142
|
2,246
|
|
Valuation
allowance
|
(2,142)
|
(2,246)
|
|
Deferred
tax asset, net of allowance
|
$(0)
|
$(0)
|
At December 31, 2020, the Company had federal and state net
operating loss carry forwards for income tax purposes of
approximately $76.8 million. The effect of an ownership change
would be the imposition of an annual limitation on the use of net
operating loss carryforwards (“NOL”) attributable to
periods before the change. Any limitation may result in expiration
of a portion of the NOL carryforwards before utilization. The
Company has not performed a detailed analysis to determine the
realizability of the NOL under Section 382 of the IRC. As
such, deferred tax assets related to NOLs incurred before the
Closing Date of $71 million relating to True Drinks, Inc. have not
been recorded. After the Closing Date we incurred $5.8
million of federal gross NOLs and $5.1 million of state gross NOLs,
which will begin to expire in 2029.
In
assessing the realization of deferred tax assets, management
considers whether it is more likely than not that some portion or
all of the deferred tax assets will be realized. The ultimate
realization of deferred tax assets is dependent upon the generation
of future taxable income during the period in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable
income and taxing strategies in making this assessment.
Based on the review of positive and
negative evidence, the Company has provided a full valuation
allowance against its deferred tax assets as it is more likely than
not that they may not be realized.
The
expected tax expense (benefit) based on the U.S. federal statutory
rate is reconciled with actual tax expense (benefit) as
follows:
|
|
Year ended December 31, 2020
|
Year ended December 31, 2019
|
|
Statutory
federal income tax rate
|
21.0%
|
21.0%
|
|
Non-taxable
Income
|
(2.5)%
|
15.1%
|
|
State
taxes, net of federal tax benefit
|
4.7%
|
20.6%
|
|
Stock
compensation
|
(3.5)%
|
-%
|
|
Non-deductible
expenses
|
(0.0)%
|
(1.3)%
|
|
Derivatives
|
(0.7)%
|
27.2%
|
|
Return
to provisoin adjustment
|
(19.8)%
|
-%
|
|
Change
in valuation allowance
|
0.8%
|
(81.3)%
|
|
Income
taxes provision (benefit)
|
-%
|
1.4%
|
|
|
As of December 31,
|
|
|
|
2020
|
2019
|
|
Current
|
|
|
|
US
Federal
|
$-
|
$-
|
|
US
State
|
-
|
-
|
|
Total
current provision
|
-
|
-
|
|
Deferred
|
|
|
|
US
Federal
|
(399)
|
1,331
|
|
US
State
|
341
|
443
|
|
Total
deferred benefit
|
(59)
|
1,774
|
|
Change
in valuation allowance
|
59
|
(1,745)
|
|
Total
provision for income taxes
|
$0
|
$29
|
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-not to be sustained upon examination by taxing
authorities. As of December 31, 2020, and 2019, there were no
uncertain tax positions. The Company’s policy for recording
interest and penalties associated with 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 years
ended December 31, 2020 and 2019. Management is currently unaware
of any issues under review that could result in significant
payments, accruals or material deviations from its
position.
The Company is
subject to U.S. federal and state taxes in the normal course of
business, and its income tax returns are subject to examination by
the relevant tax authorities. Tax years 2017-2020 are
still open for examination by Federal tax authorities and tax years
2016-2020 are
generally open for examination by state tax authorities. The
Company is under IRS audit for 2017, however no material
adjustments have currently been identified that would affect the
tax provision as stated.
NOTE 14- SUBSEQUENT EVENTS
The
Company has evaluated events subsequent to December 31, 2020 to
assess the need for potential recognition or disclosure in this
report. Such events were evaluated through the date these financial
statements were available to be issued. Based upon this evaluation
the following items were noted:
On
March 19, 2021, the Company entered into Securities Purchase
Agreements by and between the Company and certain family trusts in
which Mr. Brandon Stump, the Company's Chief Executive Officer, and
Mr. Ryan Stump, the Company's Chief Operating Officer are trustees
and beneficiaries (the "Purchase
Agreements"), for the private placement of an aggregate of
351,699,883 shares of its common stock, par value $0.001 ("
Common Stock"), at a
purchase price per share of $0.00853 (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, less fees and expenses. The Private Placement was
undertaken pursuant to Rule 506 promulgated under the Securities
Act of 1933, as amended, and was consummated in a transaction
approved by the Company's independent directors in accordance with
Rule 16b-3(d)(1) of the Securities Exchange Act of 1934, as
amended.
The net
proceeds to be received by the Company are intended to be used to
repay certain indebtedness of the Company, and for general working
capital purposes.
F-24