Pre-Effective Amendment to Registration Statement (General Form) — Form S-1 Filing Table of Contents
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From
time to time after the effective date of this Registration
Statement.
(Approximate
date of commencement of proposed sale to the public)
If
any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, other than securities offered only in
connection with dividend or interest reinvestment plans, check the
following box. [X]
If
this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering. [ ]
If
this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier
effective registration statement for the same
offering. [ ]
If
this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier
effective registration statement for the same
offering. [ ]
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. (Check one):
Large accelerated filer
[
]
Accelerated
filer
[ ]
Non-accelerated
filer
[ ]
Smaller reporting company
[X]
Emerging growth
company
[ ]
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 7(a)(2)(B) of the Securities Act. [
]
CALCULATION
OF REGISTRATION FEE
Title of Each Class
of
Securities To be
Registered
Amount
to
be
Registered(1)(2)
Proposed
Maximum
Offering
Price
Per
Share(3)
Proposed
Maximum
Aggregate
Offering
Price
Amount
of
Registration
Fee
Common Stock, par
value $0.001 per share
26,317,060,072
$ 0.0023
$60,529,238.17
$ 7,856.70(4)
(1)
Represents shares offered by the
selling stockholders. Includes an indeterminable number of
additional shares of common stock, pursuant to Rule 416 under the
Securities Act of 1933, as amended, that may be issued to prevent
dilution from stock splits, stock dividends or similar transactions
that could affect the shares to be offered by the selling
stockholders.
(2)
The amount to be registered consists
of (i) 17,628,941,493 shares of
common stock, par value $0.001 per share, (ii) up to 4,654,349,239 shares of common stock
issuable upon conversion of outstanding shares of the
registrant’s Series A Convertible Preferred Stock, par value
$0.001 per share, and (iii) up to 4,033,769,340 shares of common
stock issuable upon exercise of certain outstanding common stock
purchase warrants.
(3)
The price of $0.0023 is
a fixed price at
which the selling stockholders may sell their shares until our common stock
is listed on a national securities exchange or are quoted on the
OTCQX or OTCQB tier of the OTC Markets, at which time the shares
may be sold at prevailing market prices or privately negotiated
prices.
(4)
Previously
paid.
The
Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states
that this registration statement shall thereafter become effective
in accordance with Section 8(a) of the Securities Act of 1933, as
amended, or until the registration statement shall become effective
on such date as the Commission, acting pursuant to said section
8(a), may determine.
The information in this preliminary prospectus is not complete and
may be changed. The selling stockholders named in this preliminary
prospectus may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This preliminary prospectus is not an offer to sell
these securities and the selling stockholders named in this
preliminary prospectus are not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
Subject to Completion, Dated January 21,
2020
PRELIMINARY
PROSPECTUS
CHARLIE’S HOLDINGS,
INC.
26,317,060,072 Shares
Common
Stock
C:
This
prospectus relates to the offering and resale by the selling
stockholders identified in this prospectus of up to 26,317,060,072 shares of our common stock,
par value $0.001 per share, which consists of: (i) 17,628,941,493
shares of common stock, (ii) up to
4,654,349,239 shares of common stock issuable upon
conversion of outstanding shares of our Series A Convertible
Preferred Stock, par value $0.001 per share (“Series A Preferred”), and (iii)
up to 4,033,769,340 shares of common stock issuable upon exercise
of certain outstanding common stock purchase warrants (the
“Warrants”).
The selling stockholders acquired these securities in a
private transaction exempt from registration under the Securities
Act of 1933 as amended (the “Securities Act”). We are
registering the offer and sale of the common stock to satisfy
registration rights we have granted to certain of the selling
stockholders.
The shares of our
common stock may be offered and sold by the selling stockholders at
a fixed price of
$0.0023 per share until our common stock is quoted on
the OTCQB tier of the OTC
Markets (the “OTCQB”),
and thereafter at prevailing market prices or privately negotiated
prices or in transactions that are not in the public market.
Although we have applied to have our common stock quoted on the
OTCQB and we believe that upon the effective date of this
registration statement our common stock will qualify for quotation
on the OTCQB, we cannot assure you
that our common stock will, in fact, be quoted on
the OTCQB.
We will
not receive any proceeds from the sale of these shares by the
selling stockholders. The selling stockholders may sell the shares
as set forth under “Plan of
Distribution.” For a list of the selling stockholders,
see the section entitled “Selling Stockholders” on page 71.
We will bear the costs relating to the registration of these
shares.
Our common stock is
traded on the OTC Pink Marketplace under the symbol
“CHUC.” On January 21, 2020, the last reported sale
price of shares of our common stock on the OTC Pink Marketplace was
$0.0022. We have applied to
have our shares of common stock quoted on the OTCQB Marketplace
under the same symbol.
We may
amend or supplement this prospectus from time to time by filing
amendments or supplements as required. You should read the entire
prospectus and any amendments or supplements carefully before you
make your investment decision.
Investment
in our common stock involves risks. See “Risk Factors”
beginning on page 8 of this prospectus.
Neither
the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
This prospectus is part of a registration
statement on Form S-1 that we filed with the Securities and
Exchange Commission (the “SEC”). Under this registration statement, the
selling stockholders may, from time to time, sell up to an
aggregate of 26,317,060,072 shares of our common stock, par value
$0.001 per share. The
registration statement we filed with the SEC, of which this
prospectus forms a part, includes exhibits that provide more detail
of the matters discussed in this prospectus. You should read this
prospectus and the related exhibits filed with the SEC before
making your investment decision. The registration statement
and the exhibits can be obtained from the SEC, as indicated under
the section entitled “Where
You Can Find More Information.”
You should rely only on the information contained
in this prospectus. Neither we nor the selling stockholders have
authorized anyone to provide you with different or additional
information. If anyone provides you with different or inconsistent
information, you should not rely on it. Neither we nor the selling stockholders are making
an offer to sell our common stock in any jurisdiction where the
offer or sale thereof is not permitted. You should not assume that
the information appearing in this prospectus or the documents
incorporated by reference in this prospectus is accurate as of any
date other than their respective dates. Our business, financial
condition, results of operations and prospects may have changed
since those dates. You should read carefully the entirety of this
prospectus before making an investment
decision.
As used in this
prospectus, unless the context requires otherwise, the terms
“Company,”“we,”
“our” and
“us” refer to
Charlie’s Holdings, Inc. (formerly known as True Drinks
Holdings, Inc.), “Charlie’s” and
“CCD” refer to
Charlie’s Chalk Dust, LLC, a California limited liability
company and wholly-owned subsidiary of the Company, and
“Don Polly”
refers to Don Polly, LLC, a Nevada limited liability company that
is owned by entities controlled by
Brandon and Ryan Stump, the Company’s Chief Executive Officer
and Chief Operating Officer, respectively, and a
consolidated variable interest for which the Company is the primary
beneficiary.
Our
objective is to become a significant leader in the rapidly growing,
global e-cigarette segment of the broader nicotine related products
industry. Through Charlie’s, we formulate, market and
distribute branded e-cigarette liquid for use in both open and
closed nicotine-only e-cigarette and vaping systems.
Charlie’s products are produced domestically through contract
manufacturers for sale through select distributors, specialty
retailers and third-party online resellers throughout the United
States, as well as more than 80 countries worldwide.
Charlie’s primary international markets include the United
Kingdom, Italy, Spain, Belgium, Australia, Sweden and Canada. In
June 2019, we launched distribution, through Don Polly, of certain
premium vapor, tincture and topical wellness products containing
hemp-derived cannabidiol (“CBD”) and we currently intend to
develop and launch additional products containing hemp-derived CBD
in the future. Prior to the Share
Exchange, our primary business was the development, marketing, sale
and distribution of all-natural, vitamin-enhanced drinks, including
AquaBall® Naturally Flavored Water and Bazi® All Natural
Energy.
Recently
there have been significant news stories and health alerts related
to flavored nicotine vaping, leading to some states banning the
sale of flavored nicotine products and causing the Food and Drug
Administration (“FDA”) to review its policies on
controlling the sale of these products. The most recent health
related concerns seem to indicate that a vitamin E acetate related
compound may be causing the health issues. On November 8, officials
at the Centers for Disease Control and Prevention
(“CDC”)
reported a breakthrough in the investigation into the outbreak of
vaping-related lung injuries. The CDC's principal deputy director, Dr.
Anne Schuchat, stated that "vitamin E acetate is a known additive
used to dilute liquid in e-cigarettes or vaping products that
contain THC,” suggesting the possible culprit for the
series of lung injuries across the U.S. All of Charlie's nicotine-only, e-liquid
products are tested by third party laboratories which have
confirmed that none of our products contain any vitamin E acetate
or Tetrahydrocannabinol
(“THC”).
However,
these developments have had a negative effect on our sales since
mid-September 2019 (see further discussion below) and therefore, in
response to these developments and while government regulators are
formulating future polices management has adopted the following
plan of operation.
First, we plan to focus on increasing the sales of
our CBD related products, including topicals, tinctures and vaping
liquids. We feel there is a significant upside in the CBD space,
and we have begun to focus on numerous vertical markets for the
sale of our isolate, full and broad-spectrum products. These
vertical markets include the medical and wellness markets. In addition, we have begun
conversations with various companies and organizations that, if
successful, will allow us to significantly expand our marketing and
distribution reach.
Secondly,
we see a significant opportunity for sales growth in international
markets for nicotine e-liquids. Presently 25% of our e-liquid
product sales come from the international market and we are well
positioned to increase those sales in the countries that we
presently sell, and in additional overseas markets, as we have
already built an international distribution
platform.
Lastly, we believe
that nicotine based flavored vaping products will continue to be a
significant growth opportunity once all the rightful regulatory
changes have been made, including the FDA’s recently
announced enforcement policy with respect to flavored
cartridge-based e-cigarettes. Currently, we intend to pursue
marketing authorization from the FDA for certain of our
nicotine-based liquids, including, our
menthol and/or tobacco vaping products. As further described
under the heading “Government Regulation of Charlie’s
Products” below, we recently entered into an agreement
with Avail Vapor, LLC (“Avail”) to assist, in part, with
certain regulatory analysis and strategy as we prepare to submit
three premarket tobacco application (“PMTA”) to the FDA on or before
the May 2020 deadline. We expect the cost associated with the
preparation and submission of these PTMAs will be approximately $.4
million. In addition, we are evaluating the potential returns
associated with obtaining marketing authorization for our other
nicotine based vaping products after the May 2020 deadline. We feel
that a significant amount of our competitors will not have the
resources and/or expertise to complete the extensive and costly
PMTA process and that, once complete, we will be able to benefit
from being one of only a select group of companies operating in the
flavored nicotine product space. For
more information, see the section of this prospectus titled
“Government Regulation of
Charlie’s Products,” as well as the risks and uncertainties
described under “Risk Factors –
Regulatory and Market Risks” below.
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, which policy will go into effect on or around February 2,2020. The application of any new laws, regulations or policies 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 that relate to our
nicotine-based vaping liquid increase across the United States, or
internationally, the Company’s business, results of
operations and financial condition could be adversely
impacted.
Our Products
Charlie’s Product Line
Our business efforts consist primarily of
formulating, marketing and
distributing our portfolio
of branded e-cigarette liquid
and other premium vapor products for use in
nicotine-only e-cigarette and vaping systems, which we
collectively refer to as the “Charlie’s Product
Line” or
“Charlie’s
Products.”
E-Liquids
E-liquids used to produce vapor in vaping devices
are sold separately for use in refillable tanks of open system
vaporizers. Liquids are available in differing nicotine
concentrations (0 mg, 3 mg and 6 mg per milliliter) to suit user
preferences. Liquids are available in a variety of flavors,
including our proprietary blends. Liquid solution consists of
flavoring and/or nicotine dissolved in one or several hygroscopic
components, which turns the water in the solution into the
smoke-like vapor when heated. The most commonly used hygroscopic
components are propylene glycol (“PG”), vegetable glycerin
(“VG”) or polyethylene glycol 400. VG imparts
sweetness and produces vapor clouds, while PG produces more
“throat hit”, which simulates the feeling of smoking.
Our proprietary brands of e-liquids are manufactured by ISO Class 7
certified manufacturers in the United States, which helps ensure
their purity and quality.
Charlie’s
e-liquid products are produced under seven brand names
distinguished by their flavor profiles, packaging art and
ingredient transparency. All products are packaged in plastic drip
containers that are typically available in seven sizes ranging from
10 mil to 100ml, as well as bulk concentrate formats.
●
Black
Label and White Label.
Charlie’s original black and white product line launched in
2015. Black Label is currently available in five flavors and White
Label is currently available in four flavors.
●
CCD3. Launched in 2016, is a sea salt caramel ice
cream flavor.
●
Pachamama™.
A line launched in 2016 consisting of eight eclectic mixes of
natural fruit flavors such as passion fruit raspberry yuzu, blood
orange banana gooseberry and huckleberry pear
acai.
●
Meringue. The third brand launched in 2016, based on
creative character stories, currently includes three
flavors.
●
Campfire™.
Outdoors and Smores flavor inspired by camp
vibes.
●
Stumps™.
Line of four flavors inspired by the founders and their families
broadly released in 2017 across various formats. Currently active
in select markets.
●
The Creator of
Flavor™. Two flavors
broadly released in 2018 across various formats. Currently active
in select markets.
-2-
Nicotine Salt Products
Nicotine salt e-liquids
(“NIC
salts”) are traditionally
formulated for use in lower wattage open, semi-open and closed
system vaporizers and are available in higher nicotine
concentrations (25mg and 50mg per milliliter) than traditional
e-liquids. Nicotine salts consist of nicotine dissolved in an acid
that results in a lower PH level than other e-liquids. This form of
nicotine has a higher bioavailability resulting in faster blood
stream absorption and more closely mimics the effects of
combustible tobacco products. We recently released lower
concentration, NIC salt versions of certain flavors. These products
are designed to offer consumers access to the favorable
characteristics of NIC salts, such as increased flavor presence and
smoother draw, in a low nicotine concentration format. These
products can be used with a variety of vaping devices, making them
appealing to a broader consumer base. We broadly released
Pachamama™ Salts, an extension of the Pachamama™ line,
in late December 2018 to a select group of key accounts, which now
includes seven flavors packaged in 10ml, 30ml and 60ml bottles in
both high and low concentration formats. During the third quarter
of 2019, we launched NIC salt extensions of the Black, Gold and
White Label Charlie’s Chalk Dust brands and have plans to
further release additional products in this category as demand
continues to grow.
Government Regulation of Charlie’s Products
On June 22, 2009, the Family Smoking
Prevention and Tobacco Control Act (“FSPTCA”) authorized the FDA to immediately
regulate the manufacture, sale, and marketing of four categories of
tobacco products – cigarettes, cigarette tobacco,
roll-your-own tobacco, and smokeless tobacco. On May 10, 2016, the
FDA issued the "Deeming Regulations," which came into effect August8, 2016. The Deeming Regulations extended the FDA's "tobacco
products" authorities to apply to most previously unregulated
products that meet the statutory definition of "tobacco product,"
including e-liquids, e-cigarettes and other vaping products that
contain (or are used to consume e-liquid containing)
tobacco-derived ingredients. Deemed tobacco products in
this segment include, but are not limited to, e-liquids, atomizers,
batteries, cartomizers, clearomisers, tank systems, flavors,
bottles that contain e-liquids and programmable software
(“Deemed Tobacco
Products”). Under this definition, we believe all vaping
products in the Charlie’s Product Line may be considered a
Deemed Tobacco Products. Beginning August 8, 2016, Deemed Tobacco
Products became subject to all existing statutory controls
initially applicable only to cigarettes, cigarette tobacco,
roll-your-own tobacco, and smokeless tobacco as well as some
existing and some new FDA regulations related to the sale and
distribution of Deemed Tobacco Products. As a
result, Deemed Tobacco Products are now subject to
various federal restrictions and requirements, including without
limitation, a prohibition on marketing of "new tobacco products"
(i.e., products not commercially marketed in the United States "as
of"February 15, 2007, or modified in any physical respect since)
without prior FDA authorization.
The FDA has announced a compliance policy for
such Deemed Tobacco Products that qualify as "new tobacco
products" and that the agency will not enforce these requirements
for non-finished products (i.e., those intended solely for use in
future manufacturing). Prior to the FDA’s most recent
enforcement policy regarding flavored cartridge-based e-cigarettes,
which policy was announced on January 2, 2020, the FDA’s
compliance policy allowed companies to market finished
non-combusted Deemed Tobacco Products that qualify as
"new tobacco products" that were on the U.S. market on August 8,2016, until May 12, 2020, and to continue marketing of such
products during the FDA's review of a pending marketing application
submitted by May 12, 2020. In the absence of this policy, products
from our Charlie's Product Line, including nicotine-based products
under our Pachamama brand, would require prior authorization from FDA to
market these products after August 8, 2016. 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, which policy will go into effect on or
around February 2, 2020. 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 products from the Charlie’s Product Line,
including nicotine-based vapid liquid
marketed under our Pachamama brand, are marketed pursuant to FDA's
current compliance policy based on evidence that they were on the
U.S. market on August 8, 2016, have not been physically modified
since and are marketed for use in open systems, rather than closed,
cartridge-based systems that are the subject of the FDA’s
latest enforcement policy. See “Risk Factors –
Regulatory and Market Risks” below.
FDA authorization to introduce a "new tobacco
product" (or to continue marketing a "new tobacco product" covered
by the current or potentially modified compliance policy
for Deemed Tobacco Products on the U.S. market on August8, 2016) could be obtained via any of the following three
authorization pathways: (1) submission of a premarket tobacco
product application ("PMTA") and receipt of a marketing authorization order;
(2) submission of a substantial equivalence report and receipt of a
substantial equivalence order; or (3) submission of a request for
an exemption from substantial equivalence requirements and receipt
of a substantial equivalence exemption determination. We cannot
predict if the finished, nicotine-containing e-liquid products
of Charlie's Chalk Dust and Pachamama product lines,
all of which would be considered "new
tobacco products," will receive the required premarket approval
from the FDA if they were to seek premarket approval through an
available authorization pathway.
Since
there were few, if any, e-liquid, e-cigarette or other vaping
products on the market as of February 15, 2007, including the
Charlie’s Products, there is no way to utilize the less
onerous substantial equivalence or substantial equivalence
exemption pathways that traditional tobacco corporations can
utilize for cigarettes, smokeless tobacco, and other traditional
tobacco products. In order to obtain premarket approval,
manufacturers of practically all e-liquid, e-cigarette or other
vaping products must to use the PMTA pathway, which could
potentially cost hundreds of thousands of dollars or even millions
of dollars per application. Furthermore, the Deeming Regulations
created a significant barrier to entry for any new e-liquid,
e-cigarette or other vaping product seeking to enter the market
after August 8, 2016, since any such product would require an FDA
marketing authorization through one of the aforementioned
pathways.
We believe that the nicotine based flavored vaping
liquids in the Charlie’s Product Line will continue to be a
significant growth opportunity for the Company. As the May 2020
PMTA deadline approaches, we are preparing to submit up to three
PMTAs to the FDA to request marketing authorization for
Charlie’s menthol and/or tobacco vaping liquids. As a part of
these preparations, on November 25, 2019, we entered into a
services agreement (the “Avail Agreement”) with Avail Vapor, LLC
(“Avail”), for
the manufacturing of vapor products and to provide certain
regulatory analysis, strategy and other consulting services in
connection with the preparation and submission of three PMTAs to
the FDA. It is anticipated that the compensation to be paid by us
to Avail for services provided under the Avail Agreement will be
approximately $4,440,000, which will be paid upon completion of
services provided as described therein.
We are also evaluating the potential returns
associated with filing additional PMTAs for other Charlie’s
Products after the May 2020 expiration of the grace period.
We estimate the cost associated with
any future PMTA submission to be at least $750,000, which cost may
vary based on several factors including the selection of contract
research organizations to assist with the application process, as
well as variable costs associated with scientific, market
perception and clinical studies that may be required in connection
with each PMTA. We plan to evaluate several factors before
preparing and submitting any PMTA to the FDA, including, but not
limited to the regulatory environment for our products and the
availability of capital for the costs associated with each
submission. No assurances may be given that we will submit any
PMTAs to the FDA prior to the expiration of the grace period, or
that any PMTA submitted to the FDA will be approved. For more
information, see the section of this prospectus titled
“Description of our Business-
Government Regulation”
below.
Don Polly
Don Polly is a company under common ownership with
the Company, and was established in April 2019 for the specific
purpose of developing, marketing and distributing proprietary and
innovative hemp-derived cannabidiol (“CBD”), non-Tetrahydrocannabinol
(“THC”), wellness products. Don Polly is owned by
two limited liabilities companies, of which one is wholly-owned by
Brandon Stump, the Company’s Chief Executive Officer, and the
other is wholly-owned by Ryan Stump, the Company’s Chief
Operating Officer. In June 2019, Charlie’s entered into a
Licensing Agreement with Don Polly, pursuant to which Charlie's
granted Don Polly a limited right and license to use certain of
Charlie’s trademarks, copyrights and original artwork, in
connection with Don Polly’s branded CBD products, as well as
a Services Agreement pursuant to which Charlie’s
provides certain services to Don Polly related to
the sales, marketing, brand development of Don Polly
products.
As a result, the Company and Don Polly launched a
line of premium vapor, tincture and topical
wellness products containing hemp-derived CBD in June
2019, which we refer to the “Don Polly
Products” and
“Don
Polly Product Line”. Don
Polly’s efforts have been focused on developing and producing
high quality CBD products made from single-strain-sourced hemp
extract and high purity CBD isolate crystals. In addition, good
manufacturing practices and quality control parameters are of the
utmost importance to the Don Polly Products, which contribute to
the differentiation of the Don Polly Products in the CBD product
industry. The Don Polly Products consist of
full-spectrum
and isolate CBD products across three categories including vapor,
tinctures, and topicals.
Isolate CBD Products
Our CBD isolate
products contain a minimum purity of 99% isolate crystals, tested
by independent, third-party facilities to ensure it is free of
pesticides and heavy metals. Vape, as a CBD delivery method, has
grown in popularity due to the high level of bioavailability and
reported therapeutic responses. In response to demand for CBD
infused e-liquids from our existing distribution channels, we
launched a new line of CBD infused vapor products in June 2019. We
refer to these products as the “Don Polly Vape Product Line” or
the “Don Polly Isolate
Products.” The Don Polly Vape Product Line is
currently available in 30ml chubby bottles across three flavors
(Minty Mango, Grape Berry and Strawberry Watermelon) and two
strengths (250mg and 500mg). We are continuing to research and
develop isolate products as both vape line extensions and in other
product categories.
Full Spectrum CBD Products
Our
full spectrum hemp extract comes from whole plant extraction which
retains the plant’s natural compounds. This extraction method
ensures each product preserves the holistic benefits of the plant,
including minimal amounts of THC (0.3% or less), which allows for
optimal absorption of the plant’s nutrients. While CBD alone
is a beneficial cannabinoid, full spectrum products provide the
body access to all the plant’s cannabinoids, allowing the end
user to achieve a wide range of therapeutic benefits. The full
spectrum products are formulated with single-source and single
strain hemp extracts. Don Polly believes this sourcing practice
yields various compounds that work synergistically to heighten the
effects of the products, making them superior to single-compound
CBD isolates. In June 2019, we introduced the Pachamama™
tincture and topical full spectrum products. The tincture offering
now includes six flavors (the Natural, Green Tea Echinacea, Goji
Cacao, Kava Kava Valerian, Ylang Ylang Holy Basil and Black Pepper
Turmeric). available in 30ml bottle sizes and both 750mg and 1750mg
strengths. Our topical wellness products include the Cooling
Ointment, available in a one ounce jar and 750mg strength, and the
Athletic Rub, available in a two ounce jar and 500mg strength. We
plan on continuing to research, develop, and launch products in
these categories.
-3-
Broad Spectrum CBD Products
In
addition to isolate and fill spectrum CBD products, we believe
there is an opportunity to develop broad spectrum hemp-derived CBD
extracts that provide the same benefits of full spectrum CBD
products but, through additional processing of hemp-derived
extracts, eliminate the presence of THC. This category of THC-free,
broad spectrum products will provide consumers with concerns about
THC access to the same level of quality and nutrients we value in
our full spectrum products. We are currently developing certain
broad spectrum products, which, ultimately, will allow us to launch
products which match the consumer accessibility of our CBD isolate
products with the experience and benefits of our full spectrum
products. In October 2019, we launched our first three broad
spectrum products including Body Lotion, Icy Muscle Gel and Pain
Cream.
True Drinks
– Legacy
Product -- Bazi®
Prior to the Share Exchange, we marketed and
distributed products, including AquaBall® and Bazi®,
offering a healthful, natural alternative to high sugar, high
calorie and nutritionally deficient beverages. A discussed below
in “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations,” we
ceased producing AquaBall® in early 2018. We continue to
market and sell Bazi®, but on a very limited basis and only as
we sell off existing inventory, as we focus our resources on the
marketing, distribution and selling of the Charlie’s Products
and the Don Polly Products. Bazi® is a liquid nutritional
drink packed with eight different super fruits, including the
Chinese jujube and seven other super fruits, plus 12 vitamins.
Management is currently exploring the value of continuing the
marketing and sale of Bazi®.
Recent
Developments
The Share Exchange
On April 26, 2019 (the “Closing
Date”), we entered into a
Securities Exchange Agreement with each of the former members
(“Members”) of Charlie’s, and certain direct
investors in the Company (“Direct
Investors”), pursuant to
which we acquired all outstanding membership interests of
Charlie’s beneficially owned by the Members in exchange for
the issuance by the Company of units, with such units consisting of
an aggregate of (i) 15,655,538,349 shares of common stock (which
includes the issuance of an aggregate of 1,396,305 shares of a
newly created class of Series B Convertible Preferred Stock, par
value $0.001 per share (“Series B
Preferred”), convertible
into an aggregate of 13,963,047,716 shares of common stock, issued
to certain individuals in lieu of common stock); (ii) 206,249
shares of a newly created class of Series A Convertible Preferred
Stock, par value $0.001 per share (“Series A
Preferred”), convertible
into an aggregate of 4,654,349,239 shares of common stock; and
(iii) warrants to purchase an aggregate of 3,102,899,493 shares of
common stock (the “Investor
Warrants”) (the
“Share Exchange”). As a result of the Share Exchange,
Charlie’s became a wholly owned subsidiary of the
Company.
In connection with the Share Exchange, the Company
also entered into registration rights agreements (the
“Registration Rights
Agreements”) with each of
the Members and Direct Investors, pursuant to which the Company
agreed to use its best efforts to file a registration statement
with the SEC no later than 30 days after the Closing Date in order
to register, on behalf of the Members and Direct Investors, the
shares of common stock, shares of common stock issuable upon
conversion of the Series A Preferred and Series B Preferred, and
shares of common stock issuable upon exercise of the Investor
Warrants.
Immediately prior to, and in connection with, the
Share Exchange, Charlie’s consummated a private offering of
membership interests that resulted in gross proceeds to
Charlie’s of approximately $27.5 million (the
“Charlie’s
Financing”). Katalyst
Securities LLC (“Katalyst”) acted as the sole placement agent in
connection with the Charlie's Financing
pursuant to an Engagement Letter entered into by and between
Katalyst, Charlie's and the Company on
February 15, 2019, which was amended on April 16, 2019
(“Amended Engagement
Letter”). As
consideration for its services in connection with the
Charlie’s Financing and Share Exchange, the Company issued to
Katalyst and its designees five-year warrants to purchase an
aggregate of 930,869,848 shares of common stock at a price of
$0.0044313 per share (the “Placement Agent
Warrants”). The Placement
Agent Warrants have substantially the same terms as those set forth
in the Investor Warrants. As additional consideration for advisory
services provided in connection with the Charlie’s Financing
and the Share Exchange, the Company issued an aggregate of
902,661,671 shares of common stock (the “Advisory
Shares”), including to
Scot Cohen, a member of the Company’s Board of Directors,
pursuant to a subscription agreement.
The
Share Exchange resulted in a change of control of the Company, with
the Members and Direct Investors owning approximately 85.7% of the
Company’s outstanding voting securities immediately after the
Share Exchange, and the Company’s current stockholders
beneficially owning approximately 14.3% of the issued and
outstanding voting securities, which includes the Advisory Shares.
Following the Share Exchange, Ryan Stump and Brandon Stump, the
founders of Charlie’s and the Company’s Chief Executive
Officer and Chief Operating Officer, respectively, held in excess
of 50% of the Company’s issued and outstanding voting
securities.
The Share Exchange is accounted for as a reverse
recapitalization in accordance with accounting principles generally
accepted in the United States (“U.S. GAAP”) because the primary assets of the Company
were nominal following the close of the Share Exchange.
Charlie’s was determined to be the accounting acquirer based
upon the terms of the Share Exchange and other factors including:
(i) Charlie’s stockholders and other persons holding
securities convertible, exercisable or exchangeable directly or
indirectly for Charlie’s membership units owned approximately
49%, on a fully diluted basis, of the Company’s outstanding
securities immediately following the effective time of the Share
Exchange (ii) individuals associated with Charlie’s now hold
a majority of the seats on the Company’s Board of Directors
and (iii) Charlie’s management holds all key positions in the
management of the combined Company. Accordingly, the historical
financial statements of True Drinks became the Company's historical
financial statements including the comparative prior periods. All
references in the unaudited condensed consolidated financial
statements to the number of shares and per-share amounts of common
stock have been retroactively restated to reflect the exchange
rate.
Following the
consummation of the Share Exchange, the business operations of the
Company consist of those of Charlie’s, which is principally engaged in
formulating, marketing and distributing branded e-cigarette liquid
and other products for use in nicotine-only e-cigarette and vaping
systems.
Launch of CBD Products
In
June 2019, we introduced, through Don Polly, full-spectrum hemp
extract and CBD isolate wellness products across a variety of
formats and with different strengths. Our initial launch consisted
of six vapor, eight tincture and two topical product variations.
The newly released products were launched under the
Pachamama™ brand by way of a licensing agreement between Don
Polly and Charlie’s, entered on April 25, 2019. In the near
term, we expect to expand the hemp-derived CBD-based products line
to include additional CBD isolate products and THC- free, broad
spectrum hemp extract products currently in
development.
Pachamama™
CBD products are currently available in the U.S., Mexico, U.K.,
South Africa and Switzerland, and we expect to continue expanding
both our domestic and international distribution
efforts.
Filing of Amended and Restated Charter; Automatic Conversion of
Series B Preferred
On June28, 2019, we amended and restated our Articles of Incorporation
(the “Amended and Restated
Charter”) to (i) change our corporate name to
Charlie’s Holdings, Inc. and (ii) increase the number of
shares authorized as common stock from 7.0 billion to 50.0 billion
shares. The Amended and Restated Charter was approved by our Board
of Directors and holders of a majority of our outstanding voting
securities on May 8, 2019, and the Amended and Restated Charter was
filed with the State of Nevada on June 28, 2019.
As a
result of the filing of the Amended and Restated Charter and the
increase of our authorized common stock to 50.0 billion shares, all
1,396,305 outstanding shares of Series
B Preferred automatically converted into a total of 13,963,047,716
shares of common stock in accordance with the Certificate of Designations, Preferences and
Rights of the Series B Convertible Preferred
Stock.
Current Capital Structure
Following the Share Exchange and the filing of the
Amended and Restated Charter, our authorized capital stock
currently consists of 50.0 billion shares of common stock, and 5.0
million shares of preferred stock, $0.001 par value per share,
of which 300,000 shares have been designated as Series A
Convertible Preferred Stock (“Series A
Preferred”) and 1,500,000
shares have been designated as Series B Convertible Preferred Stock
(“Series B
Preferred”).
As of January 17, 2020, there were 18,973,827,540
shares of common stock, 204,560 shares of Series A Preferred and no
shares of Series B Preferred outstanding. Each share of Series A
Preferred outstanding has a stated value of $100 per share. Subject
to certain limitations, holders of outstanding shares of Series A
Preferred may elect to convert those shares into that number of
shares of common stock equal to the stated value of the shares of
Series A Preferred held, divided by $0.0044313, or an aggregate of
4,616,268,089 shares of common stock. Holders of our common stock
are entitled to one vote for each share held on all matters
submitted to a vote of the Company’s stockholders, and
holders of shares of Series A Preferred are entitled to vote on an
as-converted basis along with holders of common stock on all
matters presented to the Company’s stockholders. As such,
outstanding shares of common stock represent
approximately 80% of
our voting class and outstanding shares of Series A Preferred
represent approximately 20%. For additional disclosure of the
Company’s capital structure, see the section of this
prospectus titled “Description of our Capital
Stock”
below.
Corporate Information
Our principal place of business is 1007 Brioso Drive, Costa Mesa,
CA92627. Our telephone number is (949) 531-6855. Our corporate
website address is https://charliesholdings.com. Our common stock
is currently listed for quotation on the OTC Pink Marketplace under
the symbol “CHUC.”
We are
a “smaller reporting company” as defined in Rule 12b-2
of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)
and have elected to take advantage of certain of the scaled
disclosure available to smaller reporting companies.
This
prospectus covers the resale of a total of 26,317,060,072 shares of
our common stock, consisting of: (i) 17,628,941,493 shares of common stock currently
outstanding, (ii) up to 4,654,349,239 shares of common stock
issuable upon conversion of outstanding shares of Series A
Preferred, and (iii) 4,033,769,340 shares of common stock
issuable upon exercise outstanding Warrants.
Offering
price
The
selling stockholders will determine when and how
they will sell the common stock offered in this
prospectus. The shares of our
common stock may be offered and sold by selling stockholders at a fixed price
of $0.0023 per share until our common stock is quoted
on the OTCQB tier of the OTC Markets (the
“OTCQB”),
and thereafter at prevailing market prices or privately negotiated
prices or in transactions that are not in the public market.
Although we have applied to have our common stock quoted on the
OTCQB and we believe that upon the effective date of this
registration statement our common stock will qualify of quotation
on the OTCQB, we cannot assure you
that our common stock will, in fact, be quoted on
the OTCQB.
Common stock
outstanding
18,973,827,540
shares. The number of outstanding shares does not include shares
issuable upon conversion of outstanding shares of our conversion of
Series A Preferred and/or exercise of outstanding
Warrants.
Use of
proceeds
We will
not receive any proceeds from the sale of the shares of common
stock offered by the selling stockholders.
Risk
factors
You
should read the “Risk
Factors” section of this prospectus for a discussion
of factors to consider carefully before deciding to invest in
shares of our common stock.
Market
for our shares
Our
common stock is traded on the OTC Pink Marketplace under the symbol
“CHUC.”
We
have applied to have our shares of common stock quoted on the OTCQB
marketplace under the same symbol. No assurance can be given that
such application will be approved.
The number of
shares of common stock outstanding is based on an aggregate of
18,973,827,540 shares outstanding as
of January 17, 2020, and
excludes:
●
204,560 shares of Series A Preferred
convertible into 4,616,268,089 shares of common
stock;
●
outstanding
warrants, including the Warrants, to purchase 4,033,769,340 shares
of common stock, with a weighted average exercise price of $
0.044313;
●
61,824,826
shares of common stock reserved for issuance upon exercise of
outstanding stock options issued under our 2013 Stock Incentive
Plan (the “2013
Plan”), with a weighted average exercise price of
$0.02 per share; and
●
1,107,254,205
shares of common stock reserved for issuance upon exercise of stock
options available under our 2019 Omnibus Incentive Plan (the
“2019 Plan ”).
As of December 31, 2019, a total of 739,500,000 awards
have been granted under the 2019 Plan.
Unless
otherwise indicated in this prospectus, all share and per share
figures reflect the exchange of membership interests of
Charlie’s then outstanding for certain of the Company’s
securities upon the consummation of the Share Exchange on April 26,2019; however, the share and per share numbers in the audited
financial statements of Charlie’s for the year ended December31, 2018 included in this prospectus are not adjusted to give
effect to the Share Exchange.
-6-
SUMMARY HISTORICAL FINANCIAL DATA OF CHARLIE’S CHALK
DUST, LLC
The following tables set forth a summary of
Charlie’s historical financial data as of, and for the
periods ended on, the dates indicated, as, following the Share
Exchange, we are now primarily dependent on the business of
Charlie’s. We have derived the statements of operations data
for the years ended December 31, 2018 and 2017 from the
audited financial statements of Charlie’s included elsewhere
in this prospectus. The statements of operations data for the
nine-months ended September 30, 2019 and 2018 and the balance sheet
data as of September 30, 2019 have been derived from
Charlie’s unaudited financial statements included elsewhere
in this prospectus and have been prepared on the same basis as the
audited financial statements. In the opinion of our management, the
unaudited data reflects all adjustments, consisting of normal and
recurring adjustments, necessary for a fair presentation of results
as of and for these periods. You should read this data together
with our financial statements and related notes included elsewhere
in this prospectus and the sections in this prospectus
entitled “Risk
Factors,”“Unaudited Pro Forma Condensed Combined
Financial Information,” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations of Charlie’s
Chalk Dust, LLC,” and our financial statements and
related notes appearing elsewhere in this prospectus. Our historical results for any prior period are
not indicative of our future results, and our results for the
nine-months ended September 30, 2019 may not be indicative of our
results for the year ending December 31,2019.
Basic and diluted
weighted average number of units outstanding
1,000
1,000
7,847,468
14,41
(1)
See Note 1 to each
of our audited and unaudited condensed financial statements,
respectively, included elsewhere in this prospectus for an
explanation of the methods used to calculate the historical net
income (loss) per share, basic and diluted, and the number of
shares used in the computation of the per share
amounts.
Investing in our common stock involves a high degree of risk. In
addition to the information, documents or reports included or
incorporated by reference in this prospectus and, if applicable,
any prospectus supplement or other offering materials, you should
carefully consider the risks described below in addition to the
other information contained in this prospectus, before making an
investment decision. Our business, financial condition or results
of operations could be harmed by any of these risks. As a result,
you could lose some or all of your investment in our common stock.
The risks and uncertainties described below are not the only ones
we face. Additional risks not currently known to us or other
factors not perceived by us to present significant risks to our
business at this time also may impair our business
operations.
Our operations are now primarily dependent on the business of
Charlie’s, and our ability to achieve positive cash flow
under our new business plan is uncertain.
As
a result of the Share Exchange, our continued operations are now
primarily dependent on the business of Charlie’s. Although
Charlie’s generated net revenue of approximately $19.1
million during the nine months ended September 30, 2019 and $20.8
million for the year ended December 31, 2018, and we anticipate
approximately the same revenue in 2019, there can be no guarantee
that the Company will continue to grow revenue or achieve positive
cash flow in the future.
Our operating results in the past will not reflect our operating
results in the future, which makes it difficult to evaluate our
future business, prospects, and forecast revenue.
Until
recently, our business was comprised primarily of the development,
marketing, sale and distribution of all-natural, vitamin-enhanced
drinks. As a result of our decision to consummate the Share
Exchange, our future revenue will substantially differ from past
revenue, and our operating results will vary significantly compared
to past operating results. It is too early to predict whether
consumers will accept, and continue to use on a regular basis, our
new products, due in part to the fact that we have had limited
recent operating history as a combined entity with Charlie’s.
Factors that will significantly affect our operating results
include, without limitation, the following:
●
the
expected increase in revenue due to the addition of those products
developed and marketed by Charlie’s prior to the Share
Exchange, as well as any products that we may release in the
future, to our revenue stream;
●
our
decision in early 2018 to discontinue the production and sale of
AquaBall®, that in the years ended December 31, 2018 and 2017,
contributed approximately $1,767,802 and $3,581,142 in revenue,
respectively;
●
our
previous sole reliance on sales of Bazi®, that in the years
ended December 31, 2018 and 2017, contributed approximately
$179,250 and $242,192 in revenue to the Company, respectively;
and
●
the
restructuring of substantially all of our previously outstanding
debt and shares of preferred stock on April 26, 2019, in connection
with the Share Exchange.
Although we believe that, as a result of the Share Exchange and the
restructuring of our prior debt, our cash resources are currently
sufficient, our long-term liquidity and capital requirements may be
difficult to predict, which may adversely affect our long-term cash
position.
Prior
to the Share Exchange, our core business product sales were
significantly below levels necessary to achieve positive cash flow.
In addition, we had significant liabilities, amounting to
approximately $7.6 million as of September 30, 2019 and $1.4
million as of December 31, 2018. However, as a result of the
acquisition of Charlie’s as our wholly owned subsidiary,
Charlie’s historical results of operations, and the
restructuring of substantially all of our outstanding debt on April26, 2019, we currently believe that our cash resources are
sufficient to fund our operations for the next twelve months,
although no assurances can be given. However, if we are
required to seek additional financing in the future in order to
fund our operations, retire indebtedness and otherwise carry out
our business plan, there can be no assurance that such financing
will be available on acceptable terms, or at all, and there can be
no assurance that any such arrangement, if required or otherwise
sought, would be available on terms deemed to be commercially
acceptable and in our best interests.
-8-
Our business is difficult to evaluate because we have recently
significantly modified our product offerings and customer
base.
As
a result of the Share Exchange, we have recently modified our
operations, engaging in the sale of new products in a new market
through new distributors and new lines of business. There is a risk
that we will be unable to successfully integrate the newly acquired
businesses with our current structure. Our estimates of capital,
personnel and equipment required for our newly acquired businesses
are based on the historical experience of management and businesses
they are familiar with. Our management has limited direct
experience in operating a business of our current size, as well as
one that is publicly traded.
Our products could fail to attract or retain users or generate
revenue and profits.
As
a result of the Share Exchange, our customer base has changed
significantly. Our ability to develop, increase, and engage our new
customer base and to increase our revenue depends heavily on our
ability to continue to evolve our existing products and to create
successful new products, both independently and in conjunction with
developers or other third parties. We may introduce significant
changes to our existing products or acquire or introduce new and
unproven products, including using technologies with which we have
little or no prior development or operating experience. If new or
enhanced products fail to engage our customers, or if we are
unsuccessful in our monetization efforts, we may fail to attract or
retain customers or to generate sufficient revenue, operating
margin, or other value to justify our investments, and our business
may be adversely affected.
Our significant stockholders may have certain personal interests
that may affect the Company.
Together,
Brandon Stump and Ryan Stump, the founders of Charlie’s and
our Chief Executive Officer and Chief Operating Officer,
respectively, collectively own approximately 57% of our issued and
outstanding voting securities as a result of the Share
Exchange. As a result, Ryan Stump and Brandon Stump have the
ability to exert influence over both the actions of our Board of
Directors, the outcome of issues requiring approval by our
stockholders, as well as the execution of management’s plans.
This concentration of ownership may have effects such as delaying
or preventing a change in control of the Company that may be
favored by other stockholders or preventing transactions in which
stockholders might otherwise recover a premium for their shares
over current market prices.
We will need to hire additional qualified accounting and
administrative personnel in order to remediate material weaknesses
in our internal control over financial accounting, and we will need
to expend additional resources and efforts to establish and
maintain the effectiveness of our internal control over financial
reporting and our disclosure controls and procedures.
As a public company, we are subject to the
reporting requirements of the Securities Exchange Act of 1934, as
amended (the “Exchange
Act”), and the
Sarbanes-Oxley Act of 2002. Our management is required to evaluate
and disclose its assessment of the effectiveness of our internal
control over financial reporting as of each year-end, including
disclosing any “material weakness” in our internal
control over financial reporting. A material weakness is a control
deficiency, or combination of control deficiencies, that results in
more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or
detected. As a result of its assessment, management has determined
that there were material weaknesses due to the lack of segregation
of duties and sufficient internal controls (including
technology-based general controls) that encompass our Company as a
whole with respect to entity and transactions level controls in
order to ensure complete documentation of complex and non-routine
transactions and adequate financial reporting. If we continue to
experience material weaknesses in our internal controls or fail to
maintain or implement required new or improved controls, such
circumstances could cause us to fail to meet our periodic reporting
obligations or result in material misstatements in our financial
statements, or adversely affect the results of periodic management
evaluations and, if required, annual auditor attestation reports.
Due to these material weaknesses, management concluded that, as of
December 31, 2018 and 2017, our internal control over financial
reporting was ineffective. Management also concluded that our
disclosure controls and procedures were ineffective as of December31, 2018 and 2017, as well as for the quarter ended June 30, 2019.
These weaknesses were first identified in our Annual Report on Form
10-K for the year ended December 31, 2012. In 2018, we
reduced our staff to one employee, and outsourced our
accounting and financial functions, further
exacerbating our weaknesses in our internal control over
financial reporting and our disclosure controls and procedures.
Although the number of employees has grown as a result of the Share
Exchange and the addition of Charlie’s operations, including
the hiring of a new Chief Executive Officer, Chief Financial
Officer and the accounting and information technology staffs of
Charlie’s, we cannot assure you that we will have sufficient
resources to resolve these material weaknesses.
These weaknesses have the
potential to adversely impact our financial reporting
process and our financial reports. We will need to hire additional
qualified accounting and administrative personnel in order to
resolve these material weaknesses.
-9-
The loss of one or more of our key personnel or our failure to
attract and retain other highly qualified personnel in the future,
could harm our business.
We
currently depend on the continued services and performance of key
members of our management team, in particular, Brandon Stump and
Ryan Stump, Charlie’s founders and our Chief Executive
Officer and Chief Operating Officer, respectively, and David Allen,
our Chief Financial Officer. If we cannot call upon them
or other key management personnel for any reason, our operations
and development could be harmed. We have not yet developed a
succession plan. Furthermore, as we grow, we will be required to
hire and attract additional qualified professionals such as
accounting, legal, finance, production, market and sales experts.
We may not be able to locate or attract qualified individuals for
such positions, which will affect our ability to grow and expand
our business.
We rely on contractual arrangements with Don Polly, our
consolidated variable interest entity for our CBD-related
business operations, which may not be as effective as direct
ownership in providing operational control.
We
have relied and expect to continue to rely on contractual
arrangements with Don Polly and its shareholders, consisting of
entities wholly-owned by Brandon Stump and Ryan Stump, for the
operation of our CBD-related operations. These contractual
arrangements may not be as effective as direct ownership in
providing us with control over our consolidated variable interest
entity. For example, Don Polly and its shareholders could breach
their contractual arrangements with us by, among other things,
failing to conduct their operations, including maintaining our
website and using the domain names and trademarks, in an acceptable
manner or taking other actions that are detrimental to our
interests.
If
we had direct ownership of Don Polly, we would be able to exercise
our rights as a shareholder to effect changes in the board of
directors of Don Polly, which in turn could implement changes,
subject to any applicable fiduciary obligations, at the management
and operational level. However, under the current contractual
arrangements, we rely on the performance by Don Polly, and its
shareholders of their obligations under the contracts. The
shareholders of Don Polly may not act in the best interests of our
company or may not perform their obligations under these contracts.
Such risks exist throughout the period in which we intend to
operate our business through the contractual arrangements with Don
Polly. Therefore, our contractual arrangements with Don Polly, our
consolidated variable interest entity, may not be as effective in
ensuring our control over the relevant portion of our business
operations as direct ownership would be.
The shareholders of Don Polly, our consolidated variable interest
entity, may have potential conflicts of interest with us, which may
materially and adversely affect our business and financial
condition.
The
equity interests of Don Polly, our consolidated variable interest
entity, are held by entities controlled by Brandon Stump, our Chief
Executive Officer, and Ryan Stump, our Chief Operating Officer.
Their interests in Don Polly may differ from the interests of our
company as a whole. These shareholders may breach, or cause Don
Polly to breach, the existing contractual arrangements we have with
them and Don Polly, which would have a material adverse effect on
our ability to effectively control Don Polly and receive economic
benefits from it. For example, the shareholders may be able to
cause our agreements with Don Polly to be performed in a manner
adverse to us by, among other things, failing to remit payments due
under the contractual arrangements to us on a timely basis. We
cannot assure you that when conflicts of interest arise, any or all
of these shareholders will act in the best interests of our company
or such conflicts will be resolved in our favor.
Currently,
we do not have any arrangements to address potential conflicts of
interest between these shareholders and the Company. If we cannot
resolve any conflict of interest or dispute between us and the
shareholders of Don Polly, we would have to rely on legal
proceedings, which could result in the disruption of our business
and subject us to substantial uncertainty as to the outcome of any
such legal proceedings.
-10-
We have no commercial manufacturing capacity and rely on
third-party contract manufacturers to produce commercial quantities
of our products.
We
do not have the facilities, equipment or personnel to manufacture
commercial quantities of our products and therefore must rely on
qualified third-party contract manufactures with appropriate
facilities and equipment to contract manufacture commercial
quantities of products. Any performance failure on the part of our
contract manufacturers could delay commercialization of any of our
products, depriving us of potential product revenue.
Failure
by our contract manufacturers to achieve and maintain high
manufacturing standards could result in product recalls or
withdrawals, delays or failures in testing or delivery, cost
overruns or other problems that could materially adversely affect
our business. Contract manufacturers may encounter difficulties
involving production yields, quality control and quality assurance.
If for some reason our contract manufacturers cannot perform as
agreed, we may be required to replace them. Although we believe
there are a number of potential replacements, we may incur added
costs and delays in identifying and obtaining any such
replacements.
The
inability of a manufacturer to ship orders of our products in a
timely manner or to meet quality standards could cause us to miss
the delivery date requirements of our customers for those items,
which could result in cancellation of orders, refusal to accept
deliveries or a reduction in purchase prices, any of which could
have a material adverse effect as our revenue would decrease and we
would incur net losses as a result of sales of the product, if any
sales could be made.
We are subject to cyber-security risks, including those related to
customer, employee, vendor or other company data and including in
connection with integration of acquired businesses and
operations.
We
use information technologies to securely manage operations and
various business functions. We rely on various technologies, some
of which are managed by third parties, to process, transmit and
store electronic information, and to manage or support a variety of
business processes and activities, including reporting on our
business and interacting with customers, vendors and employees. In
addition, we collect and store certain data, including proprietary
business information, and may have access to confidential or
personal information that is subject to privacy and security laws,
regulations and customer-imposed controls. Our systems are subject
to repeated attempts by third parties to access information or to
disrupt our systems. Despite our security design and controls, and
those of our third-party providers, we may become subject to system
damage, disruptions or shutdowns due to any number of causes,
including cyber-attacks, breaches, employee error or malfeasance,
power outages, computer viruses, telecommunication or utility
failures, systems failures, service providers, natural disasters or
other catastrophic events. It is possible for such vulnerabilities
to remain undetected for an extended period. We may face other
challenges and risks as we upgrade and standardize our information
technology systems as part of our integration of acquired
businesses and operations. We have contingency plans in place to
prevent or mitigate the impact of these events, however, these
events could result in operational disruptions or the
misappropriation of sensitive data, and depending on their nature
and scope, could lead to the compromise of confidential
information, improper use of our systems and networks, manipulation
and destruction of data, defective products, production downtimes
and operational disruptions and exposure to liability. Such
disruptions or misappropriations and the resulting repercussions,
including reputational damage and legal claims or proceedings, may
adversely affect our results of operations, cash flows and
financial condition, and the trading price of our common
stock.
This risk is enhanced in certain jurisdictions
with stringent data privacy laws. For example, California recently
adopted the California Consumer Privacy Act of 2018
(“CCPA”), which provides new data privacy rights
for consumers and new operational requirements for businesses. The
CCPA includes a statutory damages framework and private rights of
action against businesses that fail to comply with certain CCPA
terms or implement reasonable security procedures and practices to
prevent data breaches. The CCPA goes into effect in January
2020.
We are affected by extensive laws, governmental regulations,
administrative determinations, court decisions and similar other
constraints, which can make compliance costly and subject us to
enforcement actions by governmental agencies.
The
formulation, manufacturing, packaging, labeling, holding, storage,
distribution, advertising and sale of our products are affected by
extensive laws, governmental regulations and policies,
administrative determinations, court decisions and similar
constraints at the federal, state and local levels, both within the
United States and in any country where we conduct business. There
can be no assurance that we, or our independent distributors, will
be in compliance with all of these regulations. A failure by us or
our distributors to comply with these laws and regulations could
lead to governmental investigations, civil and criminal
prosecutions, administrative hearings and court proceedings, civil
and criminal penalties, injunctions against product sales or
advertising, civil and criminal liability for us and/or our
principals, bad publicity, and tort claims arising out of
governmental or judicial findings of fact or conclusions of law
adverse to us or our principals. In addition, the adoption of new
regulations and policies or changes in the interpretations of
existing regulations and policies may result in significant
new compliance costs or discontinuation of product sales, and may
adversely affect the marketing of our products, resulting in
decreases in revenue.
The business that we conduct outside the U.S. may be adversely
affected by international risk and uncertainties.
Although
our operations are based in the United States, we conduct business
outside of the United States and expect to continue to do so in the
future. Any business that we conduct outside of the United States
is subject to additional risks that may have a material adverse
effect on our ability to continue conducting business in certain
international markets, including, without limitation:
●
Potentially
reduced protection for intellectual property rights;
●
Unexpected
changes in tariffs, trade barriers and regulatory
requirements;
●
Economic
weakness, including inflation or political instability, in
particular foreign economies and markets;
●
Business
interruptions resulting from geo-political actions, including war
and terrorism or natural disasters, including earthquakes,
hurricanes, typhoons, floods and fires; and
●
Failure to comply with Office of Foreign Asset
Control rules and regulations and the Foreign Corrupt Practices Act
(“FCPA”).
These
factors or any combination of these factors may adversely affect
our revenue or our overall financial
performance.
-11-
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 regulation and private
sector actions, including efforts aimed at reducing the incidence
of use in minors and efforts seeking to hold the importers, makers
and sellers of these products responsible for alleged adverse
health effects associated with the use of, in particular,
inhalable, vaporized e-liquid solutions containing nicotine derived
from tobacco. More broadly, new regulatory actions by the FDA and
other federal, state or local governments or agencies have an
impact the consumer acceptability of or access to our products,
including regulations promulgated by 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 May 2020. Additionally, on January 2, 2020
the FDA issued an enforcement policy effectively banning the
sale of flavored cartridge-based e-cigarettes marketed primarily by
large manufacturers in the United States without prior
authorization from the FDA, which policy will go into effect on or
around February 2, 2020. According to the FDA, it is expected that
the new policy will have minimal impact on small manufacturers,
such as vape shops, that sell non-cartridge based products. We
believe that any ban on flavored
e-cigarettes, or similar enforcement action by the FDA, would have
a significant material adverse impact on the Charlie’s
Products, which would, in turn, have a material adverse impact on
our overall business.
Additional
regulatory challenges may come in future months and years,
including the FDA’s publication of new product standards or
additional rule making that may impact vape shops or other small
manufacturers, limit adult consumer choices, delay or prevent the
launch of new or modified risk tobacco products or products with
claims of reduced risk, require the recall or other removal of
certain products from the marketplace, restrict communications
including marketing, advertising, and educational campaigns
regarding the product category to adult consumers, restrict the
ability to differentiate products, create a competitive advantage
or disadvantage for certain companies, impose additional
manufacturing, labeling or packaging requirements, interrupt
manufacturing or otherwise significantly increase the cost of doing
business, or restrict or prevent the use of specified products in
certain locations or the sale of products by certain retail
establishments. Any of these actions may also have a material
adverse effect on our business. Each of our products are also
subject to intense competition and changes in adult consumer
preferences, which could have a material adverse effect on our
business.
Our products contain nicotine, which is considered to be a highly
addictive substance.
Certain
of our products contain nicotine, a chemical found in cigarettes,
e-cigarettes, certain other vapor products and other tobacco
products, which is considered to be highly addictive. The Family
Smoking Prevention and Tobacco Control Act empowers the FDA to
regulate the amount of nicotine found in vapor products, but may
not require the reduction of nicotine yields of a vapor product to
zero. Any FDA regulation may require us to reformulate, recall and
or discontinue certain of the products we may sell from time to
time, which may have a material adverse effect on our ability to
market our products and have a material adverse effect on our
business, financial condition, results of operations, cash flows
and or future prospects.
Recent bans on the sales of flavored e-cigarettes directly impacts
the markets in which we may sell Charlie’s Products, and may
have a material adverse impact on our business.
On January 2, 2020 the FDA issued an
enforcement policy effectively banning the sale of flavored
cartridge-based e-cigarettes marketed primarily by large
manufacturers in the United States without prior authorization from
the FDA, which policy will go into effect on or around February 2,2020. In addition, Utah, Washington,
Rhode Island and Massachusetts have temporarily banned the sale of
flavored e-cigarettes as of the date of this prospectus, while
previously imposed bans in New York, Michigan and Oregon have been
temporarily halted by judicially imposed injunctions. Other states
and municipalities are considering implementing similar
restrictions, and some cities have implemented more restrictive
measures than their state counterparts, such as San Francisco,
which in June 2019, approved a new ban on the sale of flavored
nicotine products, including vaping liquids and menthol cigarettes.
Any ban of on the sale of flavored e-cigarettes directly limits the
markets in which we may sell the Charlie’s Products. In the
event the prevalence of such bans increase across the United
States, our business, results of operations and financial condition
will be materially harmed.
There is uncertainty related to the regulation of flavored
e-cigarette liquid and vaporization products and certain other
consumption accessories, including the possibility that all
flavored e-cigarette liquid and vaporization products may be
recalled or removed from the market entirely. Any increased
regulatory compliance burdens will have a material adverse impact
on our operations and future business development
efforts.
There has been increasing activity on the federal,
state, and local levels with respect to scrutiny of flavored
e-cigarette liquid and vaporizer products, including the
FDA’s recently announced enforcement policy regarding
flavored cartridge-based e-cigarette products, and there is uncertainty regarding whether and in
what circumstances federal, state, or local regulatory authorities
will seek to develop and/or enforce regulations relative to other
products used for the vaporization of nicotine. Federal,
state, and local governmental bodies across the United States have
indicated that flavored e-cigarette liquid, vaporization products
and certain other consumption accessories may become subject to new
laws and regulations at the state and local levels. In addition to
initiatives taken by the FDA at the federal level, over 25 states
have implemented statewide regulations that prohibit vaping in
public places, and, as of the date of this prospectus, Utah,
Washington, Rhode Island and Massachusetts have temporarily banned
the sale of flavored e-cigarettes, while previously imposed bans in
New York, Michigan and Oregon have been temporarily halted by
judicially imposed injunctions. Many states, provinces, and some
cities have passed laws restricting the sale of e-cigarettes and
certain other nicotine vaporizer
products.
Changes
to the application of existing laws and regulations, and/or the
implementation of any new laws or regulations that may be adopted
in the future, at a federal, state, or local level, directly or
indirectly implicating flavored e-cigarette liquid and products
used for the vaporization of nicotine would materially limit our
ability to sell such products, result in additional compliance
expenses, and require us to change our labeling and methods of
distribution, any of which would have a material adverse effect on
our business, results of operations and financial
condition.
The regulation of tobacco products by the FDA in the United States
and the issuance of Deeming Regulations may materially adversely
affect the Company.
The “Deeming Regulations” issued by
the FDA in May 2016 require any e-liquid, e-cigarettes, and other
vaping products considered to be Deemed Tobacco Products that were
not commercially marketed as of the grandfathering date of February15, 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 May 12, 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 May 12, 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 May 12, 2020
deadline.
As at the date of this prospectus, we are
preparing to submit three PTMAs for certain of our traditional
nicotine vapor products, including, but not limited to menthol
and/or tobacco products with the assistance of Avail, pursuant to
the terms of the Avail Agreement. We estimate the cost associated
with these PMTAs to be approximately $4.4 million. We are also
evaluating the potential returns associated with filing additional
PMTAs for other Charlie’s Products after the May 2020
expiration of the grace period, which we expect to cost at least
$750,000 per application, which cost may vary based on several
factors including the selection of contract research organizations
to assist with the application process, as well as variable costs
associated with scientific, 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.
-12-
There is substantial concern regarding the effect of long-term use
of vaping products. Despite the recent outbreak of vaping-related
lung injuries, the medical profession does not yet definitively
know the cause of such injuries. Should vapor products, such as the
Charlie’s Products, be determined conclusively to pose
long-term health risks, including a risk of vaping-related lung
injury, our business will be negatively
impacted.
Because vapor
products have been developed and commercialized recently, the
medical profession has not yet had a sufficient period of time to
fully realize the long-term health effects attributable to vapor
product use. On November 8, officials at the CDC reported a
breakthrough in the investigation into the outbreak of
vaping-related lung injuries. The CDC's principal deputy director,
Dr. Anne Schuchat, stated that "vitamin E acetate is a known
additive used to dilute liquid in e-cigarettes or vaping products
that contain THC,” suggesting the possible culprit for the
series of lung injuries across the U.S. As a result, there is
currently no way of knowing whether or not vapor products are safe
for their intended use. If the medical profession were to determine
conclusively that vapor product usage poses long-term health risks,
the use of such products, including the Charlie’s Products,
could decline, which could have a material adverse effect on our
business, results of operations and financial
condition.
The market for vapor products is a niche market, subject to a great
deal of uncertainty, and is still evolving.
Vapor
products, having recently been introduced to market, are still at
an early stage of development, represent a niche market, are
evolving rapidly and are characterized by an increasing number of
market entrants. Our future sales and any future profits are
substantially dependent upon the widespread acceptance and use of
vapor products. Rapid growth in the use of, and interest in, vapor
products is recent, and may not continue on a lasting basis. The
demand and market acceptance for these products is subject to a
high level of uncertainty. Therefore, we are subject to all of the
business risks associated with a new enterprise in a niche market,
including risks of unforeseen capital requirements, failure of
widespread market acceptance of vapor products, in general or,
specifically our products, failure to establish business
relationships and competitive disadvantages as against larger and
more established competitors.
Possible
yet unanticipated changes in federal and state law could cause any
of our current products, as well as products that we intend to
launch, containing hemp-derived CBD oil to be illegal, or
could otherwise prohibit, limit or restrict any of our products
containing CBD.
We recently launched and commenced distribution of
certain 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,
currently Idaho, Mississippi and South Dakota have not adopted laws and regulations permitted by
the 2018 Farm Act. No assurance can be given that such state laws
may not be implemented, repealed or amended such that our products
containing hemp-derived CBD would be deemed legal in those states
that have not adopted regulations pursuant to the 2018 Farm Act, or
illegal under the laws of one or more states now permitting such
products, which in turn would render such intended products illegal
in those states under federal law even if the federal law is
unchanged. In the event of
either repeal of federal or of state laws and regulations, or of
amendments thereto that are adverse to our intended products, we
may be restricted or limited with respect to those products that we
may sell or distribute, which could adversely impact our intended
business plan with respect to such intended
products.
Additionally,
the FDA has indicated its view that certain types of products
containing CBD may not be permissible under the FDCA. The
FDA’s position is related to its approval of Epidiolex, a
marijuana-derived prescription medicine to be available in the
United States. The active ingredient in Epidiolex is CBD. On
December 20, 2018, after the passage of the 2018 Farm Bill,
FDA Commissioner Scott Gottlieb issued a statement in which he
reiterated the FDA’s position that, among other things, the
FDA requires a cannabis product (hemp-derived or otherwise)
that is marketed with a claim of therapeutic benefit, or with any
other disease claim, to be approved by the FDA for its intended use
before it may be introduced into interstate commerce and that the
FDCA prohibits introducing into interstate commerce food products
containing added CBD, and marketing products containing CBD as a
dietary supplement, regardless of whether the substances are
hemp-derived. We do not believe that any of our Don Polly Products
fall within the FDA’s regulatory authority reiterated by
Commissioner Gottlieb in December 2018, as we have not, and do not
intend to market any of our Don Polly Products with a claim of
therapeutic benefit or with any other disease claim. However,
should any regulatory action, including action taken by the FDA,
and/or legal proceeding alleging violations of such laws could have
a material adverse effect on our business, financial condition and
results of operations.
-13-
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.
-14-
Companies
with greater capital and research capabilities could re-formulate
existing products or formulate new products that could gain wide
marketplace acceptance, which could have a depressive effect on our
future sales. In addition, aggressive advertising and promotion by
our competitors may require us to compete by lowering prices
because we do not have the resources to engage in marketing
campaigns against these competitors, and the economic viability of
our operations likely would be diminished.
Adverse publicity associated with our products or ingredients, or
those of similar companies, could adversely affect our sales and
revenue.
Adverse
publicity concerning any actual or purported failure by us to
comply with applicable laws and regulations regarding any aspect of
our business could have an adverse effect on the public perception
of the Company. This, in turn, could negatively affect our ability
to obtain financing, endorsers and attract distributors or
retailers for our products, which would have a material adverse
effect on our ability to generate sales and revenue.
Our
distributors’ and customers’ perception of the safety
and quality of our products or even similar products distributed by
others can be significantly influenced by national media attention,
publicized scientific research or findings, product liability
claims and other publicity concerning our products or similar
products distributed by others. Adverse publicity, whether or not
accurate, that associates consumption of our products or any
similar products with illness or other adverse effects, will likely
diminish the public’s perception of our products. Claims that
any products are ineffective, inappropriately labeled or have
inaccurate instructions as to their use, could have a material
adverse effect on the market demand for our products, including
reducing our sales and revenue.
Our products may not meet health and safety standards or could
become contaminated.
We
have adopted various quality, environmental, health and safety
standards. We do not have control over all of the third parties
involved in the manufacturing of our products and their compliance
with government health and safety standards. Even if our
products meet these standards, they could otherwise become
contaminated. A failure to meet these standards or contamination
could occur in our operations or those of our manufacturers,
distributors or suppliers. This could result in expensive
production interruptions, recalls and liability claims. Moreover,
negative publicity could be generated from false, unfounded or
nominal liability claims or limited recalls. Any of these failures
or occurrences could negatively affect our business and financial
performance.
The sale of our products involves product liability and related
risks that could expose us to significant insurance and loss
expenses.
We
face an inherent risk of exposure to product liability claims if
the use of our products results in, or is believed to have resulted
in, illness or injury. Our products contain combinations of
ingredients, and there is little long-term experience with the
effect of these combinations. In addition, interactions of these
products with other products, prescription medicines and
over-the-counter drugs have not been fully explored or understood
and may have unintended consequences. While our third-party
manufacturers perform tests in connection with the
formulations of our products, these tests are not designed to
evaluate the inherent safety of our products.
Any
product liability claim may increase our costs and adversely
affect our revenue and operating income. Moreover, liability claims
arising from a serious adverse event may increase our costs
through higher insurance premiums and deductibles and may make
it more difficult to secure adequate insurance coverage in the
future. In addition, our product liability insurance may fail
to cover future product liability claims, which, if adversely
determined, could subject us to substantial monetary
damages.
-15-
The success of our business will depend upon our ability to create
and expand our brand awareness.
The
market we compete in is highly competitive, with many well-known
brands leading the industry. Our ability to compete effectively and
generate revenue will be based upon our ability to create and
expand awareness of our products distinct from those of our
competitors. It is imperative that we are able to convey to
consumers the benefits of our products. However, advertising
and packaging and labeling of such products will be limited by
various regulations. Our success will be dependent upon our
ability to convey to consumers that our products are superior to
those of our competitors.
We must develop and introduce new products to succeed.
Our
industry is subject to rapid change. New products are constantly
introduced to the market. Our ability to remain competitive depends
in part on our ability to enhance existing products, to develop and
manufacture new products in a timely and cost-effective manner, to
accurately predict market transitions, and to effectively market
our products. Our future financial results will depend to a great
extent on the successful introduction of several new products. We
cannot be certain that we will be successful in selecting,
developing, manufacturing and marketing new products or in
enhancing existing products.
The
success of new product introductions depends on various factors,
including, without limitation, the following:
●
proper
new product selection;
●
successful
sales and marketing efforts;
●
timely
delivery of new products;
●
availability
of raw materials;
●
pricing
of raw materials;
●
regulatory
allowance of the products; and
●
customer
acceptance of new products.
If we are not able to adequately protect our intellectual property,
then we may not be able to compete effectively, and we
may not be profitable.
Our
existing proprietary rights may not afford remedies and
protections necessary to prevent infringement, reformulation,
theft, misappropriation and other improper use of our products by
competitors. We own the formulations for our products and we
consider these product formulations our critical proprietary
property, which must be protected from competitors. We do not
currently have any patents for our product formulations. Although
trade secret, trademark, copyright and patent laws generally
provide a certain level of protection, and we attempt to protect
ourselves through contracts with manufacturers of our products, we
may not be successful in enforcing our rights. In addition,
enforcement of our proprietary rights may require lengthy and
expensive litigation. We have attempted to protect some of the
trade names and trademarks used for our products by registering
them with the U.S. Patent and Trademark Office, but we must rely on
common law trademark rights to protect our unregistered trademarks.
Common law trademark rights do not provide the same remedies as are
granted to federally registered trademarks, and the rights of a
common law trademark are limited to the geographic area in which
the trademark is actually used. Our inability to protect our
intellectual property could have a material adverse impact on our
ability to compete and could make it difficult for us to achieve a
profit.
Compliance with changing corporate governance regulations and
public disclosures may result in additional risks and
exposures.
Changing
laws, regulations and standards relating to corporate governance
and public disclosure, including the Sarbanes-Oxley Act of 2002 and
new regulations from the SEC, have created uncertainty for public
companies such as ours. These laws, regulations, and standards are
subject to varying interpretations in many cases, and as a result,
their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies. This could result
in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and
governance practices. As a result, our efforts to comply with
evolving laws, regulations, and standards have resulted in, and are
likely to continue to result in, increased expense and significant
management time and attention.
-16-
Risks Related to Our Common Stock and this
Offering
A limited trading market currently exists for our securities, and
we cannot assure you that an active market will ever develop, or if
developed, will be sustained.
There
is currently a limited trading market for our common stock on the
OTC Pink Marketplace and an active trading market for our common
stock may not develop. Consequently, we cannot assure you when and
if an active-trading market in our shares will be established, or
whether any such market will be sustained or sufficiently liquid to
enable holders of shares of our common stock to liquidate their
investment in our Company. If an active public market should
develop in the future, the sale of unregistered and restricted
securities by current stockholders may have a substantial impact on
any such market.
Sales of a
substantial number of shares of our common stock, or the perception
that such sales may occur, may adversely impact the price of our
common stock.
Sales of a substantial number of shares of our
common stock in the public market could occur at any time. These
sales, or the perception that such sales may occur, may adversely
impact the price of our common stock, even if there is no
relationship between such sales and the performance of our
business. As of January 17, 2020, we had 18,973,827,540 shares of common stock outstanding, as well as
outstanding options to purchase an aggregate of 801,324,826
shares of our common stock at a
weighted average exercise price of $ 0.0044313 per share, up to 4,616,268,089 shares of common
stock issuable upon conversion of outstanding shares of Series A
Preferred and outstanding warrants to purchase up to an aggregate
of 4,033,769,340 shares of our common stock at a weighted average
exercise price of $0.0044313 per
share. The exercise and/or conversion of such outstanding
derivative securities may result in further dilution to our
stockholders.
If we issue additional shares of common stock in the future, it
will result in the dilution of our existing
stockholders.
Our
Charter currently authorizes the issuance of up to 50.0 billion
shares of common stock, of which approximately 18.9 billion shares
are currently issued and outstanding. In addition, we have reserved
approximately 9.8 billion shares for issuance upon conversion
and/or exercise of our outstanding shares of Series A Preferred,
warrants and stock options, as well as for issuance as awards under
our 2019 Omnibus Incentive Plan. The issuance of any additional
shares of our common stock, including those shares issuable upon
conversion and/or exercise of our outstanding derivative
securities, will result in significant dilution to our stockholders
and a reduction in value of our outstanding common stock. Further,
any such issuance may result in a change of control of our
corporation.
Holders of Series A Convertible Preferred Stock have substantial
rights and ranks senior to our common stock.
Our
common stock ranks junior as to dividend rights, redemption rights,
conversion rights and rights in any liquidation, dissolution or
winding-up of the Company to the Series A Preferred. Upon
liquidation, dissolution or winding-up of the Company, the holders
of the Series A Preferred are entitled to a liquidation preference
equal to the original purchase price of Series A Preferred prior to
and in preference to any distribution to the holders of our common
stock. In addition, the holders of the Series A Preferred are also
entitled to an annual 8% dividend payable in cash or shares of our
common stock. Such rights could cause dilution of our common stock
or limit our cash.
Our outstanding Series A Preferred contains anti-dilution
provisions that, if triggered, could cause substantial dilution to
our then-existing common stock holders which could adversely affect
our stock price.
Our
outstanding Series A Preferred contains certain anti-dilution
provisions that benefit the holders thereof. As a result, if we, in
the future, issue common stock or grant any rights to purchase our
common stock or other securities convertible into our common stock
for a per share price less than the then existing conversion price
of the Series A Preferred, an adjustment to the then current
conversion price would occur. This reduction in the conversion
price could result in substantial dilution to our then-existing
common stockholders as well as give rise to a beneficial conversion
feature reported on our statement of operations. Either or both of
which could adversely affect the price of our common
stock.
The price of our securities could be subject to wide fluctuations
and your investment could decline in value.
The
market price of the securities of a company such as ours with
little name recognition in the financial community can be subject
to wide price swings. The market price of our common stock may be
subject to wide changes in response to quarterly variations in
operating results, announcements of new products by us or our
competitors, reports by securities analysts, volume trading, or
other events or factors. In addition, the financial markets have
experienced significant price and volume fluctuations for a number
of reasons, including the failure of certain companies to meet
market expectations. These broad market price swings, or any
industry-specific market fluctuations, may adversely affect the
market price of our securities.
-17-
Companies
that have experienced volatility in the market price of their stock
have been the subject of securities class action litigation. If we
were to become the subject of securities class action litigation,
it could result in substantial costs and a significant diversion of
our management’s attention and resources.
Because
our common stock may be classified as “penny stock,”
trading may be limited, and the share price could decline.
Moreover, trading of our common stock, if any, may be limited
because broker-dealers would be required to provide their customers
with disclosure documents prior to allowing them to participate in
transactions involving our common stock. These disclosure
requirements are burdensome to broker-dealers and may discourage
them from allowing their customers to participate in transactions
involving our common stock.
We have issued preferred stock with rights senior to our common
stock, and may issue additional preferred stock in the
future.
Our
Charter authorizes the issuance of up to
5.0 million shares of preferred stock, par value $0.001
per share, without stockholder approval and on terms established by
our directors, of which 300,000 shares have been designated as
Series A Preferred and 1.5 million shares have been designated
as Series B Preferred. We may issue additional shares of
preferred stock in the future in order to consummate a financing or
other transaction, in lieu of the issuance of shares of our common
stock. The rights and preferences of any such class or series
of preferred stock would be established by our Board of Directors
in its sole discretion and may have dividend, voting, liquidation
and other rights and preferences that are senior to the rights of
the common stock.
Our Amended and Restated Bylaws designate courts within the state
of Nevada as the sole and exclusive forum for certain types of
actions and proceedings that may be initiated by our stockholders,
which could limit our stockholders’ ability to obtain a
favorable judicial forum for disputes with us or our directors,
officers, employees or agents.
Our
Amended and Restated Bylaws require that, to the fullest extent
permitted by law, and unless the Company consents in writing to the
selection of an alternative forum, a state court located within the
State of Nevada (or, if no state court located within the State of
Nevada has jurisdiction, the federal district court for the
District of Nevada), will, to the fullest extent permitted by law,
be the sole and exclusive forum for each of the
following:
●
any derivative action or proceeding brought on behalf of the
Company;
●
any action asserting a claim of breach of a fiduciary duty owed by
any director or officer or other employee of the Company to the
Company or the Company’s stockholders;
●
any action asserting a claim against the Company or any director or
officer or other employee of the Company arising pursuant to any
provision of the Nevada Revised Statutes or the Company’s
Amended and Restated Articles of Incorporation, as amended, or the
Amended and Restated Bylaws; or
●
any action asserting a claim against the Company or any director or
officer or other employee of the Company governed by the internal
affairs doctrine.
Because the applicability of the exclusive forum
provision is limited to the extent permitted by law, we believe
that the exclusive forum provision would not apply to suits brought
to enforce any duty or liability created by the Securities Exchange
Act of 1934, as amended (“Exchange
Act”), the Securities Act
of 1933, as amended (the “Securities
Act”) or any other claim
for which the federal courts have exclusive jurisdiction. 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.
The selling stockholders will only be
able to sell their shares of our common stock registered herein at
a fixed price of $0.0023 per share until our common stock is quoted on the
OTCQB tier of the OTC Markets.
Our
shares of common stock are currently quoted on the OTC Pink
Marketplace, and we have applied to have our common stock quoted on
the OTCQB. Until our common stock is quoted on the OTCQB, the
shares of common stock offered pursuant to this prospectus may only
be resold by the selling stockholders at a fixed price of $0.01 per
share, which price may be materially higher or lower than the
current trading price of shares of our common stock. There is no
assurance our application to the OTCQB will be approved, and, if we
are unsuccessful in securing a quotation for our common stock on
the OTCQB, the shares of common stock offered pursuant to this
prospectus will continue to be offered at a fixed price of
$0.0023 per share, irrespective of the market price of
our common stock.
This prospectus contains forward-looking
statements that involve substantial risks and uncertainties. All
statements contained in this prospectus other than statements of
historical facts, including statements regarding our strategy,
future operations, future financial position, future revenue,
projected costs, prospects, plans, objectives of management and
expected market growth, are forward-looking statements. These
statements involve known and unknown risks, uncertainties and other
important factors that may cause our actual results, performance or
achievements to be materially different from any future results,
performance or achievements expressed or implied by the
forward-looking statements.
The
words “anticipate,”“believe,”“estimate,”“expect,”“intend,”“may,”“plan,”“predict,”“project,”“target,”“potential,”“will,”“would,”“could,”“should,”“continue,”
and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain
these identifying words. These forward-looking statements include,
among other things, statements about:
●
anticipated
trends and challenges in our business and the markets in which we
operate;
●
the
impact of regulation of our nicotine-based and CBD-based
products;
●
the
accuracy of our estimates regarding expenses, future revenue and
capital requirements;
●
our
ability to anticipate market needs or develop new or enhanced
products to meet those needs;
●
our
expectations regarding market acceptance of our
products;
●
the success of competing products by others that
are or become available in the market in which we sell our
products;
●
our ability to protect our proprietary information
and trademarks;
●
our ability to manage additional expansion into
international markets;
●
our ability to maintain or broaden our business
relationships and develop new relationships with strategic
alliances, suppliers, customers, distributors or
otherwise;
●
our ability to secure a quotation for our common stock on the
OTCQB; and
●
other risks and uncertainties, including
those described under
“Risk
Factors” and elsewhere
in this prospectus.
These
forward-looking statements are only predictions and we may not
actually achieve the plans, intentions or expectations disclosed in
our forward-looking statements, so you should not place undue
reliance on our forward-looking statements. Actual results or
events could differ materially from the plans, intentions and
expectations disclosed in the forward-looking statements we make.
We have based these forward-looking statements largely on our
current expectations and projections about future events and trends
that we believe may affect our business, financial condition and
operating results. We have included important factors in the
cautionary statements included in this prospectus, that could cause
actual future results or events to differ materially from the
forward-looking statements that we make. Our forward-looking
statements do not reflect the potential impact of any future
acquisitions, mergers, dispositions, joint ventures or investments
we may make.
You
should read this prospectus with the understanding that our actual
future results may be materially different from what we expect. We
do not assume any obligation to update any forward-looking
statements whether as a result of new information, future events or
otherwise, except as required by applicable law.
-19-
UNAUDITED PRO
FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed
combined financial statements are presented to illustrate the
estimated effects of the transaction between Charlie’s Chalk
Dust, LLC, a Delaware limited liability company
(“Charlie’s”
or the “Company”) and True Drinks Holdings, Inc.
(“True Drinks”) which was accounted for as a reverse
recapitalization under U.S. GAAP (the “Merger”).
On April 26, 2019 (the “Closing
Date”), the Company
entered into a Securities Exchange Agreement with each of the
members (“Members”) of Charlie’s, and certain direct
investors (“Direct
Investors”), pursuant to
which we acquired all outstanding membership interests of
Charlie’s beneficially owned by the Members in exchange for
the issuance by the Company of units, with such units consisting of
an aggregate of (i) 15,655,538,349 shares of common stock (which
includes the issuance of an aggregate of 1,396,305 shares of a
newly created class of Series B Convertible Preferred Stock, par
value $0.001 per share (“Series B
Preferred”), convertible
into an aggregate of 13,963,047,716 shares of common stock, issued
to certain individuals in lieu of common stock); (ii) 206,249
shares of a newly created class of Series A Convertible Preferred
Stock, par value $0.001 per share (“Series A
Preferred”), convertible into an aggregate of 4,654,349,239
shares of common stock; and (iii) warrants to purchase an aggregate
of 3,102,899,493 shares of common stock (the
“Investor
Warrants”) (the
“Share Exchange”). As a result of the Share Exchange,
Charlie’s became a wholly owned subsidiary of the
Company.
Immediately prior to, and in connection with, the
Share Exchange, Charlie’s consummated a private offering of
membership interests that resulted in net proceeds to
Charlie’s of approximately $27.5 million (the
“Charlie’s Financing”).
Katalyst Securities LLC (“Katalyst”) acted as the sole placement agent in
connection with the Charlie’s Financing pursuant to an
Engagement Letter entered into by and between Katalyst,
Charlie’s and the Company on February 15, 2019. As
consideration for its services in connection with the
Charlie’s Financing and the Share Exchange, the Company
issued to Katalyst and its designees five-year warrants to purchase
an aggregate of 930,869,848 shares of Common Stock at a price of
$0.0044313 per share (the “Placement Agent
Warrants”). The Placement
Agent Warrants have substantially the same terms as those set forth
in the Investor Warrants.
The
Share Exchange resulted in a change of control of the Company, with
the Members and Direct Investors owning approximately 85.7% of the
Company’s outstanding voting securities immediately after the
Share Exchange, and the Company’s current stockholders
beneficially owning approximately 14.3% of the issued and
outstanding voting securities, which includes the Advisory Shares.
Together, Brandon Stump and Ryan Stump, the founders of
Charlie’s and the Company’s newly appointed Chief
Executive Officer and Chief Operating Officer, respectively, own
approximately 57% of the Company’s issued and outstanding
voting securities as a result of the Share
Exchange.
The Share Exchange is accounted for as a reverse
recapitalization in accordance with accounting principles generally
accepted in the United States (“U.S. GAAP”) because the primary assets of the Company
were nominal following the close of the Share Exchange.
Charlie’s was determined to be the accounting acquirer based
upon the terms of the Share Exchange and other factors including:
(i) Charlie’s stockholders and other persons holding
securities convertible, exercisable or exchangeable directly or
indirectly for Charlie’s membership units now own
approximately 49%, on a fully diluted basis, of the Company’s
outstanding securities immediately following the effective time of
the Merger, (ii) individuals associated with Charlie’s now
hold a majority of the seats on the Company’s Board of
Directors and (iii) Charlie’s management holds all key
positions in the management of the combined Company. Accordingly,
the historical financial statements of True Drinks became the
Company's historical financial statements including the comparative
prior periods. All references in the unaudited condensed
consolidated financial statements to the number of shares and
per-share amounts of common stock have been retroactively restated
to reflect the exchange rate.
The following unaudited pro forma condensed
combined statements of operations for the nine months ended
September 30, 2019 and the year ended December 31, 2018
(collectively, the
“Pro
Forma Statements”)
have been prepared in compliance with
the requirements of Regulation S-X under the Securities Act using
accounting policies in accordance with U.S. GAAP. The unaudited pro
forma condensed combined financial information is based on
Charlie’s and True Drinks’ historical consolidated
financial statements as adjusted, to give effect to Charlie’s
reverse recapitalization of True Drinks and Charlie’s
Financing.
Accounting
policies used in the preparation of the Pro Forma Statements are
based on the audited consolidated financial statements of
Charlie’s for the year ended December 31, 2018 and the nine
months ended September 30, 2019.
-20-
The
pro forma adjustments are based on estimates and currently
available information and assumptions that Charlie’s
management believes are reasonable. The notes to the Pro Forma
Statements provide a discussion of how such adjustments were
derived and presented in the Pro Forma Statements. Changes in facts
and circumstances or discovery of new information may result in
revised estimates. As a result, there may be material adjustments
to the Pro Forma Statements. Certain historical True Drinks and
Charlie’s financial statement caption amounts have been
reclassified or combined to conform to Charlie’s presentation
and disclosure requirements.
The Pro Forma Statements should be read together
with True Drink’s historical financial statements, which are
included in True Drink’s latest Annual Report on Form 10-K
filed with the Securities and Exchange Commission
(“SEC”) on April 1, 2019 and the September 30,2019 results included in the Company’s report on Form 10-Q
filed with the SEC on November 14, 2019, and Charlie’s
historical information included in the Company’s 8K/A filed
on July 10, 2019.
The
unaudited pro forma condensed combined statements of operations for
the nine months ended September 30, 2019 and the year ended
December 31, 2018 give effect to these transactions as if they had
occurred on January 1, 2018.
Because Charlie’s was treated as the
acquirer under the reverse recapitalization, Charlie’s and
True Drink’s assets and liabilities were recorded at their
precombination carrying amounts in the unaudited pro forma
condensed combined financial information. The historical
consolidated financial statements have been adjusted in the
unaudited pro forma combined condensed consolidated financial
statements to give effect to pro forma events that are: (1)
directly attributable to the Merger; (2) factually supportable; and
(3) with respect to the unaudited pro
forma condensed combined statements of operations, expected
to have a continuing impact on the combined results of
Charlie’s and True Drinks following the
Merger.
The
Pro Forma Statements do not give effect to the potential impact of
current financial conditions, regulatory matters, operating
efficiencies or other savings or expenses, if any, that may be
associated with the integration of the two companies. The Pro Forma
Statements are preliminary and have been prepared for illustrative
purposes only and is not necessarily indicative of the financial
position or results of operations in future periods or the results
that actually would have been realized had True Drinks and
Charlie’s been a combined organization during the specified
periods. The actual results reported in periods following the
transaction may differ significantly from those reflected in the
pro forma condensed combined financial information presented herein
for a number of reasons, including, but not limited to, differences
between the assumptions used to prepare this pro forma condensed
combined financial information.
The
assumptions and estimates underlying the unaudited adjustments to
the pro forma condensed combined financial statements are described
in the accompanying notes, which should be read together with the
pro forma condensed combined financial
statements.
-21-
Unaudited Pro Forma Combined Statement of
Income – Year Ended December 31,2018
Charlie's
True Drinks
Pro Forma
Adjustments
Note
3
Pro
Forma
Combined
Revenue:
$ 20,840,794
$ 1,947,052
$ (1,436,113)
(f)
$ 21,351,733
Cost
of revenue
8,514,790
1,228,448
(728,025)
(f)
9,015,213
Gross profit
12,326,004
718,604
(708,088)
12,336,520
Operating expenses:
Selling
and marketing
2,904,456
411,371
-
3,315,827
General
and administrative
2,126,945
10,997,813
1,128,327
(b)
14,253,085
Product
development
95,180
-
-
95,180
5,126,581
11,409,184
1,128,327
17,664,092
Operating income (loss)
7,199,423
(10,690,580)
(1,836,415)
(5,327,572)
Other income (expense):
Change
in fair value of derivative liabilities
-
8,883,383
(8,883,383)
(a)
-
Impairment
of goodwill
-
(1,898,000)
-
(1,898,000)
Interest
expense
-
(813,545)
813,545
(a)
-
Other
income
453
639,443
-
639,896
Total
other income (expense)
453
6,811,281
(8,069,838)
(1,258,104)
Income
(loss) before provision for income taxes
7,199,876
(3,879,299)
(9,906,253)
(6,585,676)
Provision
for income taxes
-
-
(2,159,963)
(c)
(2,159,963)
Net
income (loss)
7,199,876
(3,879,299)
(12,066,216)
(8,745,639)
Dividends
on preferred stock
-
(260,688)
260,688
(a)
(1,650,000)
-
-
(1,650,000)
(e)
Net
income (loss) attributable to common
shareholders
$ 7,199,876
$ (4,139,987)
$ (13,455,528)
$ (10,395,639)
Net loss per common share:
Basic
and diluted
$ (0.02)
(0.00)
Weighted average common shares outstanding:
Basic
and diluted
230,204,655
4,591,184,190
(d)
4,821,388,845
-22-
Unaudited
Pro Forma Combined Statement of Income – Nine Months Ended
September 30, 2019
Pro Forma
Pro Forma
Charlie's
True Drinks
Adjustments
Note 3
Combined
Revenue:
$ 19,056,000
$ 28,014
$ -
$ 19,084,014
Cost
of revenue
8,121,000
14,145
-
8,135,145
Gross profit
10,935,000
13,869
-
10,948,869
Operating expenses:
Selling
and marketing
1,606,000
20,692
-
1,626,692
General
and administrative
11,255,000
217,543
846,246
(b)
12,318,789
12,861,000
238,235
846,246
13,945,481
Operating income (loss)
(1,926,000)
(224,366)
(846,246)
(2,996,612)
Other income (expense):
Change
in fair value of derivative liabilities
2,925,000
(975,430)
(1,949,570)
(a)
-
Interest
expense
-
(192,932)
192,932
(a)
-
Other
income
-
353,972
-
353,972
Total
other income (expense)
2,925,000
(814,390)
(1,756,638)
353,972
Income
(loss) before provision for income taxes
999,000
(1,038,756)
(2,602,884)
(2,642,640)
Provision
for income taxes
-
-
(299,700)
(c)
(299,700)
Net
income (loss)
999,000
(1,038,756)
(2,902,584)
(2,942,340)
Dividends
on preferred stock
-
(64,279)
64,279
(a)
(1,237,500)
(1,237,500)
(e)
Net
income (loss) attributable to common
shareholders
$ 999,000
$ (1,103,035)
$ (4,075,805)
$ (4,179,840)
Net loss per common share:
Basic
and diluted
$ (0.00)
(0.00)
Weighted average common shares outstanding:
Basic
and diluted
486,287,708
4,591,184,190
(d)
5,077,471,898
-23-
Notes
to the Unaudited Pro Forma Condensed Combined Financial
Information
Note 1 — Basis of Presentation
The unaudited pro forma condensed combined
financial information was prepared in accordance with U.S. GAAP and
pursuant to the rules and regulations of SEC Regulation S-X and
presents the pro forma results of operations of the combined
companies based upon the historical data of True Drinks Holdings,
Inc. (“True Drinks”) and Charlies Chalk Dust, LLC, a Delaware
limited liability company (“Charlie’s”).
Basis of Presentation
The
unaudited pro forma condensed consolidated financial statements
were prepared in accordance with the regulations of the SEC. The
unaudited pro forma condensed consolidated statement of operations
for the nine months ended September 30, 2019 and the year ended
December 31, 2018 assumes that the Merger occurred on January 1,2018 and combines the historical results of Charlie’s and
True Drinks.
For
accounting purposes, Charlie’s is considered to be the
acquiring company and the Merger will be accounted for as a reverse
recapitalization of True Drinks by Charlie’s because the
primary assets of True Drinks, which include cash and other assets
and liabilities, will be nominal following the close of the merger.
Under reverse recapitalization accounting, the assets and
liabilities of True Drinks will be recorded, as of the completion
of the merger, at their fair value which is expected to approximate
book value because of the short-term nature of the instruments. No
goodwill or intangible assets are expected to be recognized and any
excess consideration transferred over the fair value of the net
assets of True Drinks following determination of the actual
purchase consideration for True Drinks will be reflected as an
adjustment to equity. Consequently, the financial statements of
Charlie’s reflect the operations of the acquirer for
accounting purposes together with a deemed issuance of shares,
equivalent to the shares held by the former stockholders of the
legal acquirer and a recapitalization of the equity of the
accounting acquirer. The historical financial statements of True
Drinks and Charlie’s, which are provided elsewhere in this
registration statement, have been adjusted to give pro forma effect
to events that are (i) directly attributable to the Merger, (ii)
factually supportable, and (iii) with respect to the statements of
operations, expected to have a continuing impact on the combined
results.
To
the extent there are significant changes to the business following
completion of the Merger, the assumptions and estimates set forth
in the unaudited pro forma condensed consolidated financial
statements could change significantly. Accordingly, the pro forma
adjustments are subject to further adjustments as additional
information becomes available and as additional analyses are
conducted following the completion of the Merger. There can be no
assurances that these additional analyses will not result in
material changes to the estimates of fair
value.
Note 2 — Preliminary purchase price
allocation
The
following is the preliminary estimate of the value of assets
acquired and liabilities assumed by Charlie’s in the Merger,
which closed on April 26, 2019:
Cash
and cash equivalents
$ 401
Accounts
receivable
1,173
Inventory,
net
25,657
Accounts
payable and accrued expenses
(710,615)
Debt
– short term
(3,394,497)
Net
liabilities acquired
$ (4,077,881)
-24-
Note 3 — Pro forma adjustments
The
pro forma adjustments are based on preliminary estimates and
assumptions that are subject to change. The following adjustments
have been reflected in the unaudited pro forma condensed combined
financial information:
(a)
Represents
the elimination of True Drink’s change in fair value of
derivative liabilities, interest expense and dividends on preferred
stock in connection with the transaction.
(b)
The
Company granted 705,204,430 unvested common shares to certain
employees of Charlie’s. These shares vest over a 2-year
period. The fair value of a share of common stock was $0.0032 which
is based upon a valuation prepared by the Company on the date of
the Merger. The Company will record $0.8 million and $1.1 million
during the nine months ended September 30, 2019 and year ended
December 31, 2018, respectively.
(c)
Represents
the pro forma tax impact of Charlie’s assumed conversion from
an LLC to a C-Corp using an estimated tax rate of 30% applied to
Charlie’s net income.
(d)
Represents
the increase in the weighted average shares of 4,591,184,190 shares
due to the Transactions.
(e)
Represents
the recording of a $1.24 million and $1.65 million 8% dividend of
the Series A Preferred for the nine months ended September 30, 2019
and year ended December 31, 2018, respectively. The dividend was
calculated as follows:
206,248.18
- Total Series A Preferred issued as of September 30,2019
X $100 per Series A share
$20,624,818
X 8%
$1,650,000
on an annual basis
or
$412,500 on a quarterly basis
(f)
To eliminate intercompany revenue and cost of revenue related to
transactions between True Drinks and the Company during the twelve
months ended December 31, 2018.
As used in this prospectus, unless otherwise
stated or the context otherwise requires, references to the
“Company,” “we,” “us,” “our,” or similar references mean
Charlie’s Holdings, Inc. (formerly True Drinks Holdings,
Inc.), its subsidiaries and consolidated variable interest entity
on a consolidated basis. References to “Charlie’s”
and “CCD” refer to Charlie’s Chalk Dust,
LLC, a California limited liability company and wholly-owned
subsidiary of the Company, and “Don Polly” refers to Don Polly,
LLC, a Nevada limited liability company that is owned by entities controlled by Brandon Stump and
Ryan Stump, the Company’s Chief Executive Officer and Chief
Operating Officer, respectively, and a consolidated variable
interest for which the Company is the primary
beneficiary.
Overview
Our objective is to become a significant leader in
the rapidly growing, global e-cigarette segment of the broader
nicotine related products industry. Through Charlie’s, we
formulate, market and distribute branded e-cigarette liquid for use
in both open and closed nicotine-only e-cigarette and vaping
systems. Charlie’s products are produced domestically through
contract manufacturers for sale through select distributors,
specialty retailers and third-party online resellers throughout the
United States, as well as more than 80 countries worldwide.
Charlie’s primary international markets include the United
Kingdom, Italy, Spain, Belgium, Australia, Sweden and Canada. In
June 2019, we launched distribution, through Don Polly, of certain
premium vapor, tincture and topical wellness products containing
hemp-derived cannabidiol (“CBD”) and we currently intend to develop and
launch additional products containing hemp-derived CBD in the
future. Prior to the Share Exchange (defined below), our
primary business was the development, marketing, sale and
distribution of all-natural, vitamin-enhanced drinks, including
AquaBall® Naturally Flavored Water and Bazi® All Natural
Energy (“Bazi”). We continue to sell limited amounts of
Bazi, but have ceased all production and sales of AquaBall®
Naturally Flavored Water.
Recently there have been significant news stories and health alerts
related to flavored nicotine vaping, leading to some states banning
the sale of flavored nicotine products and causing the Food and
Drug Administration (“FDA”) to review its policies on
controlling the sale of these products. The most recent health
related concerns seem to indicate that a vitamin E acetate related
compound may be causing the health issues. On November 8, officials
at the Centers for Disease Control and Prevention
(“CDC”)
reported a breakthrough in the investigation into the outbreak of
vaping-related lung injuries. The ’DC's principal deputy
director, Dr. Anne Schuchat, stated that "vitamin E acetate is a
known additive used to dilute liquid in e-cigarettes or vaping
products that contain THC,” suggesting the possible
culprit for the series of lung injuries across the U.S.
All of Charlie’s
nicotine-only, e-liquid products are tested by third party
laboratories which have confirmed that none of our products contain
any vitamin E acetate or Tetrahydrocannabinol
(“THC”).
However,
these developments have had a negative effect on our sales since
mid-September 2019 (see further discussion below) and therefore, in
response to these developments and while government regulators are
formulating future polices management has adopted the following
plan of operation.
First, we plan to focus on increasing the sales of
our CBD related products, including topicals, tinctures and vaping
liquids. We feel there is a significant upside in the CBD space,
and we have begun to focus on numerous vertical markets for the
sale of our isolate, full and broad-spectrum products. These
vertical markets include the medical and wellness markets. In addition, we have begun
conversations with various companies and organizations that, if
successful, will allow us to significantly expand our marketing and
distribution reach.
Secondly,
we see a significant opportunity for sales growth in international
markets for nicotine e-liquids. Presently 25% of our e-liquid
product sales come from the international market and we are well
positioned to increase those sales in the countries that we
presently sell, and in additional overseas markets, as we have
already built an international distribution
platform.
Lastly, we believe
that nicotine based flavored vaping products will continue to be a
significant growth opportunity once all the rightful regulatory
changes have been made, including the FDA’s recently
announced enforcement policy with respect to flavored
cartridge-based e-cigarettes. Currently, we intend to pursue
marketing authorization from the FDA for certain of our
nicotine-based liquids, including, our
menthol and/or tobacco vaping products. As further described
under the heading “Government Regulation of Charlie’s
Products” below, we recently entered into an agreement
with Avail Vapor, LLC (“Avail”) to assist, in part, with
certain regulatory analysis and strategy as we prepare to submit
three premarket tobacco application (“PMTA”) to the FDA on or before
the May 2020 deadline. In addition, we are evaluating the potential
returns associated with obtaining marketing authorization for our
other nicotine based vaping products after the May 2020 deadline.
We feel that a significant amount of our competitors will not have
the resources and/or expertise to complete the extensive and costly
PMTA process and that, once complete, we will be able to benefit
from being one of only a select group of companies operating in the
flavored nicotine product space. For
more information, see the section of this prospectus titled
“Government Regulation of
Charlie’s Products,” as well as the risks and uncertainties
described under “Risk Factors –
Regulatory and Market Risks.”
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, which policy will go into effect on or around February 2,2020. The application of any new laws, regulations or policies 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 that relate to our
nicotine-based vaping liquid increase across the United States, or
internationally, the Company’s business, results of
operations and financial condition could be adversely
impacted.
-26-
C:
Recent Developments
Share Exchange
On April 26, 2019,
the Company (then known as True Drinks Holdings, Inc.), entered
into a Securities Exchange Agreement with each of the former
members of Charlie’s on that date (the “Charlie’s Members”),
pursuant to which the Company acquired all outstanding membership
interests beneficially owned by the Charlie’s Members in
exchange for certain units consisting of the Company’s
securities (the “Share
Exchange”). As a result, Charlie’s became a
wholly owned subsidiary of the Company. Following the consummation
of the Share Exchange, the primary business operations of the
Company consisted of those of Charlie’s and, more recently,
Don Polly. See “Prospectus
Summary - The Share
Exchange.”
The Share Exchange resulted in a change of control of the Company,
with the Members and Direct Investors owning approximately 85.7% of
the Company’s outstanding voting securities immediately after
the Share Exchange, and the Company’s current stockholders
beneficially owning approximately 14.3% of the issued and
outstanding voting securities, which includes the Advisory Shares.
Following the Share Exchange, Ryan Stump and Brandon Stump, the
founders of Charlie’s and the Company’s Chief Executive
Officer and Chief Operating Officer, respectively, held in excess
of 50% of the Company’s issued and outstanding voting
securities.
Launch of CBD Products
In
June 2019, we introduced, through Don Polly, full-spectrum hemp
extract and CBD isolate wellness products across a variety of
formats and with different strengths. Our initial launch consisted
of six vapor, eight tincture and two topical product variations.
The newly released products were launched under the
Pachamama™ brand by way of a licensing agreement between Don
Polly and Charlie’s, entered on April 25, 2019. In the near
term, we expect to expand the hemp-derived CBD-based products line
to include additional CBD isolate products and THC-free, broad
spectrum hemp extract products currently in
development.
Pachamama™
CBD products are currently available in the U.S., Mexico, U.K. and
Switzerland, and we expect to continue expanding both our domestic
and international distribution efforts.
Filing of Amended and Restated Charter; Automatic Conversion of
Series B Preferred
On June 28, 2019, we amended and restated our
Articles of Incorporation (the “Amended and Restated
Charter”) to (i) change
our corporate name to Charlie’s Holdings, Inc. and (ii)
increase the number of shares authorized as common stock from 7.0
billion to 50.0 billion shares. The Amended and Restated Charter
was approved by our Board of Directors and holders of a majority of
our outstanding voting securities on May 8, 2019, and the Amended
and Restated Charter was filed with the State of Nevada on June 28,2019.
As
a result of the filing of the Amended and Restated Charter and the
increase of our authorized common stock to 50.0 billion shares,
all 1,396,305 outstanding shares of Series B Preferred
automatically converted into a total of 13,963,047,716 shares of
common stock in accordance with the Certificate of
Designations, Preferences and Rights of the Series B Convertible
Preferred Stock.
Our Products
Charlie’s Product Line
Our business efforts consist primarily
of formulating, marketing and distributing our portfolio
of branded e-cigarette liquid and other premium vapor products
for use in nicotine-only e-cigarette and vaping systems, which we
collectively refer to as the “Charlie’s Product
Line” or
“Charlie’s
Products.”
-27-
E-Liquids
E-liquids used to produce vapor in vaping devices
are sold separately for use in refillable tanks of open system
vaporizers. Liquids are available in differing nicotine
concentrations (0 mg, 3 mg and 6 mg per milliliter) to suit user
preferences. Liquids are available in a variety of flavors,
including our proprietary blends. Liquid solution consists of
flavoring and/or nicotine dissolved in one or several hygroscopic
components, which turns the water in the solution into the
smoke-like vapor when heated. The most commonly used hygroscopic
components are propylene glycol (“PG”), vegetable glycerin
(“VG”) or polyethylene glycol 400. VG imparts
sweetness and produces vapor clouds, while PG produces more
“throat hit”, which simulates the feeling of smoking.
Our proprietary brands of e-liquids are manufactured by ISO Class 7
certified manufacturers in the United States, which helps ensure
their purity and quality.
Charlie’s
e-liquid products are produced under seven brand names
distinguished by their flavor profiles, packaging art and
ingredient transparency. All products are packaged in plastic drip
containers that are typically available in seven sizes ranging from
10 mil to 100ml, as well as bulk concentrate formats.
●
Black Label and White
Label. Charlie’s original
black and white product line launched in 2015. Black Label is
currently available in five flavors and White Label is currently
available in four flavors.
●
CCD3. Launched in 2016, is a sea salt caramel ice
cream flavor.
●
Pachamama™.
A line launched in 2016 consisting of eight eclectic mixes of
natural fruit flavors such as passion fruit raspberry yuzu, blood
orange banana gooseberry and huckleberry pear
acai.
●
Meringue. The third brand launched in 2016, based on
creative character stories, currently includes three
flavors.
●
Campfire™.
Outdoors and Smores flavor inspired by camp
vibes.
●
Stumps™.
Line of four flavors inspired by the founders and their families
broadly released in 2017 across various formats. Currently active
in select markets.
●
The Creator of
Flavor™. Two flavors
broadly released in 2018 across various formats. Currently active
in select markets.
Nicotine Salt Products
Nicotine salt e-liquids
(“NIC
salts”) are traditionally
formulated for use in lower wattage open, semi-open and closed
system vaporizers and are available in higher nicotine
concentrations (25mg and 50mg per milliliter) than traditional
e-liquids. Nicotine salts consist of nicotine dissolved in an acid
that results in a lower PH level than other e-liquids. This form of
nicotine has a higher bioavailability resulting in faster blood
stream absorption and more closely mimics the effects of
combustible tobacco products. We recently released lower
concentration, NIC salt versions of certain flavors. These products
are designed to offer consumers access to the favorable
characteristics of NIC salts, such as increased flavor presence and
smoother draw, in a low nicotine concentration format. These
products can be used with a variety of vaping devices, making them
appealing to a broader consumer base. We broadly released
Pachamama™ Salts, an extension of the Pachamama™ line,
in late December 2018 to a select group of key accounts, which now
includes seven flavors packaged in 10ml, 30ml and 60ml bottles in
both high and low concentration formats. During the third quarter
of 2019, we launched NIC salt extensions of the Black, Gold and
White Label Charlie’s Chalk Dust brands and have plans to
further release additional products in this category as demand
continues to grow.
Don Polly
Don Polly is a company under common ownership with
the Company, and was established in April 2019 for the specific
purpose of developing, marketing and distributing proprietary and
innovative hemp-derived cannabidiol (“CBD”), non-THC, wellness products. Don
Polly is owned by two limited liabilities companies, of which one
is wholly-owned by Brandon Stump, the Company’s Chief
Executive Officer, and the other is wholly-owned by Ryan Stump, the
Company’s Chief Operating Officer. In June 2019,
Charlie’s entered into a Licensing Agreement with Don Polly,
pursuant to which Charlie's granted Don Polly a limited right and
license to use certain of Charlie’s trademarks, copyrights
and original artwork, in connection with Don Polly’s branded
CBD products, as well as a Services Agreement pursuant to
which Charlie’s provides certain services to Don
Polly related to the sales, marketing, brand development of
Don Polly products.
As a result, the Company and Don Polly launched a
line of premium vapor, tincture and topical wellness products
containing hemp-derived CBD in June 2019, which we refer to
the “Don Polly
Products” and
“Don
Polly Product Line”. Don
Polly’s efforts have been focused on developing and producing
high quality CBD products made from single-strain-sourced hemp
extract and high purity CBD isolate crystals. In addition, good
manufacturing practices and quality control parameters are of the
utmost importance to the Don Polly Products, which contribute to
the differentiation of the Don Polly Products in the CBD product
industry. The Don Polly Products consist of full-spectrum and
isolate CBD products across three categories including vapor,
tinctures, and topicals.
-28-
Isolate CBD Products
Our CBD isolate
products contain a minimum purity of 99% isolate crystals, tested
by independent, third-party facilities to ensure it is free of
pesticides and heavy metals. Vape, as a CBD delivery method, has
grown in popularity due to the high level of bioavailability and
reported therapeutic responses. In response to demand for CBD
infused e-liquids from our existing distribution channels, we
launched a new line of CBD infused vapor products in June 2019. We
refer to these products as the “Don Polly Vape Product Line” or
the “Don Polly Isolate
Products.” The Don Polly Vape Product Line is
currently available in 30ml chubby bottles across three flavors
(Minty Mango, Grape Berry and Strawberry Watermelon) and two
strengths (250mg and 500mg). We are continuing to research and
develop isolate products as both vape line extensions and in other
product categories.
Full Spectrum CBD Products
Our
full spectrum hemp extract comes from whole plant extraction which
retains the plant’s natural compounds. This extraction method
ensures each product preserves the holistic benefits of the plant,
including minimal amounts of THC (0.3% or less), which allows for
optimal absorption of the plant’s nutrients. While CBD alone
is a beneficial cannabinoid, full spectrum products provide the
body access to all the plant’s cannabinoids, allowing the end
user to achieve a wide range of therapeutic benefits. The full
spectrum products are formulated with single-source and single
strain hemp extracts. Don Polly believes this sourcing practice
yields various compounds that work synergistically to heighten the
effects of the products, making them superior to single-compound
CBD isolates. In June 2019, we introduced the Pachamama™
tincture and topical full spectrum products. The tincture offering
now includes six flavors (the Natural, Green Tea Echinacea, Goji
Cacao, Kava Kava Valerian, Ylang Ylang Holy Basil and Black Pepper
Turmeric). available in 30ml bottle sizes and both 750mg and 1750mg
strengths. Our topical wellness products include the Cooling
Ointment, available in a one ounce jar and 750mg strength, and the
Athletic Rub, available in a two ounce jar and 500mg strength. We
plan on continuing to research, develop, and launch products in
these categories.
Broad Spectrum CBD Products
In
addition to isolate and fill spectrum CBD products, we believe
there is an opportunity to develop broad spectrum hemp-derived CBD
extracts that provide the same benefits of full spectrum CBD
products but, through additional processing of hemp-derived
extracts, eliminate the presence of THC. This category of THC-free,
broad spectrum products will provide consumers with concerns about
THC access to the same level of quality and nutrients we value in
our full spectrum products. We are currently developing certain
broad spectrum products, which, ultimately, will allow us to launch
products which match the consumer accessibility of our CBD isolate
products with the experience and benefits of our full spectrum
products. In October 2019, we launched our first three broad
spectrum products including Body Lotion, Icy Muscle Gel and Pain
Cream.
True Drinks
– Legacy
Product -- Bazi®
Prior to the Share Exchange, we marketed and
distributed products, including AquaBall® and Bazi®,
offering a healthful, natural alternative to high sugar, high
calorie and nutritionally deficient beverages. A discussed below
in “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations,” we
ceased producing AquaBall® in early 2018. We continue to
market and sell Bazi®, but on a very limited basis and only as
we sell off existing inventory, as we focus our resources on the
marketing, distribution and selling of the Charlie’s Products
and the Don Polly Products. Bazi® is a liquid nutritional
drink packed with eight different super fruits, including the
Chinese jujube and seven other super fruits, plus 12 vitamins.
Management is currently exploring the value of continuing the
marketing and sale of Bazi®.
-29-
Manufacturing and Distribution
Manufacturing
Charlie’s
Product Line. We work closely with
contract manufacturing partners such as Avail, in the
United States, Ireland and Scotland to manufacture our products.
Our e-liquid and NIC salts products are manufactured to meet our
proprietary formula specifications in facilities that are ISO Class
7 certified, which helps
ensure their purity and quality. In 2018, we sourced
97% of our products from three suppliers in the United States.
While we have developed long-standing relationships with our
manufacturing sources and take great care to ensure that they share
our commitment to quality, we do not have any long-term term
contracts with these parties for the production of our product
lines. We maintain redundancies in our supply chain and are aware
of several alternative sources for our
products.
Don
Polly Product Line. Our hemp-derived,
CBD-based Don Polly Products are manufactured with contract
manufacturers to meet our formula specifications. While we do not
have any long-term contracts with these parties, we are
strengthening our supplier partnerships as well as identifying
additional supplier and contract manufacturing
opportunities.
Bazi®.
Bazi® had been manufactured by Arizona Packaging and
Production since 2007. Presently, we are not manufacturing Bazi
Product, and we have sold all of the existing
inventory.
Distribution
Charlie’s
Product Line. Once manufactured,
Charlie’s Products are directly distributed throughout the
United States and in more than 80 countries, primarily the
United Kingdom, Italy, Spain, Belgium, Australia, Sweden and
Canada. We
distribute our products to more than 2,100 specialty retailers
through direct sales and to distributors and wholesalers both in
the United States and internationally. Retailers of our
products include specialty retailers throughout the United States
and in over 80 other countries. We also distribute our
products on a very limited basis through convenience stores and gas
stations. With respect to products that we sell through
third-party distributors and wholesalers, we typically sell our
products to these customers for their re-sale. In select markets we
maintain exclusive arrangements with distributors and, when
warranted, will memorialize these agreements contractually.
Don Polly Product
Line. Although we only launched
the Don Polly Product Line in June 2019, our Don Polly Products are
currently distributed to key distribution and large retail accounts
in the United States, Mexico and Switzerland. Like the
Charlie’s Product Line, we will distribute Don Polly Products
directly to retailers, as well as through the use of distributors
and third-party wholesalers.
Bazi®.
Our e-commerce platform allows current and future consumers to
purchase Bazi® Energy Shot through http://www.drinkbazi.com. All sales of Bazi®
Energy Shot are made through our online platform, and, to a lesser
extent, online marketplaces such as Amazon.
Sales and Marketing
Charlie’s Product
Line. We have a
15-person sales team, based in the United States, that promotes our
Charlie’s Products globally. Salespeople seek to form
long-term “360” collaborative relationships with their
clients, partnering with them on sell-through efforts, providing
access to Charlie’s marketing and creative teams and advising
and educating them on the Charlie’s Product Line and other
industry-related issues. Currently, we advertise our products
primarily through direct customer engagement through social media
channels, print media, directed Internet marketing, industry
tradeshows and collaborative events with retail partners.
Historically, participation at industry-specific tradeshows played
a large role in our marketing and distribution strategy. However,
in 2018 we began shifting resources to collaborative events, and,
instead, our marketing team is now focusing its efforts on
fostering relationships with key distributors and retailers by
launching customer-specific marketing campaigns, in-person visits
to new customer accounts and other forms of direct customer
engagement. In 2018, approximately 30% of our sales were to
customers outside of the United
States.
-30-
We
intend to strategically expand our advertising activities in 2019
and increase our public relations efforts to gain industry
awareness as well as editorial coverage for our brands. Some of our
competitors promote their brands through print media and through
celebrity endorsements and have substantial resources to devote to
such efforts. We believe that our and our competitors’
efforts have helped increase our sales, our product acceptance and
general industry awareness.
Don Polly Product
Line. Since the launch of the
Don Polly products in June 2019, we have employed similar sales and
marketing efforts used for the Charlie’s Product Line, and
intend to utilize those sales and marketing efforts in the near
term.
Source and Availability of Raw Materials
Charlie’s Product
Line. Our manufacturing
partners source the ingredients for our proprietary e-cigarette
liquids from a variety of sources, in accordance with our
formulations and quality specifications. We source our proprietary
e-liquids from multiple ISO Class 7 certified manufacturers in the
United States, which helps ensure their purity and quality. In an
effort to maintain consistency across our supply chain, we directly
purchase certain product packaging and are responsible for managing
various third-party supplier relationships.
Don Polly Product
Line. For our full spectrum CBD
products we currently source the individual components and CBD from
several suppliers. Each are delivered to our primary manufacturer
for storage prior to manufacturing. Our primary manufacturer for
isolate CBD products handles all raw material sourcing
internally.
Bazi®.
During 2018, we relied significantly
on one supplier for 100% of our purchases of certain raw materials
for Bazi®. Bazi, Inc. has sourced these raw materials from
this supplier since 2007, and does not anticipate any issues with
the supply of these raw materials. Presently, we are not producing
Bazi product.
Although
we own the formulas for the Charlie’s Products, the Don Polly
Products and Bazi®, we obtain certain components, such as
packaging, flavors and certain raw materials, from third party
suppliers. None of the third party suppliers are considered to be
material to the business on a standalone basis and all are
components that are readily available from other suppliers on the
market. However, given the rapid growth of the vaping, e-cigarette
and CBD industries, there may be fluctuations in the availability
of certain of the materials we obtain from third-parties due to
high demand from our competitors. If any given supplier or
distributor is lost or unavailable in a specific region, and we are
unable to contract with alternative suppliers or distributors to
provide the requisite service(s) and product(s), we may be unable
to fulfill customer orders and our business could be materially
harmed.
Competition
The
industries in which we operate are highly competitive.
Charlie’s Product Line. Our
Charlie's Product Line competes in a highly-fragment industry. Some
identifiable competitors of Charlie's include Naked100, Milkman,
Humble, and Beard. Other brands such as Juul, Vuse, Group Mark Ten,
Green Smoke, Blu, Vaporfi, Njoy, Logic, V2, and Apollo all
participate in a different segment of the electronic cigarette
market which appeals to current smokers and recently-converted
electronic cigarette users.
In the
e-liquid flavor space, new flavor brands emerge daily due to low
barriers to entry. Companies that produce electronic cigarettes and
vaporizers, including Vaporfi, Atmos and Njoy, carry their own
flavor lines for the refillable market. Other brands like Mount
Baker Vapor focus on wide variety of choice and value, while other
brands like Charlie’s Chalk Dust carve out their identity
with branding, and more nuanced flavor combinations. The nature of
our competitors is varied as the market is highly fragmented and
the barriers to entry into the business are low.
-31-
Part
of our business strategy focuses on the establishment of
relationships with distributors and prominent branding focused on
performance and quality. We are aware that e-cigarette
competitors in the industry are also seeking to enter into such
relationships and try to create brand loyalty. In many cases,
competitors for such relationships may have greater management,
human, and financial resources than we do for attracting
distributor relationships. Furthermore, certain of our
electronic cigarette competitors may have better control
of their supply and distribution, be, better established, larger
and better financed than our Company.
We plan
to compete primarily on the basis of product quality, brand
recognition, brand loyalty, service, marketing, and advertising. We
are subject to highly competitive conditions in all aspects of our
business. The competitive environment and our competitive position
can be significantly influenced by weak economic conditions,
erosion of consumer confidence, competitors’ introduction of
low-priced products or innovative products, cigarette excise taxes,
higher absolute prices and larger gaps between price categories,
and product regulation that diminishes the ability to differentiate
tobacco products.
We also compete against “big tobacco”,
U.S. cigarette manufacturers of both conventional
tobacco cigarettes and
electronic cigarettes like Altria Group, Inc., Lorillard,
Inc. and Reynolds American, Inc. We compete against big tobacco who
offers not only conventional tobacco cigarettes and
electronic cigarettes but also smokeless tobacco products
such as “snus” (a form of moist ground smokeless
tobacco that is usually sold in sachet form that resembles small
tea bags), chewing tobacco and snuff. Big tobacco has nearly
limitless resources, global distribution networks in place and a
customer base that is fiercely loyal to their brands. Furthermore,
we believe that big tobacco will devote more attention and
resources to developing and offering
electronic cigarettes as the market for
electronic cigarettes grows. Because of their
well-established sales and distribution channels, marketing
expertise and significant resources, big tobacco may be better
positioned than small competitors like us to capture a larger share
of the electronic cigarette market.
Don Polly Product
Line. The market for CBD-based
hemp products is rapidly growing and is highly competitive. The
competition consists of publicly and privately-owned companies,
which tend to be highly fragmented in terms of both geographic
market coverage and products offered. With the Company’s
leading brand status, innovation capabilities, existing sales and
marketing platform, established distribution channels and
high-quality manufacturing, Management believes the Company is
well-positioned to capitalize on favorable long-term trends in the
hemp-based, CBD wellness products segment.
Bazi®. Bazi® competitors include Steaz®,
Guayaki Yerba Mate, POM Wonderful®, as well as sports and
energy drinks including Gatorade®, Red Bull®, 5-Hour
Energy®, RockStar®, Monster®, Powerade®,
Accelerade® and All Sport®. These competitors can use
their resources and scale to rapidly respond to competitive
pressures and changes in consumer preferences by introducing new
products, reducing prices or increasing promotional activities.
Many of our competitors have longer operating histories and have
substantially greater financial and other resources than we do.
They, therefore, have the advantage of established reputations,
brand names, track records, back office and managerial support
systems and other advantages that we cannot duplicate in the near
future, if ever. Moreover, many competitors, by virtue of their
longevity and capital resources, have established lines of
distribution to which we do not have access, and are not likely to
duplicate in the near term, if ever.
Intellectual Property
Patents and Trademarks
Charlie’s Product Line
and Don Polly Product Line. We
are the registered owner of the federal trademarks for
CHARLIE’S CHALK DUST, PACHAMAMA, STUMPS, AUNT MERINGUE &
Design, CAMPFIRE & Design, Mr. MERINGUE & Design, and THE
CREATOR OF FLAVOR & Design. We also maintain registrations in
several international markets and will work with our international
distributors to manage intellectual property and trademark
registrations when necessary.
We
plan to continue to expand our brand names and our proprietary
trademarks and designs worldwide as our business
grows.
-32-
True Drinks -- Legacy
Products. We maintain federal
trademark registration for Bazi®. This trademark registration
is protected for a period of ten years and then is renewable
thereafter if still in use.
Licensing Agreements
Charlie’s Product
Line. Charlie's is
currently active in exploring several long-term licensing
arrangements with several well-known industry participants. The
goal of such relationships is to acquire additional revenue streams
as well as to introduce the Charlie’s Chalk Dust and
Pachamama™ brands to a wider consumer
base.
Don Polly Product
Line. On April 25, 2019, the
Company and Charlie’s entered into a License Agreement (the
“License
Agreement”) with Don
Polly. As previously noted, Don Polly is classified as a variable
interest entity for which the Company is the primary beneficiary,
and is owned by entities controlled by Brandon Stump and Ryan
Stump, the Company’s Chief Executive Officer and Chief
Operating Officer, respectively. Pursuant to the License Agreement,
Charlie’s provides Don Polly with a limited right and license
to use certain of Charlie’s intellectual property rights,
including certain trademarks, copyrights and original artwork, in
connection with certain of Don Polly’s branded CBD products.
In exchange for such license, Don Polly (i) pays Charlie’s
monthly royalties amounting to 75% of its net profits, (ii) uses
its best efforts to market, promote and advertise its products,
(iii) provides Charlie’s with most favored nations pricing in
the event that Charlie’s wishes to sell products sold by Don
Polly, (iv) provide Charlie’s with the exclusive right of
first refusal to purchase Don Polly, including all of its assets
and liabilities, for a purchase price of $111,618 on or before
December 31, 2025, and (v) will not license any intellectual
property from any other source other than Charlie’s in
connection with its design, manufacture, advertisement, promotion
distribution and sale of CBD infused products within the agreed
upon territory. The License Agreement will continue in perpetuity
unless terminated in accordance with its terms.
Concurrently with the execution of the License
Agreement, Charlie’s and Don Polly also entered into a
Services Agreement (the “Services
Agreement”), pursuant to
which Charlie’s provides certain services to Don Polly,
including, without limitation, (i) the development and creation of
Don Polly’s sales, marketing, brand development and customer
service strategies and (ii) performing sales, branding, marketing
and other business functions at the request of Don Polly.
Charlie’s will perform such services in the capacity of a
contractor, and all materials and work product created by
Charlie’s in its capacity as such will be the property of Don
Polly. As consideration for the Services provided by
Charlie’s, Don Polly (i) pays Charlie’s 25% of its net
profits on a quarterly basis, and (ii) reimburse Charlie’s
for all out-of-pocket business expenses that are preapproved in
writing by Don Polly. The Services Agreement will continue in
perpetuity unless terminated in accordance with its
terms.
True Drinks -- Legacy
Products. We previously had a
licensing agreement with Disney (the “Disney
License”), which allowed
us to feature popular Disney characters on
AquaBall®
Naturally Flavored Water, allowing
AquaBall®
to stand out among other beverages
marketed towards children. As discussed in the section entitled
“Recent
Developments” above, in
connection with the discontinued production of
AquaBall®, we notified
Disney of our desire to terminate the Disney License in early
2018. As a result of our
decision to discontinue the production of
AquaBall® and terminate
the Disney License, and considering amounts due, Disney drew from a
letter of credit funded by Red Beard in the amount of $378,000 on
or about June 1, 2018. Subsequently, Disney agreed to a settlement
and release of all claims related to the Disney License in
consideration for the payment to Disney of
$42,000.
Government Regulations
Charlie’s Product Line
Pursuant to a December 2010, decision, by the U.S.
Court of Appeals for the District of Columbia Circuit, in Sottera,
Inc. v. Food & Drug Administration, 627 F.3d 891 (D.C. Cir.
2010), the FDA is permitted to regulate
electronic cigarettes as “tobacco products”
under the Family Smoking Prevention and Tobacco Control Act of 2009
(the “Tobacco Control
Act”).
Under
this Court decision, the FDA is not permitted to regulate
electronic cigarettes as “drugs” or
“devices” or a “combination product” under
the Federal Food, Drug and Cosmetic Act unless they are marketed
for therapeutic purposes.
-33-
The
Tobacco Control Act also requires establishment, within the
FDA’s new Center for Tobacco Products, of a Tobacco Products
Scientific Advisory Committee to provide advice, information and
recommendations with respect to the safety, dependence or health
issues related to tobacco products.
The FDA had previously indicated that it intended
to regulate e-cigarettes under the Tobacco Control
Act through the issuance of “Deeming Regulations”
that would include e-liquid, e-cigarettes, and other vaping
products (collectively, “Deemed Tobacco
Products”) under
the Tobacco Control Act and subject to the FDA’s
jurisdiction.
On
May 10, 2016, the FDA issued the “Deeming Regulations”
which came into effect August 8, 2016. The Deeming Regulations
amended the definition of “tobacco products” to include
e-liquid, e-cigarettes and other vaping products. Deemed Tobacco
Products include, but are not limited to, e-liquids, atomizers,
batteries, cartomizers, clearomisers, tank systems, flavors,
bottles that contain e-liquids and programmable software. Beginning
August 8, 2016, Deemed Tobacco Products became subject to all FDA
regulations applicable to cigarettes, cigarette tobacco, and other
tobacco products which require:
●
a
prohibition on sales to those younger than 18 years of age and
requirements for verification by means of photographic
identification;
●
health
and addictiveness warnings on product packages and in
advertisements;
●
a
ban on vending machine sales unless the vending machines are
located in a facility where the retailer ensures that individuals
under 18 years of age are prohibited from entering at any
time;
●
registration
with, and reporting of product and ingredient listings to, the
FDA;
●
no
marketing of new tobacco products prior to FDA review;
●
no
direct and implied claims of reduced risk such as "light", "low"
and "mild" descriptions unless FDA confirms (a) that scientific
evidence supports the claim and (b) that marketing the product will
benefit public health;
●
payment
of user fees;
●
ban
on free samples; and
●
childproof
packaging.
In addition, the Deeming Regulations requires any
Deemed Tobacco Product that was not commercially marketed as of the
“grandfathering” date of February 15, 2007, to obtain
premarket approval before it can be marketed in the United States.
Premarket approval could take any of the following three pathways:
(1) submission of a premarket tobacco product application
(“PMTA”) and receipt of a marketing authorization
order; (2) submission of a substantial equivalence report and
receipt of a substantial equivalence order; or (3) submission of a
request for an exemption from substantial equivalence requirements
and receipt of an substantial equivalence exemption determination.
The Company cannot predict if any of the products in the Charlie's
Product Line, all of which would be considered
“non-grandfathered”, will receive the required
premarket approval from the FDA if the Company were to undertake
obtaining premarket approval through any of the available
pathways.
-34-
Since
there were virtually no e-liquid, e-cigarettes or other vaping
products on the market as of February 15, 2007, there is no way to
utilize the less onerous substantial equivalence or substantial
equivalence exemption pathways that traditional tobacco corporation
can utilize. In order to obtain premarket approval, practically all
e-liquid, e-cigarettes or other vaping products would have to
follow the PMTA pathway which would cost hundreds of thousands of
dollars per application. Furthermore, the Deeming Regulations also
effectively froze the US market on August 8, 2016 since any new
e-liquid, e-cigarette or other vaping product would be required to
obtain an FDA marketing authorization though one of the
aforementioned pathways. Deemed Tobacco Products that were on the
market prior to August 8, 2016 have been provided with a grace
period where such products can continue to be marketed until the
May 12, 2020 PMTA submission deadline. Upon submission of a PMTA,
such products would be permitted to be sold pending the FDA’s
review of the submitted PMTAs, even if the May 12, 2020 deadline
has passed.
In a press release dated July 28, 2017, the FDA
also stated that “the FDA plans to issue foundational rules
to make the product review process more efficient, predictable, and
transparent for manufacturers, while upholding the agency’s
public health mission. Among other things, the FDA intends to issue
regulations outlining what information the agency expects to be
included in PMTAs, Modified Risk Tobacco Product
(“MRTP”) applications and reports to demonstrate
Substantial Equivalence (“SE”). The FDA also plans to finalize guidance
on how it intends to review PMTAs for ENDS. The agency also will
continue efforts to assist industry in complying with federal
tobacco regulations through online information, meetings, webinars
and guidance documents”.
As the May 2020 PMTA deadline approaches, we are
preparing to submit up to three PMTAs to the FDA
to request marketing authorization for
Charlie’s menthol and/or tobacco vaping liquids. As a part of
these preparations, on November 25, 2019, we entered into
the Avail Agreement for the manufacturing of vapor products and,
pursuant to which, Avail will provide certain regulatory analysis,
strategy and other consulting services in connection with the
preparation and submission of three PMTAs to the FDA. It is
anticipated that the compensation to be paid by us to Avail for
services provided under the Avail Agreement will be approximately
$4,440,000, which will be paid upon completion of services provided
as described therein.
We are also evaluating the potential returns
associated with filing additional PMTAs for other Charlie’s
Products after the May 2020 expiration of the grace period.
We estimate the cost associated with
any future PMTA submission to be at least $750,000, which cost may
vary based on several factors including the selection of contract
research organizations to assist with the application process, as
well as variable costs associated with scientific, market
perception and clinical studies that may be required in connection
with each PMTA. We plan to evaluate several factors before
preparing and submitting any PMTA to the FDA, including, but not
limited to the regulatory environment for our products and the
availability of capital for the costs associated with each
submission. No assurances may be given that we will submit any
PMTAs to the FDA prior to the expiration of the grace period, or
that any PMTA submitted to the FDA will be
approved.
In
addition to federal regulation, state and local governments
currently legislate and regulate tobacco products, including what
is considered a tobacco product, how tobacco taxes are calculated
and collected, to whom tobacco products can be sold and by whom, in
addition to where tobacco products, specifically cigarettes may be
smoked and where they may not. Certain municipalities have enacted
local ordinances which preclude the use of e-liquid, e-cigarettes
and other vaping products where traditional tobacco burning
cigarettes cannot be used and certain states have proposed
legislation that would categorize vaping products as tobacco
products, equivalent to their tobacco burning counterparts. If
these bills become laws, vaping products may lose their appeal as
an alternative to traditional cigarettes, which may have the effect
of reducing the demand for the products.
The
Company may be required to discontinue, prohibit or suspend sales
of its e-liquid products in states that require us to obtain a
retail tobacco license. If the Company is unable to obtain certain
licenses, approvals or permits and if the Company is not able to
obtain the necessary licenses, approvals or permits for financial
reasons or otherwise and/or any such license, approval or permit is
determined to be overly burdensome to the Company, then the Company
may be required to cease sales and distribution of its e-liquid
products to those states, which would have a material adverse
effect on the Company’s business, results of operations and
financial condition.
As
a result of FDA import alert 66-41 (which allows the detention of
unapproved drugs promoted in the U.S.), U.S. Customs has from time
to time temporarily and in some instances indefinitely detained
certain products. If the FDA modifies the import alert from its
current form which allows U.S. Customs discretion to release the
products, to a mandatory and definitive hold the Company may no
longer be able to ensure a supply of raw materials or saleable
product, which will have material adverse effect on the
Company’s business, results of operations and financial
condition.
At present, neither the Prevent
All Cigarette Trafficking Act (which prohibits the use of the U.S. Postal
Service to mail most tobacco products and which amends the
Jenkins
Act, which would require
individuals and businesses that make interstate sales
of cigarettes or smokeless tobacco to comply with state
tax laws) nor the Federal Cigarette Labeling
and Advertising Act (which
governs how cigarettes can be advertised and marketed)
apply to electronic cigarettes. The application of either or both
of these federal laws to electronic cigarettes would have
a material adverse effect on our business, results of operations
and financial condition.
-35-
The tobacco industry expects significant
regulatory developments to take place over the next few years,
driven principally by the World Health Organization’s
Framework Convention on Tobacco Control (“FCTC”). The FCTC is the first international
public health treaty on tobacco, and its objective is to establish
a global agenda for tobacco regulation with the purpose of reducing
initiation of tobacco use and encouraging cessation. Regulatory
initiatives that have been proposed, introduced or enacted
include:
●
the
levying of substantial and increasing tax and duty
charges;
●
restrictions
or bans on advertising, marketing and sponsorship;
●
the
display of larger health warnings, graphic health warnings and
other labeling requirements;
●
restrictions
on packaging design, including the use of colors and generic
packaging;
●
restrictions
or bans on the display of tobacco product packaging at the point of
sale, and restrictions or bans on cigarette vending
machines;
●
requirements
regarding testing, disclosure and performance standards for tar,
nicotine, carbon monoxide and other smoke constituents
levels;
●
requirements
regarding testing, disclosure and use of tobacco product
ingredients;
●
increased
restrictions on smoking in public and work places and, in some
instances, in private places and outdoors;
●
elimination
of duty free allowances for travelers; and
●
encouraging
litigation against tobacco companies.
If
e-liquid, e-cigarettes or other vaping products are subject to one
or more significant regulatory initiatives enacted under the FCTC,
the Company’s business, results of operations and financial
condition could be materially and adversely affected.
European Union
On April 3, 2014, the European Union issued the
“New
Tobacco Product Directive” and is intended to regulate “tobacco
products”, including cigarettes, roll-your-own tobacco,
cigars and smokeless tobacco, and “electronic cigarettes and
herbal products for smoking”, including e-cigarettes,
e-liquid, refill containers, liquid holding tanks and e-liquid
bottles sold directly to consumers. The New Tobacco Product
Directive became effective May 20, 2016.
-36-
The
New Tobacco Product Directive introduces a number of new regulatory
requirements for e-cigarettes, e-liquid and other vaping products,
which includes the following: (i) restricts the amount of nicotine
that e-cigarettes and e-liquid can contain; (ii) requires
e-cigarettes, e-liquid and refill containers to be sold in child
and tamper-proof packaging and nicotine liquids to contain only
“ingredients of high purity”; (iii) provides that
e-cigarettes, e-liquid and other vaping products must deliver
nicotine doses at “consistent levels under normal conditions
of use” and come with health warnings, instructions for their
use, information on “addictiveness and toxicity”, an
ingredients list, and information on nicotine content; (iv)
significantly restricts the advertising and promotion of
e-cigarettes, e-liquid and other vaping products; and (v) requires
e-cigarette, e-liquid and other vaping product manufacturers and
importers to notify EU Member States before placing new products on
the market and to report annually such to Member States (including
on their sales volumes, types of users and their
“preferences”). Failure to make annual reports to
Member State Competent Authorities or to properly notify prior to a
substantive change to an existing product or introduction of a new
product could result in the Company’s inability to market or
sell its products and cause material adverse effect on the
Company’s business, results of operations and financial
condition.
The
New Tobacco Product Directive requires Member States to transpose
into law New Tobacco Product Directive provisions by May 20, 2016.
An “EU directive” requires Member States to achieve
particular results. However, it does not dictate the means by which
they do so. Its effect depends on how Member States transpose the
New Tobacco Product Directive into their national laws. Member
States may decide, for example, to introduce further rules
affecting e-cigarettes, e-liquid and other vaping products (for
example, age restrictions) provided that these are compatible with
the principles of free movement of goods in the Treaty on the
Functioning of the European Union. The Tobacco Product Directive
also includes provisions that allow Member States to ban specific
e-cigarettes, e-liquid and other vaping products or specific types
of e-cigarettes, e-liquid and other vaping products in certain
circumstances if there are grounds to believe that they could
present a serious risk to human health. If at least three Member
States impose a ban and it is found to be duly justified, the
European Commission could implement a European Union wide ban.
Similarly, the New Tobacco Product Directive provides that Member
States may prohibit a certain category of tobacco, flavoring or
related products on grounds relating to a specific situation in
that Member State for public health purposes. Such measures must be
notified to the European Commission to determine whether they are
justified.
There
are also other national laws in Member States regulating
e-cigarettes, e-liquid and other vaping products. It is not clear
what impact the new Tobacco Product Directive will have on these
laws.
Canada
On September 27, 2017, Health Canada released a
Notice to the Industry that portions of Bill S-5 related to the
sale of vaping products that are marketed without health or
therapeutic claims are to be enacted immediately upon Royal Assent.
In effect, this both legitimizes the sale of vaping products within
Canada and creates an initial regulatory framework. Health Canada
has taken the stance that vaping products that are not marketed as
therapeutic are to be considered consumer products and subject to
the requirements of the Canada Consumer Product Safety
Act (“CCPSA”). Under the CCPSA, there is a
“general prohibition” on products that are classified
as “very toxic” under the Consumer Chemicals and
Containers Regulations, 2001 (“CCCR, 2001”). Health Canada has reviewed the
toxicity of nicotine containing products and has determined that
“vaping liquids containing equal to or more than 66 mg/ml
(6.6%) nicotine meet the classification of "very toxic" under the
CCCR, 2001 and will be prohibited from import, advertising or sale
under Section 38 of the CCCR, 2001. None of the Company’s
e-liquid products for sale fall under this classification of
“very toxic” and are therefore able to be marketed for
sale within Canada. Health Canada has also determined that products
containing any nicotine that falls below the “very
toxic” classification to be regulated as “toxic”
under the CCCR, 2001. This classification requires the use of
childproof packaging, specific labeling requirements and pictograms
as outlined in the CCCR, 2001.
At
present, the Company has made efforts to ensure that its e-liquid
products that are being marketed in Canada are in full compliance
with the recommendations of Health Canada and will expect no
interruption to business upon Royal Ascent of Bill
S-5.
Health
Canada had also stated an intent to develop additional regulations
under the authority of the CCPSA, however, at this time it is
unclear what those additional regulations may be or how they will
affect the Company’s business. If e-liquid, e-cigarettes or
other vaping products are subject to one or more significant
regulatory initiatives enacted under the Bill S-5 or otherwise, the
Company’s business, results of operations and financial
condition could be materially and adversely affected.
-37-
Currently in Canada, electronic smoking products
(i.e., electronic products for the vaporization and administration
of inhaled doses of nicotine including electronic cigarettes,
cigars, cigarillos and pipes, as well as cartridges of nicotine
solutions and related products) fall within the scope of
the Food and Drugs
Act. All of these products
require market authorization prior to being imported, advertised or
sold in Canada. Market authorization is granted by Health Canada
following successful review of scientific evidence demonstrating
safety, quality and efficacy with respect to the intended purpose
of the health product. To date, no electronic smoking product has
been authorized for sale by Health Canada.
In the absence of evidence establishing otherwise,
an electronic smoking product delivering nicotine is regulated as a
“new drug” under Division 8, Part C of
the Food and Drug
Regulations. In addition, the
delivery system within an electronic smoking kit that contains
nicotine must meet the requirements of the Medical Devices
Regulations. Appropriate
establishment licenses issued by Health Canada are also needed
prior to importing, and manufacturing electronic cigarettes.
Products that are found to pose a risk to health and/or are in
violation of the Food and Drugs
Act and related
regulations may be subject to compliance and enforcement actions in
accordance with the Health Products and Food Branch
Inspectorate’s Compliance and Enforcement Policy (POL-0001).
According to Health Canada regulations, it is not permissible to
import, advertise or sell electronic smoking products without the
appropriate authorizations, and persons that violate these
regulations are subject to repercussions from Health Canada,
including but not limited to, seizure of the
products.
Since
no scientific evidence demonstrating safety, quality and efficacy
with respect to the intended purpose of e-cigarettes, e-liquid or
other vaping products has been submitted to Health Canada to date,
there is the possibility that in the future Health Canada may
modify or retract the current prohibitions currently in place.
However, there can be no assurance that the Company will be in
total compliance, remain competitive, or financially able to meet
future requirements and regulations imposed by Health
Canada.
To date, Health Canada has not imposed any
restrictions on e-cigarettes, e-liquid and other vaping products
that do not contain nicotine. e-cigarettes, e-liquid and other
vaping products that do not make any health claim and do not
contain nicotine may legally be sold in Canada. Thus, vendors can
openly sell nicotine-free e-cigarettes, e-liquid and other vaping
products. However, there are vape shops operating throughout Canada
selling e-cigarettes, e-liquid and other vaping products containing
nicotine without any implications from Health Canada. e-cigarettes,
e-liquid and other vaping products are subject to standard product
regulations in Canada, including the Canada Consumer Product Safety
Act and
the Consumer Packaging and
Labelling Act.
At present, neither the Tobacco Act (which regulates the manufacture, sale,
labelling and promotion of tobacco products) nor
the Tobacco Products Labelling
Regulations (Cigarettes
and Little Cigars) (which governs how cigarettes can be advertised
and marketed) apply to e-cigarettes, e-liquid and other vaping
products. The application of these federal laws to e-cigarettes,
e-liquid and other vaping products would have a material adverse
effect on the Company’s business, results of operations and
financial condition.
Company’s efforts to mitigate risks associated with new and
evolving regulation.
The
Company is constantly seeking to stay in compliance with all
existing and reasonably expected future regulations. The Company,
through its internal compliance team, market consultants and
technicians and testing labs hopes to stay in accordance with all
standards whether set forth in the New Tobacco Products Directive
or the Deeming Regulations. Making sure that all e-liquid products
meet and exceed the standards set forth by each market’s
regulatory body is of the highest concern for the Company. Staying
in compliance with all marketing and packaging directives is
imperative to maintaining access to the markets. Although these
processes are costly and time consuming, it is imperative for the
Company’s success that these steps are taken and constantly
kept up to date. Failure to comply in a timely fashion to any
particular directive or regulation could have material adverse
effects on the results of business operations.
-38-
Don Polly Product Line
Don Polly’s CBD products are subject to
various state and federal laws regarding the production and sales
of hemp-based products. Section 12619 of the Agriculture
Improvement Act of 2018 (“2018 Farm
Bill”) removed
“hemp,” as defined in the Agricultural Marketing Act of
1946 (the “1946 Agricultural
Act”), from the
classification of “marijuana,” which is generally
prohibited as a Schedule I drug under the Controlled Substances Act
of 1970 (“CSA”). Under the 1946 Agricultural Act (as
amended by the 2018 Farm Bill), the term “hemp”
means “the plant Cannabis sativa L. and any part of that
plant, including the seeds thereof and all derivatives, extracts,
cannabinoids, isomers, acids, salts, and salts of isomers, whether
growing or not, with a delta-9 tetrahydrocannabinol concentration
of not more than 0.3 percent on a dry weight basis.” As a
result of the passage of the 2018 Farm Bill, and since the
Company believes the Don Polly Products contain parts of the
cannabis plant with a THC concentration of not more than 0.3
percent on a dry weight basis, the Company believes that the Don
Polly Products are not governed by the CSA and, ergo, would not be
subject to prosecution thereunder because the Company believes the
Don Polly Products contain “hemp” within the meaning of
the 1946 Agricultural Act (as amended by the 2018 Farm Bill)
and do not contain any “marijuana” as prohibited under
the CSA (as amended by the 2018 Farm Bill); provided, however,
there is a lack of legal protection for hemp-based products that
contain more than 0.3 percent THC and there is a risk that the
Company would be subject to prosecution under the CSA in the event
that its CBD products are found to contain more than 0.3 percent
THC.
Furthermore, the 1946 Agricultural Act (as amended
by the 2018 Farm Bill) provides additional regulations
regarding the production of hemp-based products and there is the
risk that the Don Polly Products may be found to be in violation of
these regulations. Specifically, the 1946 Agricultural Act (as
amended by the 2018 Farm Bill) contains provisions relating to
the shared state-federal jurisdiction over hemp cultivation and
production, whereby states and Indian tribes have been delegated
the broad authority to regulate and limit the production and sale
of hemp and hemp products within their borders. Under the 1946
Agricultural Act (as amended by the 2018 Farm Bill), a plan
under which a State or Indian tribe monitors and regulates the
production of hemp shall only be required to include “(i) a
practice to maintain relevant information regarding land on which
hemp is produced in the State or territory of the Indian tribe,
including a legal description of the land, for a period of not less
than three calendar years; (ii) a procedure for testing, using
post-decarboxylation or other similarly reliable methods, delta-9
tetrahydrocannabinol concentration levels of hemp produced in the
State or territory of the Indian tribe; (iii) a procedure for the
effective disposal of—(I) plants, whether growing or not,
that are produced in violation of this subtitle; and (II) products
derived from those plants; (iv) a procedure to comply with
enforcement procedures; (v) a procedure for conducting annual
inspections of, at a minimum, a random sample of hemp producers to
verify that hemp is not produced in violation of [applicable law];
(vi) a procedure for submitting the information, as applicable, to
the Secretary of Agriculture (the “Secretary”) not more than 30 days after the date on
which the information is received; and (vii) a certification that
the State or Indian tribe has the resources and personnel to carry
out the practices and procedures described in clauses (i) through
(vi).” Further, a hemp producer in a State or the territory
of an Indian tribe for which a State or Tribal plan is approved
shall be determined to have negligently violated the State or
Tribal plan, including by negligently— “(i) failing to
provide a legal description of land on which the producer produces
hemp; (ii) failing to obtain a license or other required
authorization from the State department of agriculture or Tribal
government, as applicable; or (iii) producing Cannabis sativa L.
with a delta-9 THC concentration of more than 0.3 percent on a dry
weight basis.” A hemp producer that negligently violates a
State or Tribal plan 3 times in a 5-year period shall be ineligible
to produce hemp for a period of 5 years beginning on the date of
the third violation. If the State department of agriculture or
Tribal government in a State or the territory of an Indian tribe
for which a State or Tribal plan, as applicable, determines that a
hemp producer in the State or territory has violated the State or
Tribal plan with a culpable mental state greater than
negligence— “(i) the State department of agriculture or
Tribal government, as applicable, shall immediately report the hemp
producer to —(I) the Attorney General; and (II) the chief law
enforcement officer of the State or Indian tribe, as
applicable.” In the case of a State or Indian tribe for which
a State or Tribal plan is not approved, the production of hemp in
that State or the territory of that Indian tribe shall be subject
to a plan established by the Secretary to monitor and regulate that
production. A plan established by the Secretary under shall
include— “(A) a practice to maintain relevant
information regarding land on which hemp is produced in the State
or territory of the Indian tribe, including a legal description of
the land, for a period of not less than 3 calendar years; (B) a
procedure for testing, using post-decarboxylation or other
similarly reliable methods, delta-9 tetrahydrocannabinol
concentration levels of hemp produced in the State or territory of
the Indian tribe; (C) a procedure for the effective disposal
of—(i) plants, whether growing or not, that are produced in
violation of [applicable law]; and (ii) products derived from those
plants; (D) a procedure to comply with the enforcement procedures;
(E) a procedure for conducting annual inspections of, at a minimum,
a random sample of hemp producers to verify that hemp is not
produced in violation of this subtitle; and (F) such other
practices or procedures as the Secretary considers to be
appropriate. The Secretary shall also establish a procedure to
issue licenses to hemp producers. In the case of a State or Indian
tribe for which a State or Tribal plan is not approved under
applicable law, it shall be unlawful to produce hemp in that State
or the territory of that Indian tribe without a license issued by
the Secretary. A violation of a plan established by the Secretary
shall be subject to enforcement and the Secretary shall report the
production of hemp without a license issued by the Secretary to the
Attorney General. In the event that the Company’s CBD
products are found to be in violation of these regulations, the
Company may become subject to enforcement action as provided for in
the 1946 Agricultural Act (as amended by the 2018 Farm Bill)
and may become subject to prosecution
thereunder.
-39-
True Drinks -- Legacy Products
Certain
states and localities prohibit the sale of certain beverages unless
a deposit or tax is charged for containers. These requirements vary
by each jurisdiction. Similar legislation has been proposed in
certain other states and localities, as well as by Congress. We are
unable to predict whether such legislation will be enacted or what
impact its enactment would have on our business, financial
condition or results of operations.
All
of our facilities in the United States are subject to federal,
state and local environmental laws and regulations. Although
compliance with these provisions has not had any material adverse
effect on our financial or competitive position, compliance with or
violation of any current or future regulations and legislation
could require material expenditures or have a material adverse
effect on our financial results.
Research and Development
Our
research and development activities consist of development and
testing of new flavors, formulations, formats and delivery methods
for our existing products, as well as development of new products
for the Charlie’s Product Line and the Don Polly Product
Line.
For the years ended December 31, 2017 and 2018, Charlie’s
recorded product development expenses of $116,040 and $95,180,
respectively.
Employees
We had 57 full-time
employees across Charlie’s Holdings Inc., Charlie’s
Chalk Dust LLC and Don Polly LLC as of January 17,2020.
Compliance with Environmental Laws
In
California, in connection with sales of Bazi®, we are required
to collect redemption values from our retail customers and to remit
such redemption values to the State of California Department of
Resources Recycling and Recovery based upon the number of cans and
bottles of certain carbonated and non-carbonated products sold. In
certain other states where our products are sold, we are also
required to collect deposits from our customers and to remit such
deposits to the respective jurisdictions based upon the number of
cans and bottles of certain carbonated and non-carbonated products
sold in such states.
Facilities
We occupy
approximately 7,200 square feet
of office located at 1007 Brioso Drive, Costa Mesa, CA92627 that
is owned by Brandon Stump, Ryan Stump and Keith Stump, the
Company’s Chief Executive Officer, Chief Operating Officer
and member of the Company’s Board of Directors, respectively.
The lease has an initial term of five years, expires on August 31,2024, and a base rent 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. We also occupy
the following spaces:
●
Approximately 3,306
square feet of multi-tenant industrial space located at 1701 E.
Edinger, Suite E13, Santa Ana, CA92705, used for general office
and warehouse space. The lease began on April 1, 2018, and for a
term of three years, with a monthly base lease rate of
$3,306.
●
Approximately
11,100 square feet of industrial space located at 5331 Production
Drive, Huntington Beach, CA92649, used for warehousing and
shipping operations. The lease began on June 1, 2019, and for a
term of three years, with a monthly base lease rate of
$12,987.
●
Certain
of Don Polly’s operations are operated from a 7,366 square
foot facility in Denver Colorado. The facility offers multi-use
space, housing both warehouse and administrative functions. The
lease commenced on April 1, 2019, and for a term of 38 months, with
a monthly base lease rate of $10,435.
We
believe that our facilities are sufficient to meet our current
needs and that suitable additional space will be available as and
when needed.
Legal
Proceedings
From
time to time, claims are made against the Company in the ordinary
course of business, which could result in litigation. Claims and
associated litigation are subject to inherent uncertainties, and
unfavorable outcomes could occur. In the opinion of management, the
resolution of these matters, if any, will not have a material
adverse impact on the Company’s financial position or results
of operations. Other than as set forth below, there are no
additional pending or threatened legal proceedings at this
time.
Delhaize America
Supply Chain Services, Inc. v. True Drinks, Inc. On May 8, 2018, Delhaize America
Supply Chain Services, Inc. (“Delhaize”) filed a complaint
against the Company in the General Court of Justice Superior Court
Division located in Wake County, North Carolina alleging breach of
contract, among other causes of action, related to contracts
entered into by and between the two parties. Delhaize is seeking in
excess of $25,000 plus interest, attorney’s fees and
costs. We believe the allegations are unfounded and are
defending the case vigorously. We believe the probability of
incurring a material loss to be remote.
The Irvine
Company, LLC v. True Drinks, Inc. On September 10,2018, The Irvine Company, LLC (“Irvine”) filed a complaint
against the Company in the Superior Court of Orange County, located
in Newport Beach, California, alleging breach of contract related
to the Company’s early termination of its lease agreement
with Irvine in May 2018. Pursuant to the Complaint, Irvine sought
to recover approximately $74,000 in damages from the Company. In
November 2018, the Company and Irvine agreed to settle the lawsuit
for an aggregate of $15,750.
-40-
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
Our objective is to become a significant leader in
the rapidly growing, global e-cigarette segment of the broader
nicotine related products industry. Through Charlie’s, we
formulate, market and distribute branded e-cigarette liquid for use
in both open and closed nicotine-only e-cigarette and vaping
systems. Charlie’s products are produced domestically through
contract manufacturers for sale through select distributors,
specialty retailers and third-party online resellers throughout the
United States, as well as more than 80 countries worldwide.
Charlie’s primary international markets include the United
Kingdom, Italy, Spain, Belgium, Australia, Sweden and Canada. In
June 2019, we launched distribution, through Don Polly, of certain
premium vapor, tincture and topical wellness products containing
hemp-derived cannabidiol (“CBD”) and we currently intend to develop and
launch additional products containing hemp-derived CBD in the
future. Prior to the Share Exchange (defined below), our
primary business was the development, marketing, sale and
distribution of all-natural, vitamin-enhanced drinks, including
AquaBall® Naturally Flavored Water and Bazi® All Natural
Energy (“Bazi”). We continue to sell limited amounts of
Bazi, but have ceased all production and sales of AquaBall®
Naturally Flavored Water.
Recently
there have been significant news stories and health alerts related
to flavored nicotine vaping, leading to some states banning the
sale of flavored nicotine products and causing the Food and Drug
Administration (“FDA”) to review its policies on
controlling the sale of these products. The most recent health
related concerns seem to indicate that a vitamin E acetate related
compound may be causing the health issues. On November 8, officials
at the Centers for Disease Control and Prevention
(“CDC”)
reported a breakthrough in the investigation into the outbreak of
vaping-related lung injuries. The CDC's principal deputy director, Dr.
Anne Schuchat, stated that "vitamin E acetate is a known additive
used to dilute liquid in e-cigarettes or vaping products that
contain THC,” suggesting the possible culprit for the
series of lung injuries across the U.S. All of Charlie's nicotine-only, e-liquid
products are tested by third party laboratories which have
confirmed that none of our products contain any vitamin E acetate
or Tetrahydrocannabinol
(“THC”).
However,
these developments have had a negative effect on our sales since
mid-September 2019 (see further discussion below) and therefore, in
response to these developments and while government regulators are
formulating future polices management has adopted the following
plan of operation.
First, we plan to focus on increasing the sales of
our CBD related products, including topicals, tinctures and vaping
liquids. We feel there is a significant upside in the CBD space,
and we have begun to focus on numerous vertical markets for the
sale of our isolate, full and broad-spectrum products. These
vertical markets include the medical and wellness markets. In addition, we have begun
conversations with various companies and organizations that, if
successful, will allow us to significantly expand our marketing and
distribution reach.
Secondly,
we see a significant opportunity for sales growth in international
markets for nicotine e-liquids. Presently 25% of our e-liquid
product sales come from the international market and we are well
positioned to increase those sales in the countries that we
presently sell, and in additional overseas markets, as we have
already built an international distribution
platform.
Lastly, we believe
that nicotine based flavored vaping products will continue to be a
significant growth opportunity once all the rightful regulatory
changes have been made, including the FDA’s recently
announced enforcement policy with respect to flavored
cartridge-based e-cigarettes. Currently, we intend to pursue
marketing authorization from the FDA for certain of our
nicotine-based liquids, including, our
menthol and/or tobacco vaping products. As further described
under the heading “Government Regulation of Charlie’s
Products” below, we recently entered into an agreement
with Avail Vapor, LLC (“Avail”) to assist, in part, with
certain regulatory analysis and strategy as we prepare to submit
three premarket tobacco application (“PMTA”) to the FDA on or before
the May 2020 deadline. We expect the cost associated with the
preparation and submission of these PTMAs will be approximately $.4
million. In addition, we are evaluating the potential returns
associated with obtaining marketing authorization for our other
nicotine based vaping products after the May 2020 deadline. We feel
that a significant amount of our competitors will not have the
resources and/or expertise to complete the extensive and costly
PMTA process and that, once complete, we will be able to benefit
from being one of only a select group of companies operating in the
flavored nicotine product space. For
more information, see the section of this prospectus titled
“Government Regulation of
Charlie’s Products,” as well as the risks and uncertainties
described under “Risk Factors –
Regulatory and Market Risks.”
-41-
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, which policy will go into effect on or around February 2,2020. The application of any new laws, regulations or policies 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 that relate to our
nicotine-based vaping liquid increase across the United States, or
internationally, the Company’s business, results of
operations and financial condition could be adversely
impacted.
For the three months ended September 30, 2019 and
2018, our revenues from operations were $5,590,000 and $5,223,000,
respectively. Net income for
the three months ended September 30, 2019 was $1,557,000, which
included a non-cash gain on change in fair value of derivative
liabilities of $2,747,000, as compared to a net income of
$1,886,000 for the three months ended September 30, 2018. Non-cash
stock-based compensation costs of approximately $599,000 related to
the Share Exchange were expensed in the quarter ended September 30,2019. We expect to continue to incur these costs over the next six
reporting quarters, however, we believe they will not have a
significant impact on operating results.
For
the nine months ended September 30, 2019 and 2018, our revenues
from operations were $19,056,000 and $16,142,000, respectively. Net
income for the nine months ended September 30, 2019 was $999,000,
which included a non-cash gain on change in fair value of
derivative liabilities of $2,925,000, as compared to a net income
of $6,069,000 for the nine months ended September 30, 2018.
Significant transaction costs of approximately $5.0 million were
expensed in the nine months ended September 30, 2019, offset by
non-cash gain on derivative liability of $2,925,000 which, along
with increased operating cost, accounted for the $5,070,000 decline
in net income from the prior year.
Recent Developments
Share Exchange
On April 26, 2019 (the “Closing
Date”), we entered into a
Securities Exchange Agreement with each of the former members
(“Members”) of Charlie’s, and certain direct
investors in the Company (“Direct
Investors”), pursuant to
which we acquired all outstanding membership interests of
Charlie’s beneficially owned by the Members in exchange for
the issuance by the Company of units, with such units consisting of
an aggregate of (i) 15,655,538,349 shares of common stock (which
includes the issuance of an aggregate of 1,396,305 shares of a
newly created class of Series B Convertible Preferred Stock, par
value $0.001 per share (“Series B
Preferred”), convertible
into an aggregate of 13,963,047,716 shares of common stock, issued
to certain individuals in lieu of common stock); (ii) 206,249
shares of a newly created class of Series A Convertible Preferred
Stock, par value $0.001 per share (“Series A
Preferred”), convertible
into an aggregate of 4,654,349,239 shares of common stock; and
(iii) warrants to purchase an aggregate of 3,102,899,493 shares of
common stock (the “Investor
Warrants”) (the
“Share Exchange”). As a result of the Share Exchange,
Charlie’s became a wholly owned subsidiary of the
Company.
Immediately prior to, and in connection with, the
Share Exchange, Charlie’s consummated a private offering of
membership interests that resulted in gross proceeds to
Charlie’s of approximately $27.5 million (the
“Charlie’s
Financing”). Katalyst
Securities LLC (“Katalyst”) acted as the sole placement agent in
connection with the Charlie’s Financing pursuant to an
Engagement Letter entered into by and between Katalyst,
Charlie’s and the Company on February 15, 2019, which was
amended on April 16, 2019 (“Amended Engagement
Letter”). As
consideration for its services in connection with the
Charlie’s Financing and Share Exchange, the Company issued to
Katalyst and its designees five-year warrants to purchase an
aggregate of 930,869,848 shares of common stock at a price of
$0.0044313 per share (the “Placement Agent
Warrants”). The Placement
Agent Warrants have substantially the same terms as those set forth
in the Investor Warrants. As additional consideration for advisory
services provided in connection with the Charlie’s Financing
and the Share Exchange, the Company issued an aggregate of
902,661,671 shares of common stock (the “Advisory
Shares”), including to
Scot Cohen, a member of the Company’s Board of Directors,
pursuant to a subscription agreement.
-42-
The
Share Exchange resulted in a change of control of the Company, with
the Members and Direct Investors owning approximately 85.7% of the
Company’s outstanding voting securities immediately after the
Share Exchange, and the Company’s current stockholders
beneficially owning approximately 14.3% of the issued and
outstanding voting securities, which includes the Advisory Shares.
Following the Share Exchange, Brandon Stump and Ryan Stump, the
founders of Charlie’s and the Company’s newly appointed
Chief Executive Officer and Chief Operating Officer, respectively,
held approximately 57% of the Company’s issued and
outstanding voting securities.
Launch of CBD Products
In June 2019, we introduced, through Don Polly,
full-spectrum hemp extract and CBD isolate wellness products across
a variety of formats and with different strengths. Our initial
launch consisted of six vapor, eight tincture and two topical
product variations. The newly released products were launched under
the Pachamama™ brand by way of a licensing agreement between
Don Polly and Charlie’s, entered on April 25, 2019. In the
near term, we expect to expand the hemp-derived CBD-based products
line to include additional CBD isolate products and
Tetrahydrocannabinol (“THC”)- free, broad spectrum hemp extract
products currently in development.
Pachamama™
CBD products are currently available in the U.S., Mexico, U.K. and
Switzerland, and we expect to continue expanding both our domestic
and international distribution efforts.
Filing of Amended and Restated Charter; Automatic Conversion of
Series B Preferred
On June 28, 2019, we amended and restated our
Articles of Incorporation (the “Amended and Restated
Charter”) to (i) change
our corporate name to Charlie’s Holdings, Inc. and (ii)
increase the number of shares authorized as common stock from 7.0
billion to 50.0 billion shares. The Amended and Restated Charter
was approved by our Board of Directors and holders of a majority of
our outstanding voting securities on May 8, 2019, and the Amended
and Restated Charter was filed with the State of Nevada on June 28,2019.
As
a result of the filing of the Amended and Restated Charter and the
increase of our authorized common stock to 50.0 billion shares,
all 1,396,305 outstanding shares of Series B Preferred
automatically converted into a total of 13,963,047,716 shares of
common stock in accordance with the Certificate of
Designations, Preferences and Rights of the Series B Convertible
Preferred Stock.
We
had operating losses of approximately $1,190,000 for the three
months ended September 30, 2019, due, primarily to approximately
$299,000 of stock based compensation costs incurred in connection
with the Share Exchange, a $2.8 million increase in general and
administrative expenses as we grow the business and a decline in
our nicotine-based product sales of $556,000 from the same period
in 2018, offset by an increase in sales from our newly launched CBD
products business of $920,000. For the three months ended September30, 2018, we had operating income of approximately $1,886,000 from
our branded nicotine-based e-cigarette liquid
business.
Revenue
Revenue for the three months ended September 30,2019 increased approximately $367,000, or 7%, to approximately
$5,590,000, as compared to approximately $5,223,000 for same period
last year due to a $556,000 decrease in our nicotine-based product
sales, offset by an increase in sales from our newly launched CBD
wellness products business of $920,000. The decrease in sales in
our nicotine based e-liquid flavor sales is directly related to the
current regulatory and health related news stories surrounding the
vaping industry. The nicotine
based e-liquid sales decline began late in the quarter ended
September 30, 2019 and we expect sales in future quarters to
decline until the rightful regulatory changes have been enacted.
For the period from mid September through mid November 2019 we have
experienced a decline in sales of 75% of our domestic nicotine
based e-liquid sales with little effect on our international
e-liquid sales and CBD product sales.
-43-
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 $340,000, or 16%, to approximately
$2,525,000, or 45% of revenue, for the three months ended September30, 2019, as compared to approximately $2,185,000, or 42% of
revenue, for the same period in 2018. This 3% percent increase in
the cost of revenue is due to an increase in the sales mix to
distributors, marginally lower average wholesale prices, and lower
fixed cost absorption, but was slightly offset by relatively stable
manufacturing costs.
General and Administrative Expenses
For
the three months ended September 30, 2019, total general and
administrative expenses increased approximately $2,800,000 to
$3,567,000 as compared to approximately $767,000 for the same
period in 2018. Costs relating to the completion of our stock
exchange transaction on April 26, 2019 accounted for part of the
$2.8 million increase, including $599,000 of non-cash stock-based
compensation expense and $375,000 of accrued executive bonus
expenses. The remaining $1.8 million increase is primarily due to
professional fees and increased salaries associated with conducting
business as a public company and certain step-up costs related to
new business activities, including the launch of CBD
products.
Sales and Marketing Expenses
For
the three months ended September 30, 2019, total sales and
marketing expenses increased approximately $303,000, or 79%, to
approximately $688,000 as compared to approximately $385,000 for
the same period in 2018, which was primarily due to enhanced
marketing efforts for the launch of our CBD wellness
products.
Income (Loss) from Operations
We
had a net loss from operations of approximately $1,190,000 for the
three months ended September 30, 2019, as compared to net income
from operations of approximately $1,886,000 for the same period in
2018. Net (loss) Income is determined by adjusting income from
operations by the following items:
Gain in fair value of derivative liabilities
For
the three months ended September 30, 2019 and 2018, the gain in
fair value of derivative liabilities was $2,747,000 and $0
respectively. The derivative liability is associated with the
issuance of the Investor Warrants and the Placement Agent Warrants
in connection with the Share Exchange and the gain for the quarter
ended September 30, 2019 reflects the effect of the change in stock
price on the liability associated with the issuance of these
warrants. There were no warrants outstanding on September 30,2018.
Net Income
For
the three months ended September 30, 2019, we had net income of
$1,557,000 as compared to net income of $1,886,000 for the same
period in 2018.
We
had operating losses of approximately $1,926,000 for the nine
months ended September 30, 2019, due, primarily to approximately
$5.0 million of transaction related costs, including costs incurred
in connection with the Share Exchange, but offset by revenue
derived from our branded nicotine-based e-cigarette liquid business
and CBD products. For the nine months ended September 30, 2018, we
had operating income of approximately $6,069,000 from our branded
nicotine-based e-liquid business.
Revenue
Revenue
for the nine months ended September 30, 2019 increased
approximately $2,914,000, or 18%, to approximately $19,056,000, as
compared to approximately $16,142,000 for comparable period in 2018
due to the release of additional e-liquid flavors and formats,
growth in customer base and sales territories and improved traction
with existing customers which accounted for approximately $949,000
of the revenue increase. In addition, in June 2019 we introduced
several CBD product lines which generated approximately $1,942,000
in revenue during the nine months ended September 30, 2019. Even
though our nicotine e-liquid flavored products had an increase in
revenue of $949,000 over the comparable period in 2018, we did
experience a decline in sales during the latter part of the nine
month period ended September 30, 2019 due to the current regulatory
and health related news stories surrounding the vaping industry and
we expect sales in future quarters to decline until permanent
regulatory changes have been enacted. For the period from mid
September through mid November 2019 we have experienced a decline
in sales of 75% of our domestic nicotine based e-liquid sales with
little effect on our international e-liquid sales and CBD product
sales.
-45-
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 $1,716,000, or 27%, to approximately
$8,121,000, or 43% of revenue, for the nine months ended September30, 2019, as compared to approximately $6,405,000, or 40% of
revenue, for the same period in 2018. This 3% percent increase in
the cost of revenue is due to an increase in the sales mix to
distributors, marginally lower average wholesale prices, and lower
fixed cost absorption, but was slightly offset by relatively stable
manufacturing costs.
General and Administrative Expenses
For
the nine months ended September 30, 2019, total general and
administrative expenses increased approximately $8,992,000 to
approximately $11,255,000 as compared to approximately $2,263,000
for the same period in 2018. Costs relating to the completion of
the Share Exchange on April 26, 2019 accounted for a significant
part of the $9.0 million increase, including $3.7 million of
non-cash stock-based compensation and $1.7 million of employee
bonuses. The remaining $3.6 million increase is primarily due to
professional fees and increased salaries associated with conducting
business as a public company and certain step-up costs related to
new business activities, including the launch of CBD
products.
Sales and Marketing Expenses
For
the nine months ended September 30, 2019, total sales and marketing
expenses increased approximately $201,000, or 14%, to approximately
$1,606,000 as compared to approximately $1,405,000 for the same
period in 2018, which was primarily due to enhanced marketing
efforts for the launch of our CBD wellness
products.
Income (Loss) from Operations
We
had a net loss from operations of approximately $1,926,000 for the
nine months ended September 30, 2019 as compared to net income from
operations of approximately $6,069,000 for the same period in 2018.
Net (loss) Income is determined by adjusting income from operations
by the following items:
Change in fair value of derivative liabilities
For
the nine months ended September 30, 2019 and 2018, the gain in fair
value of derivative liabilities was $2,925,000 and $0 respectively.
The derivative liability is associated with the issuance of the
Investor Warrants and the Placement Agent Warrants in connection
with the Share Exchange and the gain for the nine months ended
September 30, 2019 reflects the effect of the change in stock price
on the liability associated with the issuance of these warrants.
There were no warrants outstanding on September 30,2018.
Net Income
For
the nine months ended September 30, 2019, we had a net income of
$999,000 as compared to net income of $6,069,000 for the same
period in 2018.
Effects of Inflation
Inflation
has not had a material impact on our business.
Liquidity and Capital Resources
As of September 30, 2019, we had working capital
of approximately $1,460,000, which consisted of current assets of
approximately $8,648,000 and current liabilities of approximately
$7,188,000. This compares to working capital of approximately
$704,000 at December 31, 2018. The current liabilities, as
presented in the balance sheet at September 30, 2019 included
elsewhere in this prospectus, primarily include approximately
$1,936,000 of accounts payable and accrued expenses, approximately
$158,000 of deferred revenue associated with product shipped but
not yet received by customers (see our revenue recognition policy
under the “Critical Accounting
Policies” section below),
approximately $257,000 of lease liabilities and $4,837,000 of
derivative liability associated with the Member
Warrants.
Our
cash and cash equivalents balance at September 30, 2019 was
approximately $4,166,000.
-46-
For the nine months ended September 30, 2019 we
used cash from operations of $524,000, as compared to generating cash of
$5,698,000 for the same period in
2018. This decline in the cash generated from operations is due
primarily to an increase in accounts receivable, inventories and
prepaid expenses.
For the nine months ended September 30, 2019 we
used cash for investment activities of $365,000 as compared
to $12,000 for the same period
in 2018. The cash used for investment activities is primarily used
for the purchase of fixed assets and certain leasehold improvements
for the buildout of our Don Polly
operation.
For
the nine months ended September 30, 2019 we generated cash from
financing activities, of $4,751,000 as compared to a use of cash of
$5,352,000 for the same period in 2018. In 2019, we generated
financing cash from the Charlie’s Financing, which was offset
by Member distributions to the former Members of Charlie’s,
as compared to the 2018 period during which we used cash for Member
distributions to the former Members of Charlie’s. The
Charlie’s Member distributions were all prior to or part of
the Share Exchange and no further distributions will be made as
Charlie’s is now a wholly-owned subsidiary of the
Company.
Our
plans and growth depend on our ability to increase revenues and
continue our business development efforts. We currently anticipate
that our current cash position will be enough to meet our working
capital requirements to continue our sales and marketing efforts
for at least 12 months. If in the future our plans or assumptions
change or prove to be inaccurate, or there is a significant change
in the regulatory environment, we may need to raise additional
funds through public or private debt or equity offerings,
financings, corporate collaborations, or other
means.
Off-Balance Sheet Arrangements
The
Company has no off-balance sheet arrangements other than operating
lease commitments.
-47-
Basis of Presentation
The unaudited interim condensed consolidated
financial statements contained within this prospectus and the
disclosure in this Management’s Discussion and Analysis of
Financial Condition and Results of Operations with respect to the
period ended September 30, 2019 and 2018 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 accounting principles generally accepted in the
United States of America (“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
prospectus not misleading.
Amounts
related to disclosure of December 31, 2018 balances within the
interim condensed consolidated financial statements were derived
from the audited 2018 financial statements and notes thereto of
Charlie’s. These financial statements and the notes hereto
should be read in conjunction with the audited December 31, 2018
financial statements and notes thereto contained herein. In the
opinion of the Company, all adjustments, including normal recurring
adjustments necessary to present fairly the financial position,
results of operations, and cash flows of the Company for the
interim period have been included. The results of operations for
the interim period are not necessarily indicative of the results
for any subsequent interim period or for the full
year.
The
Share Exchange is accounted for as a reverse recapitalization under
U.S. GAAP because the primary assets of the Company were nominal
following the close of the Share Exchange. Charlie’s was
determined to be the accounting acquirer based upon the terms of
the Share Exchange and other factors including: (i) Charlie’s
stockholders and other persons holding securities convertible,
exercisable or exchangeable directly or indirectly for
Charlie’s membership units now own approximately 49%, on a
fully diluted basis, of the Company’s outstanding securities
immediately following the effective time of the Share Exchange,
(ii) individuals associated with Charlie’s now hold a
majority of the seats on the Company’s Board of Directors and
(iii) Charlie’s management holds all key positions in the
management of the combined Company.
The
disclosure in this prospectus with respect to the period ended
September 30, 2019 and 2018, including the unaudited
condensed consolidated financial statements contained herein, are
based on Charlie’s historical financial statements and the
Company’s financial activity beginning April 26, 2019, as
adjusted, to give effect to Charlie’s reverse
recapitalization of the Company and the Charlie’s Financing.
In addition, from the period April 26, 2019 until June 30, 2019,
there were minimal costs and revenue associated with the Bazi
product line which are included in the interim condensed
consolidated financial statements. We do not intend to continue to
produce and sell the Bazi product line, and these costs and
expenses are nominal and will continue to be so in the future. The
operating results of Don Polly for the quarter ended
September 30, 2019 are also included.
Historical
financial information presented prior to April 26, 2019 is that of
Charlie’s only, while financial information presented after
April 26, 2019 includes Charlie’s, Don Polly, Bazi Drinks and
the Company, which includes the transactions associated with the
Share Exchange and Charlie’s Financing completed prior to the
Share Exchange, along with ongoing corporate costs.
Critical Accounting Policies
Included
below is a discussion of critical accounting policies used in the
preparation of our financial statements. While all these
significant accounting policies impact our financial condition and
results of operations, we view certain of these policies as
critical. Policies determined to be critical are those policies
that have the most significant impact on our financial statements
and require management to use a greater degree of judgment and
estimates. Actual results may differ from those
estimates.
We
believe that given current facts and circumstances, it is unlikely
that applying any other reasonable judgments or estimate
methodologies would cause a material effect on our consolidated
results of operations, financial position or liquidity for the
periods presented herein.
The
accounting policies identified as critical are as
follows:
-48-
Revenue Recognition
The Company recognizes revenues in accordance with
Accounting Standards Codification (“ASC ”) 606 – Contracts with Customers.
Revenues are generated from contracts with customers that consist
of sales to retailers and distributors. Contracts with customers
are generally short term in nature with the delivery of product as
a single performance obligation. Revenue from the sale of product
is recognized at the point in time when the single performance
obligation has been satisfied and control of the product has
transferred to the customer. In evaluating the timing of the
transfer of control of products to customers, The Company considers
several indicators, including significant risks and rewards of
products, the right to payment, and the legal title of the
products. Based on the assessment of control indicators, sales are
generally recognized when products are received by customers.
Shipping generally occurs prior to the transfer of control to the
customer and is therefore accounted for as a fulfillment expense.
In circumstances where shipping and handling activities occur after
the customer has obtained control of the product, the Company has
elected to account for shipping and handling activities as a
fulfillment cost rather than an additional promised service.
Contract durations are generally less than one year, and therefore
costs paid to obtain contracts, which generally consist of sales
commissions, are recognized as expenses in the period incurred.
Revenue is measured by the transaction price, which is defined as
the amount of consideration expected to be received in exchange for
providing goods to customers. The transaction price is adjusted for
estimates of known or expected variable consideration, which
includes refunds and returns as well as incentive offers and
promotional discounts on current orders. Sales returns are
generally not material to the financial statements, and do not
comprise a significant portion of variable consideration. Estimates
for sales returns are based on, among other things, an assessment
of historical trends, information from customers, and anticipated
returns related to current sales activity. These estimates are
established in the period of sale and reduce revenue in the period
of the sale. Variable consideration related to incentive offers and
promotional programs are recorded as a reduction to revenue based
on amounts the Company expects to collect. Estimates are regularly
updated and the impact of any adjustments are recognized in the
period the adjustments are identified. In many cases, key sales
terms such as pricing and quantities ordered are established at the
time an order is placed and incentives have very short-term
durations.
Amounts
billed and due from customers are short term in nature and are
classified as receivables since payments are unconditional and only
the passage of time related to credit terms is required before
payments are due. The Company does not grant payment financing
terms greater than one year. Payments received in advance of
revenue recognition are recorded as deferred
revenue.
Accounts Receivable
Accounts
receivable is recorded at the invoiced amount and does not bear
interest. We determine the allowance for doubtful accounts by
regularly evaluating individual customer receivables and
considering a customer’s financial condition, credit history
and current economic conditions and set up an allowance for
doubtful accounts when collection is uncertain. Customers’
accounts are written off against the allowance when all attempts to
collect have been exhausted. Recoveries of accounts receivable
previously written off are recorded as income when received. As of
September 30, 2019, and December 31, 2018, the allowance for bad
debt totaled $379,000 and $151,000, respectively. We determine the
allowance for customer returns by evaluating historical trends in
customer refunds as well as changes in the regulatory environment
that could affect the future salability of certain products.
As of September 30, 2019 and December 31, 2018, the allowance for
customer returns totaled $346,000 and $0,
respectively.
Inventories
Inventories
primarily consist of finished goods and are stated at the lower of
cost (determined by the average cost method) or net realizable
value. We calculate estimates of excess and obsolete inventories
determined primarily by reviewing inventory on hand, historical
sales activity, industry trends and expected net realizable value.
As of September 30, 2019 and December 31, 2018, the reserve for
excess and obsolete inventories totaled $66,000 and $74,000,
respectively.
Stock-Based Compensation
We
account for all stock-based compensation using a fair value-based
method. The fair value of financial instruments granted to
employees is estimated on the date of the grant using the
Black-Scholes option-pricing model and the related stock-based
compensation expense is recognized over the vesting period during
which an employee is required to provide service in exchange for
the award. The fair value financial instruments granted to
non-employees is measured and expensed as the options
vest.
-49-
Income taxes
Income
taxes are computed under the liability method. This method requires
the recognition of deferred tax assets and liabilities for
temporary differences between the financial reporting basis and the
tax basis of our assets and liabilities. The impact on deferred
taxes of changes in tax rates and laws, if any, are applied to the
years during which temporary differences are expected to be settled
and are reflected in the consolidated financial statements in the
period of enactment. A valuation allowance is recorded when it is
more likely than not that some of the deferred tax assets will not
be realized.
Financial statement
effects of a tax position are initially recognized when it is more
likely than not, based on the technical merits, that the position
will be sustained upon examination by a taxing authority. A tax
position that meets the more-likely-than-not recognition threshold
is initially and subsequently measured as the largest amount of tax
benefit that meets the more-likely-than-not threshold of being
realized upon ultimate settlement with a taxing authority. We
recognize potential accrued interest and penalties related to
unrecognized tax benefits as income tax expense.
Charlie’s Holdings, Inc. (Formerly True Drinks Holdings,
Inc.)
As discussed in detail in
“Prospectus Summary- The Share
Exchange” the Company
entered into a Securities Exchange Agreement with each of the
former members of Charlie’s, and certain direct investors in
the Company, pursuant to which the Company acquired all outstanding
membership interests of Charlie’s beneficially owned by its
members in exchange for Company securities (the
“Share Exchange ”). As a result, Charlie’s became a
wholly owned subsidiary of the Company. Since the date of the
Share Exchange, the Company’s primary business is the
development, marketing and distribution of high-quality
nicotine-based and CBD-based vapor products. The Company now
distributes its vapor products both domestically and
internationally through select distributors, specialty retailers
and third-party online resellers. The information in this section is for historical
purposes only, and is not an accurate description of the
company’s financial condition and results of operations
following the share exchange.
-50-
Net Sales
Net
sales for the year ended December 31, 2018 were $1,947,052 compared
to $3,823,334 during the same period in 2017, a decrease of 49.1%.
This decrease is the result of management’s decision to cease
sales of AquaBall®, with all remaining AquaBall®
inventory being sold in the quarter ending June 30,2018.
The
percentage that each product category represented of our net sales
is as follows:
During
the year ended December 31, 2018, the Company terminated the
Bottling Agreement and ceased production of AquaBall®. As a
result, the Company’s operations have been reduced.
Accordingly, total sales for the year ended December 31, 2018 are
not indicative of future sales or results, and will be
substantially lower in the current fiscal year compared to the year
ended December 31, 2018. Specifically, we do not anticipate
material revenue subsequent to the year ended December 31, 2018,
relative to the revenue recognized in the year ended December 31,2018, in the absence of the consummation of a
transaction.
Gross Profit and Gross Margin
Gross profit
for the year ended December 31, 2018 was $718,604 as compared
to a gross profit of $771,190 for the year ended December 31,2017. Gross profit as a percentage of revenue (gross margin)
during the year ended December 31, 2018 was 36.9%, compared to
20.2% for the same period in 2017. This increase in gross profit
margin was a result of the sale of all remaining inventory of
AquaBall to Red Beard after management’s decision to cease
sales of AquaBall®. This sale was priced at
AquaBall®’s regular sales price, thus resulting in
greater gross margin.
Sales, Marketing, General and Administrative Expense
Selling,
marketing, general and administrative expense was $11,409,184, or
586% of net sales, for the year ended December 31, 2018, as
compared to $10,699,331, or 280% of net sales for the year ended
December 31, 2017. This year over year increase of $709,853 was
primarily the result of the cessation of sales of AquaBall®
Naturally Flavored Water. Approximately $10.05 million of the total
expense for 2018 was related to the recording of the fair value of
stock issuable to a related party. These results are not indicative
of future selling, general and administrative expense, which
expense is currently anticipated to be substantially lower. The
Company currently has one employee, and currently anticipates
limited expenditures in the immediate future, consisting of those
costs necessary to maintain its current operations and to pay costs
and expense necessary to comply with the reporting requirements
under the Exchange Act.
Other
income for the year ended December 31, 2018 was $6,811,281, as
compared to $1,995,567 for the year ended December 31, 2017. We
recorded a gain on the change in fair value of derivative
liabilities of $8,883,383 for the year ended December 31, 2018
compared to a gain of $2,331,888 for the year ended December 31,2017. Also, in 2018, we recorded an impairment charge of $1,898,000
to goodwill compared to an impairment charge of $130,000 on our
spherical bottle patent in 2017.
Net Loss
Our
net loss for the year ended December 31, 2018 was $3,879,299 as
compared to a net loss of $12,447,143 for the year ended December31, 2017. This year-over-year decrease in loss of $8,567,844
consists of a decrease in operating loss of approximately
$3,752,130 due to management’s decision to cease production
and sales of AquaBall® and the corresponding reduction in
personnel, as well as selling, general and administrative expense
combined with the net effects of recording non-cash items related
to the issuance of promissory notes and Common Stock related to the
Niagara Settlement. On a basic and diluted per share basis, our
loss was $0.01 per share for the year ended December 31, 2018, as
compared to loss of $0.07 per share for the year ended December 31,2017. We expect to continue to incur a net loss in subsequent
periods throughout fiscal 2019 in the absence of the consummation
of a transaction.
Liquidity and Capital Resources
Our
auditors have included a paragraph in their report on our
consolidated financial statements, included in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2018, indicating
that there is substantial doubt as to the ability of the Company to
continue as a going concern. The accompanying condensed
consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States
of America, which contemplates continuation of the Company as a
going concern. For the three months ended March 31, 2019, the
Company had net loss of $1,038,756, negative working capital of
$4,077,881, and an accumulated deficit of $53,159,404.
Although,
during the year ended December 31, 2018 and the three months ended
March 31, 2019, the Company raised approximately $1.0 million from
financing activities, including the sale of certain Senior Secured
Promissory Notes and the Food Labs Note, and received approximately
$5.6 million in net proceeds as a result of the Share Exchange in
April 2019, additional capital is necessary to continue
operations.
The
accompanying condensed consolidated financial statements do not
include any adjustments that will result in the event the Company
is unsuccessful in securing the capital necessary to execute our
business plan.
The
Company has historically financed its operations through sales of
equity and debt securities, and, to a lesser extent, cash flow
provided by sales of its products. Despite recent sales of
preferred stock and the issuance of certain Senior Secured
Promissory Notes, the Food Labs Note and the Red Beard LOC, as well
as the Company’s receipt of approximately $5.6 million as a
result of the Share Exchange, funds generated from sales of our
securities and cash flow provided by sales are insufficient to fund
our operating requirements for the next twelve months. As a result,
we require additional capital to continue operating as a going
concern. No assurances can be given that we will be
successful. In the event we are unable to obtain additional
financing, we will not be able to fund our working capital
requirements, and therefore will be unable to continue as a going
concern.
-52-
Capital Raising Activities
Secured Note Financing.
On July 26, 2017, we commenced
an offering of Senior Secured Promissory Notes (the “
Secured
Notes ”) in the aggregate principal amount of up
to $1.5 million to certain accredited investors (the “
Secured
Note Financing
”). The amount available was
subsequently raised to $2.3 million. As additional consideration
for participating in the Secured Note Financing, investors received
five-year warrants, exercisable for $0.15 per share, to purchase
that number of shares of our common stock equal to 50% of the principal amount of the
Secured Notes purchased by the investor, divided by $0.15 per share
(the “ Warrants ”). We offered and sold Secured Notes in the
aggregate principal amount of $2,465,000 and issued Warrants to
purchase up to 8.2 million shares of common stock
to participating
investors.
The Secured Notes (i) bore interest at a rate of
8% per annum, (ii) had a maturity date of 1.5 years from the date
of issuance, and (iii) were subject to a pre-payment and change in
control premium of 125% of the principal amount of the Secured
Notes at the time of pre-payment or change in control, as the case
may be. To secure the Company’s obligations under the Secured
Notes, the Company granted to participating investors a continuing
security interest in substantially all of the Company’s
assets pursuant to the terms and conditions of a Security Agreement
(the “ Security Agreement
”). Subsequent to the quarter
ended March 31, 2019, on April 26, 2019, Red Beard purchased the
Secured Notes, and thereafter converted all amounts due under the
Secured Notes into shares of common stock, thereby terminating the Secured
Notes.
2018 Note Issuance.
Subsequent to the three months ended
March 31, 2018, in connection with the
Settlement with Niagara, and in order to make the Cash Payment, the
Company issued to Red Beard a senior secured convertible promissory
note (the “ Red
Beard Note ”) in the
principal amount of $2.25 million, which was subsequently reduced
to $813,887 in connection with the sale to Red Beard of all of the
Company’s remaining AquaBall® inventory. The Red Beard Note
accrued interest at a rate of 5% per annum. Pursuant to the terms
of the Red Beard Note, Red Beard had the right, at its sole option,
to convert the outstanding balance due into that number of fully
paid and non-assessable shares of the Company’s common
stock equal
to the outstanding balance divided by 0.005 (the “
Conversion
Option ”);
provided,
however , that the Company had
the right, at its sole option, to pay all or a portion of the
accrued and unpaid interest due and payable to Red Beard upon its
exercise of the Conversion Option in cash. Pursuant to the terms of
the Red Beard Note, such Conversion Option was not to be
exercisable unless and until such time as the Company has amended
its Articles of Incorporation to increase the number of authorized
shares of common stock from 300.0 million to
at least 2.0 billion, which
occurred on November 15, 2018. On April 26, 2019, in connection
with the consummation of the Share Exchange, Red Beard elected to
convert all amounts due under the Red Beard Note into shares
of common stock.
Food Labs
Note. On September 18, 2018,
the Company entered into an agreement with Food Labs, pursuant to
which the Company issued to Food Labs a promissory note in the
principal amount of $50,000. The Food Labs Note (i) accrued
interest at a rate of 5% per annum, (ii) included an additional
lender’s fee equal to $500, or 1% of the principal amount,
and (iii) was scheduled to mature on December 31, 2019. As
disclosed above, on April 26, 2019, in connection with the Share
Exchange, Red Beard purchased the Food Labs Note from Food Labs,
and thereafter converted all amounts due under the Food Labs Note
into shares of common stock,
resulting in the termination of the Food Labs
Note.
Red Beard
Line-of-Credit. On November 19,2018, the Company entered into the Red Beard LOC with Red Beard,
effective October 25, 2018, pursuant to which the Company could
borrow up to $250,000 ; provided, however
, that Red Beard could, in its sole
discretion, decline to provide additional advances under the Red
Beard LOC upon written notice the Company of its intent to decline
to make such advances. Interest accrued on the outstanding
principal of the Red Beard LOC at a rate of 8% per annum;
provided,
however , upon the occurrence
of an Event of Default, as defined in the Red Beard LOC, the
accrual of interest would have increased to a rate of 10% per
annum. Prior to the Maturity Date, Red Beard had the right, at its
sole option, to convert the Outstanding Balance due under the Red
Beard LOC into that number of shares of common stock
equal to the Outstanding Balance
divided by $0.005, which it elected to do on April 26, 2019 in
connection with the consummation of the Share
Exchange.
The Share
Exchange. On April 26, 2019,
subsequent to the quarter ended March 31, 2019, the Company
received approximately $5.6 million in net proceeds as a result of
the Share Exchange.
Charlie’s
had operating income of approximately $7,199,000 for the year ended
December 31, 2018. The years’ operating income was
derived from its branded nicotine based e-cigarette liquid
business. For the year ended December 31, 2017,
Charlie’s had operating income of approximately $3,527,000
from its branded nicotine e-cigarette liquid business. The details
of the operating income are as follows:
Revenue
Revenue
for the twelve months ended December 31, 2018 increased
approximately $8,607,000, or 70.4%, to approximately $20,841,000,
as compared to approximately $12,234,000 for same period last year
due to introduction of new e-cigarette liquids and increasing the
customer base and sales territories.
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 $3,040,000, or 27.0%, to approximately
$8,515,000, or 40.9% of revenue, for the year ended December 31,2018, as compared to approximately $5,475,000, or 44.8% of revenue,
for the same period in 2017. This 3.9% percent decrease in the cost
of revenue is due to lower production costs on increased volume and
the addition of more profitable customers.
Sales and Marketing Expenses
For
the year ended December 31, 2018, total sales and marketing
expenses increased approximately $1,042,000, or 55.9%, to
approximately $2,904,000 as compared to approximately $1,862,000
for the same period in 2017. The increase was primarily due to
increased salary expense for the addition of personnel and
increased commission costs on the increased sales.
Product Development
For
the year ended December 31, 2018, product development was
approximately $95,000 as compared to approximately $116,000 for the
same period in 2017. The decrease in expense of $21,000 is due
primarily lower product registration activity in 2018.
General and Administrative Expenses
For
the year ended December 31, 2018, total general and administrative
expenses increased approximately $604,000, or 39.7%, to
approximately $2,127,000 as compared to approximately $1,523,000
for the same period in 2017, which was primarily due to increased
salary expense for the addition of personnel and professional fees
associated with exploring strategic alternatives.
-54-
Income from Operations
Charlie’s had
net income from operations of approximately $7,199,000 for the year
ended December 31, 2018 as compared to net income from operations
of approximately $3,257,000 for the same period in 2017. Net Income
is determined by adjusting income from operations by the following
items:
Other Income
For the
years ended December 31, 2018 and 2017, other income was $453 and
$9,410, respectively.
Net Income
For the
year ended December 31, 2018, Charlie’s had net income of
$7,200,000 as compared to $3,266,000 for the same period in 2017.
Charlie’s is a limited liability company and this net income
is before tax as taxes are the responsibility to the members of
Charlie’s.
Effects of Inflation
Inflation has not
had a material impact on the Charlie’s business.
Liquidity and Capital Resources
As of
December 31, 2018, Charlie’s had working capital of
approximately $704,000, which consisted of current assets of
approximately $2,101,000 and current liabilities of approximately
$1,396,000. This compares to working capital of approximately
$1,459,000 at December 31, 2017. The current liabilities as
presented in the balance sheet at December 31, 2018 primarily
include approximately $1,217,000 of accounts payable and accrued
expenses and approximately $180,000 of deferred revenue associated
with product shipped but not yet received by customers (see our
revenue recognition policy below in the critical accounting policy
paragraph).
Our
cash and cash equivalents balance at December 31, 2018 was
approximately $305,000.
For the
year ended December 31, 2018 we generated cash from operations of
$7,784,000 as compared to $3,021,000 for the same period in
2017.
For the
year ended December 31,2018 we used cash for financing activities
(primarily LLC member distributions of $8,119,000 as compared to
$2,557,000 for the same period in 2017.
Charlie’s
plans and growth depend on its ability to increase revenues and
continue its business development efforts. Charlie’s
currently anticipates that its current cash position will be enough
to meet its working capital requirements to continue our sales and
marketing efforts for at least 12 months. If in the future
Charlie’s plans or assumptions change or prove to be
inaccurate, we may need to raise additional funds through public or
private debt or equity offerings, financings, corporate
collaborations, or other means.
The following sets forth certain information
regarding each of our directors and executive officers as of the
date of this prospectus.
Name
Age
Position
Brandon Stump (1)
33
Chief Executive Officer and Chairman (Principal Executive
Officer)
David Allen (2)
64
Chief Financial Officer and Secretary (Principal Financial
Officer)
Ryan Stump (3)
30
Chief Operating Officer and Director
Adam Mirkovich (4)
34
Chief Information Officer
Scot Cohen
50
Director
Keith Stump (5)
58
Director
Jeffrey Fox (6)
56
Director
(1)
Mr.
Stump was appointed to serve as the Company’s Chief Executive
Officer and as a director on the Board on April 26, 2019 in
connection with the Share Exchange, effective immediately following
Mr. Van Boerum’s resignation as Principal Executive Officer.
The Company’s Board appointed Brandon Stump as Chairman on
May 8, 2019.
(2)
Mr.
Allen was appointed to serve as the Company’s Chief Financial
Officer on April 26, 2019 in connection with the Share Exchange,
effective immediately following Mr. Van Boerum’s resignation
as Principal Financial Officer.
(3)
Mr.
Stump was appointed to serve as the Company’s Chief Operating
Officer and as a director on the Board on April 26, 2019 in
connection with the Share Exchange.
(4)
Mr.
Mirkovich was appointed to serve as the Company’s Chief
Information Officer on May 20, 2019.
Brandon
Stump and Ryan Stump are brothers, and Keith Stump is their father.
Other than with the respect to the Stumps, there are no familial
relationships between any of the Company’s executive officers
and directors listed above.
The
following biographical information regarding the foregoing
directors and officers of the Company is presented
below:
Brandon Stump, Chief
Executive Officer and Chairman. Mr. Stump was appointed as Chief Executive Officer
of the Company on April 26, 2019 in connection with the Share
Exchange. Mr. Stump is a co-founder of Charlie’s, and has
served as the Chief Executive Officer of Charlie’s since its
inception in 2014. Prior to co-founding Charlie’s, Mr.
Stump co-founded his first business, the Ohio House in 2011, with
his brother Ryan Stump. Since then, he has gone on to co-found both
The Chadwick House and Buckeye Recovery Network, both established
in 2017, as well as The Mend California, established in 2018. These
programs provide a continuum of care and services to men and women
from the country promoting emotional, physical and spiritual
development.
As
a co-founder of Charlie’s, the Board of Directors believes
that Mr. Stump’s substantial entrepreneurial, marketing,
sales and industry experience provide the Board with valuable
expertise that will assist the Company in continuing to grow its
revenue and to enter into new markets for its
products.
-56-
David Allen, Chief
Financial Officer and Secretary. Mr. Allen was appointed as the
Company’s Chief Financial Officer on April 26, 2019, upon
consummation of the Share Exchange. Mr. Allen brings over 22 years
of experience as the Chief Financial Officer of public companies.
From September 2018 to May 2019, Mr. Allen served as Chief
Financial Officer of Iconic Brands, Inc. (OTCQB: ICNB). Prior to
that, from December 2014 to January 2018, Mr. Allen served as the
Chief Financial Officer of WPCS International, Inc., a design-build
engineering firm focused on the deployment of wireless networks and
related services. WPCS International was listed on Nasdaq, and Mr.
Allen oversaw its financial reporting obligations and SEC
compliance. From 2004 to 2017, Mr. Allen served as Chief Financial
Officer of Bailey’s Express, Inc., a privately held trucking
corporation, which filed for Chapter 11 bankruptcy in July 2017.
Mr. Allen currently serves as the Chapter 11 Plan Administrator for
the bankruptcy case. From June 2006 to June 2013, Mr. Allen served
as the Chief Financial Officer and Executive Vice President of
Administration at Converted Organics, Inc., a company organized to
convert food waste into organic fertilizer. At Converted Organics,
he was responsible for SEC reporting, audit, insurance and taxes.
In June 2019, Mr. Allen was appointed to the Board of Directors and
serves as audit committee chairman of MariMed, Inc. (OTC:MRMD). Mr.
Allen is currently an Assistant Professor of Accounting at Southern
Connecticut State University, a position he has held since 2017,
and for the 12 years prior to that he was an Adjunct Professor of
Accounting at SCSU and Western Connecticut State University. Mr.
Allen is a licensed CPA and holds a Bachelor’s Degree in
Accounting and a Master’s Degree in Taxation from Bentley
College.
Ryan Stump, Chief Operating
Officer and Director. Mr. Stump was appointed as the
Company’s Chief Marketing Officer on April 26, 2019 in
connection with the Share Exchange. Mr. Stump has served as the Chief Operating Officer of
Charlie’s since 2014, during which time he has been
responsible for all global operations of Charlie’s. Prior to
joining Charlie’s, Mr. Stump worked as an Associate Territory
Manager and then as a Territory Manager for ConMed, a medical sales
device company, from 2010 to 2013. Mr. Stump also co-founded and
continues to be engaged with multiple companies, including The Ohio
House since 2011, the Buckeye Recovery Network since 2017, and The
Mend California since 2018. Mr. Stump earned a B.S. and B.A. in
Sports Marketing and Marketing from Duquesne
University.
The
Board of Directors believes that Mr. Stump’s experience
operating high growth companies, as well as entrepreneurial
experience, will be valuable to the Board as it manages the
Company’s anticipated continued growth.
Adam Mirkovich, Chief
Information Officer. Mr. Mirkovich was appointed as the
Company’s Chief Information Officer on May 20, 2019. Mr.
Mirkovich has over a decade of
experience managing supply chains for consumer products. Mr.
Mirkovich has served as an independent management
consultant specializing in building and optimizing value
chains for startups and growth stage companies in the beverage,
nicotine vape, and nutritional supplements industries since 2013.
Prior to joining the Company, Mr. Mirkovich served as the Chief
Operating Officer of Orchid Ventures, Inc. (CSE:ORCD), a
multi-state premium cannabis vape company, from September 2018 to
April 2019. From December 2014 to February 2016, Mr. Mirkovich
served as the Director of Supply Chain and Operations at Space Jam
Juice, LLC, a distributor of premium vapor products. From November
2010 to April 2013, Mr. Mirkovich served as the Product Lifecycle
Management (“PLM”) Program Manager for Niagara Bottling,
LLC, a leading bottled water manufacturer. While there, he led the
product revision, introduction, and discontinuance practices for
customers’ private labeled water, flavored, and carbonated
beverages. Prior to his role in PLM Management, Mr. Mirkovich
served as a member of the Supply Chain Logistics team at Niagara
Bottling, providing strategic support of company expansion
activities and tactical support of purchasing, production
planning, and multi-region logistics in North American
operations. Mr. Mirkovich earned a Bachelor of Science degree in
Business Administration and Economics from Chapman
University.
Scot
Cohen, Director. Mr.
Cohen was appointed to the Board in March 2013 and is the Founder
and Managing Partner of V3 Capital Partners, a private investment
firm focused on early-stage companies primarily in the consumer
products industry, and Co-Manager of Red Fortune Fund, aprivate
equity fund based in Hong Kong. Mr. Cohen also is the Founder of
Petro River Oil, LLC and Chairman of Petro River Oil Corp. (OTCBB:
PTRC), a publicly traded oil and gas producer with assets in Kansas
and Oklahoma, and Petro Spring, a global oil and gas technology
solutions provider. Prior to creating V3 Capital Partners, Mr.
Cohen was the Founder and Managing Partner at Iroquois Capital
Opportunity Fund, a special situations private equity investment
fund, and a Co-Founder of Iroquois Capital, a hedge fund with
investments in small and micro-cap private and public companies.
Mr. Cohen currently serves as a director on the Board of Directors
of Wrap Technologies, Inc. (NASDAQ: WRTC), and is active in
philanthropic activities with numerous charities including the
Jewish Enrichment Council. Mr. Cohen received a Bachelor of Science
degree from Ohio University in 1991.
The
Board of Directors believes Mr. Cohen’s success with multiple
private investment firms, his extensive contacts within the
investment community, and his financial expertise will assist the
Company’s efforts to expand and to implement its business
plan.
-57-
Keith Stump,
Director. Mr. Stump has over 35 years of sales and
management experience. He joined Charlie’s in January 2018 as a
Strategic Advisor, where he has predominantly focused on sales,
marketing and scaling the business, including through
organizational alignments, process improvement,
leadership/management training and development. Prior to joining
Charlie’s, Mr. Stump
served as a partner and Vice President of Sales in Blue
Technologies, Inc., an office technology and Managed IT Service
provider headquartered in Cleveland, Ohio, which he co-founded in
1995. While at Blue Technologies, Inc., Mr. Stump was responsible
for the sales performance of the company’s five divisions,
along with operational oversight. His duties included P&L
responsibility for all product divisions, leadership training and
development, new product and service offerings, enterprise account
selling, amongst other duties. Mr. Stump was instrumental in
helping Blue Technologies, Inc. become one of the Top 10 Konica
Minolta providers in the country, as well as one of the Top 75
Office Technologies Dealers in the United States. Mr. Stump serves
on several not-for-profit boards, which serve those in recovery
from addiction and developmental disabilities.
The
Board of Directors believes that Mr. Stump’s sales,
marketing, management experience and industry experience, as well
as entrepreneurial experience, will be valuable to the Board as it
manages the Company’s anticipated continued
growth.
Jeffrey
Fox, Director. Mr. Fox has been
a leading business strategist, brand marketing authority and
general management executive for some of the world's largest
restaurant and consumer companies including roles as Chief Brand
& Concept Officer for Pizza Hut, Co-founder of Collider LLC, a
cultural marketing strategy firm, Managing Director of the
California office of advertising agency Foote, Cone and Belding
(FCB), various positions with the Yum! Brands and within Sony's
interactive and PlayStation video game divisions, and Hill &
Knowlton Public Relations. Jeff is currently a member of two board
of directors -- Cicis Pizza and Flix Brewhouse. Jeff holds a
bachelor's degree in Journalism from San Diego State University and
received a master's degree in Mass Communications from California
State University, Northridge.
The Board of
Directors believes that Mr. Fox’s strong experience in
brand building across several diverse Fortune 100 consumer product
companies will be significantly valuable to the Company as it
continues to rapidly grow its product offerings and launch new
brands and products around the world.
Other
than as described above, there have been no events under any
bankruptcy act, no criminal proceedings and no judgments or
injunctions material to the evaluation of the ability and integrity
of any director or nominee set forth above during the past ten
years.
Subsequent to
the year ended December 31, 2018, and effective April 26, 2019 upon
consummation of the Share Exchange, Ms. Cappello and Messrs. Greco
and LeVecke (collectively, the “Former Directors”) resigned from
their positions as directors on the Company’s Board, leaving
Messrs. Sherman and Cohen as the remaining directors. In addition,
Ryan and Brandon Stump were appointed as new directors immediately
after the resignations of the Former Directors. Certain disclosure which follows regarding
corporate governance refers to the Company’s Board and
corporate governance policies and procedures prior to the
resignation of the Former Directors, and does not reflect the
Company’s corporate governance policies and procedures
subsequent to such resignations.
Board of Directors;
Attendance at
Meetings
The Board held five meetings
and acted by unanimous written consent three times
during the year ended December 31, 2019. Each director attended at
least 75% of Board meetings during the year ended December 31,2019. We have no formal policy with respect to the attendance of
Board members at annual meetings of shareholders, but encourage all
incumbent directors and director nominees to attend each annual
meeting of shareholders.
Independent Directors
The
Board has determined that Messrs. Cohen and Fox may be considered
independent directors as defined by the rules and regulations of
the Nasdaq Stock Market.
In addition, the Board has determined that Mr. Cohen
satisfies the definition of an “audit committee financial
expert” under SEC rules and regulations. This designation
does not impose any duties, obligations or liabilities on
Mr. Cohen that are greater than those generally imposed on
them as members of the Audit Committee and the Board, and his
designation as an audit committee financial expert does not affect
the duties, obligations or liability of any other member of the
Audit Committee or the Board.
Board Committees and Charters
As of December 31, 2019, the Board had a standing
Audit Committee. Currently, the Board does not have an active
Compensation Committee or Nominating and Corporate Governance
Committee. Instead, the full Board currently administers the duties
of each of these committees, and will likely do so for the
foreseeable future. Written charters for each of the Board’s
active committees are available on the Company’s website at
www.irdirect.net/CHUC/ and by clicking on the
“Corporate
Governance”
tab.
-58-
Audit Committee
As of December 31,2019, the Audit Committee consisted of Messrs. Scot Cohen (Chair)
and Jeff Fox. The Audit Committee met
two times during the year ended December 31,2019.
The
Audit Committee assisted the Board in fulfilling its legal and
fiduciary obligations in matters involving the Company’s
accounting, auditing, financial reporting, internal control and
legal compliance functions by approving the services performed by
the Company’s independent accountants and reviewing their
reports regarding the Company’s accounting practices and
systems of internal accounting controls. The Audit Committee was
responsible for the appointment, compensation, retention and
oversight of the independent accountants and for ensuring that the
accountants are independent of management.
Compensation Committee
As noted above, the
Board currently does not have an active compensation committee.
Instead, the full Board currently
administers the duties that are typically allocated to the
compensation committee, and will likely do so for the foreseeable
future.
Nominating and Corporate Governance Committee
As noted above, the
Board currently does not have an active nominating and corporate
governance committee. Instead, the
full Board currently administers the duties that are typically
allocated to the nominating and corporate governance
committee, and will likely do so for
the foreseeable future.
Board Leadership Structure
The Board does not
have a policy regarding the separation of the roles of the Chief
Executive Officer and Chairman of the Board, as the Board believes
it is in the best interest of the Company’s and its
stockholders to make that determination based on the position and
director of the Company and the membership of the Board from time
to time.
Upon
consummation of the Share Exchange, Brandon Stump was appointed as
the Company’s Principal Executive Officer, and shortly
thereafter was appointed as Chairman of the Board. The Board felt
that this was in the Company’s and its stockholder’s
best interests under the circumstances due to Brandon Stump’s
knowledge and experience in the vapor market and due to the fact
that he is the co-founder and Chief Executive Officer of
Charlie’s. As of December 31, 2019, Mr. Stump continued to
serve both as the Company’s Chief Executive Officer and as
Chairman of the Board.
-59-
Board Role in Risk Assessment
Management,
in consultation with outside professionals, as applicable,
identifies risks associated with the Company’s operations,
strategies and financial statements. In addition, risk assessment
was also performed through periodic reports received by the Audit
Committee from management, counsel and the Company’s
independent registered public accountants relating to risk
assessment and management. Audit Committee members met privately in
executive sessions with representatives of the Company’s
independent registered public accountants during and prior to the
year ended December 31, 2019. The Board also provides risk
oversight through its periodic reviews of the financial and
operational performance of the Company.
Code of Ethics
We
have adopted a Code of Ethics that applies to all of our directors,
officers and employees, a copy of which was attached as an exhibit
to our Annual Report on Form 10-K, filed with the SEC on April 1,2019.
Section 16(a) of the Exchange Act requires our
officers, directors, and persons who beneficially own more than ten
percent of our common stock to
file reports of ownership and changes in ownership with the SEC.
Officers, directors, and greater-than-ten-percent stockholders are
also required by the SEC to furnish us with copies of all Section
16(a) forms that they file.
Based
solely upon a review of these forms that were furnished to us, we
believe that each of our officers and directors failed to timely
file at least one report due under Section 16(a) during the year
ended December 31, 2019.
The
following table sets forth the compensation paid to the following
persons for our fiscal years ended December 31, 2019
and 2018:
(a)
our
principal executive officer;
(b)
our most highly compensated executive officers who
were serving as an executive officer at the end of the fiscal year
ended December 31, 2019 who had total compensation
exceeding $100,000 (together, with the principal executive officer,
the “Named Executive
Officers”);
and
(c)
any
additional individuals who would have been considered Named
Executive Officers, but for the fact that they were not serving in
such capacity at the end of our most recently completed fiscal
year.
Name
and Principal
Position
Year
Salary
($)
Bonus ($)
Option Awards
($)(1)
Total ($)
Brandon Stump
(2)
2019
$ 333,330
$ –
(3)
$ –
(3)
$ 333,330
Chief Executive Officer and Chairman of the
Board
Ryan Stump
(4)
2019
$ 333,330
$ –
(3)
$ –
(3)
$ 333,330
Chief Operating Officer
David Allen
(5)
2019
$ 93,750
$ –
$ 43,500
$ 137,250
Chief Financial Officer
Robert Van Boerum (6)
2019
$ 67,500
$ –
$ –
$ 67,500
Former Principal Executive Officer and Principal Financial
Officer
2018
$ 103,654
$ –
$ 9,517
$ 113,171
(1)
The
amounts in the “Option Awards” columns do not represent
any cash payments actually received by the individuals listed in
the table with respect to any of such stock options awarded to them
during the year ended December 31, 2019. Rather, the amounts
represent the aggregate grant date fair value of options awards to
the individuals listed in the table during the year ended December31, 2019, computed in accordance with the Financial Accounting
Standards Board’s Accounting Standards Codification Topic
718, Compensation – Stock
Compensation.
(2)
Mr. Stump was
appointed to serve as the Company’s Chief Executive Officer
and as a director on the Board on April 26, 2019 in connection with
the Share Exchange, effective immediately following Mr. Van
Boerum’s resignation as Principal Executive
Officer.
(3)
During the year
ended December 31, 2019, the Company accrued expenses for amounts
payable at the time pursuant to the B. Stump Employment Agreement
(defined below) and the R. Stump Employment Agreement (defined
below), the terms of which are summarized
below.
The Company and
each of Messrs. Stump and Stump are currently negotiating proposed
amendments to the respective employment agreements, including
modifying bonus amounts and equity awards that may be issued to
each of Messrs. Stump and Stump for performance during the year
ended December 31, 2019. As such, the amounts that may be awarded
to Messrs. Stump and Stump for performance during the year ended
December 31, 2019 are not yet certain.
(4)
Mr. Stump was
appointed to serve as the Company’s Chief Operating Officer
and as a director on the Board on April 26, 2019 in connection with
the Share Exchange.
(5)
Mr. Allen was
appointed to serve as the Company’s Chief Financial Officer
on April 26, 2019 in connection with the Share Exchange, effective
immediately following Mr. Van Boerum’s resignation as
Principal Financial Officer.
(6)
Mr.
Van Boerum was appointed to serve as the Company’s Principal
Executive Officer and Principal Financial Officer effective May 15,2018, and resigned from such positions on April 26, 2019, effective
upon consummation of the Share Exchange. Mr. Van Boerum currently
provides consulting services to the Company in order to aid in the
transition of the Company and its management as a result of the
Share Exchange.
-61-
Employment Agreements
Brandon
Stump. On April 26, 2019, in
connection with the Share Exchange and his appointment as Chief
Executive Officer, the Company and Brandon Stump entered into an
employment agreement (the “B. Stump Employment
Agreement”) pursuant to
which (i) Mr. Stump serves as the Company’s Chief Executive
Officer, initially for a term of three years, renewable for
one-year periods thereafter; (ii) Mr. Stump is subject to a
non-competition requirement for three years after his termination;
(iii) Mr. Stump is subject to a non-solicitation requirement for
one year after his termination, and be entitled to receive the
following compensation for his services as Chief Executive Officer:
(a) an annual base salary of $500,000, which shall increase on an
annual basis by an amount not less than $25,000 per year, as
determined by the Compensation Committee of the Company’s
Board of Directors, (b) an annual cash bonus of up to $750,000 per
year, which cash bonus will be determined based on the
Company’s achievement of audited gross revenue targets of
$35.0 million per year, as more particularly set forth in the B.
Stump Employment Agreement, (c) certain milestone based bonuses,
(d) an annual award of shares of Common Stock having an aggregate
value equal to one-half of Brandon Stump’s annual base salary
in effect for such year, which shares shall vest quarterly in equal
amounts over a three year period commencing on the issuance date,
(e) participation in the Company’s retirement plan, if any,
(f) reimbursement of all reasonable business-related expenses
incurred by Brandon Stump, (e) full health insurance coverage for
he and his dependents, and at least $5.0 million of life insurance,
(g) 21 paid vacation days per year, and (h) a monthly automobile
allowance of $750 per month.
The Company may terminate the B. Stump Employment
Agreement in the event of Brandon Stump’s death or
disability, or for Cause, as defined in the B. Stump Employment
Agreement; provided,
however, that at no time may
the Company terminate him without Cause. Brandon Stump may
terminate the B. Stump Employment Agreement at any time for any
reason. In the event that his employment is terminated by him
without Good Reason, as defined in the B. Stump Employment
Agreement, or by the Company for Good Cause as a result of a Change
in Control, he shall be entitled to the following compensation: (i)
any earned but unpaid salary through the termination date, (ii)
unpaid and unreimbursed expenses, (iii) earned but unpaid bonuses,
and (iv) any accrued vacation days; provided,
however, that in the event that
the B. Stump Employment Agreement is terminated by Brandon Stump
for any reason, he shall also be entitled to one year’s
severance, consisting of one year’s base salary, milestone
bonuses and certain other benefits. In the event his employment is
terminated by the Company without Cause or Brandon Stump terminates
it for Good Reason, as defined in the B. Stump Employment
Agreement, then he shall be entitled to the following compensation:
(i) all amounts due to him through the termination date, (ii) full
vesting of any and all previously granted equity-based incentive
awards, and (iii) health insurance coverage for a period of 18
months after the termination date. In addition, effective upon a
Change in Control, regardless of whether the B. Stump Employment
Agreement is terminated, his base salary for the year in which the
Change in Control occurred and any years thereafter shall
automatically increase by 20% and the milestone bonuses shall
automatically decrease by 30%.
As noted in the
footnotes to the Summary Compensation table above, during the year
ended December 31, 2019, the Company accrued expenses for amounts
payable at the time pursuant to the B. Stump Employment Agreement.
However, the Company and each of Mr. Stump are currently
negotiating proposed amendments to the B. Stump Employment
Agreement, including modifying bonus amounts and equity awards that
may be issued to Mr. Stump for performance during the year ended
December 31, 2019.
Ryan Stump. On April 26, 2019, in connection with the Share
Exchange and his appointment as Chief Operating Officer, the
Company and Ryan Stump entered into an employment agreement (the
“R.
Stump Employment Agreement”), pursuant to which (i) Mr. Stump serves
as the Company’s Chief Operating Officer for a term of three
years, renewable for one-year periods thereafter, during which time
he shall report to the Company’s Chief Executive Officer;
(ii) Mr. Stump is subject to a non-competition requirement for
three years after his termination; (iii) Mr. Stump is subject to a
non-solicitation requirement for one year after his termination,
and be entitled to receive the following compensation for his
services as Chief Operating Officer: (a) an annual base salary of
$500,000, which shall increase on an annual basis by amount that is
not less than $25,000 per year, as determined by the Compensation
Committee of the Company’s Board of Directors, (b) an annual
cash bonus of up to $750,000 per year, which cash bonus will be
determined based on the Company’s achievement of a gross
revenue target of $35.0 million per year, as more particularly set
forth in the R. Stump Employment Agreement, (c) certain milestone
based bonuses, (d) an annual award of shares of Common Stock having
an aggregate value equal to one-half of Ryan’s annual base
salary in effect for such year, which shares shall vest quarterly
in equal amounts over a three year period commencing on the
issuance date, (e) participation in the Company’s retirement
plan, if any, (f) reimbursement of all reasonable business-related
expenses incurred by Ryan Stump, (e) full health insurance coverage
for he and his dependents, and at least $5.0 million of life
insurance, (g) 21 paid vacation days per year, and (h) a monthly
automobile allowance of $750 per month.
The Company may terminate the R. Stump Employment
Agreement in the event of Ryan Stump’s death or disability,
or for Cause, as defined in the R. Stump Employment
Agreement; provided,
however, that at no time may
the Company terminate him without Cause. Ryan Stump may terminate
the R. Stump Employment Agreement at any time for any reason. In
the event that his employment is terminated by him without Good
Reason, as defined in the R. Stump Employment Agreement, or by the
Company for Good Cause as a result of a Change in Control, he shall
be entitled to the following compensation: (i) any earned but
unpaid salary through the termination date, (ii) unpaid and
unreimbursed expenses, (iii) earned but unpaid bonuses, and (iv)
any accrued vacation days; provided,
however, that in the event that
the R. Stump Employment Agreement is terminated by Ryan Stump for
any reason, he shall also be entitled to one year’s
severance, consisting of one year’s base salary, milestone
bonuses and certain other benefits. In the event that his
employment is terminated by the Company without Cause or he
terminates it for Good Reason, as defined in the R. Stump
Employment Agreement, then Ryan Stump shall be entitled to the
following compensation: (i) all amounts due to him through the
termination date, (ii) full vesting of any and all previously
granted equity-based incentive awards, and (iii) health insurance
coverage for a period of 18 months after the termination date. In
addition, effective upon a Change in Control, regardless of whether
the R. Stump Employment Agreement is terminated, his base salary
for the year in which the Change in Control occurred and any years
thereafter shall automatically increase by 20% and the milestone
bonuses shall automatically decrease by
30%.
As noted in the
footnotes to the Summary Compensation table above, during the year
ended December 31, 2019, the Company accrued expenses for amounts
payable at the time pursuant to the R. Stump Employment Agreement.
However, the Company and each of Mr. Stump are currently
negotiating proposed amendments to the R. Stump Employment
Agreement, including modifying bonus amounts and equity awards that
may be issued to Mr. Stump for performance during the year ended
December 31, 2019.
Certain
Relationships and Related Transactions
On November 19,2019, Charlie’s entered into commercial lease for the
Company’s corporate headquarters in Costa Mesa, California
(the “Lease”)
with Brandon Stump, Ryan Stump and Keith Stump. Messrs. Stump,
Stump and Stump purchased the property that is the subject of the
Lease in July 2019. The Lease, which was effective as of September1, 2019, on a month to month basis, has been formalized to have a
term of five years and a base rent rate of $22,940 per month, which
rate is subject to annual adjustments based on the consumer price
index, as may be mutually agreed upon by the parties to the Lease.
The terms of the Lease were negotiated and approved by the
independent members of the Board, and executed by Mr. David Allen,
the Company’s Chief Financial Officer after reviewing a
detailed analysis of comparable properties and rent rates compiled
by an independent, third-party consultant.
-62-
Director Compensation
The Company’s Director Compensation Plan
currently provides that non-employee directors
(“Outside
Directors”) receive (a) a
$60,000 annual retainer, payable in equal monthly installments in
cash and (b) reimbursement for expenses related to Board meeting
attendance and committee participation. In addition, directors
receive a one-time grant of an option to purchase 25 million shares
of the Company’s common stock at an exercise price equal to
the closing price of the Company’s common stock on the date
of issuance, as reported on the OTC Pink Market. Directors that
were also employees of the Company did not receive additional
compensation for serving on the Board.
From January 1,2019 until the Share Exchange, the Company suspended all director
compensation plans and stopped accruing any expense related to
director compensation. Accordingly, only those directors identified
in the table below received compensation as directors of the
Company during the year ended December 31,2019.
The following table discloses certain information
concerning the compensation of the Company’s non-employee
directors for the year ended December 31,2019:
Name
Fees Earned or
Paid in Cash
($)
Option
Awards
($)(1)
Total
($)
Scot Cohen (2)
$ –
$ –
$ –
Jeff Fox (3)
$ 35,000
72,500(4)
$ 107,500
(1)
The
amounts in the “Option Awards” columns do not represent
any cash payments actually received by the individuals listed in
the table with respect to any of such stock options awarded to them
during the year ended December 31, 2019. Rather, the amounts
represent the aggregate grant date fair value of options awards to
the individuals listed in the table during the year ended December31, 2019, computed in accordance with the Financial Accounting
Standards Board’s Accounting Standards Codification Topic
718, Compensation – Stock
Compensation.
(2)
Mr.
Cohen did not receive any compensation from the Company in
connection with his service on the Company’s Board of
Directors during the year ended December, 31
2019.
(3)
Mr.
Fox joined the Company’s Board of Directors on July 22, 2019.
Accordingly, compensation identified herein consists of the initial
stock option grant issued to Mr. Fox in connection with his
appointment, as well as fees earned for his service from July 22,2019 through December 31, 2019.
(4)
Options
awarded to Mr. Fox during the year ended December 31, 2019 consist
of stock options to purchase up to 25.0 million shares of the
Company’s common stock at an exercise price of $0.0044313 per
share. The stock options granted to Mr. Fox become exercisable upon
vesting and will vest annually, in equal installments, over a
three-year period beginning on June 1, 2020.
The
following table sets forth all equity awards held by our Named
Executive Officers at December 31, 2019:
Name
Number
of Securities Underlying Unexercised Options and
Warrants
(#)
Exercisable
Number
of Securities
Underlying
Unexercised Options and Warrants
(#)
Unexercisable
Exercise
Price
($)
Expiration
Date
Brandon
Stump
–
–
–
–
David
Allen
–
15,000,000(1)
$0.0044313
10/28/2029
Ryan
Stump
–
–
–
–
Robert
VanBoreum
–
–
–
–
(1)
Represents
an option to purchase shares of the Company’s common stock at
$0.0044313 per share granted on October 28, 2019. The stock
options granted to Mr. Allen become exercisable upon vesting and
will vest annually, in equal installments, over a three-year period
beginning on June 1, 2020.
-63-
Equity Compensation Plan Information
The
following table includes information as of December 31,2019 for our equity compensation plans:
Plan category
Number of securities to be issued upon exercise of outstanding
options, warrants and rights
Weighted-average exercise price of outstanding options,
warrants and rights
Number of securities remaining available for future issuance under
equity compensation plans (excluding securities reflected in column
(a))
(a)
(b)
(c)
Equity
compensation plans approved by stockholders
801,324,826
$ 0.0044313
367,754,205
Equity
compensation plans not approved by stockholders
–
$ –
–
Total
801,324,826
$ 0.0044313
367,754,205
2013 Stock Incentive
Plan. The 2013 Stock Incentive
Plan (the “2013 Plan”) was adopted by the Company’s Board
of Directors on December 31, 2013. The 2013 Plan initially reserved
for issuance 20.0 million shares of common stock
for issuance to all employees
(including, without limitation, officers and directors who are also
employees) of the Company or any subsidiary of the Company (each a
“Subsidiary”), any non-employee director, consultants
and independent contractors of the Company or any Subsidiary, and
any joint venture partners (including, without limitation,
officers, directors and partners thereof) of the Company or any
Subsidiary. Awards under the 2013 Plan may be made in the form of:
(i) incentive stock options within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended, once the 2013 Plan
has been approved by a majority of the Company’s
stockholders; (ii) stock options that do not qualify as incentive
stock options; and/or (iii) awards of shares that are subject to
certain restrictions specified in the 2013 Plan. On May 8, 2019,
the Board of Directors authorized increasing the number of shares
reserved for issuance under the plan to a total of 65.0 million
shares of common stock and to
ratify the issuance of any and all awards made prior to that date,
subject to stockholder approval.
During
the year ended December 31, 2018, the Company did not issue any
restricted stock awards pursuant to the 2013 Plan; however, the
Company issued an aggregate total of 34,652,903 stock option awards
pursuant to the 2013 Plan during the 2018 fiscal year.
Subsequent to the
year ended December 31, 2018, on May 16, 2019, the Board approved
an amendment to all of the outstanding stock options held by Mr.
Sherman that were issued under the 2013 Plan, in the aggregate
amount of 35,971,988, to extend the expiration date of such stock
options by five years.
As of the date of the Share Exchange, April 26, 2019, a total of
approximately 91.7 million awards were issued under 2013 Plan,
consisting entirely of outstanding stock options. As of December31, 2019, approximately 61.8 million of these stock options remain
vested and exercisable.
The Company will not grant any additional awards or shares of
common stock under the Prior Plan beyond those that are currently
outstanding.
2019 Omnibus Incentive
Plan. The 2019 Omnibus
Incentive Plan (the “2019 Plan”) was adopted by the Company’s Board
of Directors on May 8, 2019, subject to stockholder approval and
registration or qualification of the shares subject to the 2019
Plan with the federal and state securities authorities. The 2019
Plan reserved for issuance approximately 1.1 billion shares
of common stock for issuance to
all employees (including, without limitation, officers and
directors who are also employees) of the Company or any Subsidiary,
any non-employee director, consultants and independent contractors
of the Company or any Subsidiary, and any joint venture partners
(including, without limitation, officers, directors and partners
thereof) of the Company or any Subsidiary. Awards under the 2019
Plan may be made in the form of: (i) incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, once the 2019 Plan has been approved by a majority of the
Company’s stockholders; (ii) stock options that do not
qualify as incentive stock options; and/or (iii) awards of shares
that are subject to certain restrictions specified in the 2019
Plan.
As of December 31,2019, there were a total of 739,500,000 stock options issued
pursuant to the 2019 Plan, none of which have
vested.
There
were no post-employment compensation, pension or nonqualified
deferred compensation benefits earned by the Named Executive
Officers during the year ended December 31,2019.
We are
filing the registration statement of which this prospectus forms a
part to permit holders of the shares of our common stock described
in the section entitled “Selling Stockholders” to
resell such shares. We will not receive any proceeds from the
resale of any shares offered by this prospectus by the selling
stockholders.
-65-
MARKET FOR
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the OTC Pink Marketplace under the
symbol “CHUC.” Prior to July 3, 2019, our common stock
was traded on the OTC Pink Marketplace under the symbol
“TRUU.”
The following table sets forth high and low sales
prices for our common stock for
the calendar quarters indicated as reported by the OTC Pink
Marketplace. These prices represent quotations between dealers
without adjustment for retail markup, markdown, or commission and
may not represent actual transactions.
At January 17, 2020,
there were 18,973,827,540 shares of our common
stock outstanding, and approximately 476 stockholders of record.
At January 17, 2020, there were 204,560 shares of
our Series A Preferred outstanding held by approximately 120
stockholders of record.
Transfer Agent
Our Transfer Agent and Registrar for our
common stock is Corporate Stock
Transfer located in Denver, Colorado.
-66-
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company currently has two classes of voting
securities issued and outstanding: (i) common stock
and (ii) Series A Preferred. The
following tables contain the beneficial ownership of our
outstanding voting securities owned by:
(i)
Each
of our officers and directors;
(ii)
All
officer and directors as a group; and
(iii)
Each person known by us to beneficially own five
percent or more of the outstanding shares of our Series A Preferred
and common stock.
Percent ownership is calculated based on
204,560
shares of Series A Preferred
and 18,973,827,540
shares common stock
outstanding as of
January 17, 2020.
For
purposes of this section, beneficial ownership is determined in
accordance with the rules of the SEC. In computing the number of
shares beneficially owned by a person and the percentage of
ownership by that person in each table below, shares of voting
common stock subject to rights held by that person to acquire such
shares currently or within 60 days are deemed outstanding. Such
shares are not deemed outstanding for the purpose of computing the
percentage of ownership by any other person.
Each of the Company’s officers and directors who will not
hold shares of Series A Preferred were excluded from this table.
Unless otherwise indicated, the address for each stockholder is
1007 Brioso Drive, Costa Mesa, California92627.
(2)
Based on Company records as of January
17,
2020. Mr. Smith is a manager of Red Beard, and has
dispositive power and voting power over the securities reported
herein.
(3)
Based on Company records and ownership information from Schedule
13G filed by Iroquois Capital Management, LLC
(“Iroquois Capital
Management”), Mr. Richard
Abbe and Ms. Kimberly Page on May 24, 2019. Mr. Abbe shares
authority and responsibility for the investments made on behalf of
Iroquois Master Fund with Ms. Kimberly Page, each of whom is a
director of the Iroquois Master Fund. As such, Mr. Abbe and Ms.
Page may each be deemed to be the beneficial owner of the shares of
Series A Preferred reported herein.
(4)
Based on Company records as of January
17,
2020. Sander Gerber, Authorized Signor for Hudson Bay
Capital Management, LP may be deemed to be the beneficial owner of
all shares of common stock underlying the common stock held by Hudson Bay Capital Management,
LP.
(5)
Based on Company records as of January
17,
2020. Steve Derby, Managing Member of SDS Capital
Partners II, LLC may be deemed to be the beneficial owner of all
shares of common stock underlying the common stock held by SDS Capital Partners II,
LLC.
(6)
Based on Company records as of January
17,
2020. Jacob Gottlieb, Chief Executive Officer of
Altium Growth Fund, LP may be deemed to be the beneficial owner of
all shares of common stock underlying the common stock held by Altium Growth Fund,
LP.
Beneficial Ownership of Common Stock
Name,
Address and Title (if applicable) (1)
Shares
of Common Stock
Shares
Issuable Upon Conversion of Preferred A Stock
(2)
Shares
Issuable upon Exercise of Warrants (3)
Shares
Issuable upon Exercise of Vested Stock Options
Total
Number of Shares Beneficially Owned
%
Ownership of Class
Executive Officers and Directors
Brandon Stump
Chief Executive Officer and Director
9,379,218,889
-
-
-
9,379,218,889
49.5%
Ryan Stump
Chief Operating Officer and Director
4,019,665,353
4,019,665,353
21.2%
David Allen
Chief Financial Officer
-
-
-
-
-
0.0%
Adam Mirkovich
Chief Information Officer
-
-
-
-
-
0.0%
Scot Cohen (4)
Director
81,240,266
84,625,280
56,416,355
7,244,826
229,526,727
1.2%
Keith Stump
Director
93,086,946
67,700,224
45,133,084
-
205,920,254
1.1%
Executive Officers and
Directors, as a group (6
persons)
Unless
otherwise indicated, the address for each stockholder is 1007
Brioso Drive, Costa Mesa, California92627.
(2)
Pursuant to the Certificate of Designation of the
Series A Preferred (“Series A
COD”),
shares of Series A Preferred may not be converted or
exercised, as applicable, to the extent that the holder and its
affiliates would own more than 4.99% (or 9.99% upon the election of
any holder of Series A Preferred) of the Company’s outstanding common
stock after such conversion (the
“Series A Ownership
Limitation”);
provided, however,
that any holder of shares of Series A Preferred may waive the
Conversion Limitation upon 61 days written notice to the
Company.
The Series A COD also entitles each share of
Series A Preferred to vote, on an as converted basis, along with
the common stock; provided,
however, that the Series A
Preferred may not be voted to the extent that the holder and its
affiliates would control more than 9.99% of the Company’s
voting power (the “Series A Voting
Limitation”).
Ownership
percentages in this table were calculated in accordance with
Section 13(d) of the Exchange Act, and do not reflect any
adjustments due to the Series A Ownership Limitation or the Series
A Voting Limitation.
(3)
Certain of the warrants included in this table are
subject to blockers that prevent a holder from exercising Investor
Warrants or Placement Agent Warrants in the event that such
exercise would result in the holder and its affiliates beneficially
owning in excess of 4.99% of the Company’s issued and
outstanding common stock immediately thereafter, which limit may be
increased to 9.99% at the election of the holder (the
“Warrant Exercise
Limitation”).
Ownership
percentages in this table were calculated in accordance with
Section 13(d) of the Exchange Act, and do not reflect any
adjustments due to the Warrant Exercise Limitation.
(4)
Includes
securities held by V3 Capital Partners and the Scot Jason Cohen
Foundation. Mr. Cohen is the Managing Partner of V3 Capital
Partners and an officer of the Scot Jason Cohen Foundation, and has
dispositive and/or voting power over these shares.
(5)
Includes securities held by LB 2, LLC
(“LB
2”) and Red Beard
Holdings, LLC (“Red Beard”), based on Company records and ownership
information from Amendment No. 5 to Schedule 13D filed by Vincent
C. Smith on April 25, 2016. Mr. Smith is manager of LB 2 and Red
Beard. As such, Mr. Smith has dispositive power and voting power
over, and may be deemed to be the beneficial owner of the
securities held by each of these
entities.
(6)
Based
on Company records and ownership information from Amendment No. 5
to Schedule 13D filed by Vincent C. Smith on April 25,2016. Mr. Smith is a manager of Red Beard, and has dispositive
power and voting power over the securities reported
herein.
(7)
Based on Company records and ownership information
from Schedule 13G filed by Iroquois Capital Management, LLC
(“Iroquois Capital
Management”), Mr. Richard
Abbe and Ms. Kimberly Page on May 24, 2019. Mr. Abbe shares
authority and responsibility for the investments made on behalf of
Iroquois Master Fund with Ms. Kimberly Page, each of whom is a
director of the Iroquois Master Fund. As such, Mr. Abbe and Ms.
Page may each be deemed to be the beneficial owner of all shares
of common stock underlying
the common stock held by
Iroquois Master Fund.
This prospectus relates to the sale from
time to time by the selling
stockholders of up to 26,317,060,072 shares of our common
stock, which consists of the following:
●
1,692,490,632
shares of common stock issued to former Members of Charlie’s
and the Direct Investors in connection with the Company’s
exchange of all outstanding membership interests of Charlie’s
for units as a result of the Share Exchange;
●
902,661,671
shares of common stock issued as Advisory Shares as consideration
for advisory services provided to the Company in connection with
the Share Exchange;
●
13,963,047,716
shares of common stock issued upon the automatic conversion of the
Series B Preferred into shares of common stock on June 28,2019;
●
1,070,741,474 shares of common stock issued in
accordance with that certain Debt Conversion Agreement with Red
Beard Holdings, LLC (“ Red Beard”), pursuant to which Red Beard converted
certain outstanding indebtedness of the Company, in the aggregate
amount of $4,227,250, into shares of common stock (the
“Debt
Conversion”);
●
4,654,349,239
shares of common stock issuable upon conversion of outstanding
shares of Series A Preferred;
●
3,102,899,493
shares of common stock issuable upon exercise of the Investor
Warrants issued in connection with the Share Exchange;
and
●
930,869,848
shares of common stock issuable upon exercise of the Placement
Agent Warrants issued to Katalyst as consideration for
Katalyst’s services in connection with the Charlie’s
Financing and the Share Exchange.
When
we refer to the “selling stockholders” in this
prospectus, we mean the persons and entities listed in the table
below, and their respective pledgees, donees, permitted
transferees, assignees, successors and others who later come to
hold any of the selling stockholders’ interests in shares of
our common stock other than through a public
sale.
Selling
Stockholders Table
The table below presents information as of
January 17, 2020, regarding the selling
stockholders and the shares of common stock the selling stockholders may offer and sell from
time to time under this prospectus. More specifically, the
following table sets forth as to the selling
stockholders:
●
the number of
shares of our common stock that the selling stockholders
beneficially owned prior to this offering;
●
the total number of
shares of our common stock that the selling stockholders
may offer for resale pursuant to this
prospectus; and
●
the number and
percent of shares of our common stock beneficially held by the
selling stockholders after this offering, assuming all of the
resale shares of common stock are sold by the selling stockholders
and that the selling stockholders do not acquire any additional
shares of our common stock prior to their assumed sale of all of
the resale shares.
The
table was prepared based on information supplied to us by the
selling stockholders. Although we have assumed for purposes of the
table below that the selling stockholders will sell all of the
securities offered by this prospectus, because the selling
stockholders may offer from time to time all or some of their
securities covered under this prospectus, or in another permitted
manner, no assurances can be given as to the actual number of
securities that will be resold by the selling stockholders or that
will be held by the selling stockholders after completion of the
resales. In addition, the selling stockholders may have sold,
transferred or otherwise disposed of the securities in transactions
exempt from the registration requirements of the Securities Act,
since the date the selling stockholders provided the information
regarding their securities holdings. Information covering the
selling stockholders may change from time to time and changed
information will be presented in a supplement to this prospectus if
and when necessary and required.
Except
as described above, there are currently no agreements, arrangements
or understandings with respect to the resale of any of the
securities covered by this prospectus.
The applicable percentages of ownership are based
on an aggregate of 18,973,827,540 shares of our common stock
issued and outstanding on
January 17, 2020. The number of
shares common stock beneficially owned
by the selling stockholders is determined under rules promulgated
by the SEC.
-70-
Shares of Common Stock
Beneficially
Number of Shares of Common Stock Being Offered Pursuant to this
Prospectus
Shares of Common Stock Beneficially Owned After Completion of the
Offering (1)
Name of Selling Stockholder (2)
Owned
Prior to the
Offering (3)
Common
Stock (4)
Series A
Conversion
Shares
Warrant
Shares (5)
Number
Percent (6)
ABCS
Partners (7)
42,312,266
42,312,266
-
-
-
*
Alan
Finkelstein (8)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Alan
R. Cornell Revocable Living Trust dtd 05/20/2010 (9)
33,849,963
5,641,636
16,925,056
11,283,271
-
*
Albert
& Hiedi Gentile (10)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
Allan
Lipkowitz Revocable Trust dtd 08/26/2005 (11)
16,078,732
2,679,777
8,039,402
5,359,554
-
*
Alok
and Ankur Agrawal (12)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
Altium
Growth Fund, LP (13)
497,594,446
82,932,041
248,798,323
165,864,082
-
*
Alto
Opportunity Master Fund, SPC-Segregated Master Portfolio B
(14)
84,624,906
14,104,089
42,312,640
28,208,177
-
*
Anand
Kumar Sethia (15)
9,477,990
1,579,658
4,739,016
3,159,316
-
*
Andrew
Arno (16)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Andrew
Good (17)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Andrew
Lester (18)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
Andrew
Rosen (19)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Anna
Sacchetti (20)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
Anthony
Azzara (21)
25,387,472
4,231,227
12,693,792
8,462,453
-
*
Antonino
Marciano (22)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
Aroon
Dalamal (23)
33,849,963
5,641,636
16,925,056
11,283,271
-
*
Aukee
LLC (24)
10,154,989
1,692,491
5,077,517
3,384,981
-
*
Ben
Healy (25)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
Big
Boy LLC (26)
135,399,850
22,566,542
67,700,224
45,133,084
-
*
Bigger
Capital Fund, LP (27)
50,774,945
8,462,454
25,387,584
16,924,907
-
*
Brandon
Stump (28)
9,379,218,889
9,379,218,889
-
-
-
*
Brio
Capital Master Fund Ltd (29)
118,474,870
19,745,725
59,237,696
39,491,449
-
*
Bruce
Bernstein (30)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Bruce
Doniger (31)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
Byron
Hughey (32)
3,384,997
564,164
1,692,506
1,128,327
-
*
Casey
G Schoonover (33)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Casimir
S. Skrzypczak (34)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Christopher
Coleman (35)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Christopher
Cozzolino (36)
1,692,491
1,692,491
-
-
-
*
Christopher
Fiore (37)
44,645,788
7,052,045
21,156,320
14,104,089
2,333,334
*
Christopher
J. & Denise M. Blum, JTWROS (38)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
Clayton
A. Struve (39)
118,474,870
19,745,725
59,237,696
39,491,449
-
*
Cobrador
Multi-Strategy Partners, LP (40)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Conner
Raisin (41)
423,122,627
423,122,627
-
-
-
*
-71-
Cox
Investment Partners, LP (42)
169,249,813
28,208,178
84,625,280
56,416,355
-
*
Daniel
D. Sambucci (43)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
Daniel
Harlin (44)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
Daniel
Salvas (45)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
Daniel
W. and Allaire Hummel JTWROS (46)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
David
A Jenkins (47)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
David
A Newman (48)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
E
Celli & E Satloff TT Thomas I Unterberg Grandchildren's TR U/A
DTD 04/26/1993 (49)
33,849,963
5,641,636
16,925,056
11,283,271
-
*
Empery
Asset Master, Ltd (50)
376,053,040
62,675,230
188,027,351
125,350,459
-
*
Empery
Tax Efficient II, LP (51)
311,459,556
51,909,697
155,730,466
103,819,393
-
*
Empery
Tax Efficient, LP (52)
74,111,559
12,351,872
37,055,943
24,703,744
-
*
Empire
Group Ltd. (53)
33,855,856
5,641,636
16,925,056
11,283,271
5,893
*
Eric
Fosselman (54)
13,539,986
2,256,655
6,770,022
4,513,309
-
*
Ernest
J. & Michele M. Mattei JTWROS (55)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Ernest
M. Violet (56)
47,389,948
7,898,290
23,695,078
15,796,579
-
*
FirstFire
Global Opportunities Fund LLC (57)
50,774,945
8,462,454
25,387,584
16,924,907
-
*
Four
Jr. Investments, Ltd. (58)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Gabriel
Adetoro (59)
10,154,989
1,692,491
5,077,517
3,384,981
-
*
Gregory
Castaldo (60)
50,774,945
8,462,454
25,387,584
16,924,907
-
*
Heyer
1999 Family Trust No 1 (61)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Hudson
Bay Master Fund Ltd (62)
507,749,435
84,624,532
253,875,840
169,249,063
-
*
Hudson
Equity Partners, LLC (63)
84,624,906
14,104,089
42,312,640
28,208,177
-
*
Igor
Semenov (64)
152,324,831
25,387,360
76,162,752
50,774,719
-
*
Ilario
& Barbara J. Licul JTWROS (65)
50,774,945
8,462,454
25,387,584
16,924,907
-
*
Iroquois
Capital Investment Group, LLC (66)
1,456,726,555
430,174,705
613,533,280
409,018,570
4,000,000
*
Iroquois
Master Fund Ltd. (67)
257,874,718
42,312,266
126,937,920
84,624,532
4,000,000
*
James
Gilbert (68)
33,849,963
5,641,636
16,925,056
11,283,271
-
*
JD
Advisors, LLC (69)
33,849,963
5,641,636
16,925,056
11,283,271
-
*
JNS
Holdings Group LLC (70)
17,124,906
16,924,906
-
-
200,000
*
Joel
Pruzansky (71)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
John
Athanasopoulos (72)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
John
Sanderson (73)
146,207,296
24,367,775
73,103,971
48,735,550
-
*
John
V. Wagner, Jr. (74)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Jonathan
P. & Laura Greene JTWROS (75)
4,231,246
705,205
2,115,632
1,410,409
-
*
Jordan
Sigalos (76)
70,520,404
70,520,404
-
-
-
*
Justin
Keener D/B/A JMJ Financial (77)
84,624,906
14,104,089
42,312,640
28,208,177
-
*
Keith
Stump (78)
205,920,254
93,086,946
45,133,084
-
*
Kenneth
F. Kremm (79)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
Kevin
Andrew McColl (80)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
Konstantin
Kozlov (81)
6,769,994
1,128,328
3,385,011
2,256,655
-
*
-72-
Lee
Harrison Corbin (82)
25,387,472
4,231,227
12,693,792
8,462,453
-
*
Lee
J. Seidler Revocable Trust dtd 04/12/1990 (83)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Lei
Xia (84)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
Leonard
Stern (85)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
Lina
Kay (86)
44,004,952
7,334,127
22,002,573
14,668,253
-
*
Louis
Sanzo (87)
33,849,963
5,641,636
16,925,056
11,283,271
-
*
Marc
A Levinson (88)
33,849,963
5,641,636
16,925,056
11,283,271
-
*
Marilyn
Kane (89)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Matthew
Montesano (90)
141,040,909
141,040,909
-
-
-
*
Mel
S. & Wendy Lavitt (91)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Michael
Chill (92)
33,849,963
5,641,636
16,925,056
11,283,271
-
*
Michael
J. Mathieu (93)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Michael
P Valentine (94)
84,624,906
14,104,089
42,312,640
28,208,177
-
*
Michael
Silverman (95)
140,589,930
70,069,113
42,312,640
28,208,177
-
*
Nat
Tursi (96)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
Opes
Equities, Inc. (97)
2,256,654
2,256,654
-
-
-
*
Patrick
G Patel (98)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Pauline
M. Howard Trust dtd 01/02/1998 (99)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
Pensco
Trust Co Custodian FBO Andrew J. Malik, IRA (100)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Peter
K Janssen (101)
25,951,599
11,847,435
8,462,528
5,641,636
-
*
Peter
Ohler (102)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Philip
W. Faucette II (103)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Proactive
Capital Partners, LP (104)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Prokopi
Sarris (105)
184,481,479
184,481,479
-
-
-
*
Red
Beard Holdings LLC (106)
3,073,832,068
1,324,615,069
761,627,520
507,747,190
479,842,289
10%
Richard
N Molinsky (107)
18,079,130
2,820,818
8,462,528
5,641,636
1,154,148
*
Richard
Pashayan (108)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
Robert
Burkhardt (109)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Robert
Reitz (110)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
Roman
Livson (111)
1,692,491
1,692,491
-
-
-
*
Ryan
Stump (112)
4,019,665,353
4,019,665,353
-
-
-
*
Scot
Cohen (113)
269,834,965
101,549,439
84,625,280
56,416,355
27,243,891
*
SDS
Capital Partners II, LLC (114)
507,749,435
84,624,532
253,875,840
169,249,063
-
*
SEG-RedaShex
LLC (115)
50,774,945
8,462,454
25,387,584
16,924,907
-
*
Shaar
Hazuhov, LLC (116)
42,312,454
7,052,045
21,156,320
14,104,089
-
*
Shanup
Gundecha (117)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
Shay
Capital LLC (118)
169,249,813
28,208,178
84,625,280
56,416,355
-
*
Stephen
Renaud (119)
136,640,768
69,222,867
40,450,884
26,967,018
-
*
Stormy
Monday LLC (120)
11,283,271
11,283,271
-
-
-
*
The
Bradley R. Kroenig Revocable Trust dtd 05/11/2016, Fourth Amended
and Restated Trust dtd 09/13/2017 (121)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
The
Craig R. Whited & Gilda Whited Joint Living Trust dtd
03/25/2016 (122)
84,624,906
14,104,089
42,312,640
28,208,177
-
*
The
Fourys Co. Ltd (123)
25,387,472
4,231,227
12,693,792
8,462,453
-
*
Thomas
A. McGurk, Jr. (124)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Thomas
Israel Unterberg (125)
67,699,925
11,283,271
33,850,112
22,566,542
-
*
Thomas
Israel Unterberg TTEE Ellen Unterberg Celli Family Trust UA DTD
03/22/1993 (126)
33,849,963
5,641,636
16,925,056
11,283,271
-
*
Thomas
Israel Unterberg TTEE Emily Unterberg Satloff Family Trust U/A DTD
03/25/1993 (127)
33,849,963
5,641,636
16,925,056
11,283,271
-
*
Thomas
J. Enright, Jr. (128)
22,002,477
3,667,064
11,001,286
7,334,127
-
*
Thomas
Zahavi (129)
42,650,953
7,108,461
21,325,571
14,216,921
-
*
Tim
Elmes, LLC Pension Plan (130)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
US
International Consulting Network-New Jersey Corp (dba ICN Holding)
(131)
44,004,952
7,334,127
22,002,573
14,668,253
-
*
V3
Capital (132)
75,284,362
73,341,261
-
-
1,943,101
*
Wallace
P. Kithcart, Jr. (133)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
Warberg
WF VI LP (134)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
Westwood
Capital Opportunity Fund LLC (135)
169,249,813
28,208,178
84,625,280
56,416,355
-
*
Willaim
Rosenstadt (136)
2,256,654
2,256,654
-
-
-
*
William
J Febbo (137)
33,849,963
5,641,636
16,925,056
11,283,271
-
*
William
Strawbridge (138)
8,462,491
1,410,409
4,231,264
2,820,818
-
*
William
Sykes (139)
42,312,454
7,052,045
21,156,320
14,104,089
-
*
Yad
Zahav LLC (140)
146,682,522
146,682,522
-
-
-
*
Zachary
Arrick (141)
16,924,982
2,820,818
8,462,528
5,641,636
-
*
*
Less
than 1%.
(1)
Beneficial ownership of the selling stockholders
after the offering assumes (i) the selling stockholders have the
ability to fully convert all shares of Series A Preferred held and
to exercise all Investor Warrants, despite the Beneficial Ownership
Limitation, as more specifically set forth in the section of this
prospectus entitled “Prospectus Summary- The Share
Exchange,” (ii) the
conversion of all shares of Series A Preferred, and exercise of all
Warrants held by the selling stockholders, and (iii) that each
selling stockholder will sell all of the shares of common stock
offered by it under this prospectus, including all shares of common
stock that may be issued upon conversion of shares of Series A
Preferred and the exercise of the Warrants identified
herein.
(2)
Information
concerning other selling stockholders will be set forth in one or
more amendments to the registration statement, of which this
prospectus forms a part, and/or prospectus supplements from time to
time, as required.
(3)
Includes
the (i) number of shares of common stock owned by each selling
stockholder prior to the Share Exchange and (ii) all Series A
Conversion Shares and Warrant Shares issuable upon conversion
and/or exercise of shares of Series A Preferred and Warrants, as
applicable, that may be held by each selling stockholder as of the
date of this prospectus, in each case assuming that the issuance of
such shares is not limited by the Beneficial Ownership
Limitation.
(4)
Includes
shares of common stock issued during the Share Exchange to the
Series A Members and the Direct Investors and shares issued as
Advisory Shares.
(5)
Includes
Investor Warrants issued during the Share Exchange to the Series A
Members and the Director Investors, and the Broker Warrants issued
to Katalyst Securities LLC.
-73-
(6)
Calculation
of the percent of shares beneficially owned by each selling
stockholder after the offering assumes that only such selling
stockholder’s derivative securities, including, without
limitation, shares of Series A Preferred and all any Warrants were
converted and/or exercised. Accordingly, the number of issued and
outstanding shares used to calculate percent ownership was
increased by the number of shares of common stock issuable upon the
conversion and/or exercise of such derivative securities held by
such selling stockholder, in each case assuming that the issuance
of such shares is not limited by the Beneficial Ownership
Limitation, or other beneficial ownership limitations set forth
therein.
(7)
The address of ABCS Partners is 21 Inns Road,
Scarsdale, NY10583. Jeffrey Berman, Managing Partner of ABCS
Partners, may be deemed to have voting and investment power
over these securities.
(8)
The
address of Alan Finkelstein is 132 Wilmot Circle, Scarsdale, NY10583.
(9)
The address of Alan R. Cornell Revocable Living
Trust dtd 05/20/2010 is 17640 Lake Estates Drive, Boca Raton, FL33496. Alan R. Cornell, Trustee of the Alan R. Cornell Revocable
Living Trust, may be deemed to have voting and investment
power over these securities.
(10)
The
address of Albert & Hiedi Gentile is 5 Mountain View Avenue,
Mayfield, NY12117.
(11)
The address of Allan Lipkowitz Revocable Trust dtd
08/26/2005 is 2686 Anza Trail, Palm Springs, CA92264. Allan
Lipkowitz, Trustee of the Allan Lipkowitz Revocable Trust, may be
deemed to have voting and investment power over these
securities.
(12)
The
address of Alok and Ankur Agrawal is 18841 SW 41st Street, Miramar,
FL33029.
(13)
Altium
Capital Management, LP, the investment manager of Altium Growth
Fund, LP, has voting and investment power over these securities.
Jacob Gottlieb is the managing member of Altium Capital Growth GP,
LLC, which is the general partner of Altium Growth Fund, LP. Each
of Altium Growth Fund, LP and Jacob Gottlieb disclaims beneficial
ownership over these securities. The principal address of Altium
Capital Management, LP is 551 Fifth Avenue, 19th Floor New York,
New York10176.
(14)
The
address for Alto Opportunity Master Fund, SPC- Segregated Master
Portfolio B (“Alto
Opportunity”) is 222 Broadway, 19th Floor, New York, NY10038. Waqas Khatri, Director of Alto Opportunity, may be deemed to
have voting and investment power over these
securities.
(15)
The
address of Anand Kumar Sethia is Flat 7 Pavilion, 34 St. John's
Wood Road, London, UK NW8 7HB.
(16)
The
address of Andrew Arno is 160 Riverside Boulevard, Apt. 31D, NewYork, NY10069.
(17)
The
address of Andrew Good is 34 Dexter Avenue, Watertown, MA02472.
(18)
The
address of Andrew Lester is 68 Byram Ridge Road, Armonk, NY10504.
(19)
The
address of Andrew Rosen is 33 Mountain Avenue, Maplewood, NJ07040.
(20)
The
address of Anna Sacchetti is 54-36 252nd Street, Little Neck, NY11362.
(21)
The
address of Anthony Azzara is 11284 162nd Place N, Jupiter, FL33478.
(22)
The
address of Antonino Marciano is 2003 N. Ocean Blvd., Apt. 302, BocaRaton, FL33431.
(23)
The
address of Aroon Dalamal is Villa 33, Hattan 2, Dubai,
UAE.
(24)
The address of Aukee LLC is 7 Douglass Manor,
Covington, IN47932. Kyle A. McGurk, Vice President of Aukee LLC,
may be deemed to have voting and investment power over these
securities.
(25)
The
address of Ben Healy is 425 Fifth Avenue, 32E, New York, NY10016.
(26)
The address of Big Boy LLC is 1111 Bayside Drive,
Suite 270, Newport Beach, CA92625. Jeff Gehl, Managing Partner of
Big Boy LLC, may be deemed to have voting and investment
power over these securities.
(27)
The address of Bigger Capital Fund LP is 159
Jennings Road, Cold Spring Harbor, NY11724. Michael Bigger,
Managing Member of Bigger Capital Fund LP, may be deemed to
have voting and investment power over these
securities.
(28)
The
address of Brandon Stump is 1007 Brioso Drive, Costa Mesa, CA92627.
-74-
(29)
The address of Brio Capital Master Fund Ltd is 100
Merrick Road, Suite 401W, Rockville Centre, NY11570-4800. Shaye
Hirsch, Director of Brio Capital Master Fund Ltd, may be deemed to
have voting and investment power over these
securities.
(30)
The
address of Bruce Bernstein is 84 White Street, 9C, New York, NY10013.
(31)
The
address of Bruce Doniger is 17 Brookby Road, Scarsdale, NY10583.
(32)
The
address of Byron Hughey is 1111 Dogwood Drive, McLean, VA22101.
(33)
The
address of Casey G Schoonover is 777 Driggs Avenue, Apt. #2,
Brooklyn, NY11211.
(34)
The
address of Casimir S. Skrzypczak is 413 Indies Drive, Orchid, FL32963.
(35)
The
address of Christopher Coleman is 5 Flagg Avenue, Montauk, NY11954.
(36)
The
address of Christopher Cozzolino is c/o Katalyst Securities, 630
Third Avenue, 5th Floor, New York, NY10017.
(37)
The
address of Christopher Fiore is 340 East 64th Street, Apt. 9C, NewYork, NY10065.
(38)
The
address of Christopher J. & Denise M. Blum, JTWROS is 525 Budds
Landing Road, Warwick, MD21912.
(39)
The
address of Clayton A. Struve is c/o RMR Wealth Mgt., 630 Third Ave.
5th Fl, New York, NY10017.
(40)
The address of Cobrador Multi-Strategy Partners,
LP is 32 Creemer Road, Armonk, NY10504. David E. Graber, Managing
Principal of Cobrador Multi-Strategy Partners, LP, may be deemed to
have voting and investment power over these
securities.
The address of Cox Investment Partners, LP is 4514
Cole Avenue #1175, Dallas, TX75205. Craig Sanders, Manager of Cox
Investment Partners, LP, may be deemed to have voting and
investment power over these securities.
(43)
The
address of Daniel D. Sambucci is 2003 N. Ocean Blvd., Apt. #N301,
Boca Raton, FL33431-8305.
(44)
The
address of Daniel Harlin is 512 Walnut Street, New Orleans, LA70118.
(45)
The
address of Daniel Salvas is 6335 Around Hills Road, Indianapolis,
IN46226.
(46)
The
address of Daniel W. and Allaire Hummel JTWROS is 284 Great House
Farm Lane, Chesapeake City, MD21915.
(47)
The
address of David A Jenkins is 9611 North US Highway One, Box 390,
Sebastian, FL32958.
(48)
The
address of David A Newman is 494 Pelican Lane South, Jupiter, FL33458.
(49)
The
address of E Celli & E Satloff TT Thomas I Unterberg
Grandchildren's TR U/A DTD 04/26/1993 is 993 Park Avenue, Apt. 5S,
New York, NY10028-0922.
(50)
Empery Asset Management LP, the authorized agent
of Empery Asset Master Ltd ("EAM"), has discretionary authority to vote and
dispose of the shares held by EAM and may be deemed to be the
beneficial owner of these shares. Martin Hoe and Ryan Lane, in
their capacity as investment managers of Empery Asset Management
LP, may also be deemed to have investment discretion and voting
power over the shares held by EAM. EAM, Mr. Hoe and Mr. Lane each
disclaim any beneficial ownership of these shares.
The address of Empery Asset Master,
Ltd is c/o Empery Asset Management, LP, One Rockefeller Plaza,
Suite 1205, New York, NY10020.
(51)
Empery Asset Management LP, the authorized agent
of Empery Tax Efficient II, LP ("ETE II"), has discretionary authority to vote and
dispose of the shares held by ETE II and may be deemed to be the
beneficial owner of these shares. Martin Hoe and Ryan Lane, in
their capacity as investment managers of Empery Asset Management
LP, may also be deemed to have investment discretion and voting
power over the shares held by ETE Il. ETE II, Mr. Hoe and Mr. Lane
each disclaim any beneficial ownership of these shares.
The address of Empery Tax Efficient,
LP is c/o Empery Asset Management, LP, One Rockefeller Plaza, Suite
1205, New York, NY10020.
(52)
Empery Asset Management LP, the authorized agent
of Empery Tax Efficient, LP ("ETE"), has discretionary authority to vote and
dispose of the shares held by ETE and may be deemed to be the
beneficial owner of these shares. Martin Hoe and Ryan Lane, in
their capacity as investment managers of Empery Asset Management
LP, may also be deemed to have investment discretion and voting
power over the shares held by ETE. ETE, Mr. Hoe and Mr. Lane each
disclaim any beneficial ownership of these shares. The address of Empery Tax Efficient II, LP is c/o
Empery Asset Management, LP, One Rockefeller Plaza, Suite 1205, NewYork, NY10020.
(53)
The address of Empire Group Ltd. is c/o Primeway
S.A., 3rd Floor, Yamraj Building, Market Square, Road Town,
Tortola, British Virgin Islands. Primeway S.A., Director of Empire
Group Ltd, may be deemed to have voting and investment power
over these securities.
(54)
The
address of Eric Fosselman is 402 McDaniel Drive, Landenberg, PA19350.
(55)
The
address of Ernest J. & Michele M. Mattei JTWROS is 108 Gary
Lynn Lane, Windsor, CT06103.
-75-
(56)
The
address of Ernest M. Violet is 228 East Shore Road, Jamestown, RI02835.
(57)
The address of FirstFire Global Opportunities Fund
LLC is 1040 1st Avenue, Suite 190, New York, NY10022. Eliezer S.
Fireman, Managing Member of FirstFire Global Opportunities Fund
LLC, may be deemed to have voting and investment power over
these securities.
(58)
The address of Four Jr. Investments, Ltd. is 844
Harbour Isles Pl., North Palm Beach, FL33410. Robert Burke,
Manager of Four Jr. Investments, Ltd., may be deemed to have
voting and investment power over these securities.
(59)
The
address of Gabriel Adetoro is 259 Weirfield St #2, Brooklyn, NY11221.
(60)
The
address of Gregory Castaldo is 3776 Steven James Drive, GarnetValley, PA19061.
(61)
The address of Heyer 1999 Family Trust No 1 is c/o
Mistral Equity Partners, 650 5th Ave. 10th Floor, New York, NY10019. Steven J. Heyer, Trustee of the Heyer 1999 Family Trust No
1, may be deemed to have voting and investment power over
these securities.
(62)
The
address of Hudson Bay Master Fund Ltd is c/o Hudson Bay Capital
Mgt., 777 Third Avenue, 30th Floor, New York, NY10017. Hudson Bay
Capital Management, LP, the investment manager of Hudson Bay Master
Fund Ltd., has voting and investment power over these securities.
Sander Gerber is the managing member of Hudson Bay Capital GP LLC,
which is the general partner of Hudson Bay Capital Management LP.
Each of Hudson Bay Master Fund Ltd. and Sander Gerber disclaims
beneficial ownership over these securities.
(63)
The
address of Hudson Equity Partners, LLC is 14 Arbor Field Way, LakeGrove, NY11755. Jagdish Malhotra, Managing Member of Hudson Equity
Partners, LLC, may be deemed to have voting and investment power
over these securities.
(64)
The
address of Igor Semenov is 9971 Winding Ridge Lane, Davie, FL33324.
(65)
The
address of Ilario & Barbara J. Licul JTWROS is 30 Waterside
Plaza, Suite 7, New York, NY10010.
(66)
The address of Iroquois Capital Investment Group,
LLC is c/o Iroquois Capital, 125 Park Avenue, 25th Floor, New York,
NY10017. Richard Abbe may be deemed to have voting and
investment power over these securities.
(67)
The address of Iroquois Master Fund Ltd. is c/o
Iroquois Capital, 125 Park Avenue, 25th Floor, New York, NY10017.
Richard Abbe shares authority and responsibility for the
investments made on behalf of Iroquois Master Fund with Kimberly
Page, each of whom is a director of the Iroquois Master Fund. As
such, Mr. Abbe and Ms. Page may each be deemed to have
voting and investment power over these securities.
(68)
The
address of James Gilbert is 859 Nowita Place, Venice, CA90291.
(69)
The address of JD Advisors, LLC is 3543 Paxton
Avenue, Cincinnati, OH45208. Dan Kelly, Co-Manager of JD Advisors,
LLC, may be deemed to have voting and investment power over
these securities.
(70)
The address of JNS Holdings Group LLC is 3
Pinecrest Road, Scarsdale, NY10583. Josh Silverman, Member of JNS
Holdings Group LLC, may be deemed to have voting and
investment power over these securities.
(71)
The
address of Joel Pruzansky is 1066 Clinton Ave., Suite 200, Clifton,
NJ07013.
(72)
The
address of John Athanasopoulos is 14 1/2 Fayette Street, Apt. 5,
Cambridge, MA02139.
The
address of John V. Wagner, Jr. is 233 Jardin Drive, Los Altos, CA94022.
(75)
The
address of Jonathan P. & Laura Greene JTWROS is 94 West Mill
Station Drive, Newark, DE19701.
(76)
The
address of Jordan Sigalos is 3395 Michelson Drive, #5551, Irvine,
CA92612.
(77)
The
address of Justin Keener D/B/A JMJ Financial is 1688 Meridian
Avenue, Ste 700, Miami Beach, FL33139.
(78)
The
address of Keith Stump is 686 Ashbrooke Way, Hudson, OH44236.
(79)
The
address of Kenneth F. Kremm is 3728 St. Andrews Drive, The Colony,
TX75056.
(80)
The
address of Kevin Andrew McColl is 94 Polo Lane RD1 Manurewa,
Auckland, New Zealand 2576.
(81)
The
address of Konstantin Kozlov is Korneichuka Street 49-176, Moscow,
Russia 127543.
(82)
The
address of Lee Harrison Corbin is 45 Avon Road, Larchmont, NY10538.
(83)
The address of Lee J. Seidler Revocable Trust dtd
04/12/1990 is 5001 Joewood Drive, Sanibel, FL33957. Lee J.
Seidler, Trustee of the Lee J. Seidler Revocable Trust, may be
deemed to have voting and investment power over these
securities.
-76-
(84)
The
address of Lei Xia is 33 Bay State Road, Wellesley, MA02481.
(85)
The
address of Leonard Stern is 110 East 40th Street, Suite 802, NewYork, NY10016.
(86)
The
address of Lina Kay is 9703 Collins Ave, Apt. 2508 S, Bal Harbor,
FL33154.
(87)
The
address of Louis Sanzo is 32 Boulevard, Malba, NY11357.
The
address of Marilyn Kane is 330 E. 38th Street, Apt. 16N, New York,
NY10016.
(90)
The
address of Matthew Montesano is 3395 Michelson Drive, #5551,
Irvine, CA92612.
(91)
The
address of Mel S. & Wendy Lavitt is 630 Mellow Mt. Road, P.O.
Box 70, Park City, UT84060.
(92)
The
address of Michael Chill is 600 West End avenue, Apt. 8-A, NewYork, NY10024.
(93)
The
address of Michael J. Mathieu is 20 Andrews Road, Westborough, MA01581.
(94)
The
address of Michael P Valentine is 21 Fox Trace Lane, Hudson, OH44236.
(95)
The address of Michael Silverman is c/o Katalyst
Securities, 630 Third Avenue, 5th Floor, New York, NY10017.
Mr.
Silverman has advised the Company that he is affiliated with
Katalyst Securities, a broker-dealer, and that the securities were
received solely as an investment and not with a view to or for
resale or distribution.
(96)
The
address of Nat Tursi is 141-59 11th Avenue, Whitestone, NY11356.
(97)
The address of Opes Equities, Inc. is 30 Waterside
Plaza, Suite 7, New York, NY10010. Barbara J. Glenns, Vice
President of Opes Equities, Inc., may be deemed to have
voting and investment power over these securities.
(98)
The
address of Patrick G Patel is 3 Lagoon Drive East, Toms River, NJ08753.
(99)
The
address of Pauline M. Howard Trust dtd 01/02/1998 is 5 River Road,
Elkton, MD21922.
(100)
The address of Pensco Trust Co Custodian FBO
Andrew J. Malik, IRA is 700 Park Avenue, PHB, New York, NY10021.
Andrew J. Malik may be deemed to have voting and investment
power over these securities.
(101)
The address of Peter K Janssen is c/o Katalyst
Securities, 630 Third Avenue, 5th Floor, New York, NY10017.
Mr. Janssen
has advised the Company that he is affiliated with Katalyst
Securities, a broker-dealer, and that the securities were received
solely as an investment and not with a view to or for resale or
distribution.
(102)
The
address of Peter Ohler is 14246 Dorcellin Court, Nevada City, CA95959.
(103)
The
address of Philip W. Faucette II is 7725 Friendship Church Road,
Brown Summit, NC27214.
(104)
The address of Proactive Capital Partners, LP is
150 East 58th Street, 20th Floor, New York, NY10155. Jeffrey
Ramson, Manager of Proactive Capital Partners, LP, may be deemed to
have voting and investment power over these
securities.
(105)
The
address of Prokopi Sarris is 30-47 43rd Street, Astoria, NY11103.
(106)
The address of Red Beard Holdings LLC is 17595
Harvard Avenue, Suite C511, Irvine, CA92614. Vincent C. Smith,
Manager of Red Beard Holdings LLC, may be deemed to have
voting and investment power over these securities.
(107)
The
address of Richard N Molinsky is 51 Lord's Highway East, Weston, CT06883.
(108)
The
address of Richard Pashayan is 3 Whitehall Boulevard South, GardenCity, NY11530.
(109)
The
address of Robert Burkhardt is 165 West End Avenue, #22E, New York,
NY10023.
(110)
The
address of Robert Reitz is 380 Atterbury Boulevard, Hudson, OH44236.
(111)
The address of Roman Livson is c/o Katalyst
Securities, 630 Third Avenue, 5th Floor, New York, NY10017.
Mr. Livson
has advised the Company that he is affiliated with Katalyst
Securities, a broker-dealer, and that the securities were received
solely as an investment and not with a view to or for resale or
distribution.
The
address of Scot Cohen is 20 East 20th Street, New York, NY10003.
(114)
The address of SDS Capital Partners II, LLC is 500
Summer Street, Suite 405, Stamford, CT06901. Steve Derby, Managing
Member of SDS Capital Partners II, LLC, may be deemed to
have voting and investment power over these
securities.
(115)
The address of SEG-RedaShex LLC is 135 Sycamore
Drive, Roslyn, NY11576. Jonathan Schechter, Managung Member of
SEG-RedaShex LLC, may be deemed to have voting and
investment power over these securities.
(116)
The
address of Shaar Hazuhov, LLC is 100 Hewes Street, Brooklyn, NY11249.
(117)
The
address of Shanup Gundecha is 11309 Ridgegate Drive, Raleigh, NC27617.
(118)
The address of Shay Capital LLC is 280 Park
Avenue, 5th Floor West, New York, NY10017. Michael Murray,
President of Shay Capital LLC, may be deemed to have voting
and investment power over these securities.
(119)
The address of Stephen Renaud is c/o Katalyst
Securities, 630 Third Avenue, 5th Floor, New York, NY10017.
Mr. Renaud
has advised the Company that he is affiliated with Katalyst
Securities, a broker-dealer, and that the securities were received
solely as an investment and not with a view to or for resale or
distribution.
(120)
The address of Stormy Monday LLC is 84 White
Street, Apt. #9C, New York, NY10013. Bruce Bernstein, Member of
Stormy Monday LLC, may be deemed to have voting and
investment power over these securities.
(121)
The address of The Bradley R. Kroenig Revocable
Trust dtd 05/11/2016, Fourth Amended and Restated Trust dtd
09/13/2017 is 657 Daniel Court, Wyckoff, NJ07481. Bradley R.
Kroenig, Trustee of the The Bradley R. Kroenig Revocable Trust, may
be deemed to have voting and investment power over these
securities.
(122)
The address of The Craig R. Whited & Gilda
Whited Joint Living Trust dtd 03/25/2016 is 31145 Palos Verdes
Drive East, Rancho Palos Verdes, CA90275. Craig Whited, Trustee of
the Craig R. Whited & Gilda Whited Joint Living Trust, may be
deemed to have voting and investment power over these
securities.
(123)
The address of The Fourys Co. Ltd is Alan
Yanowitz, General Partner, 25825 Science Park Drive, #110,
Beachwood, OH44122. Alan Yanowitz, General Partner of The Fourys
Co. Ltd., may be deemed to have voting and investment power
over these securities.
(124)
The
address of Thomas A. McGurk, Jr. is 7 Douglass Manor, Covington, IN47932.
(125)
The
address of Thomas Israel Unterberg is 100 West River Road, Rumson,
NJ07760.
(126)
The
address of Thomas Israel Unterberg TTEE Ellen Unterberg Celli
Family Trust UA DTD 03/22/1993 is 100 West River Road, Rumson, NJ07760.
(127)
The
address of Thomas Israel Unterberg TTEE Emily Unterberg Satloff
Family Trust U/A DTD 03/25/1993 is 100 West River Road, Rumson, NJ07760.
(128)
The
address of Thomas J. Enright, Jr. is 698 Ashbrooke Way, Hudson, OH44236.
(129)
The
address of Thomas Zahavi is 240 Danbury Circle North, Rochester, NY14618.
(130)
The
address of Tim Elmes, LLC Pension Plan is 901 E. Las Olas
Boulevard, Suite 101, Fort Lauderdale, FL33301.
(131)
The address of US International Consulting
Network-New Jersey Corp (dba ICN Holding) is 80 Scenic Drive, Suite
5, Freehold, NJ07728. Igor Kokorine, Chief Financial Officer of US
International Consulting Network-New Jersey Corp, may be deemed to
have voting and investment power over these
securities.
(132)
The address of V3 Capital is 20 East 20th Street,
New York, NY10003. Scot Cohen. Managing Partner of V3 Capital, may
be deemed to have voting and investment power over these
securities.
(133)
The
address of Wallace P. Kithcart, Jr. is 9287 Hickory Ridge Drive,
Streetsboro, OH44241.
(134)
The address of Warberg WF VI LP is 716 Oak Street,
Winnetka, IL60093. Daniel Warsh, Manager of Warberg WF VI LP, may
be deemed to have voting and investment power over these
securities.
(135)
The address of Westwood Capital Opportunity Funds
LLC is 312 Westwood Rd., Woodmere, NY11598. Ari Zinberg, Chief
Investment Officer of Westwood Capital Opportunity Funds LLC, may
be deemed to have voting and investment power over these
securities.
(136)
The
address of Willaim Rosenstadt is c/o Ortoli Rosenstadt LLP, 366
Madison Avenue, 3rd Floor, New York, NY10017.
(137)
The
address of William J Febbo is 34 Calle Mimosa, San Juan, PR00927.
(138)
The
address of William Strawbridge is 11 Graceful Elm Court, TheWoodlands, TX77381.
(139)
The
address of William Sykes is 19296 East County Road 1700 N,
Charleston, IL61920-8385.
(140)
The address of Yad Zahav LLC is 100 Hewes Street,
Brooklyn, NY11249. Ahron Gold, Officer of Yad Zahav LLC, may be
deemed to have voting and investment power over these
securities.
(141)
The
address of Zachary Arrick is 435 W. 31st Street #41F, New York, NY10001.
The selling stockholders and any of its pledgees,
donees, assignees and other successors-in-interest may, from time
to time sell any or all of their shares of common stock on any
market or trading facility on which the shares are traded or in
private transactions. On January 21, 2020,
the last reported sales price for our common stock was
$0.0022 per share. Because our
common stock is currently quoted on the OTC Pink Marketplace, the
shares of common stock offered pursuant to this prospectus may only
be offered and sold by the selling stockholders at a fixed
price of $0.0023 per share until our common stock is quoted on
the OTCQB tier of the OTC Markets (the
“OTCQB”),
and thereafter at prevailing market prices or privately negotiated
prices or in transactions that are not in the public market.
Although we have applied to have our common stock quoted on the
OTCQB and we believe that upon the effective date of this
registration statement our common stock will qualify of quotation
on the OTCQB, we cannot assure you
that our common stock will, in fact, be quoted on
the OTCQB.
If
and when our common stock becomes subject to quotation on
the OTCQB, of which there can be no assurance, sales of
the shares of common stock offered pursuant to this prospectus by
the selling stockholders may be at fixed or negotiated prices. The
selling stockholders may use any one or more of the following
methods when selling shares:
●
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
●
block
trades in which the broker-dealer will attempt to sell the
securities as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
●
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its account;
●
an
exchange distribution in accordance with the rules of the
applicable exchange;
●
privately
negotiated transactions;
●
settlement of short
sales;
●
in
transactions through broker-dealers that agree with the selling
stockholders to sell a specified number of such securities at a
stipulated price per security;
●
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;
●
a
combination of any such methods of sale; or
●
any
other method permitted pursuant to applicable law.
The selling stockholders also may resell all or a
portion of the securities in open market transactions in reliance
upon Rule 144 under the Securities Act, as permitted by that rule,
or Section 4(1) under the Securities Act, if available, rather
than under this prospectus, provided that they meet the criteria
and conform to the requirements of those
provisions
Broker-dealers
engaged by the selling stockholders may arrange for other
brokers-dealers to participate in sales. If the selling stockholders effect such
transactions by selling securities to or through underwriters,
broker-dealers or agents, such underwriters, broker-dealers or
agents may receive commissions in the form of discounts,
concessions or commissions from the selling stockholders or
commissions from purchasers of the securities for whom they may act
as agent or to whom they may sell as principal. Such commissions
will be in amounts to be negotiated, but, except as set forth in a
supplement to this prospectus, in the case of an agency transaction
will not be in excess of a customary brokerage commission in
compliance with NASD Rule 2440; and in the case of a principal
transaction a markup or markdown in compliance with NASD
IM-2440.
In
connection with the sale of the common stock or interests in common
stock, the selling stockholders may enter into hedging transactions
with broker-dealers or other financial institutions, which may in
turn engage in short sales of the common stock in the course of
hedging the positions they assume. The selling stockholders may
also sell shares of the common stock short and deliver these
securities to close out their short positions, or loan or pledge
the shares of common stock to broker-dealers that in turn may sell
these securities. The selling stockholders may also enter into
option or other transactions with broker-dealers or other financial
institutions or create one or more derivative securities which
require the delivery to such broker-dealer or other financial
institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to
this prospectus (as supplemented or amended to reflect such
transaction).
-79-
The
selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be
“underwriters” within the meaning of the Securities Act
in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
Each selling stockholder has informed the Company that it does not
have any written or oral agreement or understanding, directly or
indirectly, with any person to distribute their shares of common
stock.
The
Company is required to pay certain fees and expenses incurred by
the Company incident to the registration of the shares. The Company
has agreed to indemnify the selling stockholders against certain
losses, claims, damages and liabilities, including liabilities
under the Securities Act.
The
selling stockholders will be subject to the prospectus delivery
requirements of the Securities Act, including Rule 172 thereunder.
The selling stockholders have advised us that there is no
underwriter or coordinating broker acting in connection with the
proposed sale of the resale shares by the selling
stockholders.
We
agreed to keep this prospectus effective until the earlier of (i)
the date on which the shares may be resold by the selling
stockholders without registration and without regard to any volume
or manner-of-sale limitations by reason of Rule 144, without the
requirement for the Company to be in compliance with the current
public information under Rule 144 under the Securities Act, or any
other rule of similar effect (assuming that the shares were at no
time held by any affiliate of ours, and all warrants are exercised
by “cashless exercise” as provided in each of the
warrants) or (ii) all of the shares have been sold pursuant to this
prospectus or Rule 144 under the Securities Act, or any other rule
of similar effect. The resale shares will be sold only through
registered or licensed brokers or dealers if required under
applicable state securities laws. In addition, in certain states,
the resale shares of common stock covered hereby may not be sold
unless they have been registered or qualified for sale in the
applicable state or an exemption from the registration or
qualification requirement is available and is complied
with.
Under
applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale shares may not
simultaneously engage in market making activities with respect to
the common stock for the applicable restricted period, as defined
in Regulation M, prior to the commencement of the distribution. In
addition, the selling stockholders will be subject to applicable
provisions of the Exchange Act, and the rules and regulations
thereunder, including Regulation M, which may limit the timing of
purchases and sales of shares of the common stock by the selling
stockholders or any other person. We will make copies of this
prospectus available to the selling stockholders and have informed
them of the need to deliver a copy of this prospectus to each
purchaser at or prior to the time of the sale (including by
compliance with Rule 172 under the Securities Act).
As of the date of this prospectus, the
Company’s authorized capital stock currently consists of 50.0
billion shares of common stock, and 5.0 million shares of preferred
stock, $0.001 par value per share, of which 300,000 shares
have been designated as Series A Convertible Preferred Stock
(“Series A
Preferred”) and 1,500,000
shares have been designated as Series B Convertible Preferred Stock
(“Series B
Preferred”).
As of January 17,
2020, there were 18,973,827,540 shares of common stock
outstanding. Holders of our common stock are entitled to one vote
for each share held on all matters submitted to a vote of the
Company’s stockholders. Holders
of common stock are entitled to
receive, ratably, any dividends that may be declared by our Board
of Directors out of legally available funds, subject to any
preferential dividend rights of any outstanding Preferred Stock.
Upon the liquidation, dissolution or winding up of the Company,
holders of our common stock are
entitled to receive, ratably, the Company’s net assets
available after the payment of all debts and other liabilities, and
subject to the prior rights of any outstanding Preferred Stock.
Holders of common stock have no
preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are fully paid and nonassessable. The rights,
preferences and privileges of holders of common stock
are also subject to, and may be
adversely affected by, the rights of holders of shares of any
series of Preferred Stock which the Company may designate and issue
in the future without further stockholder
approval.
Preferred
Stock
The Board is currently authorized, without further
stockholder approval, to issue from time to time up to an aggregate
of 5.0 million shares of Preferred Stock in one or more series and
to fix or alter the designations, preferences, rights,
qualifications, limitations or restrictions of the shares of each
series, including the dividend rights, dividend rates, conversion
rights, voting rights, term of redemption (including sinking fund
provisions), redemption price or prices, liquidation preferences
and the number of shares constituting any series or designations
without further vote or action by the stockholders. The issuance of
Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of management without further action
by the stockholders and may adversely affect the voting and other
rights of the holders of common stock. The issuance of Preferred Stock with voting and
conversion rights may adversely affect the voting power of the
holders of common stock,
including the loss of voting control to others.
As of
January 17,2020 and following the conversion of the Series B
Preferred following the filing of the Amended and Restated Charter,
the Series A Preferred was our only outstanding series of Preferred
Stock. Below is a summary of the terms of the Series A Preferred.
For a full description of the rights and preferences associated
with the Series A Preferred, please refer to the Series A
Certificate of Designation filed as an exhibit to the registration
statement of which this prospectus forms a
part.
Series A Preferred
On April 25, 2019, in connection with the Share
Exchange, the Company filed the Series A COD with the Secretary of
State of the State of Nevada, designating 300,000 shares of our
Preferred Stock as Series A Convertible Preferred Stock. Each share
of Series A Preferred has a stated value of $100 per share (the
“Series A Stated
Value”), and ranks senior
to all of the Company’s outstanding securities, including
shares of Series B Preferred.
The Series A Preferred provides holders with the
right to receive a one-time dividend payment equal to 8% of the
Series A Stated Value (the “Series A
Dividend”), which Series
A Dividend is payable by the Company on the earlier to occur of (i)
when declared at the election of the Company, (ii) one year from
the date of issuance, or (iii) when a holder elects to convert its
shares of Series A Preferred into common stock.
-81-
Each share of Series A Preferred is convertible,
at the option of the holder, into that number of shares of common
stock equal to the Series A Stated Value plus all accrued but
unpaid dividends, divided by $0.0044313, which conversion rate is
subject to adjustment in accordance with the terms of the Series A
COD; provided,
however, that holders of the
Series A Preferred may not convert any shares of Series A Preferred
into common stock unless and until the
Company has effected the Authorized Share Increase. In addition,
holders of Series A Preferred are prohibited from converting Series
A Preferred into common stock if, as a
result of such conversion, the holder, together with its
affiliates, would own more than 4.99% (or 9.99% upon the election
of the holder prior to the issuance of the Series A Preferred) of
the total number of shares of common
stock then issued and outstanding. Each share of
Series A Preferred is convertible at the option of the Company at
the same conversion rate set forth above, at such time, if ever,
that the Company’s common stock is
listed on the Nasdaq Stock Market and the Company has paid the
Series A Dividend. In addition, upon the occurrence of a Bankruptcy
Event (as defined in the Series A COD), the Company shall be
required to redeem, in cash, all outstanding shares of Series A
Preferred at a price equal to the conversion
amount; provided,
however, that holders of the
Series A Preferred shall have the right to waive, in whole or in
part, such right to receive payment upon the occurrence of a
Bankruptcy Event.
Holders of the Series A Preferred shall vote on an
as-converted basis along with holders of the Company’s
common stock on all matters presented to
the Company’s stockholders; provided,
however, that the number of
votes that any holder, together with its affiliates, may exercise
in connection with all of the Company securities held by such
holder shall not exceed 9.99% of the voting power of the Company.
In addition, pursuant to the Series A COD, the Company shall not
take the following actions without obtaining the prior consent of
at least a majority of the holders of the outstanding Series A
Preferred, voting separately as a single class: (i) amend the
Company’s Charter or our Amended and Restated
Bylaws, or file a certificate of designation or certificate of
amendment to any series of preferred stock if such action would
adversely affect the holders of the Series A Preferred, (ii)
increase or decrease the authorized number of shares of Series A
Preferred, (iii) create or authorize any series of stock that ranks
senior to, or on parity with, the Series A Preferred, (iv)
purchase, repurchase or redeem any shares of junior stock, or (v)
pay dividends on any junior or parity stock. Furthermore, so long
as at least 25% of the Series A Preferred remain outstanding,
holders of the Series A Preferred (other than the Direct Investors)
shall have a right to appoint two members to the Company’s
Board of Directors, and the Board shall not consist of more than
five members, unless the holders of a majority of the outstanding
Series A Preferred have consented to an increase in such
number.
-82-
Exclusive
Forum Bylaws Provision. Our Amended and
Restated 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, the
Securities Act or any other claim for which the federal courts have
exclusive jurisdiction. 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.
Resale
Registration Rights
Pursuant to the
Registration Rights Agreements and subject to the rules and
regulations of the SEC, we have agreed to file a shelf registration
statement covering the resale of the shares of common stock issuable upon conversion of the Series A Preferred
and the previously outstanding shares of Series B Preferred, and
shares of common stock issuable
upon exercise of the Investor Warrants held by the former
Members and Direct Investors who are parties to the agreements. We
are required to use our best effort to file the shelf registration
statement within 30 days following the Closing Date. The
registration statement of which this prospectus forms a part is the
shelf registration statement that we are required to file under the
Registration Rights Agreements. In the event fewer than all of our
outstanding shares of common stock can be registered due to
limitations on the use of Rule 415 of the Securities Act for the
resale of the shares of common stock, the so-called Rule 415
doctrine, priority will be given to the shares issued in the Share
Exchange.
Registration of
these shares under the Securities Act would result in the shares
becoming saleable under the Securities Act immediately upon the
effectiveness of such registration, except for shares held by
affiliates. Any sales of securities by holders of these shares
could adversely affect the trading prices, if any, of our common
stock.
Certain
legal matters in connection with this offering will be passed upon
for us by Disclosure Law Group, a Professional Corporation, of San
Diego, California.
The consolidated
financial statements for True Drinks Holdings, Inc. appearing in
this prospectus for the years ended December 31, 2018 and 2017
(which report expresses and unqualified opinion and an explanatory
paragraph related to the Company’s ability to continue as a
going concern) have been audited by Squar Milner
LLP of Irvine,
California, an independent
registered public accounting firm, as set forth in their report
thereon. Such consolidated financial statements are included in
this prospectus in reliance upon such reports given on the
authority of such firm as experts in accounting and
auditing.
The financial
statements for Charlie’s appearing in this prospectus for the
years ended December 31, 2018 and 2017 have been audited by
Squar Milner LLP of
Irvine,
California, an independent registered public accounting firm, as
set forth in their reports thereon. Such financial statements are
included in this prospectus in reliance upon such reports given on
the authority of such firm as experts in accounting and
auditing.
We have filed with the SEC a registration
statement on Form S-1, which includes amendments and exhibits,
under the Securities Act and the rules and regulations under the
Securities Act for the registration of common stock
being offered by this
prospectus. This prospectus, which constitutes a part of the
registration statement, does not contain all the information that
is in the registration statement and its exhibits and schedules.
Statements in this prospectus that summarize documents are not
necessarily complete, and in each case you should refer to the copy
of the document filed as an exhibit to the registration
statement. The registration statement and other public
filings can be obtained from the SEC’s internet site
at www.sec.gov.
As a public company, we are required to file our
annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, proxy statements on Schedule 14A and
other information (including any amendments) with the SEC. You can
find the Company’s SEC filings at the SEC’s website
at http://www.sec.gov.
Our Internet address is www.charliesholdings.com.
Information contained on our website is not part of this Annual
Report on Form 10-K. Our SEC filings (including any amendments)
will be made available free of charge on www.charliesholdings.com,
as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.
-84-
CHARLIE’S HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Financial Statements of Charlies Holdings, Inc. for the
nine months ended September 30, 2019 and
2018 (unaudited)
Condensed Consolidated Balance
Sheets
F-2
Condensed
Consolidated Statements of Operations
F-3
Condensed Consolidated Statements of
Stockholders' Equity
F-4
Condensed
Consolidated Statements of Cash Flows
F-6
Notes to
Condensed Consolidated Financial Statements
F-7
Page
Audited Financial Statements of True Drinks Holdings, Inc. for the
Years ended December 31, 2018 and 2017
Report
of Independent Registered Public Accounting Firm
F-19
Consolidated
Balance Sheets
F-20
Consolidated
Statements of Operations
F-21
Consolidated
Statements of Stockholders Equity (Deficit)
F-22
Consolidated
Statements of Cash Flows
F-23
Notes
to Consolidated Financial Statements
F-24
Page
Audited Financial Statements of Charlies Chalk Dust, LLC for the
Years ended December 31, 2018 and 2017
Report
of Independent Registered Public Accounting Firm
F-41
Balance
Sheets
F-42
Statements
of Operations
F-43
Statements
of Changes in Members Equity (Deficit)
F-44
Statements
of Cash Flows
F-45
Notes
to Financial Statements
F-46
F-1
CHARLIE’S HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE
SHEETS
(in
thousands, except share and per share amounts)
Convertible
preferred stock ($0.001 par value); 1,800,000 shares
authorized
Series
A, 300,000 shares designated, 206,248 and 0 shares issued and
outstanding as of September 30, 2019 and December 31, 2018,
respectively
-
-
Series
B, 1.5 million shares designated, 0 and 1.4 million shares issued
and outstanding as of September 30, 2019 and December 31, 2018,
respectively
-
1
Common
stock ($0.001 par value); 50 billion shares authorized; 18,936
million shares and 141 million shares issued and outstanding as of
September 30, 2019 and December 31, 2018,
respectively
18,936
141
Additional
paid-in capital
(17,467)
-
Retained
earnings
669
649
Total
stockholders' equity
2,138
791
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 9,780
$ 2,187
The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
Reconciliation of net income to net cash (used in) provided by
operating activities:
Bad
debt expense
573
-
Depreciation
and amortization
36
15
Change
in fair value of derivative liabilities
(2,925)
-
Amortization
of operating lease right-of-use asset
104
-
Stock
based compensation
3,359
-
Subtotal
of non-cash charges
1,147
15
Changes in operating assets and liabilities:
Accounts
receivable
(1,685)
(129)
Inventories
(1,181)
(491)
Prepaid
expenses and other current assets
(393)
148
Other
assets
(26)
(5)
Accounts
payable and accrued expenses
720
(26)
Deferred
revenue
(22)
117
Lease
liabilities
(83)
-
Net
cash (used in) provided by operating activities
(524)
5,698
Cash Flows from Investing Activities:
Purchase
of property, plant and equipment
(365)
(12)
Net
cash used in investing activities
(365)
(12)
Cash Flows from Financing Activities:
Proceeds
from issuance of common stock and warrants in a private offering,
net
23,160
-
Cash
distributions to CCD Members
(18,409)
(5,352)
Net
cash provided by (used in) financing activities
4,751
(5,352)
Net
increase in cash
3,862
334
Cash,
beginning of the period
304
655
Cash, end of the period
$ 4,166
$ 989
Supplemental disclosure of cash flow
information
Cash
paid for interest
$ -
$ -
Cash
paid for income taxes
$ -
$ -
Supplemental disclosure of cash flow
information
Effect
of reverse merger
$ 2,378
$ -
Conversion
of Series B convertible preferred stock
$ 1
$ -
The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
F-6
CHARLIE’S HOLDINGS,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
NOTE
1 – DESCRIPTION OF THE BUSINESS AND BASIS OF
PRESENTATION
Description of the Business
Charlie’s
Holdings, Inc., (formerly True Drinks Holdings, Inc.) a Nevada
corporation, together with its wholly owned subsidiaries and
consolidated variable interest entity (collectively, the
“Company”,
“we”),
currently formulates, markets and
distributes branded e-cigarette liquid for use in both open and
closed consumer e-cigarette and vaping systems. The Company’s
products are produced domestically through contract manufacturers
for sale by select distributors, specialty retailers and
third-party online resellers throughout the United States, as well
as over 80 countries worldwide. The Company’s primary
international markets include the United Kingdom, Italy, Spain,
Belgium, Australia, Sweden and Canada. In June 2019, The Company
launched distribution, through Don Polly, a Nevada limited
liability company that is owned by entities controlled by
Brandon and Ryan Stump, the Company’s Chief Executive Officer
and Chief Operating Officer, respectively, and a consolidated
variable interest for which the Company is the primary
beneficiary (“Don
Polly”), of certain
premium vapor, tincture and topical products containing
hemp-derived cannabidiol (“CBD”). Our CBD based products are produced,
marketed and sold through, Don Polly. and the Company currently
intends to develop and launch additional products containing
hemp-derived CBD in the future.
In addition to Don Polly, we are also the holding
company for two wholly-owned subsidiaries, Charlie’s Chalk
Dust, LLC (“Charlie’s”),
which activity includes production and sale of our branded
nicotine-based e-cigarette liquid, and Bazi, Inc., which activity
includes sales of all-natural energy drink Bazi® All Natural
Energy. At this time, we do not intend to continue sales of the
Bazi product in its current form.
Acquisition of True Drinks
Holdings, Inc.
On April 26, 2019 (the “Closing
Date”), we entered into a
Securities Exchange Agreement with each of the former members
(“Members”) of Charlie’s, and certain direct
investors in the Company (“Direct
Investors”), pursuant to
which we acquired all outstanding membership interests of
Charlie’s beneficially owned by the Members in exchange for
the issuance by the Company of units, with such units consisting of
an aggregate of (i) 15,655,538,349 shares of common stock (which
includes the issuance of an aggregate of 1,396,305 shares of a
newly created class of Series B Convertible Preferred Stock, par
value $0.001 per share (“Series B
Preferred”), convertible
into an aggregate of 13,963,047,716 shares of common stock, issued
to certain individuals in lieu of common stock); (ii) 206,249
shares of a newly created class of Series A Convertible Preferred
Stock, par value $0.001 per share (“Series A
Preferred”), convertible
into an aggregate of 4,654,349,239 shares of common stock; and
(iii) warrants to purchase an aggregate of 3,102,899,493 shares of
common stock (the “Investor
Warrants”) (the
“Share Exchange”). As a result of the Share Exchange,
Charlie’s became a wholly owned subsidiary of the
Company.
Immediately prior to, and in connection with, the
Share Exchange, Charlie’s consummated a private offering of
membership interests that resulted in net proceeds to
Charlie’s of approximately $27.5 million (the
“Charlie’s
Financing”). Katalyst
Securities LLC (“Katalyst”) acted as the sole placement agent in
connection with the Charlie’s Financing pursuant to an
Engagement Letter entered into by and between Katalyst,
Charlie’s and the Company on February 15, 2019. As
consideration for its services in connection with the
Charlie’s Financing and the Share Exchange, the Company
issued to Katalyst and its designees five-year warrants to purchase
an aggregate of 930,869,848 shares of Common Stock at a price of
$0.0044313 per share (the “Placement Agent
Warrants”). The Placement
Agent Warrants have substantially the same terms as those set forth
in the Investor Warrants.
The
Share Exchange resulted in a change of control of the Company, with
the Members and Direct Investors owning approximately 85.7% of the
Company’s outstanding voting securities immediately after the
Share Exchange, and the Company’s current stockholders
beneficially owning approximately 14.3% of the issued and
outstanding voting securities, which includes the Advisory Shares.
Following the Share Exchange, Ryan Stump and Brandon Stump, the
founders of Charlie’s and the Company’s Chief Executive
Officer and Chief Operating Officer, respectively, held in excess
of 50% of the Company’s issued and outstanding voting
securities.
The Share Exchange is accounted for as a reverse
recapitalization in accordance with accounting principles generally
accepted in the United States (“U.S. GAAP”) because the primary assets of the Company
were nominal following the close of the Share Exchange.
Charlie’s was determined to be the accounting acquirer based
upon the terms of the Share Exchange and other factors including:
(i) Charlie’s stockholders and other persons holding
securities convertible, exercisable or exchangeable directly or
indirectly for Charlie’s membership units now own
approximately 49%, on a fully diluted basis, of the Company’s
outstanding securities immediately following the effective time of
the Merger, (ii) individuals associated with Charlie’s now
hold a majority of the seats on the Company’s Board of
Directors and (iii) Charlie’s management holds all key
positions in the management of the combined Company. Accordingly,
the historical financial statements of True Drinks became the
Company's historical financial statements including the comparative
prior periods. All references in the unaudited condensed
consolidated financial statements to the number of shares and
per-share amounts of common stock have been retroactively restated
to reflect the exchange rate.
F-7
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, 2018
balances within the interim condensed consolidated financial
statements were derived from the audited 2018 financial statements
and notes thereto of Charlie’s. These financial statements
and the notes hereto should be read in conjunction with the audited
December 31, 2018 financial statements and notes thereto contained
in our Registration Statement on Form S-1, filed with the SEC on
July 11, 2019, and amended on
September 30, 2019 and October 28, 2019 (File No. 333-232596). In
the opinion of the Company, all adjustments, including normal
recurring adjustments necessary to present fairly the financial
position, results of operations, and cash flows of the Company for
the interim period have been included. The results of operations
for the interim period are not necessarily indicative of the
results for any subsequent interim period or for the full
year.
The
financial information contained in these unaudited condensed
consolidated financial statements and footnotes are based on
Charlie’s historical financial statements and the
Company’s financial activity beginning April 26, 2019, as
adjusted, to give effect to Charlie’s reverse
recapitalization of the Company and the Charlie’s Financing
completed prior to the Share Exchange. In addition, from the period
April 26, 2019 until September 30, 2019, there were minimal costs
and revenue associated with the Bazi product line which are
included in the interim condensed consolidated financial
statements. As noted above, we do not intend to continue to produce
and sell the Bazi product line in its current form, and these costs
and expenses are nominal and will continue to be so in the future.
The operating results of Don Polly are also
included.
Historical
financial information presented prior to April 26, 2019 is that of
Charlie’s only, while financial information presented after
April 26, 2019 includes Charlie’s, Don Polly, Bazi Drinks and
the Company, which includes the transactions associated with the
share exchange and private placement transaction along with ongoing
corporate costs.
Risks and Uncertainties
The
Company operates in an environment that is subject to rapid changes
and developments in laws and regulations that could have a
significant impact on the Company’s ability to sell its
products. Beginning in September 2019, certain states temporarily
banned the sale of flavored e-cigarettes, and several states and
municipalities are considering implementing similar restrictions.
Federal, state, and local governmental bodies across the United
States have indicated that flavored e-cigarette liquid,
vaporization products and certain other consumption accessories may
become subject to new laws and regulations at the federal, state
and local levels. The application of any new laws or regulations
that may be adopted in the future, at a federal, state, or local
level, directly or indirectly implicating flavored e-cigarette
liquid and products used for the vaporization of nicotine could
significantly limit the Company’s ability to sell such
products, result in additional compliance expenses, and/or require
the Company to change its labeling and/or methods of distribution.
Any ban of the sale of flavored e-cigarettes directly limits the
markets in which the Company may sell its products. In the event
the prevalence of such bans and/or changes in laws and regulations
increase across the United States, or internationally, the
Company’s business, results of operations and financial
condition could be adversely impacted.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Principles of Consolidation
As
noted above, the consolidated financial statements include the
accounts of the Company, Charlie’s Holdings, Inc., its two
100% wholly owned subsidiaries, Charlie’s Chalk Dust, LLC and
Bazi, Inc, and Don Polly, LLC, a consolidated variable interest for
which the Company is the primary beneficiary (see Note 8). All
inter-company balances and transactions have been eliminated in
consolidation.
Use of Estimates
The
preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
U.S.
GAAP requires disclosing the fair value of financial instruments to
the extent practicable for financial instruments which are
recognized or unrecognized in the balance sheet. The fair value of
the financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor
does the fair value amount consider the tax consequences of
realization or settlement.
In
assessing the fair value of financial instruments, the Company uses
a variety of methods and assumptions, which are based on estimates
of market conditions and risks existing at the time. For certain
instruments, including cash and cash equivalents, accounts
receivable, accounts payable, warrant liability and accrued
expenses, it was estimated that the carrying amount approximated
fair value because of the short maturities of these
instruments.
F-8
Revenue Recognition
The Company recognizes revenues in accordance with
Accounting Standards Codification (“ASC ”) 606 – Contracts with Customers.
Revenues are generated from contracts with customers that consist
of sales to retailers and distributors. Contracts with customers
are generally short term in nature with the delivery of product as
a single performance obligation. Revenue from the sale of product
is recognized at the point in time when the single performance
obligation has been satisfied and control of the product has
transferred to the customer. In evaluating the timing of the
transfer of control of products to customers, the Company considers
several indicators, including significant risks and rewards of
products, the right to payment, and the legal title of the
products. Based on the assessment of control indicators, sales are
generally recognized when products are received by customers.
Shipping generally occurs prior to the transfer of control to the
customer and is therefore accounted for as a fulfillment
expense.
In circumstances where shipping and handling
activities occur after the customer has obtained control of the
product, the Company has elected to account for shipping and
handling activities as a fulfillment cost rather than an additional
promised service. Contract durations are generally less than one
year, and therefore costs paid to obtain contracts, which generally
consist of sales commissions, are recognized as expenses in the
period incurred. Revenue is measured by the transaction price,
which is defined as the amount of consideration expected to be
received in exchange for providing goods to customers. The
transaction price is adjusted for estimates of known or expected
variable consideration, which includes refunds and returns as well
as incentive offers and promotional discounts on current orders.
Sales returns are generally not material to the financial
statements, and do not comprise a significant portion of variable
consideration. Estimates for sales returns are based on, among
other things, an assessment of historical trends, information from
customers, and anticipated returns related to current sales
activity. These estimates are established in the period of sale and
reduce revenue in the period of the sale. Variable consideration
related to incentive offers and promotional programs are recorded
as a reduction to revenue based on amounts the Company expects to
collect. Estimates are regularly updated and the impact of any
adjustments are recognized in the period the adjustments are
identified. In many cases, key sales terms such as pricing and
quantities ordered are established at the time an order is placed
and incentives have very short-term
durations.
Amounts
billed and due from customers are short term in nature and are
classified as receivables since payments are unconditional and only
the passage of time related to credit terms is required before
payments are due. The Company does not grant payment financing
terms greater than one year. Payments received in advance of
revenue recognition are recorded as deferred
revenue.
Cash and Cash Equivalents
The
Company considers all liquid investments purchased with original
maturities of ninety days or less to be cash
equivalents.
Accounts Receivable
Accounts
receivable is recorded at the invoiced amount and does not bear
interest. We determine the allowance for doubtful accounts by
regularly evaluating individual customer receivables and
considering a customer’s financial condition, credit history
and current economic conditions and set up an allowance for
doubtful accounts when collection is uncertain. Customers’
accounts are written off against the allowance when all attempts to
collect have been exhausted. Recoveries of accounts receivable
previously written off are recorded as income when received. As of
September 30, 2019, and December 31, 2018, the allowance for bad
debt totaled $379,000 and $151,000, respectively. We determine the
allowance for customer returns by evaluating historical trends in
customer refunds as well as changes in the regulatory environment
that could affect the future salability of certain products. As of
September 30, 2019 and December 31, 2018, the allowance for
customer returns totaled $346,000 and $0,
respectively.
Inventories
Inventories
primarily consist of finished goods and are stated at the lower of
cost (determined by the average cost method) or net realizable
value. We calculate estimates of excess and obsolete inventories
determined primarily by reviewing inventory on hand, historical
sales activity, industry trends and expected net realizable value.
As of September 30, 2019, and December 31, 2018, the reserve for
excess and obsolete inventories totaled $66,000 and $74,000,
respectively.
Stock-Based Compensation
We account for all stock-based compensation using
a fair value-based method. The fair value of equity-classified
awards granted to employees is estimated on the date of the grant
using the Black-Scholes option-pricing model and the related
stock-based compensation expense is recognized over the vesting
period during which an employee is required to provide service in
exchange for the award. We measure the fair value of
liability-classified awards using a Monte Carlo valuation model.
Compensation cost is recognized over the service period and is
remeasured at each reporting period through
settlement.
F-9
Income taxes
Income taxes are
computed under the liability method. This method requires the
recognition of deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax basis
of our assets and liabilities. The impact on deferred taxes of
changes in tax rates and laws, if any, are applied to the years
during which temporary differences are expected to be settled and
are reflected in the consolidated financial statements in the
period of enactment. A valuation allowance is recorded when it is
more likely than not that some of the deferred tax assets will not
be realized.
Financial statement
effects of a tax position are initially recognized when it is more
likely than not, based on the technical merits, that the position
will be sustained upon examination by a taxing authority. A tax
position that meets the more-likely-than-not recognition threshold
is initially and subsequently measured as the largest amount of tax
benefit that meets the more-likely-than-not threshold of being
realized upon ultimate settlement with a taxing authority. We
recognize potential accrued interest and penalties related to
unrecognized tax benefits as income tax
expense.
Segments
Operating
segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation
by the chief operating decision-maker in making decisions regarding
resource allocation and assessing performance. The Company views
its operations and manages its business in one operating
segment.
The Financial Accounting Standards Board
(“FASB”) issued ASU No. 2014-09,
Revenue from
Contracts with Customers (Topic 606). The amendments in this update create common
revenue recognition guidance for entities reporting revenue under
U.S. GAAP and IFRS by requiring entities to recognize revenue to
depict the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods and services.
Entities should apply the following five steps: (1) identify the
contract(s) with a customer, (2) identify performance obligations
in the contract, (3) determine transaction price, (4) allocate
transaction price to performance obligations in the contract, and
(5) recognize revenue when (or as) the entity satisfies a
performance obligation. Entities should also disclose qualitative
and quantitative information about (1) contracts with customers,
including revenue and impairments recognized, disaggregation of
revenue, and information about contract balances and performance
obligations and related transaction price allocation to remaining
performance obligations, (2) significant judgments and changes
thereof in determining the timing of performance obligations over
time or at a point in time and the transaction price and amounts
allocated to performance obligations, and (3) assets recognized
from the costs to obtain or fulfill a contract. The amendments in
this update are effective for annual reporting periods beginning
after December 15, 2017.
The
Company adopted this guidance on January 1, 2018 using the modified
retrospective transition method. Prior periods were not adjusted
and, based on the Company’s implementation assessment, no
cumulative-effect adjustment was made to the opening balance of
retained earnings. The adoption of this standard did not have a
material impact on the financial statements other than expanded
disclosures. For further description of the Company’s revenue
recognition policy refer to the Revenue Recognition section above
and for disaggregated revenue information refer to the Segment
Reporting section above.
Leases
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in
order to increase transparency and comparability among
organizations by, among other provisions, recognizing lease assets
and lease liabilities on the balance sheet for those leases
classified as operating leases under previous GAAP. For public
companies, ASU 2016-02 is effective for fiscal years beginning
after December 15, 2018 (including interim periods within those
periods) using a modified retrospective approach and early adoption
is permitted. In transition, entities may also elect a package of
practical expedients that must be applied in its entirety to all
leases commencing before the adoption date, unless the lease is
modified, and permits entities to not reassess (a) the existence of
a lease, (b) lease classification or (c) determination of initial
direct costs, as of the adoption date, which effectively allows
entities to carryforward accounting conclusions under previous U.S.
GAAP. In July 2018, the FASB issued ASU 2018-11, Leases (Topic
842): Targeted Improvements, which provides entities an optional
transition method to apply the guidance under Topic 842 as of the
adoption date, rather than as of the earliest period presented. The
Company adopted Topic 842 on January 1, 2019, using the optional
transition method to apply the new guidance as of January 1, 2019,
rather than as of the earliest period presented, and elected the
package of practical expedients described above. Based on the
analysis, on January 1, 2019, the Company recorded right of use
assets of approximately $81,000 and lease liability of
approximately $81,000.
F-10
Improvements to Non-Employee Share-Based Payment
Accounting
In
June 2018, the FASB issued ASU 2018-07 “Improvements to
Non-employee Share-Based Payment Accounting”, which
simplifies the accounting for share-based payments granted to
non-employees for goods and services. Under the ASU, most of the
guidance on such payments to non-employees would be aligned with
the requirements for share-based payments granted to employees. The
amendments are effective for fiscal years beginning after December15, 2019, and interim periods within fiscal years beginning after
December 15, 2020. The Company has early adopted the new standard
effective January 1, 2019 and the adoption of this standard did not
have a material impact on the Company’s condensed
consolidated financial statements.
NOTE
3 – REVERSE RECAPITALIZATION
As noted under the
heading “Share
Exchange” in Note 1 above, on April 26, 2019, we entered into a Securities
Exchange Agreement with each of the Members of Charlie’s, and
certain Direct Investors, pursuant to which we completed the Share
Exchange and acquired all outstanding membership interests of
Charlie’s beneficially owned by the Members in exchange for
the issuance by the Company of units, with such units consisting of
an aggregate of (i) 15,655,538,349 shares of common stock (which
includes the issuance of an aggregate of 1,396,305 shares of a
newly created class Series B Preferred, convertible into an
aggregate of 13,963,047,716 shares of common stock, issued to
certain individuals in lieu of common stock); (ii) shares of a
newly created class of Series A Preferred, convertible into an
aggregate of 4,654,349,239 shares of common stock; and (iii)
Investor Warrants to purchase an aggregate of 3,102,899,493 shares
of common stock . As a result of the Share Exchange,
Charlie’s became a wholly owned subsidiary of the Company.
The Company accounted for such transaction as a reverse
recapitalization.
Immediately prior to, and in connection with, the
Share Exchange, Charlie’s consummated the Charlie’s
Financing, a private offering of membership interests that resulted
in gross proceeds to Charlie’s of approximately $27.5
million. Katalyst acted as the sole placement agent in connection
with the Charlie’s Financing pursuant to an Engagement Letter
entered into by and between Katalyst, Charlie’s and the
Company on February 15, 2019, which was amended on April 16, 2019
(“Amended Engagement
Letter”). As
consideration for its services in connection with the
Charlie’s Financing and Share Exchange, the Company issued to
Katalyst and its designees five-year Placement Agent Warrants to
purchase an aggregate of 930,869,848 shares of common stock at a
price of $0.0044313 per share. The Placement Agent Warrants have
substantially the same terms as those set forth in the Investor
Warrants.
The
Share Exchange resulted in a change of control of the Company, with
the Members and Direct Investors owning approximately 85.7% of the
Company’s outstanding voting securities immediately after the
Share Exchange, and the Company’s current stockholders
beneficially owning approximately 14.3% of the issued and
outstanding voting securities, which includes the Advisory Shares.
Following the Share Exchange, Brandon Stump and Ryan Stump, the
founders of Charlie’s and the Company’s Chief Executive
Officer and Chief Operating Officer, respectively, held in excess
of 50% of the Company’s issued and outstanding voting
securities.
NOTE
4 – 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
F-11
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, 2019 (amount in thousands):
There
were no transfers between Level 1, 2 or 3 during the nine-month
period ended September 30, 2019.
The
following table presents changes in Level 3 liabilities measured at
fair value for the nine-month period ended September 30, 2019. Both
observable and unobservable inputs were used to determine the
fair value of positions that the Company has classified within
the Level 3 category. Unrealized gains and losses associated
with liabilities within the Level
3 category include changes in fair value that were
attributable to both observable (e.g., changes in market interest
rates) and unobservable (e.g., changes in unobservable long- dated
volatilities) inputs (amount in
thousands).
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, 2019 is as follows:
On April 26, 2019, in connection with employment
agreements with its CEO and COO, the Company issued market
condition awards contingent upon the achievement of certain market
capitalization targets. The awards are subject to a
three-year service vesting period. The awards are settleable
in a variable number of common shares based on defined percentages
of the Company's total shares determined by market capitalization
targets and are, therefore, classified as liabilities in accordance
with ASC 718. The fair value of the awards is remeasured at
each reporting period until settlement. Compensation cost is
attributed over the period encompassing the derived service period
and the explicit service period. The fair value of
the market condition awards as of September 30, 3019,
was approximately $2.2 million. The market condition awards
were valued using a Monte Carlo simulation technique, a risk-free
interest rate of 1.6% and a volatility
of 85% based on volatility over 3 years using
daily stock prices. For the nine-month period
ending September 30, 2019, the Company recorded an
expense of $317,000 for these
awards.
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 902.7 million shares of common stock (the
“Advisory
Shares”), including to a
member of the Company’s Board of Directors, pursuant to a
subscription agreement. The fair value of a share of common stock
was $0.0032 which is based upon a valuation prepared by the Company
on the date of the Share Exchange. The Company recorded stock-based
compensation of approximately $2.9 million on the grant
date.
Prior
to the Share Exchange, Charlie’s employees held Member units,
which were automatically converted into 7.1 million shares of
common stock and 69,815 shares of Series B Preferred (or 698.1
million shares of common stock equivalents) due to the effect of
the Share Exchange. The 705.3 million shares of common stock will
vest over a two-year period. The fair value of a share of common
stock was $0.0032 which is based upon a valuation prepared by the
Company on the date of the Share Exchange. The Company recorded
stock-based compensation of approximately $470,000 during the nine
months ended September 30, 2019.
Depreciation and
amortization expense totaled $24,000 and $5,000, respectively,
during the three months ended September 30, 2019 and 2018. For the
nine months ended September 30, 2019 and 2018 depreciation and
amortization expense totaled $36,000 and $15,000,
respectively.
NOTE
7 - CONCENTRATIONS
Vendors
The
Company’s concentration of purchases are as
follows:
During the three
months ended September 30, 2019, purchases from two vendors
represented 86% of total inventory purchases. During the three
months ended September 30, 2018, purchases from two vendors
represented 88% of total inventory purchases. During the nine
months ended September 30, 2019, purchases from two vendors
represented 91% of total inventory purchases. During the nine
months ended September 30, 2018, purchases from two vendors
represented 86% of total inventory purchases.
As of September 30,2019, and December 31, 2018, amounts owed to these vendors totaled
$338,000 and $654,000 respectively, which are included in accounts
payable in the accompanying condensed consolidated balance
sheets.
Accounts Receivable
The
Company’s concentration of accounts receivable are as
follows:
One customer made
up more than 10% of accounts receivable at September 30, 2019.
Customer A owed the Company a total of $219,000, representing 12%
of net receivables. No customer exceeded 10% of total net sales for
the three and nine-month periods ended September 30, 2019 and
September 30, 2018, respectively.
F-13
NOTE
8 – DON POLLY, LLC.
Don
Polly, LLC is a Nevada limited liability company that is owned
by entities controlled by Brandon and Ryan Stump, the
Company’s Chief Executive Officer and Chief Operating
Officer, respectively, and a consolidated variable interest
for which the Company is the primary beneficiary. Don Polly
formulates, sells and distributes the Company’s CBD product
lines.
We evaluate our ownership, contractual and other
interests in entities that are not wholly-owned to determine if
these entities are variable interest entities
(“VIEs”), and, if so, whether we are the primary
beneficiary of the VIE. In determining whether we are the
primary beneficiary of a VIE and therefore required
to consolidate the VIE, we apply a qualitative
approach that determines whether we have both (1) the power to
direct the activities of the VIE that most significantly impact the
VIE’s economic performance and (2) the obligation to absorb
losses of, or the rights to receive benefits from, the VIE that
could potentially be significant to that VIE. We continuously
perform this assessment, as changes to existing relationships or
future transactions may result in the consolidation or
deconsolidation of a VIE. Effective April 25, 2019, we
consolidated the financial statements of Don Polly and it is
considered a VIE of the Company. Since the Company has been
determined to be the primary beneficiary of Don Polly, we have
included Don Polly’s assets, liabilities, and operations in
the accompanying consolidated financial statements of the
Company.
Don
Polly operates under exclusive licensing and service contracts with
the Company whereby the Company receives 75% of net income from the
licensing agreement and 25% of net income from the service
agreement, therefore, as the Company receives 100% of the net
income or incurs 100% of the net loss of the VIE, no
non-controlling interests are recorded.
NOTE
10 – EARNING PER SHARE BASIC AND FULLY
DILUTED
Basic
earnings per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the
reporting period. Diluted earnings per common share is computed
similar to basic earnings per common share except that it reflects
the potential dilution that could occur if dilutive securities or
other obligations to issue common stock were exercised or converted
into common stock. Diluted weighted average common shares include
common stock potentially issuable under the Company’s
convertible notes, warrants and vested and unvested stock
options.
The
following table sets forth the computation of earnings per share
(amounts in thousands except per share
data):
The
following securities were not included in the diluted net earnings
per share calculation because their effect was anti-dilutive as of
the periods presented (in thousands):
On April 25, 2019, in connection with the Share
Exchange, the Company filed the Certificate of Designation,
Preferences and Rights of the Series A Convertible Preferred Stock
(the “ Series A COD
”), with the Nevada Secretary of
State of the State, designating 300,000 shares of its preferred
stock as Series A Convertible Preferred Stock. Each share of Series
A Preferred has a stated value of $100 per share (the
“ Series A Stated Value
”). The Series A Preferred rank
senior to all of the Company’s outstanding securities. At
September 30, 2019, there were a total of 206,248 shares of Series
A Preferred outstanding.
The Series A Preferred provides the holders with
the right to receive a one-time dividend payment equal to 8% of the
Series A Stated Value (the “ Series A Dividend
”), which Series A Dividend
shall be paid by the Company on the earlier to occur of (i) when
declared at the election of the Company, (ii) one year from the
date of issuance, or (iii) when a holder elects to convert its
shares of Series A Preferred into common
stock.
Each share of Series A Preferred is convertible,
at the option of the holder, into that number of shares of common
stock equal to the Series A Stated Value, plus all accrued but
unpaid dividends, divided by $0.044313, which conversion rate is
subject to adjustment in accordance with the terms of the Series A
COD. Holders of Series A Preferred are prohibited from converting
Series A Preferred into common stock if, as a result of such
conversion, the holder, together with its affiliates, would own
more than 4.99% (or 9.99% upon the election of the holder prior to
the issuance of the Series A Preferred) of the total number of
shares of common stock then issued and outstanding. Each share of
Series A Preferred is convertible at the option of the Company, at
the same conversion rate set forth above, at such time, if ever,
that the Company’s common stock is listed on the Nasdaq Stock
Market and the Company has paid the Series A Dividend. In addition,
upon the occurrence of a Bankruptcy Event (as defined in the Series
A COD), the Company shall be required to redeem, in cash, all
outstanding shares of Series A Preferred at a price equal to the
conversion amount; provided, however
, that holders of the Series A
Preferred shall have the right to waive, in whole or in part, such
right to receive payment upon the occurrence of a Bankruptcy
Event.
Holders of the Series A Preferred are entitled to
vote on an as-converted basis along with holders of the
Company’s common stock on all matters presented to the
Company’s stockholders; provided,
however, that the number of
votes that any holder, together with its affiliates, may exercise
in connection with all of the Company securities held by such
holder shall not exceed 9.99% of the voting power of the Company.
In addition, pursuant to the Series A COD, the Company shall not
take the following actions without obtaining the prior consent of
at least a majority of the holders of the outstanding Series A
Preferred, voting separately as a single class: (i) amend the
Company’s Amended and Restated Articles of Incorporation or
bylaws, or file a certificate of designation or certificate of
amendment to any series of preferred stock if such action would
adversely affect the holders of the Series A Preferred, (ii)
increase or decrease the authorized number of shares of Series A
Preferred, (iii) create or authorize any series of stock that ranks
senior to, or on parity with, the Series A Preferred, (iv)
purchase, repurchase or redeem any shares of junior stock, or (v)
pay dividends on any junior or parity stock . Furthermore, so long
as at least 25% of the Series A Preferred remain outstanding,
holders of the Series A Preferred (other than the Direct Investors)
shall have a right to appoint two members to the Company’s
Board of Directors, and the Board shall not consist of more than
five members, unless the holders of a majority of the outstanding
Series A Preferred have consented to an increase in such
number.
F-15
Series B Preferred
On April 26, 2019, in connection with the Share
Exchange, the Company filed the Certificate of Designation,
Preferences and Rights of the Series B Convertible Preferred Stock
(the “Series B
COD”), with the Secretary
of State of the State of Nevada, designating 1.5 million shares of
its preferred stock as Series B Preferred. At the time of the
filing of the Series B COD, the Series B Preferred ranked junior to
the Series A Preferred and senior to all of the Company’s
other outstanding securities.
The Series B Preferred was structured to act as a
common stock equivalent, and, on June 28, 2019, the Company amended
and restated its Articles of Incorporation (the
“Amended and Restated
Charter”) to (i) change
our corporate name to Charlie’s Holdings, Inc. and (ii)
increase the number of shares authorized as common stock from 7.0
billion to 50.0 billion shares. The Amended and Restated Charter
was approved by our Board of Directors and holders of a majority of
our outstanding voting securities on May 8, 2019, and the Amended
and Restated Charter was filed with the State of Nevada on June 28,2019. As a result of the filing of the Amended and Restated Charter
and the increase of our authorized common stock to 50.0 billion
shares, all 1,396,305 outstanding shares of Series B Preferred
automatically converted into a total of 13,963,047,716 shares of
common stock in accordance with the Series B
COD.
At September 30,2019, no shares of Series B Preferred were
outstanding.
Prior
to the filing of the Amended and Restated Charter, holders of the
Series B Preferred were entitled to vote on an as-converted basis
along with holders of the Company’s common stock on all
matters presented to the Company’s stockholders. In addition,
pursuant to the Series B COD, the Company was not permitted to take
the following actions without obtaining the prior consent of at
least 50% of the holders of the outstanding Series B Preferred,
voting separately as a single class: (i) amend the provisions of
the Series B COD so as to adversely affect holders of the Series B
Preferred, (ii) increase the authorized number of shares of Series
B Preferred, or (iii) effect any distribution with respect to
junior stock, unless the Company also provides such distribution to
holders of the Series B Preferred.
Common Stock
As
noted above, on June 28, 2019, the Company filed the Amended and
Restated Charter to change the name of the Company to
“Charlie’s Holdings, Inc.” (as mentioned in Note
1), as well as to increase the number of shares of the
Company’s common stock authorized for issuance from 7.0
billion shares to 50.0 billion shares.
Warrants
On April 26, 2019, pursuant to the Share Exchange
as described in Notes 1 and 3, the Company issued approximately 4 billion warrants,
consisting of the Investor Warrants issued to the new investors and
the Direct Investors, and the Placement Agent Warrants issued to
Katalyst. The warrants have a 5-year term and an exercise price of
$0.0044313, subject to adjustment for anti-dilution events. Due to
the exercise features of these warrants they are not indexed to the
Company’s own stock and are therefore not afforded equity
treatment in accordance with ASC Topic 815, Derivatives and Hedging
(“ASC 815”). ASC 815 requires the Company to assess
the fair value of warrant liabilities at each reporting period and
recognize any change in the fair value as items of other income or
expense (see Note 4).
NOTE
12 – STOCK OPTIONS
The True Drinks
Holdings, Inc. 2013 Stock Incentive Plan (the “
Prior
Plan ”) was first
approved in December 2013, and was approved by a majority of the
stockholders in October 2014. The Prior Plan originally authorized
20.0 million shares of common stock for issuance as equity-based
awards, which amount was increased to 120.0 million in January 2018
by authorization of the Board of Directors at that time (the
“ Prior
Plan Amendment ”). As of the
date of the Share Exchange, April 26, 2019, a total of
approximately 91.7 million awards were issued under the Prior Plan
and the Prior Plan Amendment, consisting entirely of outstanding
stock options. As of September 30, 2019, approximately 61.8 million
of these stock options remain vested and exercisable under this
plan.
The Company will not grant any additional awards or shares of
common stock under the Prior Plan beyond those that are currently
outstanding.
F-16
The
following table summarizes stock option activities for the prior
plan during the nine months ended September 30,2019:
During
the nine months ended September 30, 2019, the Company modified 49.4
million option to extend its maturity date. All options were fully
vested as of the modification date. The Company accounted for
the modification as a Type I
(probable-to-probable) modification. Any additional
compensation related to this modification was considered
immaterial.
On
May 8, 2019, our Board of Directors approved the Charlie’s
Holdings, Inc. 2019 Omnibus Incentive Plan (the “
2019 Plan
”),
and the 2019 Plan was subsequently approved by holders of a
majority of our outstanding voting securities on the same date. The
2019 Plan will supersede and replace the Prior Plan
and no new
awards will be granted under the Prior Plan. Any awards outstanding
under the Prior Plan on the date of stockholder approval of the
2019 Plan will remain subject to and be paid under the Prior Plan,
including those granted under the Prior Plan Amendment, and any
shares subject to outstanding awards under the Prior Plan that
subsequently expire, terminate, or are surrendered or forfeited for
any reason without issuance of shares will automatically become
available for issuance under the 2019 Plan. Up to 1,107,254,205
shares of common stock may be granted under the 2019 Plan. The
shares of common stock issuable under the 2019 Plan will consist of
authorized and unissued shares, treasury shares, and shares
purchased on the open market or
otherwise.
As of September 30, 2019, there were no shares granted under the
2019 Plan.
NOTE
13 - LEASES
The
Company leases office space under agreements classified as
operating leases that expire on various dates through 2022. All of
the Company’s lease liabilities result from the lease of its
warehouse in Santa Ana, California, which expires in 2021, its
office and warehouse in Denver, Colorado, which expires in 2022,
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’s lease for its corporate headquarters
terminated on September 30, 2019 and is therefore considered a
short-term lease. Currently, the Company is negotiating the terms
of a renewed lease on this property, which was recently purchased
by the Company’s CEO, COO and a Company Director from the
previous party owner. Presently the month to month lease payment on
this building is $19,495 compared to a monthly payment of $18,927
to the former non-related third party building owner. The total
amount paid to related parties for the three and nine months ended
September 30, 2019 is $19,495. The Company expects to enter into a
long-term lease arrangement with the new related party owners in
the near future once an arms-length market analysis is
completed.
F-17
At
September 30, 2019, the Company had operating lease liabilities of
approximately $711,000 and right of use assets of approximately
$690,000, which were included in the condensed consolidated balance
sheet.
The
following summarizes quantitative information about the
Company’s operating leases (amount in
thousands):
Weighted-average
remaining lease term – operating leases (in
years)
2.6
2.6
Weighted-average
discount rate – operating leases
12.0%
12.0%
NOTE
14- SUBSEQUENT EVENTS
The Company has
evaluated events subsequent to September 30, 2019 to assess the
need for potential recognition or disclosure in this report. Such
events were evaluated through the date these financial statements
were available to be issued. Based upon this evaluation the
following items were noted.
On October 29,2019, the Company granted 739,500,000 stock options under the
Charlie’s Holdings 2019 Omnibus Incentive plan. The stock
options have a three year vesting schedule, a term of 10 years and
an exercise price of $0.0044313 and an expected volatility of 70%.
The Company expects to recognize approximately $1,140,000 in
compensation expense over the three year vesting
period.
F-18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
shareholders and the board of directors
True
Drinks Holdings, Inc.
Irvine,
CA
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of True Drinks
Holdings, Inc. and its subsidiaries (the Company) as of December31, 2018 and 2017, the related consolidated statements of
operations, stockholders' deficit and cash flows for the years then
ended, and the related notes to the consolidated financial
statements (collectively, the financial statements). In our
opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of December 31,2018 and 2017, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
Going Concern
The
accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note
1 to the financial statements, the Company has suffered recurring
losses from operations and its total liabilities exceed its total
assets. A significant amount of additional capital will be
necessary to advance the marketability of the Company's products to
the point at which the Company can sustain operations. This raises
substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters also
are described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in
accordance with U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express
no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the
financialstatements. Our audits also included evaluating the
accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/
Squar Milner LLP
We have
served as the Company's auditor since 2012.
Common Stock,
$0.001 par value, 7,000,000,000 shares authorized, 245,684,343 and
218,151,591 shares issued and outstanding at December 31, 2018 and
December 31, 2017, respectively
245,685
218,152
Preferred Stock
– Series B (liquidation preference of $4 per share), $0.001
par value, 2,750,000 shares authorized, 1,285,585 shares issued and
outstanding at December 31, 2018 and December 31, 2017
1,285
1,285
Preferred Stock
– Series C (liquidation preference $100 per share), $0.001
par value, 200,000 shares authorized, 105,704 shares issued
and outstanding at December 31, 2018 and December 31,2017
106
106
Preferred Stock
– Series D (liquidation preference $100 per share), $0.001
par value, 50,000 shares authorized, 34,250 shares issued and
outstanding at December 31, 2018 and December 31, 2017
34
34
Additional paid in
capital
43,715,465
42,635,493
Accumulated
deficit
(52,120,648)
(48,241,349)
Total
Stockholders’ Deficit
(8,158,073)
(5,386,279)
Total
Liabilities and Stockholders’ Deficit
$1,630,549
$4,869,420
The
accompanying notes are an integral part of these consolidated
financial statements.
Adjustments to
reconcile net loss to net cash used in operating
activities
Depreciation
4,767
5,168
Amortization
-
120,000
Accretion of debt
discount
413,536
26,460
Impairment of
patent
-
130,000
Impairment of
goodwill
1,898,000
-
Provision for bad
debt expense
26,303
273,294
Provision for
inventory losses
(93,000)
(17,000)
Change in estimated
fair value of derivative liabilities
(8,883,383)
(2,331,888)
Fair value of stock
issued for services
9,754,303
605,500
Stock based
compensation
294,796
530,005
Changes in
operating assets and liabilities:
Accounts
receivable, net
28,176
208,054
Inventory
(169,047)
(840,189)
Prepaid expense and
other current assets
74,206
46,340
Accounts payable
and accrued expense
(2,548,108)
7,262,995
Net
cash used in operating activities
(3,078,750)
(6,428,404)
CASH
FLOWS FROM FINANCING ACTIVITIES
Proceeds from
issuance of Series D Preferred Stock, net
-
4,562,500
Net repayments on
line of credit facility
(10,953)
(96,444)
Proceeds from notes
payable
3,056,350
2,050,000
Repayments on notes
payable
-
(235,994)
Net
cash provided by financing activities
3,045,397
6,280,062
NET
DECREASE IN CASH
(33,353)
(148,342)
CASH AND CASH EQUIVALENTS –
beginning of year
76,534
224,876
CASH AND CASH EQUIVALENTS – end of
year
$43,181
$76,534
SUPPLEMENTAL
DISCLOSURES
Interest paid in
cash
$432
$75,708
Non-cash financing and investing
activities:
Conversion of
preferred stock to common stock
$-
$10,109
Dividends paid in
common stock
$259,260
$262,165
Dividends declared
but unpaid
$260,688
$261,793
Debt discount
recorded
$2,250,250
$127,217
Derecognition of
debt discount
$1,436,113
$-
Notes payable
issued in exchange for accounts payable
$3,790,540
$1,049,564
Warrants issued in
connection with preferred offering
$-
$2,627,931
Warrants exchanged
for common stock
$-
$6,080,278
Issuance of
restricted stock
$5,000
$-
The
accompanying notes are an integral part of these consolidated
financial statements.
F-23
TRUE DRINKS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Overview
True
Drinks Holdings, Inc. was incorporated in the state of Nevada in
January 2001 and is the holding company for True Drinks, Inc.
(“True
Drinks”), a company incorporated in the state of
Delaware in January 2012 that specialized in all-natural,
vitamin-enhanced drinks. Previously, our primary business was the
development, marketing, sale and distribution of AquaBall®
Naturally Flavored Water. We previously distributed AquaBall®
nationally through select retail channels, such as grocery stores,
mass merchandisers, drug stores and online. Although, as noted
below, we have discontinued the production, distribution and sale
of AquaBall®, we continue to market and distribute Bazi®
All Natural Energy, a liquid nutritional supplement drink, which is
currently distributed online and through our existing database of
customers.
As of
December 31, 2018, our principal place of business is 2 Park Plaza,
Suite 1200, Irvine, California92614. Our telephone number is (949)
203-3500. Our corporate website address is
http://www.truedrinks.com. Our common stock, par value $0.001 per
share, is currently listed for quotation on the OTC Pink
Marketplace under the symbol “TRUU.”
Cessation of Production of AquaBall®, and Management’s
Plan
During
the first quarter of 2018, due to the weakness in the sale of the
Company’s principal product, AquaBall® Naturally
Flavored Water, and continued substantial operating losses, the
Company’s Board of Directors determined to discontinue the
production of AquaBall®, and, as set forth below, terminate
the bottling agreement by and between Niagara Bottling LLC, the
Company’s contract bottling manufacturer (“Bottler” or “Niagara”), and True Drinks (the
“Bottling
Agreement”). In addition, the Company notified Disney
Consumer Products, Inc. (“Disney”) of the Company’s
desire to terminate its licensing agreement with Disney
(“Disney
License”), pursuant to which the Company was able to
feature various Disney characters on each AquaBall® bottle. As
a result of management’s decision, and the Company’s
failure to pay certain amounts due Disney under the terms of the
Disney License, the Disney License terminated, and Disney claimed
amounts due of approximately $178,000, net of $378,000 drawn from
an irrevocable letter of credit posted in connection with the
execution of the Disney License. In addition, Disney sought
additional payments for minimum royalty amounts required to be paid
Disney through the remainder of the term of the Disney License. On
July 17, 2018the Company and Disney entered into a settlement and
release whereby in exchange for a payment to Disney of $42,000, the
parties agreed to release each other from any and all claims
related to the Disney License.
In
April 2018, the Company sold its remaining AquaBall® inventory
to Red Beard for an aggregate purchase price of approximately $1.44
million (the “Purchase
Price”). As payment for the Purchase Price, the
principal amount of the senior secured convertible promissory note
issued to Red Beard by the Company in the principal amount of $2.25
million (the “Red Beard
Note”) was reduced by the Purchase Price, resulting in
approximately $814,000 owed to Red Beard under the terms of the Red
Beard Note as of April 5, 2018. Management is currently negotiating
with Red Beard to convert the remaining amounts due under the terms
of the Red Beard Note into shares of the Company’s common
stock.
The
Company has reduced its staff to one employee, and has contracted
with former management and other professionals to continue
operations. In addition, the Company has taken other steps to
minimize general, administrative and other operating costs, while
maintaining only those costs and expenses necessary to maintain
sales of Bazi® and otherwise continue operations while the
Board of Directors and the Company’s principal stockholder
explore corporate opportunities, as more particularly described
below. Management has also worked to reduce accounts payable by
negotiating settlements with creditors, including Disney, utilizing
advances from Red Beard aggregating approximately $505,000 since
September 30, 2018, and is currently negotiating with its remaining
creditors to settle additional accounts payable.
Management is
currently exploring, together with its largest shareholder,
available options to maximize the value of AquaBall® as well
as the value of its continued operations consisting of the
marketing and sale of Bazi®. In addition, although no
assurances can be given, management is actively exploring and
negotiating, together with its largest shareholder, opportunities
to engage in one or more strategic or other transactions that would
maximize the value of the Company as a fully reporting operating
public company with a focus on developing consumer brands, as well
as restructuring its preferred capital and indebtedness in order to
position the Company as an attractive candidate for such
transactions.
F-24
Termination of Bottling Agreement and Issuance of
Notes
On
April 5, 2018 (the “Effective Date”), True Drinks
settled all amounts due the Bottler under the terms of the Bottling
Agreement (the “Settlement”). As of the Effective
Date, the damage amount claimed by the Bottler under the Bottling
Agreement was $18,480,620, which amount consisted of amounts due to
the Bottler for product as well as amounts due for True
Drink’s failure to meet certain minimum requirements under
the Bottling Agreement (the “Outstanding Amount”).
Concurrently, an affiliate of Red Beard and the Bottler agreed to
terminate a personal guaranty of Red Beard’s obligations
under the Bottling Agreement in an amount not to exceed $10.0
million (the “Affiliate
Guaranty”) (the Bottling Agreement and the Affiliate
Guaranty are hereinafter referred to as the “2015 Agreements”).
Under
the terms of the Settlement, in exchange for the termination of the
2015 Agreements, the Bottler agreed to accept, among other things:
(i) a promissory note in the principal amount of $4,644,906 (the
“Principal
Amount”), with a 5% per annum interest rate, to be
compounded, annually (“Note
One”), (ii) a promissory note with a principal amount
equal to the Outstanding Amount (“Note Two”), and (iii) a cash
payment of $2,185,158 (the “Cash Payment”).
The
Principal Amount and all interest payments due under Note One shall
be due and payable to the Bottler in full on or before the December31, 2019 (the “Note
Payment”). On January 14, 2019, the Company, True
Drinks and Red Beard entered into an Assignment and Assumption
Agreement, pursuant to which the Company and True Drinks assigned,
and Red Beard assumed, all outstanding rights and obligations of
the Company and True Drinks under the terms of Note One. As a
result, all obligations of the Company and True Drinks under Note
One, including for the payment of amounts due thereunder, were
assigned to Red Beard.
Note
Two shall have no force or effect except under certain conditions
and shall be reduced by any payments made to the Bottler under the
terms of the Settlement. True Drinks and the Company shall be
jointly and severally responsible for all amounts due, if any,
under Note Two, which shall automatically expire and terminate on
December 31, 2019.
In
consideration for the guarantee of the Company’s obligations
in connection with the Settlement, including as a joint and several
obligor under the terms of Note One, the Company agreed to issue
Red Beard 348,367,950 shares of the Company’s common stock
(the “Shares”),
which Shares were to be issued at such time as the Company amended
its Articles of Incorporation to increase the number of authorized
shares of common stock from 300.0 million to at least 2.0 billion
(the “Amendment”), but in no event
later than September 30, 2018. As a condition to the
Company’s obligation to issue the Shares, Red Beard executed,
and caused its affiliates to execute, a written consent of
shareholders to approve the Amendment. As discussed below, on
November 15, 2018, the Company amended its Articles of
Incorporation to increase the number of authorized shares of common
stock to 7.0 billion, thereby triggering the Company’s
obligation to issue the Shares to Red Beard.
In
connection with the Settlement, and in order to make the Cash
Payment described above, the Company issued the Red Beard Note to
Red Beard, which Red Beard Note accrues interest at a rate of 5%
per annum. In May 2018, as a result of the sale to Red Beard of the
Company’s remaining AquaBall® inventory, the principal
amount of the Red Beard Note was reduced by the Purchase
Price.
Pursuant to the
terms of the Red Beard Note, Red Beard shall have the right, at its
sole option, to convert the outstanding balance due into that
number of fully paid and non-assessable shares of the
Company’s common stock equal to the outstanding balance
divided by $0.005 (the “Conversion Option”); provided, however, that the Company
shall have the right, at its sole option, to pay all or a portion
of the accrued and unpaid interest due and payable to Red Beard
upon its exercise of the Conversion Option in cash. Pursuant to the
terms of the Red Beard Note, such Conversion Option shall not be
exercisable unless and until such time as the Company has filed the
Amendment with the Nevada Secretary of State, which occurred on
November 15, 2018. As a result of the Increase in Authorized, Red
Beard may now exercise its Conversion Option under the Red Beard
Note at any time.
All
outstanding principal and interest due under the terms of the Red
Beard Note shall be due and payable to Red Beard in full on or
before December 31, 2019 and is secured by a continuing security
interest in substantially all of the Company’s
assets. Management is currently negotiating with Red Beard to
exercise the Conversion Option, resulting in the conversion of all
amounts due under the terms of the Red Beard Note into shares of
the Company’s common stock.
F-25
Food Labs Promissory Note
On
September 18, 2018, the Company and Food Labs, Inc.
(“Food Labs”)
entered into an agreement, pursuant to which the Company sold and
issued to Food Labs a promissory note in the principal amount of
$50,000 (the “Food Labs
Note”). The Food Labs Note (i) accrues interest at a
rate of 5% per annum, (ii) includes an additional lender’s
fee equal to $500, or 1% of the principal amount, and (iii) matures
on December 31, 2019. Food Labs is controlled by Red Beard. The
Company currently intends to borrow additional amounts from Red
Beard, as more particularly set forth under “Red Beard Line-of-Credit” below,
to pay Food Labs all amounts due Food Labs under the terms of the
Food Labs Note.
Increase in Authorized Shares of Common Stock
On
November 15, 2018, the Company filed a Certificate of Amendment to
its Articles of Incorporation with the Secretary of State of the
State of Nevada to increase the total number of shares of common
stock authorized for issuance thereunder from 300 million to 7
billion shares (the “Increase in
Authorized”).
As a
result of the Increase in Authorized, Red Beard may now exercise
its Conversion Option under the Red Beard Note at any time
and, while no assurances can be given, management believes that the
Conversion Option will be exercised by Red Beard resulting in the
conversion of all amounts due Red Beard by the Company under the
terms of the Red Beard Note being converted into shares of common
stock
Red Beard Line-of-Credit
On
November 19, 2018, the Company entered into a line-of-credit with
Red Beard, effective October 25, 2018, pursuant to which the
Company may borrow up to $250,000 (the “Red Beard LOC”);provided, however, that Red Beard may,
in its sole discretion, decline to provide additional advances
under the Red Beard LOC upon written notice the Company of its
intent to decline to make such advances. Interest shall accrue on
the outstanding principal of amount of the Red Beard LOC at a rate
of 8% per annum; provided,
however, that upon the occurrence of an Event of Default, as
defined in the Red Beard LOC, the accrual of interest shall
increase to a rate of 10% per annum. Prior to December 31, 2019
(the “Maturity Date”), Red Beard
has the right, at its sole option, to convert the outstanding
principal balance, plus all accrued but unpaid interest due under
the Red Beard LOC (the “Outstanding Balance”) into that
number of shares of common stock equal to the Outstanding Balance
divided by $0.005. As of March 29, 2019, the Company has borrowed a
total of $505,000 under the Red Beard LOC, and intends to borrow
additional amounts from Red Beard under the Red Beard LOC equal to
the principal and accrued interest due under the terms of the Food
Labs Note, totaling approximately $51,870 as of March 29, 2019,
therefore terminating the Food Labs Note.
Note Extensions
On
January 28, 2019, the Company entered into agreements with the
holders of three Senior Secured Promissory Notes (the
“Notes”) to
extend the maturity date of each of the Notes by 60 days (the
“Extension
Agreements”). The Notes were each issued between July25, 2017 to July 31, 2017, originally matured six months after
issuance, have an aggregate principal balance of $750,000, and
accrue interest at a rate of 8% per annum. As a result of the
Extension Agreements, the Notes matured on March 26, 2019, March31, 2019 and April 1, 2019, respectively. The Company is
currently in negotiations with the noteholders for possible further
extensions or conversion of the balance due under the notes into
equity of the Company. While no assurances can be given, management
is currently negotiating with Red Beard to convert all amounts due
Red Beard under the terms of the Red Beard LOC into shares of the
Company’s common stock.
Basis of Presentation and Going Concern
The
accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States
of America, which contemplates continuation of the Company as a
going concern. For the year ended December 31, 2018, the Company
incurred a net loss of $3,879,299. At December 31, 2018, the
Company had negative working capital of $9,735,704 and an
accumulated deficit of $52,120,648. A significant amount of
additional capital will be necessary to advance the marketability
of the Company’s products to the point at which the Company
can sustain operations. These conditions, among others, raise
substantial doubt about the Company’s ability to continue as
a going concern. The accompanying consolidated financial statements
do not include any adjustments that might result from the outcome
of this uncertainty.
F-26
Principles of Consolidation
The
accompanying condensed consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries True
Drinks, Bazi, Inc. and GT Beverage Company, LLC. All inter-company
accounts and transactions have been eliminated in the preparation
of these condensed consolidated financial statements.
Use of Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 date of the financial
statements and the reported amounts of revenue and expense during
the reporting period. Significant estimates made by management
include, among others, derivative liabilities, provision for losses
on accounts receivable, allowances for obsolete and slow-moving
inventory, stock compensation, deferred tax asset valuation
allowances, and the realization of long-lived and intangible
assets, including goodwill. Actual results could differ from those
estimates.
Revenue Recognition
In May 2014, the Financial Accounting
Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”)
2014-09, Revenue from Contracts with Customers (Topic 606), (ASC
606). The underlying principle of ASC 606 is to recognize revenue
to depict the transfer of goods or services to customers at the
amount expected to be collected. ASC 606 creates a five-step model
that requires entities to exercise judgment when considering the
terms of contract(s), which includes (1) identifying the
contract(s) or agreement(s) with a customer, (2) identifying our
performance obligations in the contract or agreement, (3)
determining the transaction price, (4) allocating the transaction
price to the separate performance obligations, and (5) recognizing
revenue as each performance obligation is satisfied. The Company
adopted ASC 606 effective January 1, 2018, and adoption of such
standard had no effect on previously reported
balances.
Recognition of sales of the products sold by the Company
since the adoption of the new standard has had no quantitative
effect on the financial statements. However, the guidance requires
additional disclosures to help users of financial statements better
understand the nature, amount, timing, and uncertainty of revenue
that is recognized.
The Company previously recognized and continues to recognize
revenue when risk of loss transferred to our customers and
collection of the receivable was reasonably assured, which
generally occurs when the product is shipped. A product is not
shipped without an order from the customer and credit acceptance
procedures performed.
Under the new guidance, revenue is recognized when control of
promised goods or services is transferred to our customers, in an
amount that reflects the consideration we expect to be entitled to
in exchange for those goods or services. The Company does not have
any significant contracts with customers requiring performance
beyond delivery. All orders have a written purchase order that is
reviewed for credit worthiness, pricing and other terms before
fulfillment begins. Shipping and handling activities are performed
before the customer obtains control of the goods and therefore
represent a fulfillment activity rather than a promised service to
the customer. Revenue and costs of sales are recognized when placed
under the customer’s control. Control of the products that we
sell, transfers to the customer upon shipment from our facilities,
and the Company’s performance obligations are satisfied at
that time.
All products sold by the Company are beverage products. The
products are offered for sale as finished goods only, and there are
no performance obligations required post-shipment for customers to
derive the expected value from them. Contracts with customers
contain no incentives or discounts that could cause revenue to be
allocated or adjusted over time.
The Company does not allow for returns, although it does for
damaged products, if support for the damage that occurs
pre-fulfillment is provided, returns are permitted. Damage product
returns have been insignificant. Due to the insignificant amount of
historical returns as well as the standalone nature of the
Company’s products and assessment of performance obligations
and transaction pricing for its sales contracts, the Company does
not currently maintain a contract asset or liability balance for
obligations. The Company assess its contracts and the
reasonableness of its conclusions on a quarterly
basis.
F-27
Cash and Cash Equivalents
The
Company considers all highly liquid investments with original
maturities of three months or less, to be cash equivalents. The
Company maintains cash with high credit quality financial
institutions. At certain times, such amounts may exceed Federal
Deposit Insurance Corporation (“FDIC”) insurance limits. The
Company has not experienced any losses on these
amounts.
Accounts Receivable
The
Company records its trade accounts receivable at net realizable
value. This value includes an appropriate allowance for estimated
sales returns and allowances, and uncollectible accounts to reflect
any losses anticipated and charged to the provision for doubtful
accounts. Credit is extended to our customers based on an
evaluation of their financial condition; generally, collateral is
not required. An estimate of uncollectible amounts is made by
management based upon historical bad debts, current customer
receivable balances, age of customer receivable balances, the
customer’s financial condition and current economic trends,
all of which are subject to change. Actual uncollected amounts have
historically been consistent with the Company’s expectations.
Receivables are charged off against the reserve for doubtful
accounts when, in management’s estimation, further collection
efforts would not result in a reasonable likelihood of receipt, or
later as proscribed by statutory regulations. Based on our estimates, we recorded an
allowance for doubtful accounts of approximately $0 and $391,000 as
of December 31, 2018 and 2017, respectfully.
Concentrations
The
Company has no significant off-balance sheet concentrations of
credit risk such as foreign exchange contracts, options contracts
or other foreign hedging arrangements. The Company maintains the
majority of its cash balances with two financial institutions.
There are funds in excess of the federally insured amount, or that
are subject to credit risk, and the Company believes that the
financial institutions are financially sound, and the risk of loss
is minimal.
Prior
to the termination of the Bottling Agreement in early 2018, all
production of AquaBall® was done by Niagara. Niagara handled
all aspects of production, including the procurement of all raw
materials necessary to produce AquaBall®. We utilized two
facilities to handle any necessary repackaging of AquaBall®
into six packs or 15-packs for club customers.
During
2018, we relied significantly on one supplier for 100% of our
purchases of certain raw materials for Bazi®. Bazi, Inc. has
sourced these raw materials from this supplier since
2007.
No
customer made up more than 10% of accounts receivable at December31, 2018 or 2017. The transaction whereby Red Beard purchased all
remaining inventory of AquaBall Naturally Flavored Water for
approximately $1.44 million accounted for approximately 74% of net
sales for the year ended December 31, 2018. No customer made up
more than 10% of net sales for the year ended December 31, 2017.
A
significant portion of our revenue during the years ended December31, 2018 and 2017 came from sales of the AquaBall® Naturally
Flavored Water. For the years ended December 31, 2018 and 2017,
sales of AquaBall® accounted for 91% and 94% of the
Company’s total revenue, respectively.
Fair Value of Financial Instruments
The
Company’s financial instruments consist of cash, accounts
receivable, accounts payable, derivative liability accrued expense,
and notes payable. Management believes that the carrying amount of
these financial instruments approximates their fair values, due to
their relatively short-term nature.
The
carrying amount of the Company’s debt is considered a level 3
liability, based on inputs that are unobservable.
F-28
Inventory
As of
December 31, 2018 and 2017, the Company purchased for resale a
vitamin-enhanced flavored water beverage and a liquid dietary
supplement.
Inventories are
stated at the lower of cost (based on the first-in, first-out
method) or net realizable value. Cost includes shipping and
handling fees and costs, which are subsequently expensed to cost of
sales. The Company provides for estimated losses from obsolete or
slow-moving inventories and writes down the cost of inventory at
the time such determinations are made. Reserves are estimated based
on inventory on hand, historical sales activity, industry trends,
the retail environment, and the expected net realizable
value.
The
Company maintained inventory reserves of $0 and $93,000 as of
December 31, 2018 and 2017, respectively. The 2017 inventory
reserve is related to our remaining finished goods inventory of
AquaBall® prior to the production of our new formulation of
AquaBall® produced by Niagara.
Property and
equipment are stated at cost. The Company provides for depreciation
of property and equipment using the straight-line method based on
estimated useful lives of between three and ten years. Property and
equipment is not significant to the consolidated financial
statements as of or for the years ended December 31, 2018 and
2017.
Long-Lived Assets
The
Company reviews its long-lived assets for impairment whenever
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. For purposes of evaluating the
recoverability of long-lived assets, the recoverability test is
performed using undiscounted net cash flows estimated to be
generated by the asset. An impairment was not deemed necessary in
2018 or 2017.
Goodwill and identifiable intangible assets
As a
result of acquisitions, we have goodwill and other identifiable
intangible assets. In business combinations, goodwill is generally
determined as the excess of the fair value of the consideration
transferred, plus the fair value of any noncontrolling interests in
the acquiree, over the fair value of the net assets acquired and
liabilities assumed as of the acquisition date. Accounting for
acquired goodwill in accordance with GAAP requires significant
judgment with respect to the determination of the valuation of the
acquired assets and liabilities assumed in order to determine the
final amount of goodwill recorded in business combinations.
Goodwill is not amortized, rather, it is evaluated for impairment
on an annual basis, or more frequently when a triggering event
occurs between annual tests that would more likely than not reduce
the fair value of the reporting unit below its carrying value. Such
impairment evaluations compare the reporting unit’s estimated
fair value to its carrying value. During the years ended December31, 2018 and 2017, we recognized impairment on goodwill of
$1,898,000 and $0, respectively.
F-29
Identifiable
intangible assets consist primarily of customer relationships
recognized in business combinations. Identifiable intangible assets
with finite lives are amortized over their estimated useful lives,
which represent the period over which the asset is expected to
contribute directly or indirectly tofuture cash flows. Identifiable
intangible assets are reviewed for impairment whenever events and
circumstances indicate the carrying value of such assets or
liabilities may not be recoverable and exceed their fair value. If
an impairment loss exists, thecarrying amount of the identifiable
intangible asset is adjusted to a new cost basis. The new cost
basis is amortized over the remaining useful life of the asset.
Tests for impairment or recoverability require significant
management judgment, and future events affecting cash flows and
market conditions could adversely impact the valuation of these
assets and result in impairment losses. During the years ended
December 31, 2018 and 2017 we recognized impairment on identifiable
intangible assets of $0 and $130,000, respectively, related to the
interlocking spherical bottle patent acquired in the acquisition of
GT Beverage Company, Inc.
Income Taxes
The
Company accounts for income taxes in accordance with FASB
Accounting Standards Codification 740 (“ASC Topic 740”). Under the asset
and liability method of ASC Topic 740, deferred tax assets and
liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or
settled.
Stock-Based Compensation
Total
stock-based compensation expense, for all of the Company’s
stock-based awards recognized for the year ended December 31, 2018
and 2017 was $294,796 and $530,005, respectively.
The
Company uses a Black-Scholes option-pricing model (the
“Black-Scholes
Model”) to estimate the fair value of the stock option
and warrants. The use of a valuation model requires the Company to
make certain assumptions with respect to selected model inputs.
Expected volatility is calculated based on the historical
volatility of the Company’s stock price over the contractual
term of the option. The expected life is based on the contractual
term of the option and expected employee exercise and post-vesting
employment termination behavior. Currently it is based on the
simplified approach provided by SAB 107. The risk-free interest
rate is based on U.S. Treasury zero-coupon issues with a remaining
term equal to the expected life assumed at the date of the grant
(see Note 3 below).
Shares,
warrants and options issued to non-employees for services are
accounted for at fair value, based on the fair value of instrument
issued or the fair value of the services received, whichever is
more readily determinable.
Derivative Instruments
A
derivative is an instrument whose value is “derived”
from an underlying instrument or index such as a future, forward,
swap, option contract, or other financial instrument with similar
characteristics, including certain derivative instruments embedded
in other contracts (“embedded derivatives”) and for
hedging activities. As a matter of policy, the Company does not
invest in financial derivatives or engage in hedging transactions.
However, the Company has entered into complex financing
transactions that involve financial instruments containing certain
features that have resulted in the instruments being deemed
derivatives or containing embedded derivatives. Derivatives and
embedded derivatives, if applicable, are measured at fair value
using the binomial lattice- (“Binomial Lattice”) pricing model
and marked to market and reflected on our consolidated statement of
operations as other (income) expense at each reporting
period.
Net Loss Per Share
We
compute earnings (loss) per share using the two-class method, as
unvested restricted common stock contains nonforfeitable rights to
dividends and meets the criteria of a participating security. Under
the two-class method, earnings are allocated between common stock
and participating securities. The presentation of basic and diluted
earnings per share is required only for each class of common stock
and not for participating securities. As such, we present basic and
diluted earnings per share for our one class of common
stock.
F-30
The
two-class method includes an earnings allocation formula that
determines earnings per share for each class of common stock
according to dividends declared and undistributed earnings for the
period. A company’s reported net earnings is reduced by the
amount allocated to participating securities to arrive at the
earnings allocated to common stockholders for purposes of
calculating earnings per share. At December 31, 2018 and 2017, the
Company had 116,700,107 and 198,957,185 shares of common stock
equivalents outstanding, respectively.
Unvested restricted
common stock, common stock options, and the Warrants are
antidilutive and excluded from the computation of diluted earnings
per share if the assumed proceeds upon exercise or vesting are
greater than the cost to reacquire the same number of shares at the
average market price during the period. For the years ended
December 31, 2018 and 2017, the impact of all outstanding unvested
shares of restricted common stock, common stock options, and the
Warrants are excluded from diluted loss per share as their impact
would be antidilutive.
The
Company has evaluated its business to determine if it has multiple
segments and has determined that it operates under a single
segment.
Research and Development
Research and
development costs are expensed as incurred.
Recent Accounting Pronouncements
Except
as noted below, the Company has reviewed all recently issued, but
not yet effective accounting pronouncements and has concluded that
there are no recently issued, but not yet effective pronouncements
that may have a material impact on the Company’s future
financial statements.
On
February 25, 2016, the FASB issued ASU 2016-2,
“Leases” (Topic 842), which is intended to improve
financial reporting for lease transactions. This ASU will require
organizations that lease assets, such as real estate, airplanes and
manufacturing equipment, to recognize on their balance sheet the
assets and liabilities for the rights to use those assets for the
lease term and obligations to make lease payments created by those
leases that have terms of greater than 12 months. The
recognition, measurement, and presentation of expense and cash
flows arising from a lease by a lessee primarily will depend on its
classification as finance or operating lease. This ASU will also
require disclosures to help investors and other financial statement
users better understand the amount and timing of cash flows arising
from leases. These disclosures will include qualitative and
quantitative requirements, providing additional information about
the amounts recorded in the financial statements. The ASU is
effective for the Company for the year ending December 31, 2019 and
interim reporting periods within that year, and early adoption is
permitted. Management believes the effect of this ASU will have no
impact on the Company’s consolidated financial
statements.
In
August 2016, FASB issued ASU No. 2016-15, “Statement of
Cash Flows: Classification of Certain Cash Receipts and Cash
Payments” (“ASU
2016-15”), which eliminates the diversity in practice
related to the classification of certain cash receipts and
payments. ASU 2016-15 designates the appropriate cash flow
classification, including requirements to allocate certain
components of these cash receipts and payments among operating,
investing and financing activities. The retrospective transition
method, requiring adjustment to all comparative periods presented,
is required unless it is impracticable for some of the amendments,
in which case those amendments would be prospectively adopted as of
the earliest date practicable. The new guidance was effective for
us in the first quarter of 2018. The adoption of ASU 2016-15 did
not have a material impact on the Company’s financial
statements.
F-31
NOTE 2 – SHAREHOLDERS’ EQUITY
Securities
Common Stock. The holders of common
stock are entitled to receive, when and as declared by the Board of
Directors, dividends payable either in cash, in property or in
shares of common stock of the Company. Dividends have no cumulative
rights and dividends will not accumulate if the Board of Directors
does not declare such dividends.
Series B Preferred. Each share of the
Company’s Series
B Preferred Convertible Stock (“Series B
Preferred”) has a stated value
of $4.00 per share (“Stated
Value”) and accrued annual dividends equal to 5% of
the Stated Value, payable by the Company in quarterly installments,
in either cash or shares of common stock. Each share of Series B
Preferred is convertible, at the option of the holder, into that
number of shares of common stock equal to the Stated Value, divided
by $0.25 per share (the “Series B Conversion Shares”). The Company
also has the option to require the conversion of the Series B
Preferred into Series B Conversion Shares in the event: (i) there
were sufficient authorized shares of common stock reserved as
Series B Conversion Shares; (ii) the Series B Conversion Shares
were registered under the Securities Act of 1933, as amended (the
“Securities
Act”), or the Series B Conversion Shares were freely
tradable, without restriction, under Rule 144 of the Securities
Act; (iii) the daily trading volume of the Company’s common
stock, multiplied with the closing price, equaled at least $250,000
for 20 consecutive trading days; and (iv) the average closing price
of the Company’s common stock was at least $0.62 per share
for 10 consecutive trading days.
During
the year ended December 31, 2018, the Company declared $260,688 in
dividends on outstanding shares of its Series B Preferred. The
Company issued a total of 22,533 shares of common stock to pay
$259,260 of cumulative unpaid dividends. As of December 31, 2018,
there remained $67,136 in cumulative unpaid dividends on the Series
B Preferred.
Series C
Preferred. Each
share of Series C Preferred has a stated value of $100 per share,
and as of the year ended December 31, 2018, was convertible, at the
option of each respective holder, into that number of shares
of common stock equal to $100, divided by $0.025 per
share (the “Series C Conversion
Shares”). The
Company also has the option to require conversion of the Series C
Preferred into Series C Conversion Shares in the event: (i) there
are sufficient authorized shares of common stock
reserved as Series C
Conversion Shares; (ii) the Series C Conversion Shares are
registered under the Securities Act, or the Series C Conversion
Shares are freely tradable, without restriction, under Rule 144 of
the Securities Act; and (iii) the average closing price of the
Company’s common stock is at least $0.62 per share for 10
consecutive trading day.
Subsequent to the year end, and in connection with dilution
resulting from the Niagara Settlement, the conversion price was
reset to $0.025 per share.
Series D Preferred. Each share of
Series D Preferred has a stated value of $100 per share, and,
following the expiration of the 20 day calendar day period set
forth in Rule 14c-2(b) under the Exchange Act, commencing upon the
distribution of an Information Statement on Schedule 14C to the
Company’s stockholders, each share of Series D Preferred is
convertible, at the option of each respective holder, into that
number of shares of the Company’s common stock equal to the
stated value, divided by $0.025 per share (the “Series D Conversion Shares”). The
Certificate of Designation also gives the Company the option to
require the conversion of the Series D Preferred into Series D
Conversion Shares in the event: (i) there are sufficient authorized
shares of common stock reserved as Series D Conversion Shares; (ii)
the Series D Conversion Shares are registered under the Securities
Act, or the Series D Conversion Shares are freely tradable, without
restriction, under Rule 144 of the Securities Act; and (iii) the
average closing price of the Company’s common stock is at
least $0.62 per share for 10 consecutive trading days.
Issuances
Between
February 8, 2017 and August 21, 2017, the Company issued an
aggregate total of 45,625 shares of Series D Preferred for $100 per
share in a series of private placement transactions (the
“Series D
Financing”). As additional consideration, investors in
the Series D Financing received warrants to purchase up to
60,833,353 shares of common stock, an amount equal to 200% of the
Series D Conversion Shares issuable upon conversion of shares of
Series D Preferred purchased under the Series D Financing,
exercisable for $0.15 per share. In accordance with the terms and
conditions of the Securities Purchase Agreement executed in
connection with the Series D Financing, all warrants issued were
exchanged for shares of common stock pursuant to the Warrant
Exchange Program (defined below). During the year ended December31, 2017, 6,875 shares of Series D Preferred were converted to
common stock.
Beginning on
February 8, 2017the Company and holders of outstanding common
stock purchase warrants (the “Outst
F-32
anding Warrants”) entered into
Warrant Exchange Agreements, pursuant to which each holder agreed
to cancel their respective Outstanding Warrants in exchange for
one-half of a share of common stock for every share of common stock
otherwise issuable upon exercise of Outstanding Warrants (the
“Warrant Exchange
Program”). As of the date of this Annual Report on
Form 10-K, the Company has issued 79,040,135 shares of common
stock, in exchange for the cancellation of 158,080,242 Outstanding
Warrants.
NOTE 3 –WARRANTS AND STOCK BASED COMPENSATION
Warrants
On July 26,2017, the Company commenced an offering of Senior Secured
Promissory Notes (the “Secured Notes”) in the aggregate
principal amount of up to $1.5 million to certain accredited
investors (the “Secured Note Financing”). The amount
available was subsequently raised to $2.3 million. As additional
consideration for participating in the Secured Note Financing,
investors received five-year warrants, exercisable for $0.15 per
share, to purchase that number of shares of the Company’s
common stock equal to 50% of the principal amount of the Secured
Note purchased, divided by $0.15 per share. Between July 26, 2017
and December 31, 2018, the Company offered and sold Secured Notes
in the aggregate principal amount of $2,465,000 and issued Warrants
to purchase up to 8,216,671 shares of common stock to participating
investors.
As of
December 31, 2018, the Company had the following outstanding
warrants to purchase shares of its common stock:
Warrants
Outstanding
Weighted
Average
Exercise
Price Per Share
Weighted
Average
Remaining
Life (Yrs.)
9,633,621
$0.15
3.49
427,633
$0.19
1.97
10,061,254
$0.15
3.42
Non-Qualified Stock Options
During
the year ended December 31, 2018, the Company granted options to a
certain employee to purchase a total of 200,000 shares of common
stock with an exercise price of $0.025, which expire five years
from the date of issuance. Also, during the year ended December 31,2018, the Company granted options to certain employees to purchase
a total of 70,424,891 shares of common stock with an exercise price
of $0.015, which expire ten years from the date of issuance. These
options vest upon a change of control transaction as defined in the
Company’s Stock Incentive Plan. Also, during the year ended
December 31, 2018, the company reset the exercise price and
extended the expiration date of options to certain employees and
certain members of the Company’s Board of Directors. The
reset options gave the holders the option to purchase an aggregate
total of 19,999,935 shares of common stock. The exercise prices
were reset to $0.025 per common share, and the expiration dates
were extended five years from the date of the reset. The original
exercise prices of these options were between $0.07 and $0.15 per
share, and the original expiration dates ranged from September 2021
to September 2022.
F-33
The
weighted average estimated fair value per share of the stock
options at grant date was $0.007 and $0.015 per share,
respectively. The value of the options for which the exercise price
was reset and the expiration date was extended in 2018 was also
$0.008 per share. Such fair values were estimated using the
Black-Scholes stock option pricing model and the following weighted
average assumptions.
2018
Expected
life
30
months
Estimated
volatility
75%
Risk-free interest
rate
1.1%
Dividends
-
Stock
option activity during the year ended December 31, 2018 is
summarized as follows:
During
the year ended December 31, 2018, the Company did not issue any
shares of restricted stock. During the year, a total of 1,854,061
shares were forfeited.
As of
December 31, 2018, no shares were unvested out of the total of
1,500,000 granted shares.
The
Company does not have significant income tax expense or benefit for
the year ended December 31, 2018 or 2017. Tax net operating loss
carryforwards have resulted in a net deferred tax asset with a 100%
valuation allowance applied against such asset at December 31, 2018
and 2017. Such tax net operating loss carryforwards
(“NOL”)
approximated $52.1 million at December 31, 2018. Some or all of
such NOL may be limited by Section 382 of the Internal Revenue Code
and will begin to expire in the year 2032.
The
provision for income taxes differs from the amounts which would be
provided by applying the statutory federal income tax rate of 34%
to the net loss before provision for income taxes for the years
ended December 31, 2018 and 2017 are as follows:
2018
2017
Income tax expense
(benefit) at statutory rate
$(815,000)
$(2,613,900)
Change in valuation
allowance
815,000
2,613,900
Income tax
expense
$-
$-
The components of income tax expense (benefit) attributable to continuing operations are as follows:
2018
2017
Current
expense:
Federal
$-
$-
State
-
-
Deferred expense
(benefit):
Federal
$-
$-
State
-
-
Total
$-
$-
The
income tax effect of temporary differences between financial and
tax reporting and net operating loss carryforwards gives rise to a
deferred tax asset at December 31, 2018 and 2017 as
follows:
2018
2017
Deferred tax asset
–NOL’s
$10,900,000
$10,131,000
Less valuation
allowance
(10,900,000)
(10,131,000)
Net deferred tax
asset
$-
$-
In
assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those
temporary differences become realizable. Management considers the
scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this
assessment. Based upon the history of the Company and projections
for future taxable income over the periods in which the deferred
tax assets are realizable, management believes it is not more
likely than not that the Company will realize the benefits of these
deductible differences and therefore a full valuation allowance
against the deferred tax assets has been established.
On
December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act
(“Tax Act”)
that instituted fundamental changes to the taxation of
multinational corporations. The Tax Act includes changes to the
taxation of foreign earnings by implementing a dividend exemption
system, expansion of the current anti-deferral rules, a minimum tax
on low-taxed foreign earnings and new measures to deter base
erosion. The Tax Act also includes a permanent reduction in the
corporate tax rate to 21%, repeal of the corporate alternative
minimum tax, expensing of capital investment, and limitation of the
deduction for interest expense. Furthermore, as part of the
transition to the new tax system, a one-time transition tax is
imposed on a U.S. shareholder’s historical undistributed
earnings of foreign affiliates. Although the Tax Act is generally
effective January 1, 2018, GAAP requires recognition of the tax
effects of new legislation during the reporting period that
includes the enactment date, which was December 22,2017.
F-35
As a
result of the merger with Bazi Intl. on October 15, 2012, the
Company may have access to utilize a portion of the net operating
loss carryforwards of Bazi Intl., which, in total, were
approximately $25 million at the time of the merger. The Company is
uncertain as to the portion of the Bazi net operating loss
carryforwards that may be limited by Section 382 of the Internal
Revenue Code.
The Tax
Reform Act of 1986 contains provisions that limit the utilization
of net operating loss and tax credit carryforwards if there has
been a change of ownership as described in Section 382 of the
Internal Revenue Code. Such an analysis has not been performed by
the Company to determine the impact of these provisions on the
Company’s net operating losses. A limitation under these
provisions would reduce the amount of losses available to offset
future taxable income of the Company.
ASC 740
prescribes a recognition threshold and measurement attribute for
the recognition and measurement of tax positions taken or expected
to be taken on income tax returns. ASC Topic 740 also provides
guidance on de-recognition of income tax assets and liabilities,
classification of current and deferred income tax assets and
liabilities, and accounting for interest and penalties associated
with tax positions.
Based
on management’s assessment of ASC Topic 740, management
concluded that the Company does not have any uncertain tax
positions as of December 31, 2018. There have been no income tax
related interest or penalties assessed or recorded and if interest
and penalties were to be assessed, the Company would charge
interest and penalties to income tax expense. It is not anticipated
that unrecognized tax benefits would significantly increase or
decrease within 12 months of the reporting date.
NOTE 5 – DEBT
Line-of-Credit Facility
The
Company entered into a line-of-credit agreement with a financial
institution on June 30, 2014. The terms of the agreement allowed
the Company to borrow up to the lesser of $1.5 million or 85% of
the sum of eligible accounts receivables. The line of credit
agreement matured on July 31, 2018 and was not renewed by the
Company. At December 31, 2018 and 2017, the total outstanding on
the line-of-credit was $0 and $10,953, respectively.
As
disclosed in Note 1 above, on September 18, 2018, the Company
issued a promissory note to Food Labs in the principal amount of
$50,000. The Food Labs Note (i) accrues interest at a rate of 5%
per annum, (ii) includes an additional lender’s fee equal to
$500, or 1% of the principal amount, and (iii) matures on December31, 2019. At December 31, 2018, the total outstanding on the Food
Labs Note was $51,227.
Note Payable
In
April 2017, the Company converted approximately $1,088,000 of
accounts payable into a secured note payable agreement with Niagara
(the “Niagara
Note”). The Niagara Note called for monthly payments
of principal and interest totaling $25,000 through December 2017,
and monthly payments of approximately $52,000 through maturity. The
note bore interest at 8% per annum, was scheduled to mature in
April 2019 and was secured by the personal guarantee which secures
the Bottling Agreement. As of the date of the Niagara Settlement
described in Note 1, the remaining balance on the Niagara Note was
$854,366 and was settled in full in exchange for a new note
payable.
F-36
As of
December 31, 2018, and in connection with the Niagara Settlement as
further discussed in Note 1 above, the Niagara Note was settled in
full, and a new note was issued in the principal amount of
$4,644,906. The note bears interest at 5% per annum and matures in
December 2019.
In
April 2018, the Company issued a senior secured convertible
promissory note in the amount of $2,250,000 to Red Beard in order
to pay the initial payment of the Niagara Settlement. Also, in
April 2018, the Company sold its remaining AquaBall® inventory
to Red Beard for the Purchase Price of $1,436,113. As payment for
the Purchase Price, the principal amount of the note was reduced by
the Purchase Price, resulting in approximately $814,000 owed to Red
Beard under the terms of the Red Beard Note as of April 5, 2018.
The note bears interest at 5% per annum, matures in December 2019
and is secured by a continuing security interest in substantially
all of the Company’s assets.
Pursuant to the
terms of the Red Beard Note, Red Beard shall have the right, at its
sole option, to convert the outstanding balance due into that
number of fully paid and non-assessable shares of the
Company’s common stock equal to the outstanding balance
divided by $0.005 (the “Conversion Option”); provided, however, that the Company
shall have the right, at its sole option, to pay all or a portion
of the accrued and unpaid interest due and payable to Red Beard
upon its exercise of the Conversion Option in cash. Pursuant to the
terms of the Red Beard Note, such Conversion Option shall not be
exercisable unless and until such time as the Company has filed the
Amendment with the Nevada Secretary of State, which occurred on
November 15, 2018. During the year ended December 31, 2018, the
Company recorded a beneficial conversion feature of the note in the
amount of $2,250,250. The amount is netted against the note payable
balance as a debt discount with the corresponding entry to
additional paid-in capital. During the year ended December 31,2018, a total of $1,436,113 of the beneficial conversion feature
was derecognized. The debt discount is amortized as interest
expense through the maturity date. During the year ended December31, 2018, a total of $346,052 of the debt discount was amortized
and recorded as expense.
Secured Note Financing
As
disclosed in Note 3 above, on July 26, 2017, the Company commenced
an offering of Secured Notes in the aggregate principal amount of
up to $1.5 million to certain accredited investors. The amount
available was subsequently raised to $2.3 million. Between July 26,2017 and December 31, 2018, the Company offered and sold Secured
Notes in the aggregate principal amount of $2,465,000 and issued
warrants to purchase up to 8,216,671 shares of common stock to
participating accredited investors. The warrants were valued at
$127,466 and were recorded as a discount to notes payable. During
the year ended December 31, 2018, a total of $67,474 of the debt
discount was amortized and recorded as expense.
The
Secured Notes (i) accrue interest at a rate of 8% per annum, (ii)
have a maturity date of 1.5 years from the date of issuance, and
(iii) are subject to a pre-payment and change in control premium of
125% of the principal amount of the Secured Notes at the time of
pre-payment or change in control, as the case may be. To secure the
Company’s obligations under the Secured Notes, the Company
granted to participating investors a continuing security interest
in substantially all of the Company’s assets pursuant to the
terms and conditions of a Security Agreement (the
“Security
Agreement”).
In
addition, during the year ended December 31, 2018, Red Beard
advanced the Company $455,000 to be used specifically to settle
certain accounts payable owing to certain creditors, including
Disney, and to provide funds to pay certain operating,
administrative and related costs to continue operations. As of
December 31, 2018, the Company had settled $834,000 in accounts
payable to creditors, including Disney, in consideration for the
payment to such creditors of approximately $193,000. The terms of
the advances to the Company by Red Beard to finance the
settlements, and to allow the Company to continue as a going
concern, are currently being negotiated.
During
the quarter ended September 30, 2017, the Company moved its
corporate headquarters and entered into a new lease for the
facility, which lease was scheduled to expire on March 31, 2019.
Due to the Company’s financial condition and
management’s plan, the lease was terminated on May 11, 2018.
The Company and the lessor recently agreed to settle all amounts
due under the old lease for an aggregate of $15,750 as
consideration for termination of the lease. Total rent expense
related to this and our previous operating lease for the year ended
December 31, 2018 was $47,609. Management is currently occupying
office space located at 2 Park Plaza in Irvine California, which
the Company rents for $500 on a month to month basis.
As of
December 31, 2018 and 2017, the Company maintained employment
agreements with certain key members of management. The agreements
provided for minimum base salaries, eligibility for stock options,
performance bonuses and severance payments.
Legal Proceedings
From
time to time, claims are made against the Company in the ordinary
course of business, which could result in litigation. Claims and
associated litigation are subject to inherent uncertainties, and
unfavorable outcomes could occur. In the opinion of management, the
resolution of these matters, if any, will not have a material
adverse impact on the Company’s financial position or results
of operations. Other
than as set forth below, there are no additional pending or
threatened legal proceedings at this time.
Delhaize America
Supply Chain Services, Inc. v. True Drinks, Inc. On May 8, 2018, Delhaize America
Supply Chain Services, Inc. (“Delhaize”) filed a complaint
against the Company in the General Court of Justice Superior Court
Division located in Wake County, North Carolina alleging breach of
contract, among other causes of action, related to contracts
entered into by and between the two parties. Delhaize is seeking in
excess of $25,000 plus interest, attorney’s fees and costs.
We believe the allegations are unfounded and are defending the case
vigorously. We believe the probability of incurring a material loss
to be remote.
The Irvine
Company, LLC v. True Drinks, Inc. On September 10, 2018, The
Irvine Company, LLC (“Irvine”) filed a complaint
against the Company in the Superior Court of Orange County, located
in Newport Beach, California, alleging breach of contract related
to the Company’s early termination of its lease agreement
with Irvine in May 2018. Pursuant to the Complaint, Irvine sought
to recover approximately $74,000 in damages from the Company. In
November 2018, the Company and Irvine agreed to settle the lawsuit
for an aggregate of $15,750.
NOTE 7 – FAIR VALUE MEASUREMENTS
The
application of fair value measurements may be on a recurring or
nonrecurring basis depending on the accounting principles
applicable to the specific asset or liability or whether management
has elected to carry the item at its estimated fair value. FASB ASC
820-10-35 specifies a hierarchy of valuation techniques based on
whether the inputs to those techniques are observable or
unobservable. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect the
Company’s market assumptions. These two types of inputs
create the following fair value hierarchy:
Level
1: Observable inputs such as quoted prices in active
markets;
- Level
2: Inputs, other than the quoted prices in active markets,
that are observable either directly or indirectly; and
- Level
3: Unobservable inputs in which there is little or no market
data, which require the reporting entity to develop its own
assumptions.
This
hierarchy requires the Company to use observable market data, when
available, and to minimize the use of unobservable inputs when
estimating fair value.
F-38
The
Company assesses its recurring fair value measurements as defined
by FASB ASC 810. Liabilities measured at estimated fair value on a
recurring basis include derivative liabilities. Transfers between
fair value classifications occur when there are changes in pricing
observability levels. Transfers of financial liabilities among the
levels occur at the beginning of the reporting period. There were
no transfers between Level 1, Level 2 and/or Level 3 during the
year ended December 31, 2018. The Company had no Level 1 or 2 fair
value measurements during 2018 or 2017.
The
following table presents the estimated fair value of financial
liabilities measured at estimated fair value on a recurring basis
included in the Company’s financial statements as of December31, 2018 and 2017:
Level
1
Level
2
Level
3
Total
carrying value
Quoted
market prices in active markets
Internal
Models with significant observable market parameters
Internal
models with significant unobservable market parameters
We
first entered into licensing agreements with Disney Consumer
Products, Inc. (“Disney”) and an 18-month
licensing agreement with Marvel Characters, B.V.
(“Marvel”) (collectively, the
“Licensing
Agreements”) in 2012. Each Licensing Agreement allowed
us to feature popular Disney and Marvel characters on
AquaBall®
Naturally Flavored Water, allowing AquaBall® to stand out among other
beverages marketed towards children.
In
March 2017, the Company and Disney entered into a renewed
licensing agreement, which extended the Company’s license
with Disney through March 31, 2019. The terms of the Disney License
entitled Disney to receive a royalty rate of 5% on sales of
AquaBall®
Naturally Flavored Water adorned with Disney characters, paid
quarterly, with a total guarantee of $807,000 over the period from
April 1, 2017 through March 31, 2019. In addition, the Company was
required to make a ‘common marketing fund’ contribution
equal to 1% of sales due annually during the Disney License. As
discussed in Note 1 above, in connection with the Company’s
discontinued production of AquaBall®, the Company notified Disney of
the Company’s desire to terminate the Disney License in early
2018. As a result of the Company’s decision to
discontinue the production of AquaBall® and terminate the Disney
License, and considering amounts due, Disney drew from a letter of
credit funded by Red Beard in the amount of $378,000 on or about
June 1, 2018. Subsequently, Disney and the Company agreed to a
settlement and release of all claims related to the Disney License
in consideration for the payment to Disney of
$42,000.
On
August 22, 2015, the Company and Marvel entered into a
renewed Licensing Agreement to extend the Company’s license
to feature certain
Marvel characters on bottles of AquaBall® Naturally
Flavored Water through December 31, 2017. The Marvel
Agreement required the Company to pay to Marvel a 5% royalty rate on sales of
AquaBall® Naturally Flavored Water adorned with Marvel
characters, paid quarterly, through December 31, 2017, with a total
guarantee of $200,000 over the period from January 1, 2016 through
December 31, 2017. The Company decided not to renew the
Marvel Agreement for another term. Thus, the Licensing Agreement
expired by its terms on December 31, 2017.
NOTE 9 – SUBSEQUENT EVENTS
Assignment and Assumption of Secured Promissory Note
On
January 14, 2019, the Company and True Drinks, Inc., a wholly owned
subsidiary of the Company (“True”), entered into an
Assignment and Assumption Agreement with Red Beard, pursuant to
which the Company and True assigned, and Red Beard assumed, all
outstanding rights and obligations of the Company and True due
under the terms of Note One in the principal amount of $4,644,906,
which was originally issued by the Company, True Drinks and Red
Beard jointly to Niagara Bottling, LLC on April 5, 2018 (the
“Assignment”).
As a result of the Assignment, all obligations of the Company and
True under the terms of the Note, including for the payment of
amounts due thereunder, are assigned to Red Beard.
Secured Note Extensions
On
January 28, 2019, the Company entered into agreements with the
holders of three Senior Secured Promissory Notes (the
“Notes”) to
extend the maturity date of each of the Notes by 60 days (the
“Extension
Agreements”). The Notes were each issued between July25, 2017 to July 31, 2017, originally matured six months after
issuance, have an aggregate principal balance of $750,000, and
accrue interest at a rate of 8% per annum. As a result of the
Extension Agreements, the Notes matured on March 26, 2019, March31, 2019 and April 1, 2019, respectively. The Company is currently
in negotiations with the note holders for possible further
extensions or conversion of the balance due under the notes into
equity of the Company.
Management has
reviewed and evaluated additional subsequent events and
transactions occurring after the balance sheet date through the
filing of this Annual Report on Form 10-K and determined that,
other than as disclosed above, no subsequent events
occurred.
F-40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Members
Charlie’s
Chalk Dust, LLC
Opinion on the Financial Statements
We have
audited the accompanying balance sheets of Charlie’s Chalk
Dust, LLC (the Company) as of December 31, 2018 and 2017, the
related statements of operations, changes in members’ equity
and cash flows for the years then ended, and the related notes to
the financial statements (collectively, the financial statements).
In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of
December 31, 2018 and 2017, and the results of its operations and
its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
Changes in Legal and Regulatory Environment
As
discussed in Note 8 to the financial statements, certain states
banned the sale of flavored e-cigarettes subsequent to the date of
our report on the 2018 financial statements, and several other
states and municipalities are considering implementing similar
restrictions. 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, and/or
result in additional costs.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required
to be independent with respect to the Company in accordance with
U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidenceregarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/
Squar Milner LLP
We have
served as the Company’s auditor since 2018.
Adjustments to
reconcile net income to net cash provided by operating
activities
Depreciation and
amortization
17,917
19,084
Provision for bad
debt
93,447
3,830
Changes in
operating assets and liabilities:
Accounts
receivable
128,692
(620,014)
Inventories
(287,972)
51,575
Prepaid expenses
and other current assets
13,095
(237,809)
Other
assets
(4,000)
(1,000)
Accounts payable
and accrued expenses
558,465
446,323
Deferred
revenue
65,036
92,869
Net
cash provided by operating activities
7,784,556
3,021,327
CASH
FLOWS FROM INVESTING ACTIVITIES
Purchase of
property and equipment
(16,368)
–
Net
cash used in investing activities
(16,368)
–
CASH
FLOWS FROM FINANCING ACTIVITIES
Member
distributions
(7,952,049)
(2,390,000)
Principal payments
on note payable
(166,667)
(166,667)
Net
cash used in financing activities
(8,118,716)
(2,556,667)
INCREASE
(DECREASE) IN CASH
(350,528)
464,660
CASH – beginning of
year
655,076
190,416
CASH – end of year
$304,548
$655,076
F-45
1.
ORGANIZATION
AND NATURE OF OPERATIONS
Description of Organization
Charlie’s
Chalk Dust, LLC (the “Company” or “CCD”)
was incorporated in Delaware in 2014 as a limited liability
corporation. The Company is a formulator, marketer and distributor
of branded e-cigarette liquid. CCD’s products are produced
domestically through contract manufacturers for sale to
distributors and specialty retailers throughout the United States
of America, as well as over 80 countries worldwide. The Company is
headquartered in Costa Mesa, California.
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The
Company’s financial statements are prepared on the accrual
basis of accounting in accordance with accounting principles
generally accepted in the United States of America
(“GAAP”).
Use of Estimates
The
preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Segment Reporting
The
Company and its subsidiaries currently operate in one business
segment. The following information disaggregates the
Company’s revenues from contracts with customers as a
percentage of total net revenues by geographic market and major
customer type for the years ending December 31:
2018
2017
Geographic
Market
International
28%
35%
United
States
72%
65%
Total
100%
100%
Customer
Type
Retailers
44%
45%
Distributors
56%
55%
Total
100%
100%
Segment Reporting
Sales
by geographic market are calculated based on the shipping address
and does not reflect further sub-distribution that may occur after
control of the inventory has transferred to the Company’s
customer. The Company’s primary international markets include
the United Kingdom, Italy, Spain, Belgium, Australia, Sweden and
Canada.
Revenue Recognition
The
Company recognizes revenues in accordance with Accounting Standards
Codification (“ASC”) 606 – Contracts with
Customers. The Company’s revenues are generated from
contracts with customers that consist of sales to retailers and
distributors. The Company’s contracts with customers are
generally short term in nature with the delivery of product as a
single performance obligation. Revenue from the sale of product is
recognized at the point in time when the single performance
obligation has been satisfied and control of the product has
transferred to the customer. In evaluating the timing of the
transfer of control of products to customers, the Company considers
several indicators, including significant risks and rewards of
products, the right to payment, and the legal title of the
products. Based on the assessment of control indicators, sales are
generally recognized when products are received by
customers.
F-46
Shipping
generally occurs prior to the transfer of control to the customer
and is therefore accounted for as a fulfillment expense. In
circumstances where shipping and handling activities occur after
the customer has obtained control of the product, the Company
elected to account for shipping and handling activities as a
fulfillment cost rather than an additional promised service.
Contract durations are generally less than one year, and therefore
costs paid to obtain contracts, which generally consist of sales
commissions, are recognized as expenses in the period
incurred.
Revenue
is measured by the transaction price, which is defined as the
amount of consideration expected to be received in exchange for
providing goods to customers. The transaction price is adjusted for
estimates of known or expected variable consideration, which
includes refunds and returns as well as incentive offers and
promotional discounts on current orders.
Sales
returns are generally not material to the financial statements, and
do not comprise a significant portion of variable consideration.
Estimates for sales returns are based on, among other things, an
assessment of historical trends, information from customers, and
anticipated returns related to current sales activity. These
estimates are established in the period of sale and reduce revenue
in the period of the sale.
Variable
consideration related to incentive offers and promotional programs
are recorded as a reduction to revenue based on amounts the Company
expects to collect. Estimates are regularly updated and the impact
of any adjustments are recognized in the period the adjustments are
identified. In many cases, key sales terms such as pricing and
quantities ordered are established at the time an order is placed
and incentives have very short-term durations.
Amounts
billed and due from customers are short term in nature and are
classified as receivables since payments are unconditional and only
the passage of time related to credit terms is required before
payments are due. The Company does not grant payment financing
terms greater than one year. Payments received in advance of
revenue recognition are recorded as deferred revenue.
Shipping and Handling Costs
Shipping
and handling costs incurred are included in cost of goods sold and
totaled $719,772 and $594,566 for the years ended December 31, 2018
and 2017, respectively.
Earnings Per Unit
Earnings
per unit is calculated by dividing net income of the Company by the
weighted average number of units outstanding during the year. The
Company does not have any potentially dilutive
instruments.
Cash and Cash Equivalents
The
Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash
equivalents. As of December 31, 2018 and 2017, there were no cash
equivalents.
Accounts Receivable
Accounts
receivable is recorded at the invoiced amount and does not bear
interest. The allowance for doubtful accounts is the
Company’s best estimate of the amount of probable credit
losses in existing accounts receivable. The allowance for doubtful
accounts is reviewed on a monthly basis and past due balances are
reviewed individually for collectability. Account balances are
written off against the allowance when it is determined that it is
probable that the receivable will not be recovered. As of December31, 2018 and 2017, the allowance for bad debt totaled $151,109 and
$57,623, respectively.
Inventories
Inventories
primarily consist of finished goods and are stated at the lower of
cost (determined by the average cost method) or net realizable
value. The Company provides estimates of excess and obsolete
inventories determined primarily upon inventory on hand, historical
sales activity, industry trends and expected net realizable value.
As of December 31, 2018 and 2017, the reserve for excess and
obsolete inventories totaled $73,549 and $61,914,
respectively.
F-47
Property and Equipment
Property
and equipment is stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets which range from five to seven
years for equipment, three years for software, and ten years for
furniture. Leasehold improvements are amortized over the lesser of
the related lease term or their estimated useful life. Expenditures
for repairs and maintenance are charged to expense as incurred.
Upon disposition of property and equipment, the costs and related
accumulated depreciation amounts are relieved and any resulting
gain or loss is reflected in operations during the period of
disposition.
Impairment of Long-Lived Assets
The
Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of these
assets is determined by comparing the forecasted undiscounted cash
flows attributable to such assets including any cash flows upon
their eventual disposition to their carrying value. If the carrying
value of the assets exceeds the forecasted undiscounted cash flows,
then the assets are written down to their estimated fair value. For
the years ended December 31, 2018 and 2017, there were no such
impairments.
Advertising
The
Company expenses advertising cost as incurred. Advertising expenses
amounted to $541,911 and $371,984 during the years ended December31, 2018 and 2017, respectively, and are included in sales and
marketing expense in the accompanying statements of
operations.
Note Payable
The
Company had a note payable to a former employee in connection with
a separation agreement executed in October 2015. The note required
an initial payment of $250,000 and 36 monthly payments of $13,889
beginning in February 2016. The balance of the note as of December31, 2017 was $166,667, which was repaid in full during the year
ended December 31, 2018.
Income Taxes
No
provision for income taxes has been made in the financial
statements as the Company is a “pass through” entity.
Each member is individually liable for tax on their share of the
Company’s income or loss. The Company prepares a calendar
year informational tax return.
While
electing Limited Liability Company status, the Company does not
believe it has any uncertain income tax positions that are more
likely than not to materially affect its consolidated financial
statements. The Company’s federal and state income tax
returns remain open to agency examination for the standard
statutory length of time after filing.
On
February 8, 2019, the Company was notified by the Internal Revenue
Service (“IRS”) that its form 1065, for the year ended
December 31, 2017, has been selected for examination. The Company
has responded to the IRS’s notice and is in the process of
scheduling further correspondence related to the
examination.
F-48
Recently Issued Accounting Pronouncements
The
Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with
Customers (Topic 606). The amendments in this update create
common revenue recognition guidance for entities reporting revenue
under U.S. GAAP and IFRS by requiring entities to recognize revenue
to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods and services.
Entities should apply the following five steps: (1) identify the
contract(s) with a customer, (2) identify performance obligations
in the contract, (3) determine transaction price, (4) allocate
transaction price to performance obligations in the contract, and
(5) recognize revenue when (or as) the entity satisfies a
performance obligation. Entities should also disclose qualitative
and quantitative information about (1) contracts with customers,
including revenue and impairments recognized, disaggregation of
revenue, and information about contract balances and performance
obligations and related transaction price allocation to remaining
performance obligations, (2) significant judgments and changes
thereof in determining the timing of performance obligations over
time or at a point in time and the transaction price and amounts
allocated to performance obligations, and (3) assets recognized
from the costs to obtain or fulfill a contract. The amendments in
this update are effective for annual reporting periods beginning
after December 15, 2017.
The
Company adopted this guidance on January 1, 2018 using the modified
retrospective transition method. Prior periods were not adjusted
and, based on the Company’s implementation assessment, no
cumulative-effect adjustment was made to the opening balance of
retained earnings. The adoption of this standard did not have a
material impact on the financial statements other than expanded
disclosures. For further description of the Company’s revenue
recognition policy refer to the Revenue Recognition section above
and for disaggregated revenue information refer to the Segment
Reporting section above.
In
February 2016, the FASB issued ASU 2016-02, Leases. Most prominent
among the changes in the standard is the recognition of
right-of-use (“ROU”) assets and lease liabilities by
lessees for those leases classified as operating leases under the
existing guidance. The standard requires entities to recognize and
measure leases existing at, or entered into after, the beginning of
the earliest comparative period presented using a modified
retrospective approach, with certain practical expedients
available. In July 2018, the FASB issued a practical expedient that
would allow entities the option to apply the provisions of the new
lease guidance at the effective date of adoption without adjusting
the comparative periods presented.
The
standard is effective for the Company in the year beginning January1, 2019. The Company is continuing to assess the potential impacts
of this standard and currently expects that the most significant
impact on the financial statements will be the recognition of ROU
assets and lease liabilities for operating leases. The Company has
not yet determined which practical expedients will be utilized in
connection with adopting the new standard, nor have any
quantitative impacts on the financial statements been
determined.
3.
ACCRUED
EXPENSES
Accrued
expenses consisted of the following as of December 31:
2018
2017
Sales
commissions
$70,400
$74,878
Wages
217,484
$112,911
Payroll
taxes
3,415
6,071
Total accrued
expenses
$291,299
$193,860
4.
PROPERTY
AND EQUIPMENT, NET
Property
and equipment consisted of the following as of December
31:
2018
2017
Equipment
$64,536
$54,572
Furniture
22,509
16,105
Leasehold
improvements
20,000
20,000
Software
3,150
3,150
110,195
93,827
Less: Accumulated
depreciation
(64,824)
(46,907)
Property and
equipment, net
$45,371
$46,920
Depreciation
and amortization expense totaled $17,917 and $19,084, respectively,
during the years ended December 31, 2018 and 2017.
F-49
5.
CONCENTRATIONS
During
the years ended December 31, 2018 and December 31, 2017, purchases
from three vendors represented 97% and 94%, respectively, of total
inventory purchases. As of December 31, 2018, and December 31,2017, amounts owed to these vendors totaled $653,647 and $278,802,
respectively, which are included in accounts payable in the
accompanying balance sheets.
6.
COMMITMENTS
Operating Leases
On
August 17, 2015, the Company entered into a 36-month lease
agreement for its corporate offices in Costa Mesa California, which
includes the use of warehouse space. The lease agreement commenced
on October 1, 2015 and required monthly rental payments. On October1, 2018 this lease agreement was renewed for 12-months. On February14, 2018the Company entered into a 36-month lease agreement for
auxiliary warehouse space located in Santa Ana California. The
lease agreement commenced on April 1, 2018 and required
monthly rental payments with the addition of variable common-area
operating expenses.
Future
minimum lease payments under these lease agreements for the years
ending December 31 are as follows:
2019
$206,678
2020
39,672
2021
9,918
Total
payments
$256,268
Litigation
During
the ordinary course of the Company’s business, it is subject
to various claims and litigation. Management believes that the
outcome of such claims or litigation will not have a material
adverse effect on the Company’s financial position, results
of operations or cash flow. As of December 31, 2018, there were no
outstanding legal claims concerning CCD.
The
Company uses contract manufacturers in the United States to produce
goods. The manufacturers use the Company’s formulas to fill
the Company’s orders and do not require purchase commitments
from the Company.
7.
MEMBERS
EQUITY
The
Company issues membership interests in the form of units with a
single class authorized. 1000 membership units were authorized and
issued at the Company’s formation and remain outstanding as
of December 31, 2018. The Manager (as defined in the LLC
agreement) shall approve the admission or withdrawal of Members as
well as the sale, grant, issuance or redemption of units. The
Manager with the consent of Members owning at least sixty-five
percent of the then outstanding units, may admit to the Company
additional member(s) who will be issued units on such terms as are
determined by the Manager. In addition, the Company has an
arrangement with three employees to participate in any type of
equity sale of the Company in the aggregate amount of 4.5% of the
proceeds. The ability of the holders to exercise this arrangement
is contingent upon an equity transaction and as of December 31,2018 and 2017, it was not probable that the equity participation
rights would be triggered and therefore no stock-based compensation
has been recognized in the accompanying financial
statements.
8.
SUBSEQUENT
EVENTS
The
Company evaluated events subsequent to December 31, 2018 for their
potential impact on the financial statements and disclosures
through the date the financial statements were available to be
issued.
The Company has a savings plan that became available to employees
in January 2019 which is intended to qualify under Section 401(k)
of the Internal Revenue Code (the “Plan”). Eligible
employees may elect to make contributions to the Plan through
salary deferrals up to 100% of their base pay, subject to
limitations. The Company matches contributions up to 3% of
compensation and then matches 50% of contributions up to the next
2% of compensation.
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. In September 2019, Michigan, New York and Massachusetts
temporarily banned the sale of flavored e-cigarettes, and several
other 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
state and local levels. The application of any new laws or
regulations that may be adopted in the future, at a federal, state,
or local level, directly or indirectly implicating flavored
e-cigarette liquid and products used for the vaporization of
nicotine could significantly limit the Company’s ability to
sell such products, result in additional compliance expenses,
and/or require the Company to change its labeling and/or methods of
distribution. Any ban of the sale of flavored e-cigarettes directly
limits the markets in which the Company may sell its products. In
the event the prevalence of such bans and/or changes in laws and
regulations increase across the United States, or internationally,
the Company’s business, results of operations and financial
condition could be adversely impacted.
F-50
PROSPECTUS
CHARLIE’S HOLDINGS, INC.
26,317,060,072 Shares
Common Stock
, 2019
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and
Distribution
The
following table presents the costs and expenses in connection with
the issuance and distribution of the securities to be registered,
other than underwriting discounts and commissions, payable by us in
connection with the sale of common stock being registered. Except
as otherwise noted, we will pay all of these amounts. All amounts
are estimates except the Securities and Exchange Commission
(“SEC”)
registration fee.
SEC registration
fee
$31,897
OTCQB application and
listing fees
$17,500
Accounting fees and
expenses
$15,000
Legal fees and
expenses
$50,000
Miscellaneous fees
and expenses
$5,000
Total
$119,397
Item 14. Indemnification of Directors and
Officers
Our
Articles of Incorporation, as amended and restated, provide to the
fullest extent permitted by the Nevada Revised Statutes, that
our directors or officers shall not be personally liable to us
or our stockholders for damages for breach of such
director’s or officer’s fiduciary duty. The effect of
this provision of our Articles of Incorporation is to eliminate our
rights and our stockholders lights (through stockholders’
derivative suits on behalf of our company) to recover damages
against a director or officer for breach of the fiduciary duty of
care as a director or officer (including breaches resulting from
negligent or grossly negligent behavior), except under certain
situations defined by statute. We believe that the indemnification
provisions in our Articles of Incorporation are necessary to
attract and retain qualified persons as directors and
officers.
Our
Bylaws also provide that the Board of Directors may also authorize
us to indemnify our employees or agents, and to advance the
reasonable expenses of such persons, to the same extent, following
the same determinations, and upon the same conditions as are
required for the indemnification of, and advancement of, expenses
to our directors and officers. As of the date of this Registration
Statement, the Board of Directors has not extended indemnification
rights to persons other than directors and officers.
Insofar
as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, or persons controlling us
pursuant to the foregoing provisions, or otherwise, we have been
advised that in the opinion of the SEC, such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable.
Item 15. Recent Sales of Unregistered
Securities
Other
than the issuances disclosed in the accompanying prospectus, we
have not issued securities since June 10, 2016 that were not
registered under the Securities Act of 1933. Each of the securities
were offered and sold in transactions exempt from registration
under the Securities Act, in reliance on Section 4(2) thereof and
Rule 506 of Regulation D thereunder and/or Section 3(a)(9) of the
Securities Act. Each of the investors represented that it was an
"accredited investor" as defined in Regulation D under the
Securities Act.
In
addition to the Share Exchange, as described in the accompanying
prospectus, we have issued the following securities during the
preceding three years that were not registered under the Securities
Act of 1933. Each of the securities were offered and sold in
transactions exempt from registration under the Securities Act, in
reliance on Section 4(2) thereof and Rule 506 of Regulation D
thereunder and/or Section 3(a)(9) of the Securities Act. Each of
the investors represented that it was an "accredited investor" as
defined in Regulation D under the Securities Act.
Restructuring of the Old Series B Preferred, Old Series C Preferred
and Old Series D Preferred
On
April 26, 2019, in connection with the Share Exchange, the Company
filed Amendments to the Certificate of Designation After Issuance
of Class or Series with the Secretary of State of the State of
Nevada to amend the Certificates of Designation, Preferences,
Rights and Limitations, as amended (each, a “COD”), of the Company’s Old
Preferred, consisting of Series B Convertible Preferred Stock
(“Old Series B
Preferred”), Series C Convertible Preferred Stock
(“Old Series C
Preferred”) and Series D Convertible Preferred Stock
(“Old Series D
Preferred”) (the “Amendments”). Each of the CODs
were amended to provide the Company with the right, at its
election, to convert all of the issued and outstanding shares of
Old Preferred into Common Stock, at a price of $0.25 per share in
the case of the Old Series B Preferred, and $0.025 per share in the
case of the Old Series C Preferred and Old Series D
Preferred.
Immediately after
effecting the Amendments, the Company provided each holder of the
Old Series B Preferred, Old Series C Preferred and Old Series D
Preferred with a Mandatory Conversion Notice, pursuant to which the
Company converted all outstanding shares of the Old Preferred into
an aggregate of 580,385,360 shares of common stock.
Settlement and Termination of Bottling Agreement
On April 5, 2018 (the “Effective Date”), the Company
settled all amounts due under the terms of the Bottling Agreement
with Niagara Bottling LLC (the “Bottler”), the Company’s
contract bottling manufacturer at that time (the
“Settlement”).
Under the terms of the Settlement, the Bottler agreed to accept,
among other things: (i) a promissory note in the principal amount
of $4,644,906 (the “Principal Amount”), with a 5% per
annum interest rate, to be compounded, annually
(“Note One”),
(ii) a promissory note with a principal amount equal to the
Outstanding Amount (“Note
Two”), and (iii) a cash payment of $2,185,158 (the
“Cash
Payment”).
The
Principal Amount and all interest payments due under Note One shall
be due and payable to the Bottler in full on or before the December31, 2019 (the “Note
Payment”). On January 14, 2019, the Company, its
subsidiary, True Drinks, Inc. (“True Drinks”) and Red Beard
entered into an Assignment and Assumption Agreement, pursuant to
which the Company and True Drinks assigned, and Red Beard assumed,
all outstanding rights and obligations of the Company and True
Drinks under the terms of Note One. As a result, all obligations of
the Company and True Drinks under Note One, including for the
payment of amounts due thereunder, were assigned to Red
Beard.
Note
Two shall have no force or effect except under certain conditions
and shall be reduced by any payments made to the Bottler under the
terms of the Settlement. True Drinks and the Company shall be
jointly and severally responsible for all amounts due, if any,
under Note Two, which shall automatically expire and terminate on
December 31, 2019.
In
consideration for the guarantee of the Company’s obligations
in connection with the Settlement, including as a joint and several
obligor under the terms of Note One, the Company agreed to issue
Red Beard 348,367,950 shares of the Company’s common stock
(the “Shares”),
which Shares were to be issued at such time as the Company amended
its Articles of Incorporation to increase the number of authorized
shares of Common Stock from 300.0 million to at least 2.0 billion
(the “Amendment”), but in no event
later than September 30, 2018. As a condition to the
Company’s obligation to issue the Shares, Red Beard executed,
and caused its affiliates to execute, a written consent of
shareholders to approve the Amendment. On November 15, 2018, the
Company amended its Articles of Incorporation to increase the
number of authorized shares of Common Stock to 7.0 billion, thereby
triggering the Company’s obligation to issue the Shares to
Red Beard.
Food Labs Promissory Note
On
September 18, 2018, the Company and Food Labs, Inc.
(“Food Labs”)
entered into an agreement, pursuant to which the Company sold and
issued to Food Labs a promissory note in the principal amount of
$50,000 (the “Food Labs
Note”). The Food Labs Note (i) accrues interest at a
rate of 5% per annum, (ii) includes an additional lender’s
fee equal to $500, or 1% of the principal amount, and (iii) matures
on December 31, 2019. Food Labs is controlled by Red Beard. The
Company currently intends to borrow additional amounts from Red
Beard, as more particularly set forth under “Red Beard Line-of-Credit” below,
to pay Food Labs all amounts due Food Labs under the terms of the
Food Labs Note.
Red Beard Line-of-Credit
On
November 19, 2018, the Company entered into a line-of-credit with
Red Beard, effective October 25, 2018, pursuant to which the
Company may borrow up to $250,000 (the “Red Beard
LOC”); provided,
however, that Red Beard may, in its sole discretion, decline
to provide additional advances under the Red Beard LOC upon written
notice the Company of its intent to decline to make such advances.
Interest shall accrue on the outstanding principal of amount of the
Red Beard LOC at a rate of 8% per annum; provided, however, that upon the
occurrence of an Event of Default, as defined in the Red Beard LOC,
the accrual of interest shall increase to a rate of 10% per annum.
Prior to December 31, 2019 (the “Maturity Date”), Red Beard
has the right, at its sole option, to convert the outstanding
principal balance, plus all accrued but unpaid interest due under
the Red Beard LOC (the “Outstanding Balance”) into that
number of shares of common stock equal to the Outstanding Balance
divided by $0.005.
July 2017 Issuances of Senior Secured Promissory Notes
On July26, 2017, the Company commenced an offering of Senior Secured
Promissory Notes (the “Secured Notes”), in the aggregate
principal amount of up to $1.5 million to certain accredited
investors (the “Secured Note Financing”). As additional
consideration for participating in the Secured Note Financing,
investors received five-year warrants, exercisable for $0.15 per
share, to purchase that number of shares of the Company’s
common stock equal to 50% of the principal amount of the Secured
Note purchased, divided by $0.15 per share (the “Warrants”).
The
Secured Notes (i) bear interest at a rate of 8% per annum, (ii)
have a maturity date of 1.5 years from the date of issuance, and
(iii) are subject to a pre-payment and change in control premium of
125% of the principal amount of the Secured Notes at the time of
pre-payment or change in control, as the case may be. To secure the
Company’s obligations under the Secured Notes, the Company
will also grant to participating investors a continuing security
interest in substantially all of the Company’s assets
pursuant to the terms and conditions of a Security
Agreement.
Over
the course of the Secured Note Financing, the Company offered and
sold Secured Notes in the aggregate principal amount of $2,465,000
and issued Warrants to purchase up to 8.2 million shares of common
stock to participating investors.
Series D Offering
Beginning on
February 8, 2017, the Company and certain accredited investors (the
“Investors”)
entered into a Securities Purchase Agreement (the
“Purchase Agreement”), wherein the Company
commenced an offering to Investors up to 50,000 shares of its
Series D Convertible Preferred Stock (“Series D Preferred”) for $100 per
share (the “Series D
Offering”). As additional consideration, Investors
also received five-year warrants (the “Warrants”), to purchase up to
200% of the conversion shares issuable upon conversion of shares of
Series D Preferred purchased under the Series D Offering for $0.15
per share. In accordance with the terms and conditions of the
Purchase Agreement, all Warrants issued in connection with the
Series D Offering were exchanged for shares of common stock
pursuant to the Warrant Exchange Program, as further described
below.
During
2017, the Company issued an aggregate total of 45,625 shares of
Series D Preferred, as well as warrants to purchase up to an
aggregate total of 60,833,353 shares of Common Stock. The issuance
of the shares of Series D Preferred during the year ended December31, 2017 resulted in gross proceeds to the Company of $4.56
million.
Warrant Exchange
Beginning on February 8, 2017, the Company and certain holders (the
“Holders”) of
outstanding warrants to purchase shares of the Company’s
common stock (the “Outstanding Warrants”), entered
into Warrant Exchange Agreements (the “Exchange Agreement”), pursuant to
which the Holders agreed to cancel all Outstanding Warrants held,
in exchange for one-half of a share of Common Stock for every
share of Common Stock otherwise issuable upon exercise of
Outstanding Warrants (the “Warrant Exchange Program”). Over
the course of the Warrant Exchange Program, the Company issued
79,040,135 shares of Common Stock, in exchange for the cancellation
of 158,080,242 Outstanding Warrants.
Series C Offering
On
April 13, 2016, the Company and Red Beard entered into a securities
purchase agreement pursuant to which Red Beard agreed to purchase
an aggregate total of 50,000 shares of the Company’s Series C
Convertible Preferred Stock (“Series C Preferred”) for $100 per
share over the course of two closings. The Company issued 25,000
shares of Series C Preferred to Red Beard on April 13, 2016. As
additional consideration, investors will receive five-year warrants
to purchase up to an aggregate total of approximately 33.3 million
shares of Common Stock for $0.15 per share. On April 13, 2016, the
Company issued to Red Beard warrants to purchase approximately 16.7
million shares of Common Stock.
On July13, 2016, the securities purchase agreement was amended to modify
the closing schedule for the remaining 25,000 shares of Series C
Preferred to be purchased. As amended, 10,000 shares of Series C
Preferred were purchased on July 15, 2016, and the remaining 25,000
shares were purchased between August 31, 2016 and September 13,2016.
Item 16. Exhibits and Financial Statement Schedules
(b)
Financial Statements. See
page F-1 for an index of the financial statements included in the
Registration Statement.
Item 17. Undertakings
(a) The
undersigned registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration
statement:
(i) To
include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To
reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most
recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in
the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set
forth in the “Calculation of Registration Fee” table in
the effective registration statement.
(iii)
To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
provided, however, that paragraphs (a)(1)(i),
(a)(1)(ii) and (a)(1)(iii) above do not apply if the information
required to be included in a post-effective amendment by those
paragraphs is contained in reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement, or is
contained in a form of prospectus filed pursuant to Rule 424(b)
that is part of the registration statement.
(2)
That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To
remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(4)
That, for the purpose of determining liability under the Securities
Act of 1933 to any purchaser:
(i)
Each prospectus filed by the Registrant pursuant to Rule 424(b)(3)
shall be deemed to be part of the Registration Statement as of the
date the filed prospectus was deemed part of and included in the
Registration Statement; and
(ii)
Each prospectus required to be filed pursuant to Rule 424(b)(2),
(b)(5), or (b)(7) as part of a registration statement in reliance
on Rule 430B relating to an offering made pursuant to Rule
415(a)(1)(i), (vii), or (x) for the purpose of providing the
information required by section 10(a) of the Securities Act of 1933
shall be deemed to be part of and included in the Registration
Statement as of the earlier of the date such form of prospectus is
first used after effectiveness or the date of the first contract of
sale of securities in the offering described in the prospectus. As
provided in Rule 430B, for liability purposes of the issuer and any
person that is at that date an underwriter, such date shall be
deemed to be a new effective date of the Registration Statement
relating to the securities in the Registration Statement to which
that prospectus relates, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof. Provided, however, that no statement made in a
registration statement or prospectus that is part of the
Registration Statement or made in a document incorporated or deemed
incorporated by reference into the Registration Statement or
prospectus that is part of the Registration Statement will, as to a
purchaser with a time of contract of sale prior to such effective
date, supersede or modify any statement that was made in the
Registration Statement or prospectus that was part of the
Registration Statement or made in any such document immediately
prior to such effective date.
(b) The
undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of
the registrant’s annual report pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act (and, where applicable,
each filing of an employee benefit plan’s annual report
pursuant to Section 15(d) of the Securities Exchange Act) that
is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the
securities offered herein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(c)
Insofar as indemnification for liabilities arising under the
Securities Act, as amended, may be permitted to directors, officers
and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in
the opinion of the SEC such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suitor proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
SIGNATURES
Pursuant to the
requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Costa
Mesa, State of California, on January 21, 2020.
CHARLIE'S HOLDINGS, INC.
By:
/s/ Brandon
Stump
Brandon
Stump
Chief
Executive Officer and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed by the
following persons in the capacities and on the dates
indicated.
Signature
Title
Date
/s/ Brandon
Stump
Brandon
Stump
Chief
Executive Officer and Director
(Principal Executive Officer)
January 21,
2020
/s/
*
Ryan
Stump
Chief
Operating Officer and Director
January 21,
2020
/s/ David
Allen
David
Allen
Chief
Financial Officer and Secretary
(Principal Financial Officer and Principal Accounting
Officer)
Certification of
Amendment to the Article of Incorporation incorporated herein by
reference from Exhibit 3.1 to the Current Report on Form 8-K on
filed May 20, 2011
Certificate of
Amendment to the Articles of Incorporation, incorporated herein by
reference from Exhibit 3.1 to the Current Report on Form 8-K filed
on January 22, 2013
Amended
and Restated Bylaws of Charlie's Holdings, Inc., incorporated by
reference from Exhibit 3.1 to the Current Report on Form 8-K filed
on September 11, 2019
Certificate
of Designation, Preferences, Rights and Limitations of Series A
Convertible Preferred Stock of Bazi International, Inc.,
incorporated herein by reference from Exhibit 4.2 to the Current
Report on Form 8-K filed on October 17, 2012
Certificate
of Withdrawal of the Series A Convertible Preferred Stock of True
Drinks Holdings, Inc., dated February 18, 2015, incorporated
by reference from Exhibit 3.3 to the Current Report on Form 8-K
filed on February 23, 2015
Certificate
of Designation, Preferences, Rights, and Limitations of Series B
Convertible Preferred Stock of True Drinks Holdings, Inc.,
incorporated by reference from Exhibit 3.1 to the Current Report on
Form 8-K, filed November 26, 2013
First
Amended and Restated Certificate of Designation, Preferences,
Rights and Limitations of the Series B Convertible Preferred Stock
of True Drinks Holdings, Inc., dated February 18, 2015,
incorporated by reference from Exhibit 3.2 to the Current Report on
Form 8-K filed on February 23, 2015
Certificate
of Designation, Preferences, Rights and Limitations of the Series C
Convertible Preferred Stock of True Drinks Holdings, Inc., dated
February 18, 2015, incorporated by reference from Exhibit 3.1
to the Current Report on Form 8-K filed on February 23,2015
First
Amended and Restated Certificate of Designation, Preferences,
Rights and Limitations of the Series C Convertible Preferred Stock
of True Drinks Holdings, Inc., dated March 26, 2015, incorporated
by reference from Exhibit 4.1 to the Current Report on Form 8-K
filed on April 1, 2015
Second
Amended and Restated Certificate of Designation, Preferences,
Rights and Limitations of the Series B Convertible Preferred Stock
of True Drinks Holdings, Inc., dated August 12, 2015, incorporated
herein by reference from Exhibit 3.1 to the Current Report on Form
8-K filed August 18, 2015
Amendment No. 1 to
the Second Amended and Restated Certificate of Designation,
Preferences, Rights and Limitations of the Series C Convertible
Preferred Stock of True Drinks Holdings, Inc., dated November 24,2015, incorporated herein by reference from Exhibit 4.1 to the
Current Report on Form 8-K filed December 1, 2015
Third
Amended and Restated Certificate of Designation, Preferences,
Rights and Limitations of the Series C Convertible Preferred Stock
of True Drinks Holdings, Inc., dated April 12, 2016, incorporated
herein by reference from Exhibit 4.1 to the Current Report on Form
8-K filed April 19, 2016
Certificate of
Designation, Preferences, Rights and Limitations of the Series D
Convertible Preferred Stock of True Drinks Holdings, Inc., dated
January 24, 2017, incorporated herein by reference from Exhibit 4.1
to the Current Report on Form 8-K filed February 15,2017
Second
Amended and Restated Certificate of Designation, Preferences,
Rights and Limitations of the Series B Convertible Preferred stock,
dated April 26, 2019, incorporated by reference to Exhibit 3.1 to
the Current Report on Form 8-K, filed April 30, 2019.
Fourth
Amended and Restated Certificate of Designation, Preferences,
Rights and Limitations of the Series C Convertible Preferred stock,
dated April 26, 2019, incorporated by reference to Exhibit 3.2 to
the Current Report on Form 8-K, filed April 30, 2019.
First
Amended and Restated Certificate of Designation, Preferences,
Rights and Limitations of the Series D Convertible Preferred stock,
dated April 26, 2019, incorporated by reference to Exhibit 3.3 to
the Current Report on Form 8-K, filed April 30, 2019.
Certificate
of Designations, Preferences and Rights of the Series A Convertible
Preferred Stock, dated April 25, 2019, incorporated by reference to
Exhibit 3.7 to the Current Report on Form 8-K, filed April 30,2019.
Certificate
of Designations, Preferences and Rights of the Series B Convertible
Preferred Stock, dated April 26, 2019, incorporated by reference to
Exhibit 3.9 to the Current Report on Form 8-K, filed April 30,2019.
Form of
Note Exchange Agreement, dated March 27, 2015, incorporated by
reference from Exhibit 10.2 to the Current Report on Form 8-K
filed on April 1, 2015
Form of
Securities Purchase Agreement, dated August 13, 2015 incorporated
by reference from Exhibit 10.1 to the Current Report on Form 8-K,
filed August 18, 2015
Form of
Common Stock Purchase Warrant, dated August 13, 2015 incorporated
by reference from Exhibit 10.2 to the Current Report on Form 8-K,
filed August 18, 2015
Form of
Senior Subordinated Secured Promissory Note, incorporated by
reference from Exhibit 10.1 to the Current Report on Form 8-K,
filed September 11, 2015
Senior
Secured Promissory Note, dated October 9, 2015, incorporated by
reference from Exhibit 10.2 to the Current Report on Form 8-K,
filed October 27, 2015
Amendment No.1 to
Securities Purchase Agreement, dated October 16, 2015, incorporated
by reference from Exhibit 10.4 to the Current Report on Form 8-K,
filed October 27, 2015
Engagement
Letter by and between True Drinks Holdings, Inc., Charlie’s
Chalk Dust LLC and Katalyst Securities LLC, dated February 15,2019, incorporated by reference to Exhibit 10.4 to the Current
Report on Form 8-K, filed April 30, 2019.
Amendment
to Engagement Letter, dated April 16, 2019, incorporated by
reference to Exhibit 10.5 to the Current Report on Form 8-K, filed
April 30, 2019.
Commercial
Lease Agreement, by and between Charlie’s Chalk Dust, LLC and
Brandon Stump, Ryan Stump and Keith Stump, dated November 19, 2019,
incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K, filed November 22, 2019.
10.39†
Services Agreement by
and between Charlie’s Chalk Dust, LLC and Avail, dated
November 25, 2019, incorporated
by reference to Exhibit 10.1 to the Current Report on Form 8-K,
filed December 23, 2019.
23.1*
Consent
of Disclosure Law Group (included in Exhibit 5.1)
Power
of Attorney (included in signature page to registration statement
on Form S-1 , filed on July 11, 2019)
+
Filed
herewith.
*
To be
filed by amendment.
†
Certain portions of this exhibit (indicated by [***]) have been
omitted as the Company has determined (i) the omitted information
is not material and (ii) the omitted information would likely cause
harm to the Company if publicly disclosed. In addition, portions of
this exhibit have been omitted pursuant to Item 601(a)(5) of
Regulation S-K.
-90-
Dates Referenced Herein and Documents Incorporated by Reference
