UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
For the transition period from _________ to _________
Commission file number
| CHARLIE’S HOLDINGS, INC. |
| (Exact Name of Registrant as Specified in Its Charter) |
| | | |
| (State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) |
(Address of Principal Executive Offices)
(
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| | ☒ | Smaller reporting company | |
| Emerging growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-12 of the Exchange Act). Yes
Securities registered pursuant to Section 12(b) of the Act: None
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
The number of shares of the registrant’s Common Stock, par value $0.001 per share, issued and outstanding on November 12, 2021 was
CHARLIE’S HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2021
| PART I. FINANCIAL INFORMATION |
Page |
||||
| ITEM 1. |
Financial Statements |
1 | |||
| Condensed Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020 |
1 | ||||
| Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020 (unaudited) |
2 | ||||
| Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the three and nine months ended September 30, 2021 and 2020 (unaudited) |
3 | ||||
| Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 (unaudited) |
5 | ||||
| Notes to Condensed Consolidated Financial Statements (unaudited) |
6 | ||||
| ITEM 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
19 | |||
| ITEM 3. |
Quantitative and Qualitative Disclosures About Market Risk |
29 | |||
| ITEM 4. |
Controls and Procedures |
29 | |||
| PART II. OTHER INFORMATION |
|||||
| ITEM 1. |
Legal Proceedings |
30 | |||
| ITEM 1A. |
Risk Factors |
30 | |||
| ITEM 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
43 | |||
| ITEM 3. |
Defaults Upon Senior Securities |
43 | |||
| ITEM 4. |
Mine Safety Disclosures |
43 | |||
| ITEM 5. |
Other Information |
43 | |||
| ITEM 6. |
Exhibits |
43 | |||
| SIGNATURES |
44 | ||||
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets: | ||||||||
| Property, plant and equipment, net | ||||||||
| Right-of-use asset, net | ||||||||
| Other assets | ||||||||
| Total non-current assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Derivative liability | ||||||||
| Lease liabilities | ||||||||
| Notes payable | ||||||||
| Dividends payable | ||||||||
| Deferred revenue | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Notes payable, net of current portion | ||||||||
| Lease liabilities, net of current portion | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES (see Note 12) | ||||||||
| Stockholders' equity (deficit): | ||||||||
| Convertible preferred stock ($ par value); shares authorized | ||||||||
| Series A, shares designated, and shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | ||||||||
| Series B, shares designated, shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | ||||||||
| Common stock ($ par value); shares authorized; shares and shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders' equity (deficit) | ( | ) | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(Unaudited)
| For the three months ended |
For the nine months ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2021 |
2020 |
2021 |
2020 |
|||||||||||||
| Revenues: |
||||||||||||||||
| Product revenue, net |
$ | $ | $ | $ | ||||||||||||
| Total revenues |
||||||||||||||||
| Operating costs and expenses: |
||||||||||||||||
| Cost of goods sold - product revenue |
||||||||||||||||
| General and administrative |
||||||||||||||||
| Sales and marketing |
||||||||||||||||
| Research and development |
||||||||||||||||
| Total operating costs and expenses |
||||||||||||||||
| Income (loss) from operations |
( |
) | ( |
) | ( |
) | ||||||||||
| Other income (expense): |
||||||||||||||||
| Interest expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Change in fair value of derivative liabilities |
( |
) | ( |
) | ||||||||||||
| Gain on debt extinguishment |
||||||||||||||||
| Other income |
||||||||||||||||
| Total other income (loss) |
( |
) | ( |
) | ||||||||||||
| Net income (loss) |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Net earnings (loss) per share |
||||||||||||||||
| Basic |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Diluted |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Weighted average number of common shares outstanding |
||||||||||||||||
| Basic |
||||||||||||||||
| Diluted |
||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(in thousands)
(Unaudited)
| For the Three Months Ended September 30, 2021 |
||||||||||||||||||||||||||||
| Series A Convertible Preferred Stock |
Common Stock |
Additional Paid-in |
Accumulated |
Total Stockholders' Equity |
||||||||||||||||||||||||
| Shares |
Par value |
Shares |
Par value |
Capital |
Deficit |
(Deficit) | ||||||||||||||||||||||
| Balance at July 1, 2021 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||
| Conversion of Series A convertible preferred stock |
( |
) | ( |
) | ||||||||||||||||||||||||
| Dividends paid on Series A convertible preferred stock |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Stock compensation |
||||||||||||||||||||||||||||
| Net income |
- | - | ||||||||||||||||||||||||||
| Balance at September 30, 2021 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||
| For the Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||||
| Series A Convertible Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders' Equity | ||||||||||||||||||||||||
| Shares | Par value | Shares | Par value | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balance at July 1, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||
| Stock compensation | ||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CHARLIE’S HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(in thousands)
(Unaudited)
| For the Nine Months Ended September 30, 2021 |
||||||||||||||||||||||||||||
| Series A Convertible Preferred Stock |
Common Stock |
Additional Paid-in |
Accumulated |
Total Stockholders' Equity |
||||||||||||||||||||||||
| Shares |
Par value |
Shares |
Par value |
Capital |
Deficit |
(Deficit) | ||||||||||||||||||||||
| Balance at January 1, 2021 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||
| Issuance of common stock to related parties for cash |
||||||||||||||||||||||||||||
| Conversion of Series A convertible preferred stock |
( |
) | ( |
) | ||||||||||||||||||||||||
| Issuance of common stock for dividend payment |
||||||||||||||||||||||||||||
| Dividends paid on Series A convertible preferred stock |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Stock compensation |
||||||||||||||||||||||||||||
| Fraction shares adjustment due to reverse split |
- | - | - | - | - | |||||||||||||||||||||||
| Net income |
- | - | ||||||||||||||||||||||||||
| Balance at September 30, 2021 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||
| For the Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||||
| Series A Convertible Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders' Equity | ||||||||||||||||||||||||
| Shares | Par value | Shares | Par value | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balance at January 1, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||
| Conversion of Series A convertible preferred stock | ( | ) | ||||||||||||||||||||||||||
| Reclassification of liability awards to equity | - | - | ||||||||||||||||||||||||||
| Accrue dividends payable on Series A convertible preferred stock | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock compensation | ||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| For the nine months ended |
||||||||
| September 30, |
||||||||
| 2021 |
2020 |
|||||||
| Cash Flows from Operating Activities: |
||||||||
| Net income (loss) |
$ | $ | ( |
) | ||||
| Reconciliation of net income (loss) to net cash (used in) provided by operating activities: |
||||||||
| Allowance for doubtful accounts |
||||||||
| Depreciation and amortization |
||||||||
| Change in fair value of derivative liabilities |
( |
) | ||||||
| Amortization of operating lease right-of-use asset |
||||||||
| Stock based compensation |
||||||||
| Gain from debt extinguishment |
( |
) | ||||||
| Subtotal of non-cash charges |
( |
) | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
( |
) | ||||||
| Inventories |
( |
) | ( |
) | ||||
| Prepaid expenses and other current assets |
( |
) | ||||||
| Other assets |
||||||||
| Accounts payable and accrued expenses |
( |
) | ||||||
| Deferred revenue |
( |
) | ||||||
| Lease liabilities |
( |
) | ( |
) | ||||
| Net cash used in operating activities |
( |
) | ( |
) | ||||
| Cash Flows from Investing Activities: |
||||||||
| Purchase of property, plant and equipment |
( |
) | ( |
) | ||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| Cash Flows from Financing Activities: |
||||||||
| Proceeds from issuance of common stock to related parties |
||||||||
| Proceeds from issuance of notes payable |
||||||||
| Repayment of notes payable |
( |
) | ||||||
| Dividend payment |
( |
) | ||||||
| Net cash provided by financing activities |
||||||||
| Net decrease in cash |
( |
) | ( |
) | ||||
| Cash, beginning of the period |
||||||||
| Cash, end of the period |
$ | $ | ||||||
| Supplemental disclosure of cash flow information |
||||||||
| Cash paid for interest |
$ | $ | ||||||
| Cash paid for income taxes |
$ | $ | ||||||
| Non-cash financing and investing |
||||||||
| Conversion of Series A convertible preferred stock |
$ | $ | ||||||
| Issuance of common stock for dividend payment |
$ | $ | ||||||
| Dividends paid on Series A convertible preferred stock |
$ | $ | ||||||
| Reclassification of liability awards to equity |
$ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed 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 premium, nicotine-based vapor products. The Company’s products are produced domestically through contract manufacturers for sale by select distributors, specialty retailers and third-party online resellers throughout the United States, as well as over 80 countries worldwide. The Company’s primary international markets include the United Kingdom, Italy, Spain, Belgium, Australia, Sweden and Canada. In June 2019, The Company launched distribution, through Don Polly, a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, the Company's former Chief Executive Officer and current Chief Operating Officer, respectively, and a consolidated variable interest for which the Company is the primary beneficiary (“Don Polly”), of certain premium vapor, ingestible and topical products containing hemp-derived cannabidiol (“CBD”) and other synthetic compounds derived from hemp. Our hemp-based products are produced, marketed and sold through, Don Polly, and the Company currently intends to develop and launch additional products containing hemp-derived cannabinoids in the future.
In addition to Don Polly, we are also the holding company for Charlie’s Chalk Dust, LLC (“Charlie’s” or “CCD”), a wholly-owned subsidiary of the Company, which activity includes production and sale of our premium, nicotine-based vapor products.
The Company's Common Stock, par value $
Reverse Stock Split
The Company’s Board of Directors approved a reverse stock split of the Company’s authorized, issued and outstanding shares of Common Stock, par value $0.001 per share, at a ratio of 1-for-
Going Concern Uncertainty Regarding the Legal and Regulatory Environment, Liquidity and Management’s Plan of Operation
The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company operates in a rapidly changing legal and regulatory environment; new laws and regulations or changes to existing laws and regulations could significantly limit the Company’s ability to sell its products, and/or result in additional costs. Additionally, the Company was required to apply for approval from the United States Food and Drug Administration ("FDA") to continue selling and marketing certain of its electronic nicotine delivery system (“ENDS”) products used for the vaporization of tobacco-derived nicotine in the United States. There is significant cost associated with the application process and there can be no assurance the FDA will approve the application(s). In addition, the outbreak of coronavirus (“COVID-19”) in March 2020 has had, and continues to have, a negative impact on the global economy and markets which has impacted the Company’s supply chain and sales. For the nine months ended September 30, 2021, the Company has incurred losses from operations of approximately $
Management's plans depend on its ability to increase revenues and continue its business development efforts, including the expenditure of approximately $
Risks and Uncertainties
The Company operates in an environment that is subject to rapid changes and developments in laws and regulations that could have a significant impact on the Company’s ability to sell its products. Beginning in September 2019, certain states temporarily banned the sale of flavored e-cigarettes, and several states and municipalities are considering implementing similar restrictions. Federal, state, and local governmental bodies across the United States have indicated that flavored e-cigarette liquid, vaporization products and certain other consumption accessories may become subject to new laws and regulations at the federal, state, and local levels. The application of any new laws or regulations that may be adopted in the future, at a federal, state, or local level, directly or indirectly implicating flavored e-cigarette liquid and other ENDS products, 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 tobacco-derived nicotine e-liquid products. The Company’s applications were submitted in September 2020 on a timely basis, which if approved, will allow the Company to continue to sell its approved products in the United States. Beginning in August 2021, the FDA began issuing Marketing Denial Orders (“MDO”) for ENDS products that lack evidence to demonstrate that permitting the marketing of such products would be appropriate for the protection of the public health. The Company has not received an MDO for any of its submissions, however there is no assurance that regulatory approval to sell our products will be granted or that we would be able to raise additional financing if required, which could have a significant impact on our sales.
On March 11, 2020, the World Health Organization designated the ongoing and evolving COVID-19 outbreak as a pandemic. The outbreak has caused and continues to cause a substantial disruption in international and U.S. economies and markets. The outbreak is having a temporary adverse impact on our industry as well as our business, with regards to certain supply chain disruptions and sales volume. While the disruption from COVID-19 is currently expected to be temporary, there is uncertainty around the duration. The 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
Basis of Presentation
The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented in this Quarterly Report on Form 10-Q (this “Report”) not misleading.
Amounts related to disclosure of December 31, 2020 balances within the interim condensed consolidated financial statements were derived from audited financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2020.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expense during the reporting periods. Actual results could differ from those estimates.
Significant Accounting Policies
There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2020 Annual Report.
Recent Accounting Standards
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company has adopted this standard as of January 1, 2021. The impact of adopting this standard was not material to the Company’s consolidated financial statements and related disclosures.
In June 2016 the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which supersedes current guidance requiring recognition of credit losses when it is probable that a loss has been incurred. The standard requires the establishment of an allowance for estimated credit losses on financial assets, including trade and other receivables, at each reporting date. The ASU will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. 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.
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. ASU 2020-06 eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, ASU 2020-06 modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. The amendments in ASU 2020-06 are effective for smaller reporting companies as defined by the SEC for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of ASU 2020-06 on its consolidated financial statements.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. This ASU will be effective for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. The Company does not believe the impact of adopting this standard will be material to its consolidated financial statements and related disclosures.
Reclassifications
Prior period financial statement amounts are reclassified as necessary to conform to the current period presentation. These prior period reclassifications did not affect the Company’s net income (loss), earnings (loss) per share, stockholders’ equity (deficit) or working capital.
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 September 30, 2021 and December 31, 2020 (amounts in thousands):
| Fair Value at September 30, 2021 |
||||||||||||||||
| Total |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
| Liabilities: |
||||||||||||||||
| Derivative liability - Warrants |
||||||||||||||||
| Total liabilities |
$ | $ | $ | $ | ||||||||||||
| Fair Value at December 31, 2020 |
||||||||||||||||
| Total |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
| Liabilities: |
||||||||||||||||
| Derivative liability - Warrants |
||||||||||||||||
| Total liabilities |
$ | $ | $ | $ | ||||||||||||
There were no transfers between Level 1, 2 or 3 during the nine-month period ended September 30, 2021.
The following table presents changes in Level 3 liabilities measured at fair value for the nine-month period ended September 30, 2021. Both observable and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long- dated volatilities) inputs (amounts in thousands).
| Derivative liability - Warrants |
||||
| Balance at January 1, 2021 |
$ | |||
| Change in fair value |
( |
) | ||
| Balance at September 30, 2021 |
$ | |||
A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in the Monte Carlo simulation measuring the Company’s derivative liabilities that are categorized within Level 3 of the fair value hierarchy as of September 30, 2021 and December 31, 2020 is as follows:
| September 30, |
December 31, |
|||||||
| 2021 |
2020 |
|||||||
| Exercise price |
$ | $ | ||||||
| Contractual term (years) |
||||||||
| Volatility (annual) |
% | % | ||||||
| Risk-free rate |
% | % | ||||||
| Dividend yield (per share) |
% | % | ||||||
On April 26, 2019 (the “Closing Date”), the Company entered into a Securities Exchange Agreement (“Share Exchange”) with each of the former members (“Members”) of Charlie’s, and certain direct investors in the Company (“Direct Investors”), pursuant to which the Company acquired all outstanding membership interests of Charlie’s beneficially owned by the Members in exchange for the issuance by the Company of units. Immediately prior to, and in connection with, the Share Exchange, Charlie’s consummated a private offering of membership interests that resulted in net proceeds to Charlie’s of approximately $
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment as of September 30, 2021 and December 31, 2020 are as follows (amounts in thousands):
| September 30, |
December 31, |
||||||||
| 2021 |
2020 |
Estimated Useful Life (in years) |
|||||||
| Machinery and equipment |
$ | $ | |
||||||
| Trade show booth |
|
||||||||
| Office equipment |
|
||||||||
| Leasehold improvements |
|
||||||||
| Accumulated depreciation |
( |
) | ( |
) | |||||
| $ | $ | ||||||||
Depreciation and amortization expense totaled $
NOTE 5 - CONCENTRATIONS
Vendors
The Company’s concentration of purchases is as follows:
| For the three months ended | For the nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Vendor A | % | % | ||||||||||||||
| Vendor B | % | % | ||||||||||||||
| Vendor C | % | % | % | % | ||||||||||||
| Vendor D | % | |||||||||||||||
| Vendor E | % | % | ||||||||||||||
| Vendor F | % | % | ||||||||||||||
During the three months ended September 30, 2021, purchases from two vendors represented
As of September 30, 2021, and December 31, 2020, amounts owed to these vendors totaled $
Accounts Receivable
The Company’s concentration of accounts receivable is as follows:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Customer A | % | % | ||||||
| Customer B | % | |||||||
| Customer C | % | |||||||
Two customers made up
NOTE 6 – DON POLLY, LLC.
Don Polly, LLC is a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, a former and current executive officer of the Company, respectively, and a consolidated variable interest for which the Company is the primary beneficiary. Don Polly formulates, sells and distributes the Company’s hemp-derived product lines.
We evaluate our ownership, contractual and other interests in entities that are not wholly-owned to determine if these entities are variable interest entities (“VIEs”), and, if so, whether we are the primary beneficiary of the VIE. In determining whether we are the primary beneficiary of a VIE and therefore required to consolidate the VIE, we apply a qualitative approach that determines whether we have both (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of, or the rights to receive benefits from, the VIE that could potentially be significant to that VIE. We continuously perform this assessment, as changes to existing relationships or future transactions may result in the consolidation or deconsolidation of a VIE. Effective April 25, 2019, we consolidated the financial statements of Don Polly and it is still considered a VIE of the Company. Since the Company has been determined to be the primary beneficiary of Don Polly, we have included Don Polly’s assets, liabilities, and operations in the accompanying condensed consolidated financial statements of the Company since April 25, 2019.
Don Polly operates under exclusive licensing and service contracts with the Company whereby the Company receives
NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of September 30, 2021 and December 31, 2020 are as follows (amounts in thousands):
| September 30, |
December 31, |
|||||||
| 2021 |
2020 |
|||||||
| Accounts payable |
$ | $ | ||||||
| Accrued compensation |
||||||||
| Other accrued expenses |
||||||||
| $ | $ | |||||||
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 $
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 $
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 $
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 $
The aforementioned PPP Loans were made under the PPP enacted by Congress under the CARES Act. The CARES Act (including the guidance issued by SBA and U.S. Department of the Treasury) provides that all or a portion of the PPP Loans may be forgiven upon request from the respective borrower to the SBA Lender or the Polly Lender, as the case may be, subject to requirements in the PPP Loans and under the CARES Act.
On February 19, 2021, Don Polly received notice from the Polly Lender, that the Polly PPP Loan was fully repaid, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the U.S. Small Business Administration. There is no further action required on the part of Don Polly to satisfy this liability. For the period ended March 31, 2021, the Company recorded a debt extinguishment gain of approximately $
On March 17, 2021, Don Polly obtained a second draw PPP loan (“Polly PPP Loan 2”) under the CARES Act from Polly Lender. The Polly PPP Loan 2 obtained by Don Polly provides general working capital in the amount of $
On April 28, 2021, Charlie’s received notice from SBA Lender that the Charlie’s PPP Loan was fully repaid, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the U.S. Small Business Administration. There is no further action required on the part of Charlie’s to satisfy this liability. For the period ended June 30, 2021, the Company recorded a debt extinguishment gain of approximately $
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 $
The following summarizes the Company’s notes payable maturities as of September 30, 2021 (amounts in thousands):
| Remaining months Ending December 31, 2021 |
$ | |||
| Year Ending December 31, 2022 |
||||
| Year Ending December 31, 2023 |
||||
| Year Ending December 31, 2024 |
||||
| Year Ending December 31, 2025 |
||||
| Thereafter |
||||
| Total |
$ |
NOTE 9 – EARNINGS (LOSS) PER SHARE APPLICABLE TO COMMON STOCKHOLDERS
Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the reporting period. Diluted earnings (loss) per common share is computed similar to basic earnings (loss) per common share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock. Diluted weighted average common shares include common stock potentially issuable under the Company’s convertible preferred stock, warrants and vested and unvested stock options.
For the three and nine months ended September 30, 2021 and 2020, net income (loss) is adjusted for gain from change in fair value of warrant liabilities.
The following table sets forth the computation of earnings (loss) per share (amounts in thousands, except share and per share amounts):
| For the three months ended |
For the nine months ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2021 |
2020 |
2021 |
2020 |
|||||||||||||
| Net income (loss) - basic |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Reversal of gain due to change in fair value of warrant liability |
( |
) | ( |
) | ||||||||||||
| Net income (loss) - diluted |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Weighted average shares outstanding - basic |
||||||||||||||||
| Diluted stock options |
||||||||||||||||
| Diluted warrants |
||||||||||||||||
| Diluted preferred shares |
||||||||||||||||
| Weighted average shares outstanding - diluted |
||||||||||||||||
| Basic earnings (loss) per share |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Diluted earnings (loss) per share |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
The following securities were not included in the diluted net income (loss) per share calculation because their effect was anti-dilutive as of the periods presented (in thousands):
| For the nine months ended |
||||||||
| September 30, |
||||||||
| 2021 |
2020 |
|||||||
| Options |
||||||||
| Series A convertible preferred shares |
||||||||
| Warrants |
||||||||
| Total |
||||||||
NOTE 10 – STOCKHOLDERS’ EQUITY
Series A Preferred Share Dividend & Share Waiver
On April 25, 2020, the Company was required to pay a one-time dividend equal to eight percent (
On August 13, 2020, the Company received a formal notice of default from a holder of its Series A Preferred requesting full payment of dividends due and payable with respect to the Series A Preferred held by such holder on or before August 23, 2020 (“Dividend Default”).
On April 21, 2021, the Company issued a waiver and exchange agreement (“Waiver Agreement”) to shareholders of its Series A Preferred shares (“Stock Payees”) requesting such Stock Payee's respective amount of the dividend payment (each individual Stock Payee's respective amount the "Stock Payee Indebtedness") to be paid in the form of shares of Common Stock (the "Stock Payment") and agreeing to consummate an exchange of such Stock Payee's right to the Stock Payee Indebtedness in cash for shares of Common Stock (the "Exchange"), pursuant to which the entire Stock Payee Indebtedness shall be exchanged for that number of shares of Common Stock (the “Shares”) equal to the total Stock Payee Indebtedness divided by $
On May 25, 2021, the Company entered into a Dividend Waiver and Exchange Agreement (the “Exchange Agreement”), between the Company and the holders (the “Series A Holders”) of its Series A Convertible Preferred Stock, par value $
During the three months ended September 30, 2021, the Company incurred an additional $
As of September 30, 2021, all dividend liability has been satisfied which is reflected on the Company’s condensed consolidated balance sheet.
Conversion of Series A Preferred Shares
For the nine months ended September 30, 2021, the Company issued approximately
March 2021 Private Placement
On March 19, 2021, the Company entered into Securities Purchase Agreements by and between the Company and certain family trusts in which Mr. Brandon Stump and Mr. Ryan Stump, the Company's former Chief Executive Officer and Chief Operating Officer, respectfully, are trustees and beneficiaries (the "Purchase Agreements"), for the private placement of an aggregate of
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
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
Non-Qualified Stock Options
The following table summarizes stock option activities during the nine months ended September 30, 2021 (all option amounts are in thousands):
| Stock Options |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life (in years) |
Aggregate Intrinsic Value |
|||||||||||||
| Outstanding at January 1, 2021 |
$ | $ | ||||||||||||||
| Options granted |
10.0 | - | ||||||||||||||
| Options forfeited/expired |
- | - | ||||||||||||||
| Outstanding at September 30, 2021 |
$ | $ | ||||||||||||||
| Options vested and exercisable at September 30, 2021 |
$ | $ | ||||||||||||||
As of September 30, 2021, there was approximately $
Common Stock Awards
On April 26, 2019, in connection with employment agreements with its former Chief Executive Officer and Chief Operating Officer, the Company issued market condition awards contingent upon the achievement of certain market capitalization targets. The awards are subject to a -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 $
On February 12, 2020, the Company, entered into a form of Amended and Restated Employment Agreement (together the “Amended Employment Agreements”) with both the Company’s former Chief Executive Officer and Chief Operating Officer. The terms of the Amended Employment Agreements have been amended as follows: (i) the annual equity awards based upon, among other conditions, the Company’s market capitalization and a percentage of base salary have been eliminated; however, the awards based on financial milestones remain in full force and effect; and (ii) payment of the 2019 bonuses has been deferred, resulting in the accrual of such bonuses on the books and records of the Company. On October 29, 2021, the Employment Agreement with Brandon Stump, the Company’s former Chief Executive Officer, was terminated pursuant to that certain Letter Agreement, dated October 29, 2021. All other terms of the Employment Agreement with the Company's Chief Operating Officer remain in full force and effect subject to further review by the Board of Directors as it deems necessary and appropriate.
On April 26, 2019, as additional consideration for advisory services provided in connection with the Charlie’s Financing and the Share Exchange (see Note 3 above), the Company issued an aggregate of
Prior to the Share Exchange, Charlie’s employees held Member units, which were automatically converted into
On April 1, 2021, the Board of Directors of the Company entered into an Employment Agreement (the "Agreement") with Henry Sicignano III, MBA, pursuant to which the Company appointed Mr. Sicignano to serve as President of the Company. Pursuant to the Agreement, Mr. Sicignano will serve as President for an initial period of two years, renewable on an annual basis unless earlier terminated by the Company or Mr. Sicignano. Mr. Sicignano was awarded
The Company recorded total stock-based compensation of approximately $
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, the Company’s former Chief Executive Officer, Ryan Stump, the Company’s Chief Operating Officer, and Keith Stump, a former member of the Company’s Board of Directors. The Stumps purchased the property that is the subject of the Lease in July 2019. The Lease, which was effective as of September 1, 2019, on a month-to-month basis, was then formalized on November 1, 2019 to have a term of years and a base rent rate of $
At September 30, 2021, the Company had operating lease liabilities of approximately $
The following summarizes quantitative information about the Company’s operating leases for the three and nine months ended September 30, 2021 and 2020 (amounts in thousands):
| For the three months ended |
For the nine months ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2021 |
2020 |
2021 |
2020 |
|||||||||||||
| Operating leases |
||||||||||||||||
| Operating lease cost |
$ | $ | $ | $ | ||||||||||||
| Variable lease cost |
||||||||||||||||
| Operating lease expense |
||||||||||||||||
| Short-term lease rent expense |
||||||||||||||||
| Total rent expense |
$ | $ | $ | $ | ||||||||||||
| For the nine months ended |
||||||||
| September 30, |
||||||||
| 2021 |
2020 |
|||||||
| Operating cash flows from operating leases |
$ | $ | ||||||
| Weighted-average remaining lease term – operating leases (in years) |
||||||||
| Weighted-average discount rate – operating leases |
% | % | ||||||
Maturities of our operating leases as of September 30, 2021, excluding short-term leases, are as follows (amounts in thousands):
| Remaining Months Ending December 31, 2021 |
$ | |||
| Year Ending December 31, 2022 |
||||
| Year Ending December 31, 2023 |
||||
| Year Ending December 31, 2024 |
||||
| Total |
||||
| Less present value discount |
( |
) | ||
| Operating lease liabilities as of September 30, 2021 |
$ |
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 $
NOTE 13- SUBSEQUENT EVENTS
The Company evaluated subsequent events for their potential impact on the consolidated condensed financial statements and disclosures through the date the consolidated condensed financial statements were available to be issued and determined that, except as set forth below, no subsequent events occurred that were reasonably expected to impact the consolidated condensed financial statements presented herein.
Resignation of Brandon Stump
On October 29, 2021, Brandon Stump resigned from his position as: (i) Chief Executive Officer and Chairman of the Board of Directors; and (ii) all positions held for each direct and indirect subsidiary of the Company (each, a "Subsidiary"), including as a member of the Board of Directors of the Company and each Subsidiary.
In connection with Mr. Stump's resignation, the Company and Mr. Stump entered into an agreement regarding Mr. Stump's resignation (the "Termination Agreement"), which Termination Agreement is dated October 29, 2021. Pursuant to the Termination Agreement, in consideration for Mr. Stump agreeing to terminate his employment agreement with the Company, as amended and restated on February 12, 2020 (the "Employment Agreement"), and agreeing to certain restrictions and covenants, the Company will: (i) continue to pay Mr. Stump his base salary (as defined in the Employment Agreement), through April 22, 2022; (ii) pay Mr. Stump certain bonus compensation owed to Mr. Stump in an amount equal to $
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of Charlie’s Holdings, Inc. should be read in conjunction with the financial statements and the notes to those statements appearing elsewhere in this Quarterly Report on Form 10-Q (this “Report”). Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section in this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
As used in this Report, unless otherwise stated or the context otherwise requires, references to the “Company”, “we”, “us”, “our”, or similar references mean Charlie’s Holdings, Inc. (formerly True Drinks Holdings, Inc.), its subsidiaries and consolidated variable interest entity on a consolidated basis. References to “Charlie’s” and “CCD” refer to Charlie’s Chalk Dust, LLC, a California limited liability company and wholly-owned subsidiary of the Company, and “Don Polly” refers to Don Polly, LLC, a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, the Company’s former Chief Executive Officer and current Chief Operating Officer, respectively, and a consolidated variable interest (“VIE”) for which the Company is the primary beneficiary.
Overview
Our objective is to become a significant leader in the rapidly growing, global e-cigarette and e-liquid segments of the broader nicotine related products industry. Through Charlie’s, we formulate, market and distribute premium, nicotine-based vapor products. 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 other synthetic compounds derived from hemp in the future.
Operational Plan
Considering industry-specific hurdles, as well as the potential for future regulatory changes, management has targeted opportunities for growth and has adopted the following operational plan.
First, we plan to increase the sales of our hemp-derived products, including topicals, ingestibles and disposable vapor devices. We feel there is a significant upside in the hemp-derived products space, and we have begun to shift our focus in this business to the burgeoning market for products containing compounds synthetically derived from hemp, including Delta-8-Tetrahydrocannabinol ("Delta-8-THC") and other synthetic tetrahydrocannabinol ("Synthetic THC") compounds. These product categories have grown rapidly, as they offer consumers a range of therapeutic benefits across varying potencies and product formats. We have also recently enhanced our focus on our direct-to-consumer business and have allocated additional financial resources to increase e-commerce sales of hemp-derived products.
Secondly, we continue to see a significant opportunity for sales growth in international markets for our e-liquid and other vapor products. Presently, approximately 15% of our vapor product sales come from the international market and we are well positioned to increase those sales in the countries that we presently sell, and in additional overseas markets, as we have already built an international distribution platform. Specifically, the Company intends to launch proprietary new disposables, containing synthetically derived nicotine, that have been specially formulated for the European and Middle East markets. In partnership with our international distributors, Charlie’s will sell award wining products in markets where more than 20% of the population consumes nicotine in some format.
Most importantly, we feel that tobacco and synthetically derived nicotine vapor products will continue to provide a significant growth opportunity domestically. During the quarter ended March 31, 2021, we launched our synthetic nicotine (not derived from tobacco) Pachamama Disposable product line, which will provide access to additional sales channels and broaden our customer base. These innovative product formats are not currently subject to review by the United States Food and Drug Administration (“FDA”) and currently represent Charlie’s most important, fastest-growing product category. We are continuing with our plan to obtain marketing authorization for certain of our tobacco derived nicotine vapor products through the completion of a Premarket Tobacco Application ("PMTA"), which we submitted in September 2020. Obtaining a marketing order from the FDA would, in our opinion, help to remediate 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.
Recent Developments
Resignation of Brandon Stump.
On October 29, 2021, Brandon Stump resigned from his position as: (i) Chief Executive Officer and Chairman of the Board of Directors; and (ii) all positions held for each direct and indirect subsidiary of the Company (each, a "Subsidiary"), including as a member of the Board of Directors of the Company and each Subsidiary.
In connection with Mr. Stump's resignation, the Company and Mr. Stump entered into an agreement regarding Mr. Stump's resignation (the "Termination Agreement"), which Termination Agreement is dated October 29, 2021. Pursuant to the Termination Agreement, in consideration for Mr. Stump agreeing to terminate his employment agreement with the Company, as amended and restated on February 12, 2020 (the "Employment Agreement"), and agreeing to certain restrictions and covenants, the Company will: (i) continue to pay Mr. Stump his base salary (as defined in the Employment Agreement), through April 22, 2022; (ii) pay Mr. Stump certain bonus compensation owed to Mr. Stump in an amount equal to $300,000, payable in installments of $75,000 on each of November 1, 2021, December 1, 2021, January 1, 2022, and February 1, 2022; and (iii) continue to make available to Mr. Stump certain employee benefits offered by the Company until April 22, 2022.
Reverse Stock Split
Our Board of Directors approved a reverse stock split of our authorized, issued, and outstanding shares of common stock, par value $0.001 per share (the “Common Stock”), at a ratio of 1-for-100 (the “Reverse Split”). The Reverse Split was effective as of June 16, 2021 (the “Effective Date”). All share and per share amounts in this Report have been retroactively adjusted to account for the reverse stock split.
March 2021 Private Placement
On March 19, 2021, the Company entered into Securities Purchase Agreements by and between the Company and certain family trusts in which Mr. Brandon Stump, the Company's former Chief Executive Officer and significant shareholder of the Company, and Mr. Ryan Stump, the Company's Chief Operating Officer, are trustees and beneficiaries (the "Purchase Agreements"), for the private placement of an aggregate of 3,517,000 shares of its Common Stock, at a purchase price per share of $0.853 (the "Private Placement"), which Private Placement was consummated on March 22, 2021. The Private Placement resulted in gross proceeds to the Company of approximately $3.0 million. The Private Placement was undertaken pursuant to Rule 506 promulgated under the Securities Act of 1933, as amended, and was consummated in a transaction approved by the Company's independent directors in accordance with Rule 16b-3(d)(1) of the Securities Exchange Act of 1934, as amended.
Red Beard Holdings, LLC Note Payable
On April 1, 2020, the Company, Charlie's and its VIE, Don Polly, issued a secured promissory note (the "Red Beard Note") to one of the Company's largest stockholders, Red Beard Holdings, LLC ("Red Beard") in the principal amount of $750,000 (the "Principal Amount"), requiring a guaranteed minimum interest amount of $75,000 (“Minimum Interest”), which Red Beard Note is secured by all assets of the Company pursuant to the terms of a Security Agreement entered into by and between the Company and Red Beard (the "Red Beard Note Financing"). Red Beard Note was subsequently amended on August 27, 2020, September 30, 2020, October 29, 2020, December 1, 2020, and January 19, 2021, ultimately increasing Principal Amount to $1,400,000 and Minimum Interest to $150,000.
On 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.
Small Business Administration Loan Programs
On April 30, 2020, Charlie's, a wholly owned subsidiary of the Company, received approval to enter into a U.S. Small Business Administration ("SBA") Promissory Note (the " Charlie's PPP Loan") with TBK Bank, SSB (the "SBA Lender"), pursuant to the Paycheck Protection Program ("PPP") of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") as administered by the SBA (the "PPP Loan Agreement").
The Charlie's PPP Loan provides for working capital to CCD in the amount of $650,761. The Charlie's PPP Loan was set to mature on April 30, 2022 and accrued interest at a rate of 1.00% per annum. Payments of principal and interest were deferred for six months from the date of the Charlie's PPP Loan, or until November 30, 2020. Interest, however, continued to accrue during that time.
On April 14, 2020, Don Polly also obtained a loan pursuant to the PPP enacted under the CARES Act (the "Polly PPP Loan" and together with the 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 provided for working capital to Don Polly in the amount of $215,600. The Polly PPP Loan was set to mature on April 14, 2022 and accrued interest at a rate of 1.00% per annum. Payments of principal and interest were deferred for six months from the date of the Polly PPP Loan, or until November 14, 2020. Interest continued to accrue during that time.
The aforementioned PPP Loans were made under the PPP enacted by Congress under the CARES Act. The CARES Act (including the guidance issued by SBA and U.S. Department of the Treasury) provides that all or a portion of the PPP Loans may be forgiven upon request from the respective borrower to the SBA Lender or the Polly Lender, as the case may be, subject to requirements in the PPP Loans and under the CARES Act.
On February 19, 2021 Don Polly received notice from the Polly Lender, that the Polly PPP Loan was fully repaid, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the U.S. Small Business Administration. There is no further action required on the part of Don Polly to satisfy this liability.
On March 17, 2021, Don Polly obtained a second draw PPP loan (“Polly PPP Loan 2”) under the CARES Act from Polly Lender. The Polly PPP Loan 2 obtained by Don Polly provides general working capital in the amount of $184,200. The Polly PPP Loan 2 will mature on March 17, 2026 and will accrue interest at a rate of 1.00% per annum. Payments of principal and interest will be deferred, however interest will continue to accrue during this time.
On April 28, 2021, Charlie’s received notice from SBA Lender that the Charlie’s PPP Loan was fully repaid, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the U.S. Small Business Administration. There is no further action required on the part of Charlie’s to satisfy this liability.
On June 24, 2020, SBA authorized (under Section 7(b) of the Small Business Act, as amended) an Economic Injury Disaster Loan (“EID Loan”) to Don Polly in the amount of $150,000. Installment payments, including principal and interest of $731 monthly will begin twelve months from date of the EID Loan. The balance of principal and interest will be payable thirty years from the date of the EID Loan and interest will accrue at the rate of 3.75% per annum.
PMTA
During the quarter ended September 30, 2020, the FDA's Center for Tobacco Products informed us that our PMTA has received a valid submission tracking number, passed the FDA’s filing review phase, and recently entered the substantive review phase. To date, Charlie’s has invested over $4.4 million for our initial PMTA submission. We engaged a team of more than 200 professionals, including doctors, scientists, biostatisticians, data analysts, and numerous contract research organizations to create our comprehensive PMTA submission. During the quarter ended September 30, 2021, the FDA began issuing Marketing Denial Orders (“MDO”) for electronic nicotine delivery system (“ENDS”) products that lack evidence to demonstrate that permitting the marketing of such products would be appropriate for the protection of the public health. As of September 30, 2021, the Company had not received an MDO for any of its submissions. This news highlights our progress toward achieving full regulatory compliance and our goal of providing customers with a trusted product portfolio.
Impact of COVID-19
The outbreak of a novel strain of coronavirus ("COVID-19", or, “Coronavirus”) has had and continues to have a negative impact on the global economy and the 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 the nine months ended September 30, 2021, we engaged in periodic, informal testing of our business operations, and we do not believe that our financial position, work efficiency and overall operational integrity have been materially affected. However, we recognize that a certain degree of employee enthusiasm, teamwork, creativity, and support is normally generated by being present at a physical location, and we believe that prolonged remote working may have a negative impact over time on our business, and on employee productivity. Our Denver, CO office and Huntington Beach, CA warehouse locations have fully returned to on premise status, while our corporate headquarters in Costa Mesa, CA remains remote for many 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.
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 tobacco-derived nicotine 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. At this date, Charlie’s PMTA remains among the select minority of applications submitted to the FDA that has not received an MDO or Refuse-to-File designation. However, it is possible that the FDA will request additional information or that the Company will need to amend its PMTA at some point in the future. The Company may also require additional financing in the future to support potential 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 evolve. The outbreak is having a temporary adverse impact on our industry as well as our business, with regards to certain supply chain disruptions and sales volume. While the disruption from COVID-19 is currently expected to be temporary, there is uncertainty around the duration.
Basis of Presentation
The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented in this Report not misleading.
Amounts related to disclosure of December 31, 2020 balances within the interim condensed consolidated financial statements were derived from audited financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2020, filed with the SEC on April 5, 2021. The operating results of Don Polly are also included.
Current Operating Trends and Financial Highlights
Management currently considers the following events, trends and uncertainties to be important in understanding the Company’s results of operations and financial condition for the most recent calendar quarter and full year:
Regarding results from operations for the quarter ended September 30, 2021, we generated revenue of approximately $5,219,000, as compared to revenue of $3,894,000 for the three months ended September 30, 2020. This $1,325,000 increase in revenue was due primarily to a $1,168,000 increase in sales of our nicotine-based vapor products, as well as a $157,000 increase in sales of our hemp-derived wellness products.
We generated net income for the three months ended September 30, 2021 of approximately $3,107,000, as compared to net loss of approximately $6,824,000 for the three months ended September 30, 2020. The net income for the three months ended September 30, 2021 includes non-cash stock-based compensation expense of approximately $39,000 and a non-cash gain in fair value of derivative liabilities of $2,729,000.
Regarding results from operations for the nine months ended September 30, 2021, we generated revenue of approximately $15,013,000, as compared to revenue of $12,462,000 for the nine months ended September 30, 2020. This increase in revenue was due primarily to a $2,551,000 increase in sales of our nicotine-based vapor products, while sales of our hemp-derived products remained relatively unchanged.
We generated net income for the nine months ended September 30, 2021 of approximately $2,734,000, as compared to net loss of approximately $11,384,000 for the nine months ended September 30, 2020. The net income for the nine months ended September 30, 2021 includes non-cash stock-based compensation expense of approximately $563,000 and a non-cash gain in fair value of derivative liabilities of $1,901,000.
A review of the three-month period ended September 30, 2021 follows:
| For the three months ended |
||||||||||||||||
| September 30, |
Change |
|||||||||||||||
| 2021 |
2020 |
Amount |
Percentage |
|||||||||||||
| ($ in thousands) |
||||||||||||||||
| Revenues: |
||||||||||||||||
| Product revenue, net |
$ | 5,219 | $ | 3,894 | $ | 1,325 | 34.0 | % | ||||||||
| Total revenues |
5,219 | 3,894 | 1,325 | 34.0 | % | |||||||||||
| Operating costs and expenses: |
||||||||||||||||
| Cost of goods sold - product revenue |
2,310 | 1,666 | 644 | 38.7 | % | |||||||||||
| General and administrative |
2,084 | 2,073 | 11 | 0.5 | % | |||||||||||
| Sales and marketing |
442 | 335 | 107 | 31.9 | % | |||||||||||
| Research and development |
5 | 741 | (736 | ) | -99.3 | % | ||||||||||
| Total operating costs and expenses |
4,841 | 4,815 | 26 | 0.5 | % | |||||||||||
| Income (loss) from operations |
378 | (921 | ) | 1,299 | -141.0 | % | ||||||||||
| Other income (expense): |
||||||||||||||||
| Interest expense |
(2 | ) | (29 | ) | 27 | -93.1 | % | |||||||||
| Change in fair value of derivative liabilities |
2,729 | (5,874 | ) | 8,603 | -146.5 | % | ||||||||||
| Other income |
2 | - | 2 | 100 | % | |||||||||||
| Total other income (loss) |
2,729 | (5,903 | ) | 8,632 | -146.2 | % | ||||||||||
| Net income (loss) |
$ | 3,107 | $ | (6,824 | ) | $ | 9,931 | -145.5 | % | |||||||
Results of Operations for the Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020
Revenue
Revenue for the three months ended September 30, 2021 increased approximately $1,325,000 or 34%, to approximately $5,219,000, as compared to approximately $3,894,000 for same period in 2020 due to a $1,168,000 increase in sales of our nicotine-based vapor products and a $157,000 increase in sales of our hemp-derived wellness products. The increase in our nicotine-based vapor product sales is directly related to the launch of our Pachamama Disposable product line, which is not currently subject to FDA review and currently represents Charlie’s most important, fastest-growing product category. Pachamama Disposables became Charlie’s first-ever entrant into the rapidly expanding, disposable e-cigarette market and offer users a variety of premium flavors containing synthetic nicotine (not derived from tobacco) in a compact, discrete format. However, ongoing uncertainty surrounding the FDA’s recent issuance of MDO’s and Refuse-to-File designations, as well as the addition of vapor products to the Prevent All Cigarette Trafficking Act (“PACT Act”) (See Regulatory and Market Risks) continue to affect buying patterns in the domestic vapor products market as customers reduce inventories of non-PMTA submitted products and adjust their business models to suit recent changes in regulation. Lingering effects of COVID-19 as well as shifting consumer preferences in our channels have both continued to affect sales of our CBD wellness products. As a result, during the quarter ended March 31, 2021, we began to streamline our existing hemp-derived wellness product offering and pursue the developing market for products containing synthetically derived cannabinoids, including Delta-8-THC and other Synthetic THC compounds. We view this market segment as having higher growth potential, as well as better alignment with our existing sales channels.
Cost of Revenue
Cost of revenue, which consists of direct costs of materials, direct labor, third party subcontractor services, and other overhead costs increased approximately $644,000, or 38.7%, to approximately $2,310,000, or 44.3% of revenue, for the three months ended September 30, 2021, as compared to approximately $1,666,000, or 42.8% of revenue, for the same period in 2020. This cost, as a percent of revenue, increased due to a higher sales mix consisting of our Pachamama Disposable product line, which carries a lower margin per unit relative to our other vapor products. Cost of revenue was partially offset by a lower than expected provision for inventory obsolescence across both business lines.
General and Administrative Expenses
For the three months ended September 30, 2021, total general and administrative expense increased approximately $11,000 to $2,084,000 as compared to approximately $2,073,000 for the same period in 2020. Notably, this change is primarily comprised of increases of approximately $175,000 in the provision for bad debt, $124,000 in professional fees as well as $109,000 in other general and administrative expenses. The increase in provision for bad debt was primarily related to the increase in sales and accounts receivable balance during the period. The increase in professional fees was the result of several internal projects, most of which focused on the creation of a solution “network” necessary to effectively meet the requirements of both the Consolidated Appropriations Act of 2021 and the PACT Act. These increases were offset by reductions in non-cash stock-based compensation and salaries and benefits costs of approximately $342,000 and $55,000, respectively. The reduction in non-cash, stock-based compensation is primarily due to the conclusion of the vesting period for shares of Common Stock awarded to several employees in conjunction with Share Exchange in April 2019 (as defined in Note 3 of Item 1, Part 1 of this Report).
Sales and Marketing Expense
For the three months ended September 30, 2021, total sales and marketing expense increased approximately $107,000, or 31.9%, to approximately $442,000 as compared to approximately $335,000 for the same period in 2020, which was primarily due to a return to normalized trade-show activity during the quarter. Sales commissions increased marginally due to revenue growth across our businesses, however the increase was mitigated by a restructuring of our sales team and compensation program at the beginning of 2021.
Research and Development Expense
For the three months ended September 30, 2021, total research and development costs decreased approximately $736,000, or 99.3%, to approximately $5,000 as compared to approximately $741,000 for the same period in 2020, which was primarily due to reduced costs associated with our PMTA registrations.
Income from Operations
We had operating income of approximately $378,000 for the three months ended September 30, 2021, due primarily to an increase in sales across both Charlie’s and Don Polly. We also incurred certain non-cash, general and administrative expenses during the period including a $39,000 expense related to stock-based compensation. Net income is determined by adjusting income from operations by the following items:
| ● |
Change in Fair Value of Derivative Liabilities. For the three months ended September 30, 2021, the gain in fair value of derivative liabilities was $2,729,000, compared to a loss of $5,874,000 for the three months ended September 30, 2020. The derivative liability is associated with the issuance of the Investor Warrants and the Placement Agent Warrants (as defined in Note 3 of this Report) in connection with the Share Exchange. The gain for the quarter ended September 30, 2021, reflects the effect of the decrease in stock price as of September 30, 2021, compared to June 30, 2021. Due to the limited supply of shares currently freely trading, our stock price may experience volatility and therefore, considerable fluctuations in the value of our warrant derivative liability in the future. We had 40,337,693 warrants outstanding as of September 30, 2021. |
| ● |
Interest Expense. For the three months ended September 30, 2021, and 2020, we recorded interest expense related to notes payable of $2,000 and $29,000, respectively. |
| ● |
Other Income. For the three months ended September 30, 2021 and 2020, we recorded other income of $2,000 and $0, respectively. |
Net Income (Loss)
For the three months ended September 30, 2021, we had net income of $3,107,000 as compared to a net loss of $6,824,000 for the same period in 2020.
A review of the nine-month period ended September 30, 2021 follows:
| For the nine months ended |
||||||||||||||||
| September 30, |
Change |
|||||||||||||||
| 2021 |
2020 |
Amount |
Percentage |
|||||||||||||
| ($ in thousands) |
||||||||||||||||
| Revenues: |
||||||||||||||||
| Product revenue, net |
$ | 15,013 | $ | 12,462 | $ | 2,551 | 20.5 | % | ||||||||
| Total revenues |
15,013 | 12,462 | 2,551 | 20.5 | % | |||||||||||
| Operating costs and expenses: |
||||||||||||||||
| Cost of goods sold - product revenue |
7,047 | 5,361 | 1,686 | 31.4 | % | |||||||||||
| General and administrative |
6,759 | 8,500 | (1,741 | ) | -20.5 | % | ||||||||||
| Sales and marketing |
1,212 | 1,259 | (47 | ) | -3.7 | % | ||||||||||
| Research and development |
14 | 3,372 | (3,358 | ) | -99.6 | % | ||||||||||
| Total operating costs and expenses |
15,032 | 18,492 | (3,460 | ) | -18.7 | % | ||||||||||
| Loss from operations |
(19 | ) | (6,030 | ) | 6,011 | -99.7 | % | |||||||||
| Other income (expense): |
||||||||||||||||
| Interest expense |
(33 | ) | (105 | ) | 72 | -68.6 | % | |||||||||
| Change in fair value of derivative liabilities |
1,901 | (5,264 | ) | 7,165 | -136.1 | % | ||||||||||
| Gain on debt extinguishment |
875 | - | 875 | 100 | % | |||||||||||
| Other income |
10 | 15 | (5 | ) | -33.3 | % | ||||||||||
| Total other income (loss) |
2,753 | (5,354 | ) | 8,107 | -151.4 | % | ||||||||||
| Net income (loss) |
$ | 2,734 | $ | (11,384 | ) | $ | 14,118 | -124.0 | % | |||||||
Results of Operations for the Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020
Revenue
Revenue for the nine months ended September 30, 2021 increased approximately $2,551,000 or 20.5%, to approximately $15,013,000, as compared to approximately $12,462,000 for same period in 2020 due to a $2,551,000 increase in sales of our nicotine-based vapor products, while sales of our hemp-derived products remained relatively unchanged. The increase in our nicotine-based vapor product sales is directly related to the launch of our Pachamama Disposable product line, which is not currently subject to FDA review and currently represents Charlie’s most important, fastest-growing product category. Pachamama Disposables became Charlie’s first-ever entrant into the rapidly expanding, disposable e-cigarette market and offer users a variety of premium flavors containing synthetic nicotine (not derived from tobacco) in a compact, discrete format. However, ongoing uncertainty surrounding the FDA’s recent issuance of MDO’s and Refuse-to-File designations, as well as the addition of vapor products to the Prevent All Cigarette Trafficking Act (“PACT Act”) (See Regulatory and Market Risks) continue to affect buying patterns in the domestic vapor products market as customers reduce inventories of non-PMTA submitted products and adjust their business models to suit recent changes in regulation. Lingering effects of COVID-19 as well as shifting consumer preferences in our channels have both continued to affect sales of our CBD wellness products. As a result, during the quarter ended March 31, 2021, we began to streamline our existing hemp-derived wellness product offering and pursue the developing market for products containing synthetically-derived cannabinoids, including Delta-8-THC and other Synthetic THC compounds. We view this market segment as having higher growth potential, as well as better alignment with our existing sales channels.
Cost of Revenue
Cost of revenue, which consists of direct costs of materials, direct labor, third party subcontractor services, and other overhead costs increased approximately $1,686,000, or 31.4%, to approximately $7,047,000, or 46.9% of revenue, for the nine months ended September 30, 2021, as compared to approximately $5,361,000, or 43% of revenue, for the same period in 2020. This cost, as a percent of revenue, increased due to a higher sales mix consisting of our Pachamama Disposable product line, which carries a lower margin per unit relative to our other vapor products. Cost of revenue was also negatively affected by a larger than normal provision for inventory obsolescence during the period related to certain of our hemp-derived wellness products.
General and Administrative Expenses
For the nine months ended September 30, 2021, total general and administrative expense decreased approximately $1,741,000 to $6,759,000 as compared to approximately $8,500,000 for the same period in 2020. Notably, this decrease is comprised of reductions of approximately $2,153,000 of non-cash, stock-based compensation and $61,000 of salaries and benefits costs. The reduction in non-cash, stock-based compensation is primarily due to the forfeiture of stock awards by Brandon Stump and Ryan Stump pursuant to the adoption of the Amended Employment Agreements entered February 12, 2020, as well as the conclusion of the vesting period for shares of Common Stock awarded to several employees in conjunction with the Share Exchange in April 2019. The decrease was primarily offset by increases of approximately $325,000 in professional fees, $97,000 of merchant processing costs and $51,000 of other general administrative expenses. The increase in professional fees was largely the result of several internal projects largely focused on the creation of a solution “network” necessary to effectively meet the requirements of both the Consolidated Appropriations Act of 2021 and the PACT Act as well as costs associated with certain corporate actions including our Reverse Split, completed June 16, 2021, and the private sale of 3,517,000 shares of our common stock to the Company’s founders Brandon Stump and Ryan Stump completed March 23, 2021.
Sales and Marketing Expense
For the nine months ended September 30, 2021, total sales and marketing expense decreased approximately $47,000, or 3.7%, to approximately $1,212,000 as compared to approximately $1,259,000 for the same period in 2020, which was primarily due to a shift away from broad-based advertising efforts and focusing on targeted sales and marketing programs with certain of our large key distribution partners. Our sales mix to large distributors has increased as a result of logistical changes in our business following the addition of ENDS products to the PACT Act earlier this year. During the nine months ended September 30, 2021, we also continued to refine our use of certain point-of-sale materials in favor of increased digital marketing campaigns, however we will continue to remain agile in how we focus our resources in the future. Sales commissions increased marginally due to revenue growth across our businesses, however the increase was mitigated by a restructuring of our sales team and compensation program at the beginning of 2021.
Research and Development Expense
For the nine months ended September 30, 2021, total research and development expense decreased approximately $3,358,000, to approximately $14,000 as compared to $3,372,000 for the same period in 2020, which was primarily due to reduced costs associated with our PMTA registrations.
Loss from Operations
We had operating losses of approximately $19,000 for the nine months ended September 30, 2021, due primarily to a $325,000 increase in professional fees as well as a $148,000 increase in other general and administrative costs. We also incurred certain non-cash general and administrative expenses that contributed to the loss from operations including a $563,000 expense related to stock-based compensation. Net loss is determined by adjusting loss from operations by the following items:
| ● |
Change in Fair Value of Derivative Liabilities. For the nine months ended September 30, 2021, the gain in fair value of derivative liabilities was $1,901,000, compared to loss of $5,264,000 for the same period in 2020. The derivative liability is associated with the issuance of the Investor Warrants and the Placement Agent Warrants (as defined in Note 3 of this Report) in connection with the Share Exchange. The gain for the nine months ended September 30, 2021, reflects the effect of the decrease in stock price as of September 30, 2021, compared to December 31, 2020. During the nine months ended September 30, 2021, we experienced a substantial variation in trading volume for our stock, which may persist in the future. Due to the limited supply of shares currently freely trading, our stock price may experience volatility and therefore, considerable fluctuations in the value of our warrant derivative liability in the future. We had 40,337,693 warrants outstanding as of September 30, 2021. |
| ● |
Interest Expense. For the nine months ended September 30, 2021, and 2020, we recorded interest expense related to notes payable of $33,000 and $105,000, respectively. |
| ● |
Gain on debt extinguishment. For the nine months ended September 30, 2021, and 2020, we recorded a debt extinguishment gain of $875,000 and $0, respectively, including principal and accrued interest, related to the forgiveness of the Don Polly PPP Loan and the Charlie’s PPP Loan. |
| ● |
Other Income. For the nine months ended September 30, 2021, and 2020, we recorded other income of $10,000 and $15,000, respectively. |
Net Income (Loss)
For the nine months ended September 30, 2021, we had a net income of $2,734,000 as compared to a net loss of $11,384,000 for the same period in 2020.
Effects of Inflation
Inflation has not had a material impact on our business.
Liquidity and Capital Resources
As of September 30, 2021, we had working capital of approximately $505,000, which consisted of current assets of approximately $5,667,000 and current liabilities of approximately $5,162,000. This compares to negative working capital of approximately $6,020,000 at December 31, 2020. The current liabilities, as presented in the condensed consolidated balance sheet at September 30, 2021 included elsewhere in this Report primarily include approximately $2,006,000 of accounts payable and accrued expenses, approximately $221,000 of deferred revenue associated with product shipped but not yet received by customers, approximately $392,000 of lease liabilities, and $2,543,000 of derivative liability associated with the Investor Warrants and Placement Agent Warrants (the derivative liability of $2,543,000 is included in determining the working capital of $505,000 but is not expected to use any cash to ultimately satisfy the liability). In addition, the effect of the COVID-19 pandemic may have a negative impact on our liquidity and capital reserves.
Our cash and cash equivalents balance at September 30, 2021 was approximately $1,270,000.
For the nine months ended September 30, 2021, net cash used in operating activities was approximately $980,000, as compared to $3,502,000 for the same period in 2020. This resulted from a net income of $2,734,000, partially offset by $563,000 of share-based compensation, $1,901,000 of change in fair value of derivative liabilities and $2,080,000 changes in our operating assets and liabilities.
For the nine months ended September 30, 2021, we used cash for investment activities of approximately $73,000 as compared to $153,000 for the same period in 2020. The cash used for investment activities is primarily for the on-going development and configuration of enterprise resource planning software during the nine months ended September 30, 2021.
For the nine months ended September 30, 2021 we generated approximately $901,000 cash from financing activities as compared to $2,416,000 for the same period in 2020. In the 2021 period, we generated cash from financing activities from the Polly PPP Loan 2 (as defined in Note 8 of Item 1, Part 1 of this Report) and the Private Placement (as defined in Note 10 of Item 1, Part 1 of this Report). We paid cash dividends of $883,000 and notes payable of $1,400,000 during the nine months ended September 30, 2021.
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 was required to apply for FDA approval to continue selling and marketing its products used for the vaporization of tobacco derived nicotine in the United States. There is significant cost associated with the application process and there can be no assurance the FDA will approve the application(s). In addition, the recent outbreak of COVID-19 in March 2020 has had a negative impact on the global economy and markets which has negatively impacted the Company’s supply chain and sales. For the nine months ended September 30, 2021, the Company has incurred a loss from operations of $19,000 and a consolidated net income of approximately $2,734,000 and the Company has a stockholders’ equity of $1,068,000 as of September 30, 2021. However, net cash used in operating activities was approximately $980,000, and net income for the period was largely the result of $2,754,000 in other income, including a $1,901,000 gain in fair value of derivative liabilities. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to the carrying amount and classification of recorded assets and liabilities should the Company be unable to continue operations.
Our plans and growth depend on our ability to increase revenues and continue our business development efforts, including the expenditure of approximately $4,400,000 to date, to complete our PMTA registration process. On March 23, 2021, we closed a $3 million capital raise through the private sale of 3,517,000 shares of our common stock to the Company’s founders Brandon Stump and Ryan Stump (see Recent Developments). We intend to use the proceeds to fund future growth, increase working capital, retire outstanding debt, and for other general corporate purposes. If in the future our plans or assumptions change or prove to be inaccurate, or there is a significant change in the regulatory environment or the recent outbreak of COVID-19 continues to impact the global economy, we will need to raise additional funds through public or private debt or equity offerings, financings, corporate collaborations, or other means. There can be no assurance that such financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and in our best interests.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements other than operating lease commitments.
Critical Accounting Policies
The condensed consolidated financial statements are prepared in conformity with U.S. GAAP, which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of expense in the periods presented. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, due to inherent uncertainties in making estimates, actual results could differ from the original estimates, requiring adjustments to these balances in future periods. The critical accounting estimates that affect the consolidated financial statements and the judgments and assumptions used are consistent with those described under Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4 - CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Our management, with the participation of our President 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 Report. 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 President and Chief Financial Officer concluded that, as of September 30, 2021, 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 President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting.
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15 of the Exchange Act that occurred during the quarter ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Although we have modified our workplace practices due to the COVID-19 pandemic, resulting in many of our employees working remotely since March 2020, this has not materially affected our internal controls over financial reporting. We continue to monitor and assess the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company may be involved in various claims and counterclaims and legal actions arising in the ordinary course of business. Other than as set forth below, there are no additional pending or threatened legal proceedings at this time.
C.H. Robinson Worldwide, Inc. v. True Drinks, Inc. On September 5, 2018, C.H. Robinson Worldwide (“Robinson”) filed a complaint against True Drinks, Inc. in the California Superior Court for the County of Orange located in Santa Ana, California alleging open book account, account stated, reasonable value of services received, agreement, and unjust enrichment related to shipping services provided by Robinson. Robinson has asserted $121,743 in damages plus interest, attorney’s fees and costs. 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.
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 Quarterly Report on Form 10-Q 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 (see Note 3 of Part 1, Item 1 of this Report), our continued operations are now primarily dependent on the business of Charlie’s. Although Charlie’s generated net revenue of approximately $15 million during the nine months ended September 30, 2021 and $16.7 million during the year ended December 31, 2020, there can be no guarantee that the Company can continue to grow revenue or achieve positive cash flow in the future.
Our cash resources are currently insufficient to submit each of our anticipated PMTA applications with the FDA, and otherwise satisfy our projected short-term liquidity and capital requirements.
As of December 31, 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 $3.0 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.
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 tobacco derived nicotine in the United States. There is significant cost associated with the application process and there can be no assurance the FDA will approve the application(s). In addition, the outbreak of 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 nine months ended September 30, 2021, the Company has incurred losses from operations of $19,000, and a consolidated net income of approximately $2,734,000. The Company had stockholders’ equity of $1,068,000 at September 30, 2021. 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 the Company's former Chief Executive Officer and current Chief Operating Officer, respectively, collectively own approximately 38% of our issued and outstanding voting securities. As a result, Ryan Stump and Brandon Stump have the ability to exert influence over both the actions of our Board of Directors, the outcome of issues requiring approval by our stockholders, as well as the execution of management’s plans. This concentration of ownership may have effects such as delaying or preventing a change in control of the Company that may be favored by other stockholders or preventing transactions in which stockholders might otherwise recover a premium for their shares over current market prices.
The loss of one or more of our key personnel or our failure to attract and retain other highly qualified personnel in the future, could harm our business.
We currently depend on the continued services and performance of key members of our management team, in particular, Ryan Stump, one of Charlie’s founders and our Chief Operating Officer, Matt Montesano, our Chief Financial Officer, and Henry Sicignano our President. If we cannot call upon them or other key management personnel for any reason, our operations and development could be harmed. We have not yet developed a succession plan. Furthermore, as we grow, we will be required to hire and attract additional qualified professionals such as accounting, legal, finance, production, market and sales experts. We may not be able to locate or attract qualified individuals for such positions, which will affect our ability to grow and expand our business.
We rely on contractual arrangements with Don Polly, our consolidated variable interest entity for our CBD-related business operations, which may not be as effective as direct ownership in providing operational control.
We have relied and expect to continue to rely on contractual arrangements with Don Polly and its shareholders, consisting of entities controlled by Brandon Stump and Ryan Stump, for the operation of our CBD-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 Ryan Stump, the Company's Chief Operating Officer and member of our Board of Directors, and Brandon Stump, a significant shareholder of the Company. Their interests in Don Polly may differ from the interests of our company as a whole. These shareholders may breach, or cause Don Polly to breach, the existing contractual arrangements we have with them and Don Polly, which would have a material adverse effect on our ability to effectively control Don Polly and receive economic benefits from it. For example, the shareholders may be able to cause our agreements with Don Polly to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise, any or all of these shareholders will act in the best interests of our 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.
The equity interests of Don Polly, our consolidated VIE, are held by entities controlled by Ryan Stump, the Company's Chief Operating Officer and member of our Board of Directors, and Brandon Stump, a significant shareholder of the Company and former Chief Executive Officer. Their interests in 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.
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 outbreak of COVID-19, or coronavirus, has adversely affected 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 negatively affected our sales and revenue, 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 tobacco derived nicotine vapor products, including, but not limited to menthol and/or tobacco products with the assistance of Avail, pursuant to the terms of the Avail Agreement. The costs to date associated with these PMTAs are approximately $4.4 million in total. We are also evaluating the potential market perception and clinical studies that may be required in connection with each PMTA. If we do not submit a PMTA for any Charlie’s products considered to be Deemed Tobacco Products prior to the lapse of the grace period or if any PMTA submitted by the Company is denied, we will be required to cease the marketing and distribution of such Charlie’s products, which, in turn, would have a material adverse effect on the Company’s business, results of operations and financial condition. Furthermore, there can be no assurance that if the Company were to complete a PMTA for any of the affected Charlie's products, that any application would be approved by the FDA.
Certain of our products contain nicotine, which is considered to be a highly addictive substance.
Certain of our products contain nicotine, a chemical found in cigarettes, e-cigarettes, certain other vapor products and other tobacco products, which is considered to be highly addictive. The Family Smoking Prevention and Tobacco Control Act empowers the FDA to regulate the amount of nicotine found in vapor products, but may not require the reduction of nicotine yields of a vapor product to zero. Any FDA regulation may require us to reformulate, recall and or discontinue certain of the products we may sell from time to time, which may have a material adverse effect on our ability to market our products and have a material adverse effect on our business, financial condition, results of operations, cash flows and or future prospects.
Recent bans on the sales of flavored e-cigarettes directly impacts the markets in which we may sell Charlie’s products, 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 marketing and sale of Delta-8-THC and other synthetic cannabinol products by the Company could subject it to limitations or restrictions imposed by the FDA, the states or other regulatory authorities.
The Company’s production of Delta-8-Tetrahydrocannabinol ("Delta-8-THC") and other synthetic tetrahydrocannabinol ("Synthetic THC") products derived from hemp could subject it to limitations or restrictions, which could result in an outright ban on such marketing or sale. Regulatory uncertainties regarding potential adverse changes in Federal and state laws may have a materially adverse effect on our business and the trading price of our common stock. These risks are heightened as they relate to the nicotine, marijuana, Delta-8-THC, Synthetic THC, CBD and other cannabinoid varieties, derivatives and /or equivalents which are controversial socially, scientifically and legally. In addition, although we believe that Delta-8-THC is legal under the Farm Bill, certain states have moved to ban Synthetic THC or have moved to regulate Synthetic THC as marijuana.
Notwithstanding the foregoing, the legality of hemp derived Synthetic THC is in a gray area and varies from state-to-state, with some states allowing Synthetic THC, others not addressing Synthetic THC specifically, while others have banned Synthetic THC due to its similarity to tetrahydrocannabinol. The Federal legality of Synthetic THC is still unknown, and the Federal government has yet to take a definitive position. Should the Company become subject to enforcement action by Federal, state or other regulatory agencies, it could be forced to spend significant sums defending against such enforcement action and ultimately could be forced to stop marketing and selling some or all of its Delta-8-THC products and/or be subject to other sanctions, which would have a material adverse effect on the Company’s business and shareholders’ investments.
The market for vapor products is a niche market, subject to a great deal of uncertainty, and is still evolving.
Vapor products, having recently been introduced to market, are still at an early stage of development, represent a niche market, are evolving rapidly and are characterized by an increasing number of market entrants. Our future sales and any future profits are substantially dependent upon the widespread acceptance and use of vapor products. Rapid growth in the use of, and interest in, vapor products is recent, and may not continue on a lasting basis. The demand and market acceptance for these products is subject to a high level of uncertainty. Therefore, we are subject to all of the business risks associated with a new enterprise in a niche market, including risks of unforeseen capital requirements, failure of widespread market acceptance of vapor products, in general or, specifically our products, failure to establish business relationships and competitive disadvantages as against larger and more established competitors.
Possible yet unanticipated changes in federal and state law could cause any of our current products, as well as products that we intend to launch, containing hemp-derived CBD oil to be illegal, or could otherwise prohibit, limit or restrict any of our products containing CBD.
We recently launched and commenced distribution of certain premium vapor products containing hemp-derived CBD, and we currently intend to develop and launch additional products containing hemp-derived CBD in the future. Until 2014, when 7 U.S. Code §5940 became federal law as part of the Agricultural Act of 2014 (the “2014 Farm Act”), products containing oils derived from hemp, notwithstanding a minimal or non-existing THC content, were classified as Schedule I illegal drugs. The 2014 Farm Act expired on September 30, 2018, and was thereafter replaced by the Agricultural Improvement Act of 2018 on December 20, 2018 (the “2018 Farm Act”), which amended various sections of the U.S. Code, thereby removing hemp, defined as cannabis with less than 0.3% THC, from Schedule 1 status under the Controlled Substances Act, and legalizing the cultivation and sale of industrial-hemp at the federal level, subject to compliance with certain federal requirements and state law, amongst other things. THC is the psychoactive component of plants in the cannabis family generally identified as marihuana or marijuana. There is no assurance that the 2018 Farm Act will not be repealed or amended such that our products containing hemp-derived CBD would once again be deemed illegal under federal law.
The 2018 Farm Act delegates the authority to the states to regulate and limit the production of hemp and hemp derived products within their territories. Although many states have adopted laws and regulations that allow for the production and sale of hemp and hemp derived products under certain circumstances, no assurance can be given that such state laws may not be repealed or amended such that our intended products containing hemp-derived CBD would once again be deemed illegal under the laws of one or more states now permitting such products, which in turn would render such intended products illegal in those states under federal law even if the federal law is unchanged. In the event of either repeal of federal or of state laws and regulations, or of amendments thereto that are adverse to our intended products, we may be restricted or limited with respect to those products that we may sell or distribute, which could adversely impact our intended business plan with respect to such intended products.
Additionally, the FDA has indicated its view that certain types of products containing CBD may not be permissible under the FDCA. The FDA’s position is related to its approval of Epidiolex, a marijuana-derived prescription medicine to be available in the United States. The active ingredient in Epidiolex is CBD. On December 20, 2018, after the passage of the 2018 Farm 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 OTCQB Venture Market 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 September 30, 2021, we had 210,427,674 shares of Common Stock outstanding, as well as outstanding options to purchase an aggregate of 7,582,937 shares of our Common Stock at a weighted average exercise price of $0.5367 per share, up to 32,229,377 shares of Common Stock issuable upon conversion of outstanding shares of Series A Preferred and outstanding warrants to purchase up to an aggregate of 40,338,000 shares of our Common Stock at a weighted average exercise price of $0.44313 per share. The exercise and/or conversion of such outstanding derivative securities may result in further dilution to our stockholders.
If we issue additional shares of Common Stock in the future, it will result in the dilution of our existing stockholders.
Our Charter currently authorizes the issuance of up to 500.0 million shares of Common Stock, of which approximately 210.4 million shares are currently issued and outstanding. In addition, we have reserved approximately 80.2 million 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 it 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. 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
No unregistered securities were issued during the three months ended September 30, 2021 that were not previously reported.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No other unregistered securities were issued during the three months ended September 30, 2021 that were not previously reported.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
| (a) |
Exhibits |
|
| Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a). |
||
| Certification of the Principal Financial and Accounting Officer pursuant to Rule 13a-14(a) and 15d-14(a). |
||
| Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
||
| Certification by the Principal Financial and Accounting Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS |
Inline XBRL Instance Document |
|
| 101.SCH |
Inline XBRL Taxonomy Extension Schema |
|
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase |
|
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase |
|
| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase |
|
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase |
|
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: November 15, 2021 |
CHARLIE’S HOLDINGS, INC. |
||
| By: |
/s/ Henry Sicignano |
||
| Henry Sicignano President (Principal Executive Officer) |
|||
| /s/ Matthew P. Montesano |
|||
| Matthew P. Montesano Chief Financial Officer (Principal Financial and Accounting Officer) |
|||
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Henry Sicignano, certify that:
|
1. |
I have reviewed this quarterly report on Form 10-Q of Charlie’s Holdings, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report. |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles |
|
c. |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
d. |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
/s/ Henry Sicignano |
||
|
Date: November 15, 2021 |
Henry Sicignano |
|
|
President (Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Matthew P. Montesano, certify that:
|
1. |
I have reviewed this quarterly report on Form 10-Q of Charlie’s Holdings, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report. |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles |
|
c. |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
d. |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
/s/ Matthew P. Montesano |
||
|
Date: November 15, 2021 |
Matthew P. Montesano |
|
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
EXHIBIT 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Charlie’s Holdings, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Henry Sicignano, President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
|
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
/s/ Henry Sicignano |
||
|
Henry Sicignano |
||
|
President (Principal Executive Officer) |
||
|
Date: November 15, 2021 |
EXHIBIT 32.2
CERTIFICATION OF PRINCIPAL ACCOUNTING OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Charlie’s Holdings, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Matthew P. Montesano, Principal Accounting Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
|
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
/s/ Matthew P. Montesano |
||
|
Matthew P. Montesano |
||
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
||
|
Date: November 15, 2021 |
Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - $ / shares |
Sep. 30, 2021 |
Dec. 31, 2020 |
|---|---|---|
| Preferred stock, par value (in dollars per share) | $ 0.001 | $ 0.001 |
| Preferred stock, shares authorized (in shares) | 1,800,000 | 1,800,000 |
| Common stock, par value (in dollars per share) | $ 0.001 | $ 0.001 |
| Common stock, shares authorized (in shares) | 500,000,000 | 500,000,000 |
| Common stock, shares issued (in shares) | 210,427,674 | 189,907,526 |
| Common stock, shares outstanding (in shares) | 210,427,674 | 189,907,526 |
| Series A Preferred Stock [Member] | ||
| Preferred stock, shares authorized (in shares) | 300,000 | 300,000 |
| Preferred stock, shares issued (in shares) | 142,818 | 203,811 |
| Preferred stock, shares outstanding (in shares) | 142,818 | 203,811 |
| Series B Preferred Stock [Member] | ||
| Preferred stock, shares authorized (in shares) | 1,500,000 | 1,500,000 |
| Preferred stock, shares issued (in shares) | 0 | 0 |
| Preferred stock, shares outstanding (in shares) | 0 | 0 |
Condensed Consolidated Statements of Operations (Unaudited) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
|
| Revenues: | ||||
| Revenues | $ 5,219,000 | $ 3,894,000 | $ 15,013,000 | $ 12,462,000 |
| Operating costs and expenses: | ||||
| Cost of goods sold - product revenue | 2,310,000 | 1,666,000 | 7,047,000 | 5,361,000 |
| General and administrative | 2,084,000 | 2,073,000 | 6,759,000 | 8,500,000 |
| Sales and marketing | 442,000 | 335,000 | 1,212,000 | 1,259,000 |
| Research and development | 5,000 | 741,000 | 14,000 | 3,372,000 |
| Total operating costs and expenses | 4,841,000 | 4,815,000 | 15,032,000 | 18,492,000 |
| Income (loss) from operations | 378,000 | (921,000) | (19,000) | (6,030,000) |
| Other income (expense): | ||||
| Interest expense | (2,000) | (29,000) | (33,000) | (105,000) |
| Change in fair value of derivative liabilities | 2,729,000 | (5,874,000) | 1,901,000 | (5,264,000) |
| Gain on debt extinguishment | 0 | 0 | 875,000 | 0 |
| Other income | 2,000 | 0 | 10,000 | 15,000 |
| Total other income (loss) | 2,729,000 | (5,903,000) | 2,753,000 | (5,354,000) |
| Net income (loss) | $ 3,107,000 | $ (6,824,000) | $ 2,734,000 | $ (11,384,000) |
| Net earnings (loss) per share | ||||
| Basic (in dollars per share) | $ 0.02 | $ (0.04) | $ 0.01 | $ (0.06) |
| Diluted (in dollars per share) | $ 0.00 | $ (0.04) | $ 0.01 | $ (0.06) |
| Weighted average number of common shares outstanding | ||||
| Basic (in shares) | 206,321,051 | 189,907,527 | 201,206,587 | 189,823,828 |
| Diluted (in shares) | 238,550,798 | 189,907,527 | 243,674,985 | 189,823,828 |
| Product [Member] | ||||
| Revenues: | ||||
| Revenues | $ 5,219,000 | $ 3,894,000 | $ 15,013,000 | $ 12,462,000 |
Note 1 - Description of the Business and Basis of Presentation |
9 Months Ended |
|---|---|
Sep. 30, 2021 | |
| Notes to Financial Statements | |
| Business Description and Basis of Presentation [Text Block] |
NOTE 1 – DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Description of the Business
Charlie’s Holdings, Inc., (formerly True Drinks Holdings, Inc.) a Nevada corporation, together with its wholly owned subsidiaries and consolidated variable interest entity (collectively, the “Company”, “we”), currently formulates, markets and distributes premium, nicotine-based vapor products. The Company’s products are produced domestically through contract manufacturers for sale by select distributors, specialty retailers and third-party online resellers throughout the United States, as well as over 80 countries worldwide. The Company’s primary international markets include the United Kingdom, Italy, Spain, Belgium, Australia, Sweden and Canada. In June 2019, The Company launched distribution, through Don Polly, a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, the Company's former Chief Executive Officer and current Chief Operating Officer, respectively, and a consolidated variable interest for which the Company is the primary beneficiary (“Don Polly”), of certain premium vapor, ingestible and topical products containing hemp-derived cannabidiol (“CBD”) and other synthetic compounds derived from hemp. Our hemp-based products are produced, marketed and sold through, Don Polly, and the Company currently intends to develop and launch additional products containing hemp-derived cannabinoids in the future.
In addition to Don Polly, we are also the holding company for Charlie’s Chalk Dust, LLC (“Charlie’s” or “CCD”), a wholly-owned subsidiary of the Company, which activity includes production and sale of our premium, nicotine-based vapor products.
The Company's Common Stock, par value $0.001 per share (the "Common Stock"), trades under the symbol "CHUC" on the OTCQB Venture Market.
Reverse Stock Split
The Company’s Board of Directors approved a reverse stock split of the Company’s authorized, issued and outstanding shares of Common Stock, par value $0.001 per share, at a ratio of 1-for-100 (the “Reverse Split”). The Reverse Split was effective as of June 16, 2021 (the “Effective Date”). All share and per share amounts in the Form 10-Q have been retroactively adjusted to account for the reverse stock split.
Going Concern Uncertainty Regarding the Legal and Regulatory Environment, Liquidity and Management’s Plan of Operation
The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company operates in a rapidly changing legal and regulatory environment; new laws and regulations or changes to existing laws and regulations could significantly limit the Company’s ability to sell its products, and/or result in additional costs. Additionally, the Company was required to apply for approval from the United States Food and Drug Administration ("FDA") to continue selling and marketing certain of its electronic nicotine delivery system (“ENDS”) products used for the vaporization of tobacco-derived nicotine in the United States. There is significant cost associated with the application process and there can be no assurance the FDA will approve the application(s). In addition, the outbreak of coronavirus (“COVID-19”) in March 2020 has had, and continues to have, a negative impact on the global economy and markets which has impacted the Company’s supply chain and sales. For the nine months ended September 30, 2021, the Company has incurred losses from operations of approximately $19,000 and a consolidated net income of approximately $2,734,000, and the Company has a stockholders’ equity of approximately $1,068,000 as of September 30, 2021. However, net cash used in operating activities was approximately $980,000, and net income for the period was largely the result of $2,753,000 in other income, including a $1,901,000 gain in fair value of derivative liabilities. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to the carrying amount and classification of recorded assets and liabilities should the Company be unable to continue operations.
Management's plans depend on its ability to increase revenues and continue its business development efforts, including the expenditure of approximately $4,400,000 to date, to complete the Premarket Tobacco Application (“PMTA”) registration process. On March 23, 2021, The Company closed a $3,000,000 capital raise through the private sale of 3,517,000 shares of its common stock to the Company’s founders Brandon Stump and Ryan Stump. The Company intends to use the proceeds to fund future growth, increase working capital, retire outstanding debt, and for other general corporate purposes. However, the Company may require additional financing in the future should the FDA require additional testing for one, or several, of the Company’s PMTA submissions. There can be no assurance that such financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and, in the Company’s best interests.
Risks and Uncertainties
The Company operates in an environment that is subject to rapid changes and developments in laws and regulations that could have a significant impact on the Company’s ability to sell its products. Beginning in September 2019, certain states temporarily banned the sale of flavored e-cigarettes, and several states and municipalities are considering implementing similar restrictions. Federal, state, and local governmental bodies across the United States have indicated that flavored e-cigarette liquid, vaporization products and certain other consumption accessories may become subject to new laws and regulations at the federal, state, and local levels. The application of any new laws or regulations that may be adopted in the future, at a federal, state, or local level, directly or indirectly implicating flavored e-cigarette liquid and other ENDS products, 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 tobacco-derived nicotine e-liquid products. The Company’s applications were submitted in September 2020 on a timely basis, which if approved, will allow the Company to continue to sell its approved products in the United States. Beginning in August 2021, the FDA began issuing Marketing Denial Orders (“MDO”) for ENDS products that lack evidence to demonstrate that permitting the marketing of such products would be appropriate for the protection of the public health. The Company has not received an MDO for any of its submissions, however there is no assurance that regulatory approval to sell our products will be granted or that we would be able to raise additional financing if required, which could have a significant impact on our sales.
On March 11, 2020, the World Health Organization designated the ongoing and evolving COVID-19 outbreak as a pandemic. The outbreak has caused and continues to cause a substantial disruption in international and U.S. economies and markets. The outbreak is having a temporary adverse impact on our industry as well as our business, with regards to certain supply chain disruptions and sales volume. While the disruption from COVID-19 is currently expected to be temporary, there is uncertainty around the duration. The 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 |
9 Months Ended |
|---|---|
Sep. 30, 2021 | |
| Notes to Financial Statements | |
| Significant Accounting Policies [Text Block] |
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented in this Quarterly Report on Form 10-Q (this “Report”) not misleading.
Amounts related to disclosure of December 31, 2020 balances within the interim condensed consolidated financial statements were derived from audited financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2020.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expense during the reporting periods. Actual results could differ from those estimates.
Significant Accounting Policies
There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2020 Annual Report.
Recent Accounting Standards
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company has adopted this standard as of January 1, 2021. The impact of adopting this standard was not material to the Company’s consolidated financial statements and related disclosures.
In June 2016 the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which supersedes current guidance requiring recognition of credit losses when it is probable that a loss has been incurred. The standard requires the establishment of an allowance for estimated credit losses on financial assets, including trade and other receivables, at each reporting date. The ASU will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. 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.
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. ASU 2020-06 eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, ASU 2020-06 modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. The amendments in ASU 2020-06 are effective for smaller reporting companies as defined by the SEC for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of ASU 2020-06 on its consolidated financial statements.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. This ASU will be effective for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. The Company does not believe the impact of adopting this standard will be material to its consolidated financial statements and related disclosures.
Reclassifications
Prior period financial statement amounts are reclassified as necessary to conform to the current period presentation. These prior period reclassifications did not affect the Company’s net income (loss), earnings (loss) per share, stockholders’ equity (deficit) or working capital.
|
Note 3 - Fair Value Measurements |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes to Financial Statements | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value Disclosures [Text Block] |
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 September 30, 2021 and December 31, 2020 (amounts in thousands):
There were no transfers between Level 1, 2 or 3 during the nine-month period ended September 30, 2021.
The following table presents changes in Level 3 liabilities measured at fair value for the nine-month period ended September 30, 2021. Both observable and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long- dated volatilities) inputs (amounts in thousands).
A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in the Monte Carlo simulation measuring the Company’s derivative liabilities that are categorized within Level 3 of the fair value hierarchy as of September 30, 2021 and December 31, 2020 is as follows:
On April 26, 2019 (the “Closing Date”), the Company entered into a Securities Exchange Agreement (“Share Exchange”) with each of the former members (“Members”) of Charlie’s, and certain direct investors in the Company (“Direct Investors”), pursuant to which the Company acquired all outstanding membership interests of Charlie’s beneficially owned by the Members in exchange for the issuance by the Company of units. Immediately prior to, and in connection with, the Share Exchange, Charlie’s consummated a private offering of membership interests that resulted in net proceeds to Charlie’s of approximately $27.5 million (the “Charlie’s Financing”). In conjunction with the Share Exchange, the Company issued to holders of its Series A Convertible Preferred Stock (“Series A Preferred”) warrants to purchase an aggregate of 31,028,996 shares of Common Stock (the “Investor Warrants”) and to its placement agent Katalyst Securities LLC warrants to purchase an aggregate of 9,308,699 shares of Common Stock (the “Placement Agent Warrants”). Both the Investor Warrants and Placement Agent Warrants have a -year term and a strike price of $0.44313 per share. In accordance with ASC 815, the Company has recorded the Investor Warrants and Placement Agent Warrants as derivative instruments on its condensed consolidated balance sheet. ASC 815 requires derivatives to be recorded on the balance sheet as an asset or liability and to be measured at fair value. Changes in fair value are reflected in the Company’s earnings for each reporting period.
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 4 - Property and Equipment |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes to Financial Statements | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property, Plant and Equipment Disclosure [Text Block] |
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment as of September 30, 2021 and December 31, 2020 are as follows (amounts in thousands):
Depreciation and amortization expense totaled $53,000 and $48,000, respectively, during the three months ended September 30, 2021 and 2020. Depreciation and amortization expense totaled $155,000 and $131,000, respectively, during the nine months ended September 30, 2021 and 2020.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 5 - Concentrations |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes to Financial Statements | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Concentration Risk Disclosure [Text Block] |
NOTE 5 - CONCENTRATIONS
Vendors
The Company’s concentration of purchases is as follows:
During the three months ended September 30, 2021, purchases from two vendors represented 86% of total inventory purchases, and during the three months ended September 30, 2020, purchases from four vendors represented 91% of total inventory purchases. During the nine months ended September 30, 2021, purchases from two vendors represented 80% of total inventory purchases, and during the nine months ended September 30, 2020, purchases from five vendors represented 83% of total inventory purchases.
As of September 30, 2021, and December 31, 2020, amounts owed to these vendors totaled $131,000 and $270,000 respectively, which are included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.
Accounts Receivable
The Company’s concentration of accounts receivable is as follows:
Two customers made up 27% of net accounts receivable at September 30, 2021. Two customers made up 27% of net accounts receivable at December 31, 2020. Customer A owed the Company a total of $147,700, representing 14% of net receivables at September 30, 2021. Customer C owed the Company a total of $137,700, representing 13% of net receivables at September 30, 2021. Customer A owed the Company a total of $210,000, representing 17% of net receivables at December 31, 2020. Customer B owed the Company a total of $127,000, representing 10% of net receivables at December 31, 2020. No customer exceeded 10% of total net sales for the nine months ended September 30, 2021 and 2020, respectively.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 6 - Don Polly, LLC. |
9 Months Ended |
|---|---|
Sep. 30, 2021 | |
| Notes to Financial Statements | |
| Variable Interest Entity Disclosure [Text Block] |
NOTE 6 – DON POLLY, LLC.
Don Polly, LLC is a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, a former and current executive officer of the Company, respectively, and a consolidated variable interest for which the Company is the primary beneficiary. Don Polly formulates, sells and distributes the Company’s hemp-derived product lines.
We evaluate our ownership, contractual and other interests in entities that are not wholly-owned to determine if these entities are variable interest entities (“VIEs”), and, if so, whether we are the primary beneficiary of the VIE. In determining whether we are the primary beneficiary of a VIE and therefore required to consolidate the VIE, we apply a qualitative approach that determines whether we have both (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of, or the rights to receive benefits from, the VIE that could potentially be significant to that VIE. We continuously perform this assessment, as changes to existing relationships or future transactions may result in the consolidation or deconsolidation of a VIE. Effective April 25, 2019, we consolidated the financial statements of Don Polly and it is still considered a VIE of the Company. Since the Company has been determined to be the primary beneficiary of Don Polly, we have included Don Polly’s assets, liabilities, and operations in the accompanying condensed consolidated financial statements of the Company since April 25, 2019.
Don Polly operates under exclusive licensing and service contracts with the Company whereby the Company receives 75% of net income from the licensing agreement and 25% of net income from the service agreement; therefore, as the Company receives 100% of the net income or incurs 100% of the net loss of the VIE, no non-controlling interests are recorded.
|
Note 7 - Accounts Payable and Accrued Expenses |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes to Financial Statements | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounts Payable, Accrued Liabilities, and Other Liabilities Disclosure, Current [Text Block] |
NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of September 30, 2021 and December 31, 2020 are as follows (amounts in thousands):
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 8 - Notes Payable |
9 Months Ended | |||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 | ||||||||||||||||||||||||||||||||||||
| Notes to Financial Statements | ||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Text Block] |
NOTE 8 – NOTES PAYABLE
Red Beard Holdings, LLC Note Payable
On April 1, 2020, the Company, Charlie's and its VIE, Don Polly, issued a secured promissory note (the "Red Beard Note") to one of the Company's largest stockholders, Red Beard Holdings, LLC ("Red Beard") in the principal amount of $750,000 (the "Principal Amount"), requiring a guaranteed minimum interest amount of $75,000 (“Minimum Interest”), which Red Beard Note is secured by all assets of the Company pursuant to the terms of a Security Agreement entered into by and between the Company and Red Beard (the "Red Beard Note Financing"). Red Beard Note was subsequently amended on August 27, 2020, September 30, 2020, October 29, 2020, December 1, 2020, and January 19, 2021, ultimately increasing Principal Amount to $1,400,000 and Minimum Interest to $150,000.
On March 24, 2021, the Company and Red Beard entered into a Satisfaction and Release (the "Red Beard Release"), pursuant to which the Company made a payment to Red Beard in the amount of $1,550,000 in exchange for an acknowledgment of satisfaction and full release of the Company by Red Beard from liability and obligations arising under the Red Beard Note.
Small Business Administration Loan Programs
On April 30, 2020, Charlie's, a wholly owned subsidiary of the Company, received approval to enter into a U.S. Small Business Administration ("SBA") Promissory Note (the " Charlie's PPP Loan") with TBK Bank, SSB (the "SBA Lender"), pursuant to the Paycheck Protection Program ("PPP") of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") as administered by the SBA (the "PPP Loan Agreement").
The Charlie's PPP Loan provides for working capital to CCD in the amount of $650,761. The Charlie's PPP Loan will mature on April 30, 2022 and will accrue interest at a rate of 1.00% per annum. Per the PPP Loan Agreement, payments of principal and interest were deferred for six months from the date of the Charlie's PPP Loan, or until November 30, 2020. Interest, however, continued to accrue during this time. Charlie’s was notified by SBA Lender that all payments, including principal and interest, on all PPP loans issued by the bank have been deferred indefinitely in order to allow borrowers adequate time to apply for forgiveness.
On April 14, 2020, Don Polly also obtained a loan pursuant to the PPP enacted under the CARES Act (the "Polly PPP Loan" and together with the Charlie's PPP Loan, the "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 were deferred for six months from the date of the Polly PPP Loan, or until November 14, 2020. Interest, however, continued to accrue during this time.
The aforementioned PPP Loans were made under the PPP enacted by Congress under the CARES Act. The CARES Act (including the guidance issued by SBA and U.S. Department of the Treasury) provides that all or a portion of the PPP Loans may be forgiven upon request from the respective borrower to the SBA Lender or the Polly Lender, as the case may be, subject to requirements in the PPP Loans and under the CARES Act.
On February 19, 2021, Don Polly received notice from the Polly Lender, that the Polly PPP Loan was fully repaid, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the U.S. Small Business Administration. There is no further action required on the part of Don Polly to satisfy this liability. For the period ended March 31, 2021, the Company recorded a debt extinguishment gain of approximately $217,000, including principal and accrued interest, which is reflected in the other income section of the Company’s condensed consolidated statements of operations.
On March 17, 2021, Don Polly obtained a second draw PPP loan (“Polly PPP Loan 2”) under the CARES Act from Polly Lender. The Polly PPP Loan 2 obtained by Don Polly provides general working capital in the amount of $184,200. The Polly PPP Loan 2 will mature on March 17, 2026 and will accrue interest at a rate of 1.00% per annum. Payments of principal and interest will be deferred, however interest will continue to accrue during this time.
On April 28, 2021, Charlie’s received notice from SBA Lender that the Charlie’s PPP Loan was fully repaid, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the U.S. Small Business Administration. There is no further action required on the part of Charlie’s to satisfy this liability. For the period ended June 30, 2021, the Company recorded a debt extinguishment gain of approximately $657,300, including principal and accrued interest, which is reflected in the other income section of the Company’s condensed consolidated statements of operations.
On June 24, 2020, SBA authorized (under Section 7(b) of the Small Business Act, as amended) an Economic Injury Disaster Loan (“EID Loan”) to Don Polly in the amount of $150,000. Installment payments, including principal and interest of $731 monthly, will begin twelve months from the date of the EID Loan. The balance of principal and interest will be payable thirty years from the date of the EID Loan and interest will accrue at the rate of 3.75% per annum.
The following summarizes the Company’s notes payable maturities as of September 30, 2021 (amounts in thousands):
|
Note 9 - Earnings (Loss) Per Share Applicable to Common Stockholders |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes to Financial Statements | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Earnings Per Share [Text Block] |
NOTE 9 – EARNINGS (LOSS) PER SHARE APPLICABLE TO COMMON STOCKHOLDERS
Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the reporting period. Diluted earnings (loss) per common share is computed similar to basic earnings (loss) per common share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock. Diluted weighted average common shares include common stock potentially issuable under the Company’s convertible preferred stock, warrants and vested and unvested stock options.
For the three and nine months ended September 30, 2021 and 2020, net income (loss) is adjusted for gain from change in fair value of warrant liabilities.
The following table sets forth the computation of earnings (loss) per share (amounts in thousands, except share and per share amounts):
The following securities were not included in the diluted net income (loss) per share calculation because their effect was anti-dilutive as of the periods presented (in thousands):
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 10 - Stockholders' Equity |
9 Months Ended |
|---|---|
Sep. 30, 2021 | |
| Notes to Financial Statements | |
| Stockholders' Equity Note Disclosure [Text Block] |
NOTE 10 – STOCKHOLDERS’ EQUITY
Series A Preferred Share Dividend & Share Waiver
On April 25, 2020, the Company was required to pay a one-time dividend equal to eight percent (8%) of the stated value of its Series A Preferred, equal to $1,650,000 (“Dividend Amount”), which Dividend Amount was required to be paid in cash on or before April 25, 2020.
On August 13, 2020, the Company received a formal notice of default from a holder of its Series A Preferred requesting full payment of dividends due and payable with respect to the Series A Preferred held by such holder on or before August 23, 2020 (“Dividend Default”).
On April 21, 2021, the Company issued a waiver and exchange agreement (“Waiver Agreement”) to shareholders of its Series A Preferred shares (“Stock Payees”) requesting such Stock Payee's respective amount of the dividend payment (each individual Stock Payee's respective amount the "Stock Payee Indebtedness") to be paid in the form of shares of Common Stock (the "Stock Payment") and agreeing to consummate an exchange of such Stock Payee's right to the Stock Payee Indebtedness in cash for shares of Common Stock (the "Exchange"), pursuant to which the entire Stock Payee Indebtedness shall be exchanged for that number of shares of Common Stock (the “Shares”) equal to the total Stock Payee Indebtedness divided by $0.44313.
On May 25, 2021, the Company entered into a Dividend Waiver and Exchange Agreement (the “Exchange Agreement”), between the Company and the holders (the “Series A Holders”) of its Series A Convertible Preferred Stock, par value $0.001 (“Series A Preferred”), pursuant to which the Company paid to the Series A Holders total consideration of approximately $1,650,000 (the “Dividend Amount”), which Dividend Amount was paid in the form of 1,736,501 shares of the Company’s common stock, par value $0.001 (“Common Stock”), valued at $0.44313 per share (the “Shares”), and approximately $880,000 in cash.
During the three months ended September 30, 2021, the Company incurred an additional $3,000 dividend payment in order to fully satisfy the Series A Preferred dividend.
As of September 30, 2021, all dividend liability has been satisfied which is reflected on the Company’s condensed consolidated balance sheet.
Conversion of Series A Preferred Shares
For the nine months ended September 30, 2021, the Company issued approximately 13,764,000 shares of Common Stock upon conversion of 60,992 shares of Series A Preferred.
March 2021 Private Placement
On March 19, 2021, the Company entered into Securities Purchase Agreements by and between the Company and certain family trusts in which Mr. Brandon Stump and Mr. Ryan Stump, the Company's former Chief Executive Officer and Chief Operating Officer, respectfully, are trustees and beneficiaries (the "Purchase Agreements"), for the private placement of an aggregate of 3,517,000 shares of its common stock, par value $0.001 ("Common Stock"), at a purchase price per share of $0.853 (the "Private Placement"), which Private Placement was consummated on March 22, 2021. The Private Placement resulted in gross proceeds to the Company of approximately $3.0 million. The Private Placement was undertaken pursuant to Rule 506 promulgated under the Securities Act of 1933, as amended, and was consummated in a transaction approved by the Company's independent directors in accordance with Rule 16b-3(d)(1) of the Securities Exchange Act of 1934, as amended.
|
Note 11 - Stock-based Compensation |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes to Financial Statements | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based Payment Arrangement [Text Block] |
NOTE 11 – STOCK-BASED COMPENSATION
The True Drinks Holdings, Inc. 2013 Stock Incentive Plan (the “Prior Plan”) was first approved in December 2013 and was approved by a majority of the stockholders in October 2014. The Prior Plan originally authorized 20.0 million shares of common stock for issuance as equity-based awards, which amount was increased to 120.0 million in January 2018 by authorization of the Board of Directors at that time (the “Prior Plan Amendment”). As of the date of the Share Exchange, April 26, 2019, a total of approximately 0.9 million awards were issued under the Prior Plan and the Prior Plan Amendment, consisting entirely of outstanding stock options. As of September 30, 2021, approximately 0.6 million of these stock options remain vested and exercisable under this plan.
The Company will not grant any additional awards or shares of Common Stock under the Prior Plan beyond those that are currently outstanding.
On May 8, 2019, our Board of Directors approved the Charlie’s Holdings, Inc. 2019 Omnibus Incentive Plan (the “2019 Plan”), and the 2019 Plan was subsequently approved by holders of a majority of our outstanding voting securities on the same date. The 2019 Plan will supersede and replace the Prior Plan and no new awards will be granted under the Prior Plan. Any awards outstanding under the Prior Plan on the date of stockholder approval of the 2019 Plan will remain subject to the terms in the Prior Plan, including those granted under the Prior Plan Amendment, and any shares subject to outstanding awards under the Prior Plan that subsequently expire, terminate, or are surrendered or forfeited for any reason without issuance of shares will automatically become available for issuance under the 2019 Plan. Up to 11,072,542 stock options may be granted under the 2019 Plan. The shares of common stock issuable under the 2019 Plan will consist of authorized and unissued shares, treasury shares, and shares purchased on the open market or otherwise.
Non-Qualified Stock Options
The following table summarizes stock option activities during the nine months ended September 30, 2021 (all option amounts are in thousands):
As of September 30, 2021, there was approximately $94,000 of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the 2019 Plan. That cost is expected to be recognized over a weighted average period of 2.9 years. For the three and nine months ended September 30, 2021, the Company recorded compensation expense of approximately $32,000 and $172,000 related to the granting of stock options, respectively.
Common Stock Awards
On April 26, 2019, in connection with employment agreements with its former Chief Executive Officer and Chief Operating Officer, the Company issued market condition awards contingent upon the achievement of certain market capitalization targets. The awards are subject to a -year service vesting period. The awards are settleable in a variable number of common shares based on defined percentages of the Company's total shares determined by market capitalization targets and are, therefore, classified as liabilities in accordance with ASC 718. The fair value of the awards is remeasured at each reporting period until settlement. Compensation cost is attributed over the period encompassing the derived service period and the explicit service period. The fair value of the market condition awards on the termination date of February 12, 2020 was approximately $1,638,000. The market condition awards were valued using a Monte Carlo simulation technique, a risk-free interest rate of 1.44% and a volatility of 75% based on volatility over 3 years using daily stock prices. For the nine months ended September 30, 2021 and 2020, the Company recorded an expense of $0 and $1,322,000, respectively, for these awards. In addition, as these market awards were eliminated during the first quarter of 2020 (see paragraph below), the Company reversed the entire compensation liability of $1,638,000 to Additional Paid In Capital during the nine months ended September 30, 2020.
On February 12, 2020, the Company, entered into a form of Amended and Restated Employment Agreement (together the “Amended Employment Agreements”) with both the Company’s former Chief Executive Officer and Chief Operating Officer. The terms of the Amended Employment Agreements have been amended as follows: (i) the annual equity awards based upon, among other conditions, the Company’s market capitalization and a percentage of base salary have been eliminated; however, the awards based on financial milestones remain in full force and effect; and (ii) payment of the 2019 bonuses has been deferred, resulting in the accrual of such bonuses on the books and records of the Company. On October 29, 2021, the Employment Agreement with Brandon Stump, the Company’s former Chief Executive Officer, was terminated pursuant to that certain Letter Agreement, dated October 29, 2021. All other terms of the Employment Agreement with the Company's Chief Operating Officer remain in full force and effect subject to further review by the Board of Directors as it deems necessary and appropriate.
On April 26, 2019, as additional consideration for advisory services provided in connection with the Charlie’s Financing and the Share Exchange (see Note 3 above), the Company issued an aggregate of 9.0 million shares of common stock (the “Advisory Shares”), including to a member of the Company’s Board of Directors, pursuant to a subscription agreement. The fair value of a share of common stock was $0.32 which is based upon a valuation prepared by the Company on the date of the Share Exchange. The Company recorded stock-based compensation of approximately $2.9 million on the grant date.
Prior to the Share Exchange, Charlie’s employees held Member units, which were automatically converted into 71,000 shares of common stock and 69,815 shares of Series B Convertible Preferred Stock (“Series B Preferred”) (or 6.98 million shares of common stock equivalents) due to the effect of the Share Exchange. The 7.1 million shares of common stock vested over a two-year period, which concluded during the quarter ended June 30, 2021. The fair value of a share of common stock was $0.32 which is based upon a valuation prepared by the Company on the date of the Share Exchange.
On April 1, 2021, the Board of Directors of the Company entered into an Employment Agreement (the "Agreement") with Henry Sicignano III, MBA, pursuant to which the Company appointed Mr. Sicignano to serve as President of the Company. Pursuant to the Agreement, Mr. Sicignano will serve as President for an initial period of two years, renewable on an annual basis unless earlier terminated by the Company or Mr. Sicignano. Mr. Sicignano was awarded 1,500,000 restricted shares (subject to forfeiture) (“Restricted Shares”) of the Company. Mr. Sicignano will have all the rights of a shareholder of the Company with respect to voting the 1,500,000 restricted shares awarded under this grant and share adjustments, receipt of dividends (if any) and distributions (if any) on such shares. Restricted Shares will be subject to forfeiture in 750,000 share increments on April 1, 2022 and April 1, 2023, and will also be subject to additional forfeiture-release features set forth in Addendum A to the Employment Agreement of Henry Sicignano, III, included in the Company’s 8-K filed April 6, 2021. The grant date fair value of the 1,500,000 restricted shares was approximately $65,000.
The Company recorded total stock-based compensation of approximately $39,000 and $563,000 during the three and nine months ended September 30, 2021, respectively.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 12 - Commitments and Contingencies |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes to Financial Statements | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commitments and Contingencies Disclosure [Text Block] |
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, the Company’s former Chief Executive Officer, Ryan Stump, the Company’s Chief Operating Officer, and Keith Stump, a former member of the Company’s Board of Directors. The Stumps purchased the property that is the subject of the Lease in July 2019. The Lease, which was effective as of September 1, 2019, on a month-to-month basis, was then formalized on November 1, 2019 to have a term of years and a base rent rate of $22,940 per month, which rate is subject to annual adjustments based on the consumer price index, as may be mutually agreed upon by the parties to the Lease. The terms of the Lease were negotiated and approved by the independent members of the Board, and executed by Mr. David Allen, the Company’s former Chief Financial Officer, after reviewing a detailed analysis of comparable properties and rent rates compiled by an independent, third-party consultant. The total amount paid to related parties for the nine months ended September 30, 2021 and 2020 was $208,530 and $206,460, respectively.
At September 30, 2021, the Company had operating lease liabilities of approximately $880,000 and right of use assets of approximately $869,000, which were included in the condensed consolidated balance sheet.
The following summarizes quantitative information about the Company’s operating leases for the three and nine months ended September 30, 2021 and 2020 (amounts in thousands):
Maturities of our operating leases as of September 30, 2021, excluding short-term leases, are as follows (amounts in thousands):
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 - Subsequent Events |
9 Months Ended |
|---|---|
Sep. 30, 2021 | |
| Notes to Financial Statements | |
| Subsequent Events [Text Block] |
NOTE 13- SUBSEQUENT EVENTS
The Company evaluated subsequent events for their potential impact on the consolidated condensed financial statements and disclosures through the date the consolidated condensed financial statements were available to be issued and determined that, except as set forth below, no subsequent events occurred that were reasonably expected to impact the consolidated condensed financial statements presented herein.
Resignation of Brandon Stump
On October 29, 2021, Brandon Stump resigned from his position as: (i) Chief Executive Officer and Chairman of the Board of Directors; and (ii) all positions held for each direct and indirect subsidiary of the Company (each, a "Subsidiary"), including as a member of the Board of Directors of the Company and each Subsidiary.
In connection with Mr. Stump's resignation, the Company and Mr. Stump entered into an agreement regarding Mr. Stump's resignation (the "Termination Agreement"), which Termination Agreement is dated October 29, 2021. Pursuant to the Termination Agreement, in consideration for Mr. Stump agreeing to terminate his employment agreement with the Company, as amended and restated on February 12, 2020 (the "Employment Agreement"), and agreeing to certain restrictions and covenants, the Company will: (i) continue to pay Mr. Stump his base salary (as defined in the Employment Agreement), through April 22, 2022; (ii) pay Mr. Stump certain bonus compensation owed to Mr. Stump in an amount equal to $300,000, payable in installments of $75,000 on each of November 1, 2021, December 1, 2021, January 1, 2022, and February 1, 2022; and (iii) continue to make available to Mr. Stump certain employee benefits offered by the Company until April 22, 2022.
|
Significant Accounting Policies (Policies) |
9 Months Ended |
|---|---|
Sep. 30, 2021 | |
| Accounting Policies [Abstract] | |
| Basis of Accounting, Policy [Policy Text Block] | Basis of Presentation
The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented in this Quarterly Report on Form 10-Q (this “Report”) not misleading.
Amounts related to disclosure of December 31, 2020 balances within the interim condensed consolidated financial statements were derived from audited financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2020.
|
| Use of Estimates, Policy [Policy Text Block] | Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expense during the reporting periods. Actual results could differ from those estimates.
|
| Significant Accounting Policies [Policy Text Block] | Significant Accounting Policies
There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2020 Annual Report.
|
| New Accounting Pronouncements, Policy [Policy Text Block] | Recent Accounting Standards
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company has adopted this standard as of January 1, 2021. The impact of adopting this standard was not material to the Company’s consolidated financial statements and related disclosures.
In June 2016 the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which supersedes current guidance requiring recognition of credit losses when it is probable that a loss has been incurred. The standard requires the establishment of an allowance for estimated credit losses on financial assets, including trade and other receivables, at each reporting date. The ASU will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. 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.
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. ASU 2020-06 eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, ASU 2020-06 modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. The amendments in ASU 2020-06 are effective for smaller reporting companies as defined by the SEC for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of ASU 2020-06 on its consolidated financial statements.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. This ASU will be effective for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. The Company does not believe the impact of adopting this standard will be material to its consolidated financial statements and related disclosures.
|
| Reclassification, Comparability Adjustment [Policy Text Block] | Reclassifications
Prior period financial statement amounts are reclassified as necessary to conform to the current period presentation. These prior period reclassifications did not affect the Company’s net income (loss), earnings (loss) per share, stockholders’ equity (deficit) or working capital.
|
Note 3 - Fair Value Measurements (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes Tables | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value, Liabilities Measured on Recurring Basis [Table Text Block] |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Table Text Block] |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value Measurement Inputs and Valuation Techniques [Table Text Block] |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 4 - Property and Equipment (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes Tables | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property, Plant and Equipment [Table Text Block] |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 5 - Concentrations (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes Tables | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedules of Concentration of Risk, by Risk Factor [Table Text Block] |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Concentration of Accounts Receivable [Table Text Block] |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 7 - Accounts Payable and Accrued Expenses (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes Tables | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Accounts Payable and Accrued Liabilities [Table Text Block] |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 8 - Notes Payable (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 | ||||||||||||||||||||||||||||||||||||
| Notes Tables | ||||||||||||||||||||||||||||||||||||
| Schedule of Maturities of Long-term Debt [Table Text Block] |
|
Note 9 - Earnings (Loss) Per Share Applicable to Common Stockholders (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes Tables | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Earnings Per Share, Basic and Diluted [Table Text Block] |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share [Table Text Block] |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 11 - Stock-based Compensation (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes Tables | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based Payment Arrangement, Option, Activity [Table Text Block] |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 12 - Commitments and Contingencies (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes Tables | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Lease, Cost [Table Text Block] |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Lessee, Operating Lease, Liability, Maturity [Table Text Block] |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 1 - Description of the Business and Basis of Presentation (Details Textual) |
3 Months Ended | 9 Months Ended | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 16, 2021 |
Mar. 23, 2021
USD ($)
shares
|
Mar. 22, 2021
USD ($)
$ / shares
|
Apr. 26, 2019
USD ($)
|
Sep. 30, 2021
USD ($)
$ / shares
|
Sep. 30, 2020
USD ($)
|
Sep. 30, 2021
USD ($)
$ / shares
|
Sep. 30, 2020
USD ($)
|
Jun. 30, 2021
USD ($)
|
May 25, 2021
$ / shares
|
Dec. 31, 2020
USD ($)
$ / shares
|
Jun. 30, 2020
USD ($)
|
Dec. 31, 2019
USD ($)
|
|
| Common Stock, Par or Stated Value Per Share (in dollars per share) | $ / shares | $ 0.001 | $ 0.001 | $ 0.001 | $ 0.001 | $ 0.001 | ||||||||
| Operating Income (Loss), Total | $ 378,000 | $ (921,000) | $ (19,000) | $ (6,030,000) | |||||||||
| Net Income (Loss) Attributable to Parent, Total | 3,107,000 | (6,824,000) | 2,734,000 | (11,384,000) | |||||||||
| Stockholders' Equity Attributable to Parent, Ending Balance | 1,068,000 | (10,548,000) | 1,068,000 | (10,548,000) | $ (2,075,000) | $ (5,996,000) | $ (4,105,000) | $ (547,000) | |||||
| Net Cash Provided by (Used in) Operating Activities, Total | (980,000) | (3,502,000) | |||||||||||
| Other Nonoperating Income (Expense), Total | 2,729,000 | (5,903,000) | 2,753,000 | (5,354,000) | |||||||||
| Derivative, Gain (Loss) on Derivative, Net, Total | $ 2,729,000 | $ (5,874,000) | 1,901,000 | $ (5,264,000) | |||||||||
| Proceeds from Issuance of Private Placement | $ 3,000,000 | $ 3,000,000.0 | $ 27,500,000 | ||||||||||
| Stock Issued During Period, Shares, New Issues (in shares) | shares | 3,517,000 | ||||||||||||
| Premarket Tobacco Application Registration [Member] | |||||||||||||
| Cost of Revenue, Total | $ 4,400,000 | ||||||||||||
| Reverse Stock Split [Member] | |||||||||||||
| Stockholders' Equity Note, Stock Split, Conversion Ratio | 100 | ||||||||||||
Note 3 - Fair Value Measurements (Details Textual) - USD ($) |
Mar. 23, 2021 |
Mar. 22, 2021 |
Apr. 26, 2019 |
|---|---|---|---|
| Proceeds from Issuance of Private Placement | $ 3,000,000 | $ 3,000,000.0 | $ 27,500,000 |
| Warrants and Rights Outstanding, Term (Year) | 5 years | ||
| Class of Warrant or Right, Exercise Price of Warrants or Rights (in dollars per share) | $ 0.44313 | ||
| Investor Warrants [Member] | |||
| Class of Warrant or Right, Number of Securities Called by Warrants or Rights (in shares) | 31,028,996 | ||
| Placement Agent Warrants [Member] | |||
| Class of Warrant or Right, Number of Securities Called by Warrants or Rights (in shares) | 9,308,699 |
Note 3 - Fair Value Measurements - Fair Value Hierarchy on a Recurring Basis (Details) - USD ($) $ in Thousands |
Sep. 30, 2021 |
Dec. 31, 2020 |
|---|---|---|
| Derivative liability - Warrants | $ 2,543 | $ 4,444 |
| Fair Value, Recurring [Member] | ||
| Derivative liability - Warrants | 2,543 | 4,444 |
| Total liabilities | 2,543 | 4,444 |
| Fair Value, Recurring [Member] | Fair Value, Inputs, Level 1 [Member] | ||
| Derivative liability - Warrants | 0 | 0 |
| Total liabilities | 0 | 0 |
| Fair Value, Recurring [Member] | Fair Value, Inputs, Level 2 [Member] | ||
| Derivative liability - Warrants | 0 | 0 |
| Total liabilities | 0 | 0 |
| Fair Value, Recurring [Member] | Fair Value, Inputs, Level 3 [Member] | ||
| Derivative liability - Warrants | 2,543 | 4,444 |
| Total liabilities | $ 2,543 | $ 4,444 |
Note 3 - Fair Value Measurements - Changes in Level 3 Liabilities (Details) $ in Thousands |
9 Months Ended |
|---|---|
|
Sep. 30, 2021
USD ($)
| |
| Balance, beginning | $ 4,444 |
| Change in fair value | (1,901) |
| Balance, ending | $ 2,543 |
Note 3 - Fair Value Measurements - Unobservable Inputs Assumptions (Details) |
Sep. 30, 2021 |
Dec. 31, 2020 |
|---|---|---|
| Measurement Input, Exercise Price [Member] | ||
| Derivative measurement input | 0.4431 | 0.4431 |
| Measurement Input, Expected Term [Member] | ||
| Derivative measurement input | 2.57 | 3.32 |
| Measurement Input, Price Volatility [Member] | ||
| Derivative measurement input | 0.850 | 0.700 |
| Measurement Input, Risk Free Interest Rate [Member] | ||
| Derivative measurement input | 0.004 | 0.017 |
| Measurement Input, Expected Dividend Rate [Member] | ||
| Derivative measurement input | 0 | 0 |
Note 4 - Property and Equipment (Details Textual) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
|
| Depreciation, Depletion and Amortization, Nonproduction, Total | $ 53,000 | $ 48,000 | $ 155,000 | $ 131,000 |
Note 4 - Property and Equipment - Property and Equipment (Details) - USD ($) $ in Thousands |
9 Months Ended | |
|---|---|---|
Sep. 30, 2021 |
Dec. 31, 2020 |
|
| Property and equipment, gross | $ 1,067 | $ 994 |
| Accumulated depreciation | (618) | (463) |
| Property and equipment, net | 449 | 531 |
| Machinery and Equipment [Member] | ||
| Property and equipment, gross | $ 42 | 38 |
| Estimated useful life (Year) | 5 years | |
| Trade Show Booth [Member] | ||
| Property and equipment, gross | $ 171 | 171 |
| Estimated useful life (Year) | 5 years | |
| Office Equipment [Member] | ||
| Property and equipment, gross | $ 474 | 405 |
| Estimated useful life (Year) | 5 years | |
| Leasehold Improvements [Member] | ||
| Property and equipment, gross | $ 380 | $ 380 |
| Estimated useful life | Lesser of lease term or estimated useful life |
Note 5 - Concentrations - Concentration of Purchases (Details) - Supplier Concentration Risk [Member] - Purchases [Member] |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
|
| Vendor A [Member] | ||||
| Concentration risk | 0.00% | 10.00% | 0.00% | 21.00% |
| Vendor B [Member] | ||||
| Concentration risk | 0.00% | 13.00% | 0.00% | 25.00% |
| Vendor C [Member] | ||||
| Concentration risk | 16.00% | 56.00% | 15.00% | 21.00% |
| Vendor D [Member] | ||||
| Concentration risk | 0.00% | 0.00% | 0.00% | 12.00% |
| Vendor E [Member] | ||||
| Concentration risk | 0.00% | 12.00% | 0.00% | 4.00% |
| Vendor F [Member] | ||||
| Concentration risk | 70.00% | 0.00% | 65.00% | 0.00% |
Note 5 - Concentrations - Concentration of Accounts Receivable (Details) - Customer Concentration Risk [Member] - Accounts Receivable [Member] |
9 Months Ended | 12 Months Ended |
|---|---|---|
Sep. 30, 2021 |
Dec. 31, 2020 |
|
| Customer A [Member] | ||
| Concentration risk | 14.00% | 17.00% |
| Customer B [Member] | ||
| Concentration risk | 0.00% | 10.00% |
| Customer C [Member] | ||
| Concentration risk | 13.00% | 0.00% |
Note 6 - Don Polly, LLC. (Details Textual) - Don Polly, LLC [Member] |
9 Months Ended |
|---|---|
Sep. 30, 2021 | |
| Percent of Net Income (Loss), Variable Interest Entity | 100.00% |
| Licensing Agreement [Member] | |
| Percent of Net Income Received, Variable Interest Entity | 75.00% |
| Service Agreement [Member] | |
| Percent of Net Income Received, Variable Interest Entity | 25.00% |
Note 7 - Accounts Payable and Accrued Expenses - Accounts Payable (Details) - USD ($) $ in Thousands |
Sep. 30, 2021 |
Dec. 31, 2020 |
|---|---|---|
| Accounts payable | $ 683 | $ 629 |
| Accrued compensation | 1,193 | 1,420 |
| Other accrued expenses | 130 | 476 |
| Accounts Payable and Accrued Liabilities, Current, Total | $ 2,006 | $ 2,525 |
Note 8 - Notes Payable - Notes Payable Maturities (Details) $ in Thousands |
Sep. 30, 2021
USD ($)
|
|---|---|
| Remaining months Ending December 31, 2021 | $ 0 |
| Year Ending December 31, 2022 | 0 |
| Year Ending December 31, 2023 | 0 |
| Year Ending December 31, 2024 | 0 |
| Year Ending December 31, 2025 | 0 |
| Thereafter | 334 |
| Total | $ 334 |
Note 9 - Earnings (Loss) Per Share Applicable to Common Stockholders - Earnings (Loss) Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
|
| Net income (loss) - basic | $ 3,107 | $ (6,824) | $ 2,734 | $ (11,384) |
| Reversal of gain due to change in fair value of warrant liability | (2,729) | 0 | (1,901) | 0 |
| Net income (loss) - diluted | $ 378 | $ (6,824) | $ 833 | $ (11,384) |
| Weighted average shares outstanding - basic (in shares) | 206,321,051 | 189,907,527 | 201,206,587 | 189,823,828 |
| Diluted stock options (in shares) | 0 | 0 | 1,351,628 | 0 |
| Diluted warrants (in shares) | 0 | 0 | 8,887,023 | 0 |
| Diluted preferred shares (in shares) | 32,229,747 | 0 | 32,229,747 | 0 |
| Weighted average shares outstanding - diluted (in shares) | 238,550,798 | 189,907,527 | 243,674,985 | 189,823,828 |
| Basic earnings (loss) per share (in dollars per share) | $ 0.02 | $ (0.04) | $ 0.01 | $ (0.06) |
| Diluted earnings (loss) per share (in dollars per share) | $ 0.00 | $ (0.04) | $ 0.01 | $ (0.06) |
Note 9 - Earnings (Loss) Per Share Applicable to Common Stockholders - Antidilutive Securities (Details) - shares shares in Thousands |
9 Months Ended | |
|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
|
| Anti-dilutive securities (in shares) | 37,682 | 103,942 |
| Share-based Payment Arrangement, Option [Member] | ||
| Anti-dilutive securities (in shares) | 6,231 | 7,961 |
| Convertible Preferred Shares [Member] | ||
| Anti-dilutive securities (in shares) | 0 | 55,643 |
| Warrant [Member] | ||
| Anti-dilutive securities (in shares) | 31,451 | 40,338 |
Note 12 - Commitments and Contingencies (Details Textual) - USD ($) |
3 Months Ended | 9 Months Ended | ||||||
|---|---|---|---|---|---|---|---|---|
Nov. 13, 2020 |
Nov. 01, 2019 |
Sep. 05, 2018 |
Sep. 30, 2021 |
Sep. 30, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
Dec. 31, 2020 |
|
| Operating Lease, Expense | $ 139,000 | $ 149,000 | $ 427,000 | $ 448,000 | ||||
| Operating Lease, Liability, Total | 880,000 | 880,000 | ||||||
| Operating Lease, Right-of-Use Asset | 869,000 | 869,000 | $ 1,200,000 | |||||
| True Drinks Inc. [Member] | ||||||||
| Loss Contingency, Damages Sought, Value | $ 121,743 | |||||||
| Litigation Settlement, Amount Awarded from Other Party | $ 50,000 | |||||||
| Litigation Settlement, Amount Awarded from Other Party, Installment Payment | $ 25,000 | |||||||
| Corporate Headquarters Lease [Member] | ||||||||
| Lessee, Operating Lease, Term of Contract (Year) | 5 years | |||||||
| Lease, Monthly Rent | $ 22,940 | |||||||
| Operating Lease, Expense | 208,530 | $ 206,460 | ||||||
| Operating Lease, Liability, Total | 880,000 | 880,000 | ||||||
| Operating Lease, Right-of-Use Asset | $ 869,000 | $ 869,000 | ||||||
Note 12 - Commitments and Contingencies - Operating Lease Information (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
|
| Operating lease cost | $ 139 | $ 149 | $ 427 | $ 448 |
| Variable lease cost | 0 | 0 | 0 | 0 |
| Operating lease expense | 139 | 149 | 427 | 448 |
| Short-term lease rent expense | 0 | 0 | 0 | 0 |
| Total rent expense | $ 139 | $ 149 | 427 | 448 |
| Operating cash flows from operating leases | $ 331 | $ 312 | ||
| Weighted-average remaining lease term – operating leases (in years) (Year) | 2 years 6 months | 3 years 2 months 4 days | 2 years 6 months | 3 years 2 months 4 days |
| Weighted-average discount rate – operating leases | 12.00% | 12.00% | 12.00% | 12.00% |
Note 12 - Commitments and Contingencies - Maturities of Operating Leases (Details) $ in Thousands |
Sep. 30, 2021
USD ($)
|
|---|---|
| Remaining Months Ending December 31, 2021 | $ 143 |
| Year Ending December 31, 2022 | 399 |
| Year Ending December 31, 2023 | 275 |
| Year Ending December 31, 2024 | 206 |
| Total | 1,023 |
| Less present value discount | (143) |
| Operating lease liabilities as of September 30, 2021 | $ 880 |
Note 13 - Subsequent Events (Details Textual) - Subsequent Event [Member] - Former Chief Executive Officer [Member] |
Oct. 29, 2021
USD ($)
|
|---|---|
| Accrued Bonuses, Current | $ 300,000 |
| Bonuses Payable on November 1, 2021 [Member] | |
| Accrued Bonuses, Current | 75,000 |
| Bonuses Payable on December 1, 2021 [Member] | |
| Accrued Bonuses, Current | 75,000 |
| Bonuses Payable on January 1, 2022 [Member] | |
| Accrued Bonuses, Current | 75,000 |
| Bonuses Payable on February 1, 2022 [Member] | |
| Accrued Bonuses, Current | $ 75,000 |