UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-K
 
[X]ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 20162019
 
or
 
[   ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file No. 001-32420
 
TRUE DRINKSCHARLIE’S HOLDINGS, INC.
(Exact nameName of registrantRegistrant as specifiedSpecified in its charter)Its Charter)
 
Nevada
 84-1575085
(State or Other Jurisdiction of incorporation)Incorporation or Organization) (I.R.S.IRS Employer Identification Number)No.)
 
18662 MacArthur Blvd, Suite 110
Irvine,1007 Brioso Drive, Costa Mesa, CA 9261292627
(Address of principal executive offices)Principal Executive Offices)
 
(949) 203-3500531-6855
(Issuer’s telephone number)Registrant’s Telephone Number, Including Area Code)
 
 Securities registered pursuant to Section 12(b) of the Act:
None
 Securities registered under Section 12(g) of the Exchange Act:
 
Title of Each Class Name of Each Exchange on Which Registered
Common Stock ($0.001 par value) Over the CounterOTC Markets
Securities registered under Section 12(g) of the Exchange Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [   ]  No [X]
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [   ]  No [X]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X]  No [   ]
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [   ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer[   ]Accelerated filer[   ]
Non-accelerated filer  [   ][X] Smaller reporting company  [X][X]
Emerging growth company [   ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ]  No [X]
 
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2016,2019 was approximately $11.6 million$53,148,000 based on a closing market price of $0.17$0.011 per share.share, as reported on the OTC Pink Marketplace.
 
There were 199,693,81118,982,290,068 shares of the registrant’s common stock outstanding as of March 31, 2017.
April 14, 2020.
 

 
 
 
TRUE DRINKS
CHARLIE’S HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 20162019
 
TABLETABLE OF CONTENTS
   
  Page
PART I


Item 1.
Description of Business
 1
Item 1A.
Risk Factors
 7
 14
Item 1B.
Unresolved Staff Comments
 13
 27
Item 2.
Properties
 13
 28
Item 3.
Legal Proceedings
 14
 28
Item 4.
Mine Safety Disclosures
 14
 28
   
PART II


Item 5.
Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 14
 29
Item 6.
Selected Financial Data
 15
 29
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 15
 30
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
 19
 37
Item 8.
Financial Statements and Supplementary Data
 19
 37
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 19
 38
Item 9A.
Controls and Procedures
 20
 38
Item 9B.
Other Information
 21
 38
   
PART III


Item 10.
Directors, Executive Officers and Corporate Governance
 21
 39
Item 11.
Executive Compensation
 25
 44
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 30
 49
Item 13.
Certain Relationships, and Related Transactions, and Director Independence
 34
 52
Item 14.
Principal Accountant Fees and Services
 34
 53
   
PART IV


Item 15.
Exhibits, Financial Statement Schedules
 35
 54
Item 16.
10-K Summary
 57
   
Signatures

 38
 58
 
 
 
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This report contains “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the safe harbor created by those sections. We intend to identify forward-looking statements in this report by using words such as “believes,” “intends,” “expects,” “may,” “will,” “should,” “plan,” “projected,” “contemplates,” “anticipates,” “estimates,” “predicts,” “potential,” “continue,”“believes”, “intends”, “expects”, “may”, “will”, “should”, “plan”, “projected”, “contemplates”, “anticipates”, “estimates” “predicts”, “potential”, “continue” or similar terminology. These statements are based on our beliefs as well as assumptions we made using information currently available to us. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties, and assumptions. Actual future results may differ significantly from the results discussed in the forward-looking statements. These risks include changes in production and demand for our products, changes in the level of operating expenses,expense, our ability to expand our network of customers, changes in general economic conditions that impact consumer behavior and spending, product supply, the availability, amount, and cost of capital to us and our use of such capital, and other risks discussed in this report. Additional risks that may affect our performance are discussed below under the section entitled “Risk Factors Associated with Our Business.”Factors”.
  
PPART I
 
ITEMITEM 1. DESCRIPTION OF BUSINESSBUSINESS
 
As used in this Annual Report, unless otherwise stated or the context otherwise requires, references to the “Company”, “we”, “us”, “our” or similar references mean Charlie’s Holdings, Inc. (formerly True Drinks Holdings, Inc.), its subsidiaries and consolidated variable interest entity on a consolidated basis. References to “True Drinks”, “CompanyCharlie’s” orand “ourCCD” refer to Charlie’s Chalk Dust, LLC, a California limited liability company and wholly-owned subsidiary of the Company, and “Don Polly” refers to True Drinks Holdings, Inc.Don Polly, LLC, a Nevada limited liability company that is owned by entities controlled by Brandon Stump and all of its subsidiaries, unlessRyan Stump, the context requires otherwise. We areCompany’s Chief Executive Officer and Chief Operating Officer, respectively, and a holding company and conduct no operating business, except through our subsidiaries.consolidated variable interest for which the Company is the primary beneficiary.
  
Overview
 
Our objective is to become a leader in the rapidly growing, global e-cigarette segment of the broader nicotine related products industry. Through Charlie’s, we formulate, market and distribute branded e-cigarette liquid for use in both open and closed consumer e-cigarette and vaping systems. Charlie’s products are produced domestically through contract manufacturers for sale through select distributors, specialty retailers and third-party online resellers throughout the United States, as well as over 80 countries worldwide. Charlie’s primary international markets include the United Kingdom, Italy, Spain, Belgium, Australia, Sweden and Canada. In June 2019, we launched distribution, through Don Polly, of certain premium vapor, tincture and topical products containing hemp-derived cannabidiol (“True Drinks Holdings, Inc. (theCBD”) and we currently intend to develop and launch additional products containing hemp-derived CBD in the future. Prior to the Share Exchange, as defined in “Company”, “usRecent Developments” or “we”) was incorporated in the state of Nevada in January 2001 and is the holding company for True Drinks, Inc. (“True Drinks”), a beverage company incorporated in the state of Delaware in January 2012 that specializes in all-natural, vitamin-enhanced drinks. Ourbelow, our primary business iswas the development, marketing, sale and distribution of our flagship product, AquaBall™all-natural, vitamin-enhanced drinks, including AquaBall® Naturally Flavored Water a zero-sugar, zero-calorie, preservative-free, vitamin-enhanced, naturally flavored water drink. We distribute AquaBall™ nationally through select retail channels, such as grocery stores, mass merchandisers, drug stores, convenience stores and through online retailers. We also market and distribute Bazi® All Natural Energy a liquid nutritional supplement drink, which is currently distributed online(“Bazi”). During 2018 we sold limited amounts of Bazi, but do not plan to produce any more product and through our existing databasehave ceased all production and sales of customers.AquaBall® Naturally Flavored Water.
 
Our principal placeWe intend to expand our operations and seek revenue and profit growth by increasing the sales of business is 18662 MacArthur Boulevard, Suite 110, Irvine, California, 92612. Our telephone number is (949) 203-2500. Our corporate website address is http://www.truedrinks.com. Our common stock, par value $0.001 per share (“Common Stock”)our nicotine based e-cigarette liquid by registering some of our products with the Food and Drug Administration and expanding sales territories(both domestic and international), is currently listed for quotation on the OTC Pink Marketplace under the symbol “TRUU.”as well as from our recently launched sales and distribution of CBD based products.
 
Recent Developments
 
January NoteShare Exchange
 
On January 20, 2016,April 26, 2019, the Company and certain holders ofsenior subordinated secured promissory notes (“Secured Notes”(then known as True Drinks Holdings, Inc.)in the principal amount of $500,000, entered into Notea Securities Exchange AgreementsAgreement (“SEC”) with each of the members of Charlie’s on that date (the “Charlie’s Members”), pursuant to which the holders agreed to convertCompany acquired all outstanding membership interests beneficially owned by the outstanding principal balanceCharlie’s Members in exchange for certain units consisting of their Secured Notes into an aggregate totalthe Company’s securities (the “Share Exchange”). As a result, Charlie’s became a wholly owned subsidiary of 4,413 sharesthe Company. Following the consummation of Series C Convertible Preferred Stock (“Series C Preferred”)the Share Exchange, the primary business operations of the Company consisted of those of Charlie’s and, five-year warrants to purchase up to an agate total of 1,029,701 shares of Common Stock for $0.17 per share.more recently, Don Polly.
 
 
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AmendmentThe Share Exchange resulted in a change of control of the Company, with the Members and Direct Investors owning approximately 86.1% of the Company’s outstanding voting securities immediately after the Share Exchange, and the Company’s current stockholders beneficially owning approximately 13.9% of the issued and outstanding voting securities, which includes the Advisory Shares. Together, Brandon Stump and Ryan Stump, the founders of Charlie’s and the Company’s newly appointed Chief Executive Officer and Chief Operating Officer, respectively, own approximately 57% of the Company’s issued and outstanding voting securities as a result of the Share Exchange.
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 CB Preferred Certificate of Designation
 
On April 13, 2016, in connection with the April Series C Offering (defined below), the Company filed the Third June 28, 2019, we amended and restated our Articles of Incorporation (the “Amended and Restated Certificate of Designation, Preferences, Rights and Limitations of the Series C Convertible Preferred Stock (the “Series C AmendmentCharter”), with the Nevada Secretary of State in order to: to (i) prohibit, except in certain circumstances, any holder of shares of the Company’s Series C Preferred from voting more than 50% of the total voting power of the outstanding shares of capital stock of the Company;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 preferredDirectors 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 designated as Series C Preferred from 150,000 to 200,000, and (iii) permit the issuance of50.0 billion shares, all 1,396,305 outstanding shares of Series CB Preferred and certain warrants to purchaseautomatically converted into a total of 13,963,047,716 shares of common stock in accordance with the Company’s CommonCertificate of Designations, Preferences and Rights of the Series B Convertible Preferred Stock.
Our Products
Charlie’s Product Line
Our business efforts consist primarily of formulating, marketing and distributing our portfolio of branded e-cigarette liquid and other premium vapor products for use in consumer e-cigarette and vaping systems, which we collectively refer to as the “Charlie’s Product Line” or “Charlie’s Products”.  
 
Completion of April Series C OfferingE-Liquids
 
On April 13, 2016,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 Company and one ofwater in the Company’s current shareholders, Red Beard Holdings, LLCsolution into the smoke-like vapor when heated. The most commonly used hygroscopic components are propylene glycol (“Red BeardPG”), entered into a Securities Purchase Agreement, which agreement was amended on July 13, 2016 (the “vegetable glycerin (“AprilPurchase AgreementVG”) or polyethylene glycol 400. VG imparts sweetness and produces vapor clouds, while PG produces more “throat hit”, wherein Red Beard, together with any other signatories towhich simulates the April Purchase Agreement (collectively,feeling of smoking. Our proprietary brands of e-liquids are manufactured by ISO Class 7 certified manufacturers in the “Purchasers”), agreed to purchase up to 50,000 shares of Series C Preferred for $100 per share over the course of three separate closings (the “AprilSeries C Offering”).United States, which helps ensure their purity and quality.
 
The Company issued an aggregate total of 25,000 shares of Series C Preferred on April 13, 2016, 10,000 shares of Series C Preferred on July 15, 2016 and, between August 31, 2016 and September 13, 2016, the Company issued an aggregate total of 25,000 shares of Series C Preferred. As additional consideration for participating in the April Series C Offering, the Purchasers received five-year warrants to purchase up to an aggregate total of approximately 33.3 million shares of the Company’s Common Stock for $0.15 per share.
Creation of Series D Convertible Preferred Stock
On January 24, 2017, the Company filed the Certificate of Designation, Preferences, Rights and Limitations of the Series D Convertible Preferred Stock (the “Certificate of Designation”) with the Nevada Secretary of State, designating 50,000 shares of the Company's preferred stock, par value $0.001 per share, as Series D Convertible Preferred Stock (the “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 Securities Exchange Act of 1934, as amended (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 $0.15 per share (the “Conversion Shares”). The Certificate of Designation also gives the Company the option to require the conversion of the Series D Preferred into Conversion Shares in the event: (i) there are sufficient authorized shares of Common Stock reserved as Conversion Shares; (ii) the Conversion Shares are registered under the Securities Act of 1933, as amended (the “Securities Act”), or the 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.
Series D Offering
On February 8, 2017 (the “Initial Investment Date”), the Company and certain accredited investors (the “Series D Investors”) entered into a Securities Purchase Agreement (the “Series D Purchase Agreement”), wherein the Company may offer and sell to Series D Investors up to 50,000 shares of Series D Preferred for $100 per share (the “Series D Offering”). As additional consideration, Series D Investors will also receive five-year warrants (the “Series D 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 Series D Purchase Agreement, all Series D Warrants issued in connection with the Series D Offering will be exchanged for shares of Common Stock pursuant to the Warrant Exchange Program, as further described below.
 
 
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Charlie’s e-liquid products are produced under seven brand names distinguished by their flavor profiles, packaging art and ingredient transparency. All products are packaged in plastic drip containers that are typically available in seven sizes ranging from 10ml to 100ml, as well as bulk concentrate formats.
●
Black Label and White Label. Charlie’s original black and white product line launched in 2015. Black Label is currently available in five flavors and White Label is currently available in four flavors.
 
On
●
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 Initial Investment Date,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 formulated for use in lower wattage open, semi-open and closed system vaporizers and are available in higher nicotine concentrations (25mg and 50mg per milliliter) than traditional e-liquids. Nicotine salts consist of nicotine dissolved in an acid that results in a lower PH level than other e-liquids. This form of nicotine has a higher bioavailability resulting in faster blood stream absorption and more closely mimics the effects of combustible tobacco products. We broadly released Pachamama™ Salts, an extension of the Pachamama™ line, in late December 2018 to a select group of key accounts, which now includes seven flavors packaged in 10ml and 30ml bottles. During the third quarter of 2019, we launched NIC salt extensions of the Black, Gold and White Label Charlie’s Chalk Dust brands and 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, issuedand 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 Series D Investors an aggregate totalwhich Charlie's granted Don Polly a limited right and license to use certain of 31,750 shares of Series D Preferred,Charlie’s trademarks, copyrights and original artwork, in connection with Don Polly’s branded CBD products, as well as Series D Warrantsa Services Agreement pursuant to purchase upwhich Charlie’s provides certain services to an aggregate total of 42,333,341 shares of Common Stock. Between the Initial Investment Date and the date of this Annual Report, the Company has issued an additional 5,000 shares of Series D Preferred and Series D Warrants to purchase up to an aggregate total of 6,666,669 shares of Common Stock. The issuance of the shares of Series D Preferred to date has resulted in gross proceedsDon Polly related to the Companysales, marketing, brand development of approximately $3.7 million.
Warrant ExchangeDon Polly products.
 
Beginning on February 8, 2017,As a result, the Company and certain holdersDon Polly launched a line of outstanding Common Stock purchase warrants (thepremium vapor, tincture and topical products containing hemp-derived CBD in June 2019, which we refer to the “Outstanding WarrantsDon Polly Products”), entered into Warrant Exchange Agreements (each, an and “Exchange AgreementDon Polly Product Line”), 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”). The Company expects to issue up to 71.7 million shares of Common Stock in exchange for the cancellation of 143.4 million Outstanding Warrants, including the Warrants issued in connection with the Series D Offering, over the courseDon 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 Warrant Exchange Program.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.
 
To date
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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 Company has issued 73,106,453 shareshigh level of Common Stock,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 exchange forJune 2019. We refer to these products as the cancellation of 146,212,905 Outstanding Warrants.“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 includes four flavors (the Natural, Green Tea Echinacea, Goji Cacao and Kava Kava Valerian) available in 30ml bottle sizes and both 750mg and 1750mg strengths. Our topical products include the Cooling Ointment, available in a one ounce jar and 750mg strength, and the Athletic Rub, available in a two ounce jar and 500mg strength. We plan on continuing to research, develop, and launch products in these categories.
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 marketare 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 distributebenefits of our full spectrum products.
True Drinks –Legacy Product – Bazi®
Prior to the Share Exchange, we marketed and distributed products, that offerincluding AquaBall® and Bazi®, offering a healthful, natural alternative to high sugar, high calorie and nutritionally deficient beverages. Our mission is to bring integrity back toA discussed below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, we ceased producing AquaBall® in early 2018. During 2019 we sold Bazi®, but on a very limited basis and only as we sold off existing inventory, as we focus our resources on the beverage industrymarketing, distribution and that honesty applies to every drop in every bottle. Our goal is to create and deliver beverages for families that encourage improved health, while being clear about what our products contain (and what they don’t).
AquaBall™ Naturally Flavored Water
Our flagship product is AquaBall™ Naturally Flavored Water, a zero-sugar, zero-calorie, preservative-free, vitamin-enhanced, naturally flavored water drink. AquaBall™ does not contain high fructose corn syrup, artificial flavors, or artificial colors. Unlike high sugar and high calorie beverages marketed toward children, AquaBall™ is sweetened with stevia, an all-natural sweetener, allowing AquaBall™ to provide a zero-sugar, zero-calorie alternative to juice and soda for kids.The main componentselling of the marketing vision behindCharlie’s Products and theAquaBall™brand is our licensing agreements with Disney Consumer Products, Inc. and Marvel Entertainment, allowing eachAquaBall™bottle to prominently feature various Disney and Marvel characters. Both Disney and Marvel characters have an established reputation of high retail sales of licensed products, giving eachAquaBall™the presence associated with these brands.
AquaBall™ is packaged in 10-ounce bottles, and is wrapped with colorful, eye-catching labels featuring popular Disney characters and various Marvel Superheroes. AquaBall™ currently comes in fruit punch, grape, strawberry lemonade and berry frost flavors and is sold primarily in grocery and convenience stores throughout the United States. During the year ended December 31, 2016, AquaBall™ sales accounted for approximately 92% of the Company’s total revenues.
Bazi®
Don Polly Products. Bazi® All Natural Energy, is a liquid nutritional drink packed with eight different super fruits, including the Chinese jujube and seven other superfruits,super fruits, plus 12 vitamins. The proprietary formula containsManagement is currently exploring the following fruits: jujube fruit, blueberry, pomegranate, goji berry, chokeberry, raspberry, acaivalue of continuing the marketing and sea buckthorn. Additionally,sale of Bazi® contains 12 vitamins including vitamins A, C, E and B-complex. In August, 2011, BioEnergy Ribose was added to Bazi® enhancing the products energy delivery system. During the year ended December 31, 2016, Bazi® sales accounted for approximately 8% of the Company’s total revenues.
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.
 
Manufacturing and Distribution
 
Manufacturing
  
BeginningCharlie’s Product Line. We work closely with contract manufacturing partners in May 2016, allthe 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 2019, we sourced 100% of our finished goods from two 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 AquaBall™ moved to Niagara Bottling, LLC (“Niagara”), pursuant to the termsour product lines. We maintain redundancies in our supply chain and conditionsare aware of a bottling agreement executed by the Company and Niagara in October 2015 (the “Niagara Agreement”). Niagara handles all aspects of production, including the procurement of all raw materials necessary to produce AquaBall™. In accordance with the terms of the Niagara Agreement, Niagara provides us with finished goods and bills usseveral alternative sources for product as it is shipped to customers. In addition to Niagara, we work a limited number of partners to repack bottles of AquaBall™ into six-packs and our 15-pack club packages.products.
 
Prior
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Don Polly Product Line. Our hemp-derived, CBD-based Don Polly Products are manufactured with contract manufacturers to May 2016,meet our formula specifications. While we utilized the service of certain thirddo not have any long-term contracts with these parties, to supplywe are strengthening our supplier partnerships as well as identifying additional supplier and manufacture our products. We had co-packing agreements with 7-Up Bottling in Modesto, California, Mountain Pure in Palestine, Texas, and Adirondack Beverages in Scotia, New York to package up to 4.0 million cases of AquaBall™ Naturally Flavored Water per year.contract manufacturing opportunities.
 
Bazi®. Bazi® hashad been and continues to be manufactured by Arizona Packaging and Production since 2007. Presently, we are not manufacturing Bazi Product, and have not any sales since the end of 2019.
 
Retail Distribution
 
After experiencing an increaseCharlie’s Product Line.Once manufactured, Charlie’s Products are directly distributed throughout the United States and in same storemore than 80 countries, primarily the United Kingdom, Italy, Spain, Belgium, Australia, Sweden and Canada.  We distribute our products to more than 2,200 specialty retailers through direct sales and to distributors and wholesalers both in those locations serviced by regional distributors, we began shifting our retail distribution strategy towards a nationwide network of regional distributors for eachthe United States and internationally.  Retailers of our grocery, drugproducts include specialty retailers throughout the United States and in 80 other countries.   We also distribute our products on a very limited basis through convenience stores and gas stations.  With respect to products that we sell through third-party distributors and wholesalers, we typically sell our products to these customers for their re-sale. In select markets we maintain exclusive arrangements with distributors and, when warranted, will memorialize these agreements contractually.  
Don Polly Product Line. Although we only launched the Don Polly Product Line in June 2019, our Don Polly Products are currently distributed to over 650 distribution and large retail accounts in November 2015. Throughout 2016the United States, Mexico, the United Kingdom, Switzerland and South Africa. Like the first quarter of 2017,Charlie’s Product Line, we signed with distributor partners in 44 states. We will continue to shipdistribute Don Polly Products directly to certain customers for which directretailers, as well as through the use of distributors, third-party wholesalers and independent brokers. We also expect to warehouse delivery is required.utilize direct-to-consumer sales through a newly developed e-commerce platform.
 
Online Sales
 
Charlie’s Product Line and Don Polly Product Line.Currently, we do not currently sell our Charlie's Products directly. However, we market Charlie's Products and sell branded merchandise through our website,www.charlieschalkdust.com. The Don Polly Product Line is offered for sale directly to consumers under our Pachamama brand through our in-house, e-commerce platforms on our websiteswww.enjoypachamama.comandwww.donpolly.com.
Bazi®. Our e-commerce platform allows current and future consumers to purchase AquaBall™ Naturally Flavored Water and Bazi® Energy Shot through Amazon.com and http://www.drinkbazi.com, respectively. We drive traffic. All sales of Bazi® Energy Shot are made through our online platform, and, to relevant landing pages and micro sites through digital marketing campaigns and promotions,a lesser extent, online marketplaces such as well as a variety of social media marketing efforts.Amazon.
 
Sales and Marketing
   
OurCharlie’s and Don Polly Product Lines.We have a 25-person sales team, based in the United States, that promotes our Charlie’s and Don Polly Products globally. Don Polly has also engaged with several independent brokers to help pursue mass channel retail. Salespeople seek to form long-term “360” collaborative relationships with their clients, partnering with them on sell-through efforts, providing access to our marketing efforts are directed from our corporate offices in Irvine, California, utilizing our own staff,and creative teams and advising and educating them on the Charlie’s and Don Polly Product Lines as well as outsideother industry-related issues. Currently, we advertise our products primarily through direct customer engagement through social media channels, print media, directed Internet marketing, industry tradeshows and collaborative events with retail partners. Historically, participation at industry-specific tradeshows played a large role in our marketing and distribution strategy. However, in 2018 we began allocating resources retained to build market awarenesscollaborative events, and shelf placementour 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 2019, approximately 25% of our products, including dedicated sales teams from Disney Consumer Products, Inc. and Marvel Entertainment. The Company manages key national accounts through our in-house national sales team. Our sales teams workwere to secure national distribution with these customers through multiple avenues including joint sales meetings with Disney and Marvel sales personnel.outside of the United States. 
 
As noted above,We intend to strategically expand our advertising activities in November 2015,2020 and increase our public relations efforts to gain industry awareness as well as editorial coverage for our brands. Some of our competitors promote their brands through print media and through celebrity endorsements and have substantial resources to devote to such efforts. We believe that our and our competitors’ efforts have helped increase our sales, our product acceptance and general industry awareness. In addition, we began building a nationwide network of direct store distributorshave allocated resources and personnel to handle the distribution of AquaBall™increase our sales in the grocery, drug and convenience channels. Withmarkets outside of the exception of accounts requiring direct to warehouse delivery, accounts are serviced by our distribution network. Our sales team will continue to secure distribution with both national and regional accounts, while our distributor partners add to our distribution with independent grocery and convenience stores in their respective territories.United States.
 
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Source and Availability of Raw Materials
 
Beginning in May 2016, Niagara began handling all aspects of production of AquaBall™, includingCharlie’s Product Line.Our manufacturing partners source the procurement of all raw materials. Prior to May 2016,we utilizedingredients for our proprietary e-cigarette liquids from a variety of supplierssources, 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 raw materialscertain product packaging and are responsible for the AquaBall™.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 2016,2018, 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.
 
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WeAlthough we own the formulas for both AquaBall™ Naturally Flavored Waterthe Charlie’s Products, the Don Polly Products and Bazi® Energy Shot,, 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 believe thatare 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 purchasing requirements canbusiness could be readily met from alternative sources, if necessary.materially harmed.
 
Competition
 
The industries in which we operate are highly competitive. AquaBall™ Naturally Flavored Water
Charlie’s Product Line. Our Charlie's Product Line competes most directlyin 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 other beverages marketed directlybranding, and more nuanced flavor combinations. The nature of our competitors is varied as the market is highly fragmented and the barriers to children. entry into the business are low.
Part of our business strategy focuses on the establishment of relationships with distributors and prominent branding focused on performance and quality. We are aware that e-cigarette competitors in the industry are also seeking to enter into such relationships 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, are better established, larger and better financed than our Company.
We plan to compete primarily on the basis of product quality, brand recognition, brand loyalty, service, marketing, and advertising. We are subject to highly competitive conditions in all aspects of our business. The competitive environment and our competitive position can be significantly influenced by weak economic conditions, erosion of consumer confidence, competitors’ introduction of low-priced products or innovative products, cigarette excise taxes, higher absolute prices and larger gaps between price categories, and product regulation that diminishes the ability to differentiate tobacco products.
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We also compete with otheragainst “big tobacco”, U.S. cigarette manufacturers of functional beverages,both conventional tobacco cigarettes and with manufacturers of more traditional beverages, such as juiceelectronic cigarettes like Altria Group, Inc., Lorillard, Inc. and soda.
Our primary competition for AquaBall™ is in the estimated $2.0 billion market for products marketed directly to children, including CapriSun®, Honest Kids, Good to Grow, Tummy Ticklers, Kool-aidReynolds American, Inc. We compete against big tobacco who offers not only conventional tobacco cigarettes and others. General competition in the beverage industry includes products owned by multinational corporations with significant financial resources, including Vitamin Water, owned by Coca-Cola, and Sobe and Propel, both owned by Pepsi Co. 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®. Indirect competition for the AquaBall™ and Bazi® includes soft drinks and juiceelectronic cigarettes but also smokeless tobacco products such as Sunny Delight®“snus” (a form of moist ground smokeless tobacco that is usually sold in sachet form that resembles small tea bags), chewing tobacco and other fruit drinks. Thesesnuff. 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 can use their resourceslike 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 scaleis highly competitive. The competition consists of publicly and privately-owned companies, which tend to rapidly respondbe 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 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 duplicatecapitalize on favorable long-term trends in the near future. 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.hemp-based, CBD wellness products segment.
 
Intellectual Property
We rely on the AquaBall™ patent, AquaBall™ and Bazi® trademarks and licensing agreements to market our products and make them stand out among our competitors.
 
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.
True Drinks – Legacy Products.We were granted the patent for AquaBall™AquaBall®’s stackable, spherical drink container in 2009, via GT Beverage Company, LLC, who we purchased on March 31, 2012. In both 2016 and 2017, we stopped using this bottle and, instead, switched to a bottle specifically designed for us by Niagara Bottling.Niagara. In 2016 and 2017, we took an impairment chargecharges on the value of the spherical drink container patent.
  
We maintain trademark protection for AquaBall™AquaBall® and have 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
 
We first entered intoCharlie’s Product Line.Charlie's is currently active in exploring several long-term licensing agreementsarrangements with Disney Consumer Products, Inc.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 an 18-month licensing agreement with Marvel Characters, B.V. (collectively, the “Licensing Agreements”) in 2012. Each Licensing Agreement allows usPachamama™ brands to feature popular Disney and Marvel characters on AquaBall™ Naturally Flavored Water, allowing AquaBall™ to stand out among other beverages marketed towards children. Under the terms and conditions of the Licensing Agreements, we work with the Disney and Marvel teams to create colorful, eye-catching labels that surround the entire spherical shape of each AquaBall™. Once the label designs are approved, we work with Disney and Marvel to set retail calendars, rotating the placement of different AquaBall™ designs over the course of the year.a wider consumer base.
 
 
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In 2015,Don Polly Product Line. On April 25, 2019, the Company and DisneyCharlie’s entered into a renewed LicensingLicense Agreement which extended the Company’s license with Disney through March 31, 2017 (the “DisneyLicense Agreement”). The terms of the Disney Agreement entitle Disney to receive with Don Polly. As previously noted, Don Polly is classified as a royalty rate of 5% on sales of AquaBall™ Naturally Flavored Water adorned with Disney characters, paid quarterly, with a total guarantee of $450,870 over the period from April 1, 2015 through March 31, 2017. In addition,variable interest entity for which the Company is requiredthe 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 makethe License Agreement, Charlie’s provides Don Polly with a ‘common marketing fund’ contribution equallimited right and license to 1%use certain of sales due annually duringCharlie’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 agreement. The Company is requiredevent that Charlie’s wishes to spendsell 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 totalpurchase price of $820,000$111,618 on advertising and promotional opportunities over the term of the Disney Agreement. During the year endedor before December 31, 2016,2025, 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 Company paid a total of $129,597 to Disney pursuant to the Disney Agreement.agreed upon territory. The License Agreement will continue in perpetuity unless terminated in accordance with its terms.
 
On August 22, 2015,Concurrently with the Companyexecution of the License Agreement, Charlie’s and Marvel Don Polly also entered into a renewed LicensingServices Agreement (the “Services Agreement”), pursuant to extendwhich Charlie’s provides certain services to Don Polly, including, without limitation, (i) the Company's license to feature certain Marvel charactersdevelopment 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 bottles of AquaBall™ Naturally Flavored Water through December 31, 2017.a quarterly basis, and (ii) reimburse Charlie’s for all out-of-pocket business expenses that are preapproved in writing by Don Polly. The MarvelServices Agreement requires the Company to pay to Marvel a 5% royalty rate on sales of AquaBall™ Naturally Flavored Water adornedwill continue in perpetuity unless terminated in accordance with Marvel characters, paid quarterly, through December 31, 2017, with a total guarantee of $200,000.The total royalty paid to Marvel during the year ended December 31, 2016 was $100,000.its terms.
  
Government Regulations
 
The production, distributionCharlie’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 sale inTobacco Control Act of 2009 (the “Tobacco Control Act”).
Under this Court decision, the United States of our products are subjectFDA is not permitted to various U.S. federal and state regulations, including but not limited to:regulate electronic cigarettes as “drugs” or “devices” or a “combination product” under the Federal Food, Drug and Cosmetic Act unless they are marketed for therapeutic purposes.
The Tobacco Control Act also requires establishment, within the FDA’s new Center for Tobacco Products, of a Tobacco Products Scientific Advisory Committee to provide advice, information and recommendations with respect to the safety, dependence or health issues related to tobacco products.
The FDA had previously indicated that it intended to regulate e-cigarettes under the Tobacco Control Act through the issuance of “Deeming Regulations” that would include e-liquid, e-cigarettes, and other vaping products (collectively, “Deemed Tobacco Products”) under the Tobacco Control Act and subject to the FDA’s jurisdiction.
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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:
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a prohibition on sales to those younger than 18 years of age and requirements for verification by means of photographic identification;
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health and addictiveness warnings on product packages and in advertisements;
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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;
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registration with, and reporting of product and ingredient listings to, the FDA;
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no marketing of new tobacco products prior to FDA review;
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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;
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payment of user fees;
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ban on free samples; and
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childproof packaging.
In addition, the Deeming Regulations requires any Deemed Tobacco Product that was not commercially marketed as of the “grandfathering” date of February 15, 2007, to obtain premarket approval before it can be marketed in the United States. Premarket approval could take any of the following three pathways: (1) submission of a Premarket Tobacco Application (“PMTA”) and receipt of a marketing authorization order; (2) submission of a substantial equivalence report and receipt of a substantial equivalence order; or (3) submission of a request for an exemption from substantial equivalence requirements and receipt of 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.
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”.
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As at the date of this Annual Report on Form 10-K, the Company continues to evaluate the potential returns associated with the preparation and submission of PMTAs during the remainder of the grace period to determine whether or not to continue marketing e-liquid or other vaping products in the United States after the grace period lapses on May 12, 2020.
State and local governments currently legislate and regulate tobacco products, including what is considered a tobacco product, how tobacco taxes are calculated and collected, to whom tobacco products can be sold and by whom, in addition to where tobacco products, specifically cigarettes may be smoked and where they may not. Certain municipalities have enacted local ordinances which preclude the use of e-liquid, e-cigarettes and other vaping products where traditional tobacco burning cigarettes cannot be used and certain states have proposed legislation that would categorize vaping products as tobacco products, equivalent to their tobacco burning counterparts. If these bills become laws, vaping products may lose their appeal as an 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 thePrevent All Cigarette Trafficking Act(which prohibits the use of the U.S. Postal Service to mail most tobacco products and which amends theJenkins Act, which would require individuals and businesses that make interstate sales of cigarettes or smokeless tobacco to comply with state tax laws) nor theFederal 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.
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:
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the levying of substantial and increasing tax and duty charges;
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restrictions or bans on advertising, marketing and sponsorship;
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the display of larger health warnings, graphic health warnings and other labeling requirements;
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restrictions on packaging design, including the use of colors and generic packaging;
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restrictions or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines;
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requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituents levels;
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requirements regarding testing, disclosure and use of tobacco product ingredients;
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increased restrictions on smoking in public and work places and, in some instances, in private places and outdoors;
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elimination of duty free allowances for travelers; and
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encouraging litigation against tobacco companies.
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If e-liquid, e-cigarettes or other vaping products are subject to one or more significant regulatory initiatives enacted under the FCTC, the Company’s business, results of operations and financial condition could be materially and adversely affected.
European Union
On April 3, 2014, the European Union issued the “New Tobacco Product Directive” and is intended to regulate “tobacco products”, including cigarettes, roll-your-own tobacco, cigars and smokeless tobacco, and “electronic cigarettes and herbal products for smoking”, including e-cigarettes, e-liquid, refill containers, liquid holding tanks and e-liquid bottles sold directly to consumers. The New Tobacco Product Directive became effective May 20, 2016.
The New Tobacco Product Directive introduces a number of new regulatory requirements for e-cigarettes, e-liquid and other vaping products, which includes the following: (i) restricts the amount of nicotine that e-cigarettes and e-liquid can contain; (ii) requires e-cigarettes, e-liquid and refill containers to be sold in child and tamper-proof packaging and nicotine liquids to contain only “ingredients of high purity”; (iii) provides that e-cigarettes, e-liquid and other vaping products must deliver nicotine doses at “consistent levels under normal conditions of use” and come with health warnings, instructions for their use, information on “addictiveness and toxicity”, an ingredients list, and information on nicotine content; (iv) significantly restricts the advertising and promotion of e-cigarettes, e-liquid and other vaping products; and (v) requires e-cigarette, e-liquid and other vaping product manufacturers and importers to notify EU Member States before placing new products on the market and to report annually such to Member States (including on their sales volumes, types of users and their “preferences”). Failure to make annual reports to Member State Competent Authorities or to properly notify prior to a substantive change to an existing product or introduction of a new product could result in the Company’s inability to market or sell its products and cause material adverse effect on the Company’s business, results of operations and financial condition.
The New Tobacco Product Directive requires Member States to transpose into law New Tobacco Product Directive provisions by May 20, 2016. An “EU directive” requires Member States to achieve particular results. However, it does not dictate the means by which they do so. Its effect depends on how Member States transpose the New Tobacco Product Directive into their national laws. Member States may decide, for example, to introduce further rules affecting e-cigarettes, e-liquid and other vaping products (for example, age restrictions) provided that these are compatible with the principles of free movement of goods in the Treaty on the Functioning of the European Union. The Tobacco Product Directive also includes provisions that allow Member States to ban specific e-cigarettes, e-liquid and other vaping products or specific types of e-cigarettes, e-liquid and other vaping products in certain circumstances if there are grounds to believe that they could present a serious risk to human health. If at least three Member States impose a ban and it is found to be duly justified, the European Commission could implement a European Union wide ban. Similarly, the New Tobacco Product Directive provides that Member States may prohibit a certain category of tobacco, flavoring or related products on grounds relating to a specific situation in that Member State for public health purposes. Such measures must be notified to the European Commission to determine whether they are justified.
There are also other national laws in Member States regulating e-cigarettes, e-liquid and other vaping products. It is not clear what impact the new Tobacco Product Directive will have on these laws.
Canada
On September 27, 2017, Health Canada released a Notice to the Industry that portions of Bill S-5 related to the sale of vaping products that are marketed without health or therapeutic claims are to be enacted immediately upon Royal Assent. In effect, this both legitimizes the sale of vaping products within Canada and creates an initial regulatory framework. Health Canada has taken the stance that vaping products that are not marketed as therapeutic are to be considered consumer products and subject to the requirements of the Canada Consumer Product Safety Act (“CCPSA”). Under the CCPSA, there is a “general prohibition” on products that are classified as “very toxic” under the Consumer Chemicals and Containers Regulations, 2001 (“CCCR, 2001”). Health Canada has reviewed the toxicity of nicotine containing products and has determined that “vaping liquids containing equal to or more than 66 mg/ml (6.6%) nicotine meet the classification of "very toxic" under the CCCR, 2001 and will be prohibited from import, advertising or sale under Section 38 of the CCCR, 2001. None of the Company’s e-liquid products for sale fall under this classification of “very toxic” and are therefore able to be marketed for sale within Canada. Health Canada has also determined that products containing any nicotine that falls below the “very toxic” classification to be regulated as “toxic” under the CCCR, 2001. This classification requires the use of childproof packaging, specific labeling requirements and pictograms as outlined in the CCCR, 2001.
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At present, the Company has made efforts to ensure that its e-liquid products that are being marketed in Canada are in full compliance with the recommendations of Health Canada and will expect no interruption to business upon Royal Ascent of Bill S-5.
Health Canada had also stated an intent to develop additional regulations under the authority of the CCPSA, however, at this time it is unclear what those additional regulations may be or how they will affect the Company’s business. If e-liquid, e-cigarettes or other vaping products are subject to one or more significant regulatory initiatives enacted under the Bill S-5 or otherwise, the Company’s business, results of operations and financial condition could be materially and adversely affected.
Currently in Canada, electronic smoking products (i.e., electronic products for the vaporization and administration of inhaled doses of nicotine including electronic cigarettes, cigars, cigarillos and pipes, as well as cartridges of nicotine solutions and related products) fall within the scope of the Food and Drugs Act. All of these products require market authorization prior to being imported, advertised or sold in Canada. Market authorization is granted by Health Canada following successful review of scientific evidence demonstrating safety, quality and efficacy with respect to the intended purpose of the health product. To date, no electronic smoking product has been authorized for sale by Health Canada.
In the absence of evidence establishing otherwise, an electronic smoking product delivering nicotine is regulated as a “new drug” under Division 8, Part C of the Food and Drug Regulations. In addition, the delivery system within an electronic smoking kit that contains nicotine must meet the requirements of the Medical Devices Regulations. Appropriate establishment licenses issued by Health Canada are also needed prior to importing, and manufacturing electronic cigarettes. Products that are found to pose a risk to health and/or are in violation of the Food and Drugs Act and related regulations may be subject to compliance and enforcement actions in accordance with the Health Products and Food Branch Inspectorate’s Compliance and Enforcement Policy (POL-0001). According to Health Canada regulations, it is not permissible to import, advertise or sell electronic smoking products without the appropriate authorizations, and persons that violate these regulations are subject to repercussions from Health Canada, including but not limited to, seizure of the products.
Since no scientific evidence demonstrating safety, quality and efficacy with respect to the intended purpose of e-cigarettes, e-liquid or other vaping products has been submitted to Health Canada to date, there is the possibility that in the future Health Canada may modify or retract the current prohibitions currently in place. However, there can be no assurance that the Company will be in total compliance, remain competitive, or financially able to meet future requirements and regulations imposed by Health Canada.
To date, Health Canada has not imposed any restrictions on e-cigarettes, e-liquid and other vaping products that do not contain nicotine. e-cigarettes, e-liquid and other vaping products that do not make any health claim and do not contain nicotine may legally be sold in Canada. Thus, vendors can openly sell nicotine-free e-cigarettes, e-liquid and other vaping products. However, there are vape shops operating throughout Canada selling e-cigarettes, e-liquid and other vaping products containing nicotine without any implications from Health Canada. e-cigarettes, e-liquid and other vaping products are subject to standard product regulations in Canada, including the Canada Consumer Product Safety Act and the Consumer Packaging and Labelling Act.
At present, neither the Tobacco Act (which regulates the manufacture, sale, labelling and promotion of tobacco products) nor the Tobacco Products Labelling Regulations (Cigarettes and Little Cigars) (which governs how cigarettes can be advertised and marketed) apply to e-cigarettes, e-liquid and other vaping products. The application of these federal laws to e-cigarettes, e-liquid and other vaping products would have a material adverse effect on the Company’s business, results of operations and financial condition.
Company’s efforts to mitigate risks associated with new and evolving regulation.
The Company is constantly seeking to stay in compliance with all existing and reasonably expected future regulations. The Company, through its internal compliance team, market consultants and technicians and testing labs hopes to stay in accordance with all standards whether set forth in the New Tobacco Products Directive or the Deeming Regulations. Making sure that all e-liquid products meet and exceed the standards set forth by each market’s regulatory body is of the highest concern for the Company. Staying in compliance with all marketing and packaging directives is imperative to maintaining access to the markets. Although these processes are costly and time consuming, it is imperative for the Company’s success that these steps are taken and constantly kept up to date. Failure to comply in a timely fashion to any particular directive or regulation could have material adverse effects on the results of business operations.
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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 Dietary Supplement Health2018 Farm Bill), the term “hemp” means “the plant Cannabis sativa L. and Educationany 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 1994;legal protection for hemp-based products that contain more than 0.3 percent THC and there is a risk that the Occupational SafetyCompany 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 Health Act; various environmental statutes;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 numberplan 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 federal, statesimilarly 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 local statutes and regulations(II) products derived from those plants; (iv) a procedure to comply with enforcement procedures; (v) a procedure for conducting annual inspections of, at a minimum, a random sample of hemp producers to verify that hemp is not produced in violation of this subtitle; (vi) a procedure for submitting the information, as applicable, to the Secretary of Agriculture (the “Secretary”) not more than 30 days after the date on which the information is received; and (vii) a certification that the State or Indian tribe has the resources and personnel to carry out the practices and procedures described in clauses (i) through (vi)”. Further, a hemp producer in a State or the territory of an Indian tribe for which a State or Tribal plan is approved shall be determined to have negligently violated the State or Tribal plan, including by negligently— “(i) failing to provide a legal description of land on which the producer produces hemp; (ii) failing to obtain a license or other required authorization from the State department of agriculture or Tribal government, as applicable; or (iii) producing Cannabis sativa L. with a delta-9 THC concentration of more than 0.3 percent on a dry weight basis”. A hemp producer that negligently violates a State or Tribal plan 3 times in a 5-year period shall be ineligible to produce hemp for a period of 5 years beginning on the date of the third violation. If the State department of agriculture or Tribal government in a State or the territory of an Indian tribe for which a State or Tribal plan, as applicable, determines that a hemp producer in the State or territory has violated the State or Tribal plan with a culpable mental state greater than negligence— “(i) the State department of agriculture or Tribal government, as applicable, shall immediately report the hemp producer to —(I) the Attorney General; and (II) the chief law enforcement officer of the State or Indian tribe, as applicable”. In the case of a State or Indian tribe for which a State or Tribal plan is not approved, the production transportation, sale, safety, advertising, marketing, labelingof hemp in that State or the territory of that Indian tribe shall be subject to a plan established by the Secretary to monitor and ingredientsregulate that production. A plan established by the Secretary under shall include— “(A) a practice to maintain relevant information regarding land on which hemp is produced in the State or territory of the Indian tribe, including a legal description of the land, for a period of not less than 3 calendar years; (B) a procedure for testing, using post-decarboxylation or other similarly reliable methods, delta-9 tetrahydrocannabinol concentration levels of hemp produced in the State or territory of the Indian tribe; (C) a procedure for the effective disposal of—(i) plants, whether growing or not, that are produced in violation of this subtitle; and (ii) products derived from those plants; (D) a procedure to comply with the enforcement procedures; (E) a procedure for conducting annual inspections of, at a minimum, a random sample of hemp producers to verify that hemp is not produced in violation of this subtitle; and (F) such products.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.
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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.
  
We believe that current and reasonably foreseeable governmental regulation will have minimal impact on our business.
Research and Development
 
No expenses were recorded on Our research and development activities consist of development and testing of new flavors, formulations, formats and delivery methods for our existing products, as well as development of new products for the Charlie’s Product Line and the Don Polly Product Line. For the year ended December 31, 2016. We are working with certain third parties on the2019, research and development costs primarily consisted of possible future products, but these projects are funded by the respective third parties. Upon execution of the Niagara Agreement in October 2015, we completed thetesting and development of an improved “clean label” formulation of AquaBall™, which remains sugar and calorie free but eliminated all preservatives, and is produced using a hot-fill process. We completed the transition of AquaBall™fees related to the new, preservative-free formulation and begin distribution from Niagara facilities in June 2016.Company’s PMTA submissions.
 
During 2006, Bazi® was developedFor the years ended December 31, 2019 and was launched in January 2007. This product did not require FDA or other regulatory approval. During 2009, new ingredients2018, Charlie’s recorded research and productions methods were researched to integrate into existing products or new products. Since 2012, Bazi® has beendevelopment expense of $1,102,000 and is now being sold solely online in 12, 24, 36, 48 and 144 packs.$0, respectively.
 
Employees
 
We had 1359 full-time employees across Charlie’s Holdings Inc., Charlie’s Chalk Dust LLC and one part-time employeeDon Polly LLC as of December 31, 2016.
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Compliance with Environmental Laws
In California, 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.April 6, 2020.
 
Available Information
 
As a public company, we are required to file our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements on Schedule 14A and other information (including any amendments) with the Securities and Exchange Commission (the “SEC”). You may read and copy such material at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549, on official business days during the hours of 10:00 a.m. to 3:00 p.m. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.SEC. You can also find the Company’s SEC filings at the SEC’s website at http://www.sec.gov.
 
Our Internet address is www.truedrinks.comwww.charliesholdings.com. Information contained on our website is not part of this annual reportAnnual Report on Form 10-K. Our SEC filings (including any amendments) will be made available free of charge on www.truedrinks.comwww.charliesholdings.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
 
ITEMITEM 1A. RISKRISK FACTORS
 
We are subject to various risks that could have a negative effect on the Company and its financial condition. These risks could cause actual operating results to differ from those expressed in certain “forward looking statements’statements” contained in this Annual Report on Form 10-K as well as in other communications.
 
Risks Related to the Company
 
We have a historyOur operations are now primarily dependent on the business of operating lossesCharlie’s, and despite consummation of recent financings, we require additional financing to satisfy our current contractual obligations and execute our business plan.
We have not been profitable since inception. We had a net loss of $5,445,563 and $11,990,563 during the years ending December 31, 2016 and 2015, respectively. Additionally, sales of AquaBall™ Naturally Flavored Water are significantly below levels necessaryability to achieve positive cash flow.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 we have recently consummated equity and debt financings that have resulted in aggregate gross proceedsCharlie’s generated net revenue of approximately $6$20.0 million during the year ended December 31, 2019 and $20.8 million for the year ended December 31, 2016, our2018, there can be no guarantee that the Company will continue to grow revenue or achieve positive cash position was approximately $224,876 at December 31, 2016, and we used $5,665,992 of cash for operations during the year ended December 31, 2016. To continue as a going concern, and to satisfy our contractual obligations under the Niagara Agreement, we need to secure proceeds from the sale of additional debt or equity securities, whether in a private or public offering,flow in the near term. No assurances can be given that we will be successful in our attempts to generate proceeds to fund our operations. In the event we are unable to raise additional capital through the issuance of additional debt or equity securities, we will be unable to continue as a going concern.
We face substantial uncertainties in executing our business plan.
We must attain certain objectives in order to successfully execute our business plan over, including certain sales and distribution of AquaBall™ Naturally Flavored Water required by the minimum volume requirements for each 12-month period under the Niagara Agreement. Failure to sustain sales sufficient to meet our Annual Commitment to Niagara will have a material adverse impact on our business, and no assurances can be given that we will be successful in our efforts.future.
 
 
 
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Our operating results in the past will not reflect our operating results in the future, which makes it difficult to evaluate our future business, prospects, and forecast revenue.
Until recently, our business was comprised primarily of the development, marketing, sale and distribution of all-natural, vitamin-enhanced drinks. As a result of our decision to consummate the Share Exchange, our future revenue will substantially differ from past revenue, and our operating results will vary significantly compared to past operating results. It is too early to predict whether consumers will accept, and continue to use on a regular basis, our new products, due in part to the fact that we have had limited recent operating history as a combined entity with Charlie’s. Factors that will significantly affect our operating results include, without limitation, the following:
●
the expected increase in revenue due to the addition of those products developed and marketed by Charlie’s prior to the Share Exchange, as well as any products that we may release in the future, to our revenue stream;
●
our decision in early 2018 to discontinue the production and sale of AquaBall®, that in the year ended December 31, 2018, contributed approximately $1,767,802 in revenue;
●
our previous sole reliance on sales of Bazi®, that in the years ended December 31, 2019 and 2018, contributed approximately $22,207and $179,250 in revenue to the Company, respectively; and
●
the restructuring of substantially all of our previously outstanding debt and shares of preferred stock on April 26, 2019, in connection with the Share Exchange.
Our cash resources are currently insufficient to submit each of our anticipated PMTA applications with the FDA, and otherwise satisfy our projected short-term liquidity and capital requirements.
As of December 31, 2019, we had negative working capital of approximately $1,566,000, which consisted of current assets of approximately $5,611,000 and current liabilities of approximately $7,177,000. In addition, we expect the cost associated with the preparation and submission of PMTAs with the FDA will be approximately $4.4 million.  We therefore currently believe that in orderour cash resources will be insufficient to executefund our business planoperations for the next twelve months and achieve sales growth, we must, among other things, successfully recruit additional personnel in key positions, developprepare and submit our PMTA applications with the FDA. As a larger distribution network, establish a broader customer base and increase awareness of our brand name. In order to implement any of these initiatives,result, we will be required to materially increaseseek additional financing in the future in order to fund our operating expenses,operations, complete the PMTA application process and otherwise carry out our business plan. There can be no assurance that such financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and in our best interests.

Our auditors have issued a going concern opinion on our financial statements as of December 31, 2019
            Our financial statements have been prepared assuming that the Company will continue as a going concern, which may requirecontemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company operates in a rapidly changing legal and regulatory environment; new laws and regulations or changes to existing laws and regulations could significantly limit the Company’s ability to sell its products, and/or result in additional working capital. If we arecosts. Additionally, the Company is required to apply for FDA approval to continue selling and marketing its products used for the vaporization of nicotine in the United States. There is significant cost associated with the application process and there can be no assurance the FDA will approve the application(s). In addition, the recent outbreak of a novel strain of COVID-19 (“Coronavirus”) which was identified in Wuhan, China around December 2019 and continues to spread globally, has had a negative impact on the global economy and markets which could impact the Company’s supply chain and/or sales. For the year ended December 31, 2019 the Company has incurred losses from operations of $5,764,000 and a consolidated net loss of approximately $2,146,000 and the Company has negative stockholders’ equity of $547,000. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to the carrying amount and classification of recorded assets and liabilities should the Company be unable to secure additional working capital,continue operations.
Our business is difficult to evaluate because we have recently significantly modified our product offerings and customer base.
As a result of the Share Exchange, we have recently modified our operations, engaging in the sale of new products in a new market through new distributors and new lines of business. There is a risk that we will be unable to accomplishsuccessfully integrate the newly acquired businesses with our objectives,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 unableunsuccessful in our monetization efforts, we may fail to accomplish oneattract or more of these objectives,retain customers or to generate sufficient revenue, operating margin, or other value to justify our investments, and our business may fail.be adversely affected.
 
Our licensing agreements with Disney Consumer Products, Inc. and Marvel Characters, B.V. are critical components of the marketing of the AquaBall™ line, and there is no guarantee the licensing agreements will be renewed at the end of each agreement’s term.
 
We currently have licensing agreements with Disney Consumer Products, Inc. and Marvel Characters, B.V. that allow us to place popular Disney and Marvel characters on labels of AquaBall™ Naturally Flavored Water. The use of these characters, including Disney Princesses and Spider-Man, is critical to making AquaBall™ stand out among our competitors. These licensing agreements have varying terms, the Disney Agreement expires on March 31, 2017 and the Marvel Agreement expires on December 31, 2017, and there is no guarantee we will be able to renew these agreements upon expiration, nor are we able to guarantee that we will have licensing agreements with other companies when the Disney Agreement and Marvel Agreement expire.-15-
 
Certain large shareholdersOur significant stockholders may have certain personal interests that may affect the Company.
 
Together, Brandon Stump and Ryan Stump, the founders of Charlie’s and our Chief Executive Officer and Chief Operating Officer, respectively, collectively own approximately 59% of our issued and outstanding voting securities as a result of the Share Exchange. As a result, of securities held by Mr. Vincent C. Smith,Ryan Stump and Brandon Stump have the Vincent C. Smith, Jr. Annuity Trust 2015-1 (the “Smith Trust”), and Red Beard, an entity affiliated with Mr. Smith, Mr. Smith may be deemed the beneficial owner of, in the aggregate, approximately 48% of the Company’s outstanding voting securities. As a result, Mr. Smith, the Smith Trust and/or Red Beard has the potential ability to exert influence over both the actions of theour Board of Directors, and the outcome of issues requiring approval by our stockholders, as well as the Company’s shareholders.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 shareholdersstockholders or preventing transactions in which shareholdersstockholders might otherwise recover a premium for their shares over current market prices.
We will need to hire additional qualified accounting and administrative personnel in order to remediate material weaknesses in our internal control over financial accounting, and we will need to expend additional resources and efforts to establish and maintain the effectiveness of our internal control over financial reporting and our disclosure controls and procedures.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Sarbanes-Oxley Act of 2002. Our management is required to evaluate and disclose its assessment of the effectiveness of our internal control over financial reporting as of each year-end, including disclosing any “material weakness” in our internal control over financial reporting. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As a result of its assessment, management has determined that there were material weaknesses due to the lack of segregation of duties and sufficient internal controls (including technology-based general controls) that encompass our Company as a whole with respect to entity and transactions level controls in order to ensure complete documentation of complex and non-routine transactions and adequate financial reporting. If we continue to experience material weaknesses in our internal controls or fail to maintain or implement required new or improved controls, such circumstances could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements, or adversely affect the results of periodic management evaluations and, if required, annual auditor attestation reports. Due to these material weaknesses, management concluded that, as of December 31, 2019 and 2018, our internal control over financial reporting was ineffective. Management also concluded that our disclosure controls and procedures were ineffective as of December 31, 2019 and 2018. These weaknesses were first identified in our Annual Report on Form 10-K for the year ended December 31, 2012. In 2018, we reduced our staff to one employee, and outsourced our accounting and financial functions, further exacerbating our weaknesses in our internal control over financial reporting and our disclosure controls and procedures. Although the number of employees has grown as a result of the Share Exchange and the addition of Charlie’s operations, including the hiring of a new Chief Executive Officer, Chief Financial Officer and additional accounting and information technology staff, no assurances can be provided that we will have sufficient resources to resolve these material weaknesses. These weaknesses have the potential to adversely impact our financial reporting process and our financial reports. We will need to hire additional qualified accounting and administrative personnel in order to resolve these material weaknesses.
 
Our limited operating history makes it difficultThe loss of one or more of our key personnel or our failure to evaluateattract and retain other highly qualified personnel in the future, could harm our prospects.business.
We currently depend on the continued services and performance of key members of our management team, in particular, Brandon Stump and Ryan Stump, Charlie’s founders and our Chief Executive Officer and Chief Operating Officer, respectively, and David Allen, our Chief Financial Officer.  If we cannot call upon them or other key management personnel for any reason, our operations and development could be harmed. We have not yet developed a succession plan. Furthermore, as we grow, we will be required to hire and attract additional qualified professionals such as accounting, legal, finance, production, market and sales experts. We may not be able to locate or attract qualified individuals for such positions, which will affect our ability to grow and expand our business.
We rely on contractual arrangements with Don Polly, our consolidated variable interest entity for our CBD-related business operations, which may not be as effective as direct ownership in providing operational control.
 
We have relied and expect to continue to rely on contractual arrangements with Don Polly and its shareholders, consisting of entities controlled by Brandon Stump and Ryan Stump, for the operation of our CBD-related operations. These contractual arrangements may not be as effective as direct ownership in providing us with control over our consolidated variable interest entity. For example, Don Polly and its shareholders could breach their contractual arrangements with us by, among other things, failing to conduct their operations, including maintaining our website and using the domain names and trademarks, in an acceptable manner or taking other actions that are detrimental to our interests.
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If we had direct ownership of Don Polly, we would be able to exercise our rights as a limited operating historyshareholder 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 evaluateoperate 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 prospects. Our current flagship product, AquaBall™ Naturally Flavored Water, was formulatedfinancial 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 introducedRyan 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 publicoutcome of any such legal proceedings.
We have no commercial manufacturing capacity and rely on third-party contract manufacturers to produce commercial quantities of our products.
We do not have the facilities, equipment or personnel to manufacture commercial quantities of our products and therefore must rely on qualified third-party contract manufactures with appropriate facilities and equipment to contract manufacture commercial quantities of products. Any performance failure on the part of our contract manufacturers could delay commercialization of any of our products, depriving us of potential product revenue.
Failure by our contract manufacturers to achieve and maintain high manufacturing standards could result in product recalls or withdrawals, delays or failures in testing or delivery, cost overruns or other problems that could materially adversely affect our business. Contract manufacturers may encounter difficulties involving production yields, quality control and quality assurance. If for salesome 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 2012. Our other product, Bazi® All Natural Energy, has had limited market success. There can be no assurance thatidentifying 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 will achieve significant saleswould incur net losses as a result of us focusing our sales efforts onof the AquaBall™ product, if any sales could be made.
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We are subject to cyber-security risks, including those related to customer, employee, vendor or that our new sales modelother company data and including in connection with be successful.integration of acquired businesses and operations.
 
We alsouse 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 not be successful in addressinghave 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 other operating challenges, such as developing brand awarenesssystems. Despite our security design and expanding our market presence through retail salescontrols, and our direct-to-consumer and online sales strategy. Our prospects for profitability must be considered in lightthose of our evolving business model. These factors make it difficultthird-party providers, we may become subject to assesssystem 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 prospects.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 the Companyus and/or itsour principals, bad publicity, and tort claims arising out of governmental or judicial findings of fact or conclusions of law adverse to the Companyus or itsour 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 revenues.revenue.
  
 
 
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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
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Failure to comply with Office of Foreign Asset Control rules and regulations and the Foreign Corrupt Practices Act (“FCPA”).
These factors or any combination of these factors may adversely affect our revenue or our overall financial performance.  
The recent outbreak of COVID-19, or coronavirus, may adversely affect our business.
In the event of a pandemic, epidemic or outbreak of an infectious disease, our business may be adversely affected. In December 2019, a novel strain of COVID-19 (“Coronavirus”) was identified in Wuhan, China which continues to spread globally to, among other countries, the United States. Such events may result in a period of business and travel disruption, and in reduced sales and operations, any of which could materially affect our business, financial condition and results of operations. For example, the spread of COVID-19 in the United States has resulted in travel restrictions impacting our sales professionals and is causing disruptions to our manufacturing supply chain. These conditions have begun to negatively affect our sales and revenue, although the magnitude of such a negative impact cannot be determined at this time.
The outbreak and persistence of Coronavirus in international markets that we have targeted for our international expansion have also delayed the preparation for and launch of such expansion efforts. The spread of Coronavirus has resulted in the inability of certain of our products being delivered and distributed to the overseas markets on a timely basis. If there were a shortage or halt in distribution of our products, the cost of these materials or components may increase which could harm our ability to provide our products on a timely and cost-effective basis.

The extent to which the Coronavirus impacts our business will depend on future developments, which are highly uncertain and cannot be predicted. The Company will continue to closely monitor new information as it emerges and adjust our operations and sales accordingly.
Regulatory and Market Risks 
Our business is primarily involved in the sales of products that contain nicotine and/or CBD, which faces significant regulation and actions that may have a material adverse effect on our business.
As a result of the Share Exchange, our current business is primarily involved in the sale of products that contain nicotine and/or CBD. The general market in which our products are sold faces significant governmental and private sector actions, including efforts aimed at reducing the incidence of use in minors and efforts seeking to hold the makers and sellers of these products responsible for the adverse health effects associated with them. More broadly, new regulatory actions by the Food and Drug Administration (“FDA”) and other federal, state or local governments or agencies, may impact the consumer acceptability of or access to our products, including regulations promulgated by the FDA which will require us to file PMTA(s) for any of our products that are identified as “Deemed Tobacco Products” by the FDA that we intend to market and sell after 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. 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.
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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 increasemarket 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 is dependent on growing in our existing markets as well as expanding into newof flavored e-cigarettes directly impacts the markets in which we may sell Charlie’s Products, and may have a material adverse impact on our business.
On January 2, 2020 the FDA issued an enforcement policy effectively banning the sale of flavored cartridge-based e-cigarettes marketed primarily by large manufacturers in the United States without prior authorization from the FDA.  In addition, Utah, Washington, Rhode Island and Massachusetts have temporarily banned the sale of flavored e-cigarettes, while previously imposed bans in New York, Michigan and Oregon have been temporarily halted by judicially imposed injunctions. In addition, other countries. Asstates 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 expand into foreign markets, wemay sell the Charlie’s Products. In the event the prevalence of such bans increases across the United States, our business, results of operations and financial condition will be materially harmed.
There is uncertainty related to the regulation of flavored e-cigarette liquid and vaporization products and certain other consumption accessories, including the possibility that flavored e-cigarette liquid and vaporization products may be recalled or removed from the market entirely. Any increased regulatory compliance burdens will have a material adverse impact on our operations and future business development efforts.
There has been increasing activity on the federal, state, and local levels with respect to scrutiny of flavored e-cigarette liquid and vaporizer products, and there is uncertainty regarding whether and in what circumstances federal, state, or local regulatory authorities will seek to develop and/or enforce regulations relative to products used for the vaporization of nicotine.  Federal, state, and local governmental bodies across the United States have indicated that flavored e-cigarette liquid, vaporization products and certain other consumption accessories may become subject to different political, cultural, exchange rate, economic, legalnew laws and operational risks. We may invest significant amountsregulations at the state and local levels. In addition to the initiatives taken by the FDA at the federal level, over 25 states have implemented statewide regulations that prohibit vaping in these expansions with little success.public places, and, as of January 21, 2020, 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. 
 
We currently are focusing
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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 marketing effortsability to sell such products, result in additional compliance expenses, and require us to change our labeling and methods of distribution, any of which would have a material adverse effect on our business, results of operations and financial condition.
The regulation of tobacco products by the FDA in the United States and the issuance of Deeming Regulations may materially adversely affect the Company.
The “Deeming Regulations” issued by the FDA in May 2016 require any e-liquid, e-cigarettes, and other vaping products considered to be Deemed Tobacco Products that were not commercially marketed as of the grandfathering date of February 15, 2007, to obtain premarket approval by the FDA before any new e-liquid or other vaping products can be marketed in the United States. However, any Deemed Tobacco Products such as certain products from our Charlie's Chalk Dust and Pachamama product lines that were on the market in the United States prior to August 8, 2016 have a lesser extent, Canada. We believe that our future growth will comegrace 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 both the markets thatmarket 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 Report, we are currently operatingpreparing to submit three PMTAs for certain of our traditional nicotine vapor products, including, but not limited to menthol and/or tobacco products with the assistance of Avail, pursuant to the terms of the Avail Agreement. We estimate the cost associated with these PMTAs to be approximately $4.4 million. We are also evaluating the potential market perception and clinical studies that may be required in and other international markets. Weconnection 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 any historya material adverse effect on the Company’s business, results of international expansion,operations and therefore havefinancial condition. Furthermore, there can be no assurance that if the Company were to complete a PMTA for any effortsof the affected Charlie's Products, that any application would be approved by the FDA.
There is substantial concern regarding the effect of long-term use of vaping products. Despite the recent outbreak of vaping-related lung injuries, the medical profession does not yet definitively know the cause of such injuries. Should vapor products, such as 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 increased revenue. Additionally,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 may needare subject to overcome significant regulatory and legal barriersall of the business risks associated with a new enterprise in order to sella 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 we cannot give assurancecompetitive disadvantages as to whether our distribution method will be accepted. These markets may require that we reformulate our product to comply with local customsagainst larger and laws. However, there is no guarantee that the reformulated product will be approved for sale by these regulatory agencies or attract local distributors.more established competitors.
 
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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 arerecently launched and commenced distribution of certain premium vapor products containing hemp-derived CBD, and we currently dependentintend 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 a single manufacturerSeptember 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 AquaBall™,hemp and we do not independently analyze ourhemp derived products before distribution. If we are not able to ensure timely product deliveries, potential distributors and customersunder certain circumstances, no assurance can be given that such state laws may not orderbe repealed or amended such that our intended products and our revenues may decrease. In addition, any errorscontaining hemp-derived CBD would once again be deemed illegal under the laws of one or more states now permitting such products, which in our product manufacturing could resultturn would render such intended products illegal in product recalls, significant legal exposure, and reduced revenues andthose states under federal law even if the loss of distributors.
We rely entirely on Niagara to manufacture our flagship product, AquaBall™ Naturally Flavored Water.federal law is unchanged. In the event Niagaraof 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 unablerelated to satisfyits approval of Epidiolex, a marijuana-derived prescription medicine to be available in the United States. The active ingredient in Epidiolex is CBD. On December 20, 2018, after the passage of the 2018 Farm Bill, FDA Commissioner Scott Gottlieb issued a statement in which he reiterated the FDA’s position that, among other things, the FDA requires a cannabis product (hemp-derived or otherwise) that is marketed with a claim of therapeutic benefit, or with any other disease claim, to be approved by the FDA for its intended use before it may be introduced into interstate commerce and that the FDCA prohibits introducing into interstate commerce food products containing added CBD, and marketing products containing CBD as a dietary supplement, regardless of whether the substances are hemp-derived. Although we believe our supply requirements, manufactureexisting and planned CBD product offerings comply with applicable federal and state laws and regulations, legal proceedings alleging violations of such laws could have a material adverse effect on our business, financial condition and results of operations.
Sources of hemp-derived CBD depend upon legality of cultivation, processing, marketing and sales of products on a timely basis, fillderived from those plants under state law.
Hemp-derived CBD can only be legally produced in states that have laws and shipregulations 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 orders promptly, provide services at competitive costs or offer reliable productshemp-derived CBD from licensed growers and services, our revenues and relationships with our independent distributors and customers would be adversely impacted. Inprocessors in states where such production is legal. As described in the preceding risk factor, in the event Niagara becomes unableof repeal or unwillingamendment of laws and regulations which are now favorable to continue to provide us with productsthe cannabis/hemp industry in required volumes and at suitable quality levels,such states, we would be required to identifylocate new suppliers in states with laws and obtain acceptable replacement manufacturing sources.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.
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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 isare no assuranceguarantees that we wouldwill be able to obtain alternative manufacturing sources on a timely basis. Additionally, Niagara sources the raw materials for AquaBall™, and if we were to use alternative manufacturers we may not be able to duplicate the exact taste and consistency profile of the product from Niagara. An extended interruptionfind such insurances in the supply offuture, 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 products would result in decreased product salesgrowth, and our revenues would likely decline.
Although we require Niagaramay expose us to verify the accuracy of the contents of our products, we do not have the expertise or personnel to directly monitor the production of products. We rely exclusively, without independent verification, on certificates of analysis regarding product content provided by Niagaraadditional risk and limited safety testing by them. We cannot be assured that Niagara will continue to supply products to us reliably in the compositions we require. Errors in the manufacture of our products could result in product recalls, significant legal exposure, adverse publicity, decreased revenues, and loss of distributors and endorsers.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 liquid nutrition drinkse-liquids similar to ours,those developed and sold by us, from both retail and online providers. We considerface 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 significant competing productsmarket 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 U.S.vapor market for the AquaBall™ to be Capri-Sun, Good to Grow, Bug Juice,that are much larger, better funded, and other alternatives marketed towards children, and for Bazi® to be Red Bull®, Monster®, RockStar®, and 5 Hour Energy®. Most of our competitors have longer operating histories,more established brands in the marketplace, revenues significantly greater than ours and better access to capital than us. We expect that these competitors may use their resources to engage in various business activities that could result in reduced sales of our products.
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.
 
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Adverse publicity associated with our products or ingredients, or those of similar companies, could adversely affect our sales and revenues.revenue.
 
Adverse publicity concerning any actual or purported failure of our Companyby us to comply with applicable laws and regulations regarding any aspect of our business could have an adverse effect on the public perception of ourthe Company. This, in turn, could negatively affect our ability to obtain financing, endorsers and attract distributors or retailers for the AquaBall™ and/or Bazi®,our products, which would have a material adverse effect on our ability to generate sales and revenues.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 revenues.revenue.
 
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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 bottlers,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. Most of ourOur 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.
  
Although we maintain product liability insurance, it may not be sufficient to cover all product liability claims and such claims that may arise, could have a material adverse effect on our business. The successful assertion or settlement of an uninsured claim, a significant number of insured claims or a claim exceeding the limits of our insurance coverage would harm us by adding further costs to our business and by diverting the attention of our senior management from the operation of our business. Even if we successfully defend a liability claim, the uninsured litigation costs and adverse publicity may be harmful to our business.
Any product liability claim may increase our costs and adversely affect our revenuesrevenue and operating income. Moreover, liability claims arising from a serious adverse event may increase our costs through higher insurance premiums and deductibles and may make it more difficult to secure adequate insurance coverage in the future. In addition, our product liability insurance may fail to cover future product liability claims, which, if adversely determined, could subject us to substantial monetary damages.
 
The success of our business will depend upon our ability to create and expand our brand awareness.
 
The market for functional beverageswe compete in is already 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.
 
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We must continue to develop and introduce new products to succeed.
 
The functional beverage and nutritional supplementOur 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, continue to develop and manufacture new products in a timely and cost effectivecost-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:
 
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proper new product selection;
 
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successful sales and marketing efforts;
 
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timely delivery of new products;
 
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availability of raw materials;
 
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pricing of raw materials;
 
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regulatory allowance of the products; and
 
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customer acceptance of new products.
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We may from time to time write off obsolete inventories resulting in higher expenses and consequently greater net losses.
As we sometimes produce product adorned with characters on a promotional schedule, over production of a certain character set could result in write-downs of our inventories. A change in ingredients or labeling requirements could also result in the obsolescence of certain inventory. Write-downs of this type could make it more difficult for us to achieve profitability. We incurred write-downs against inventory of $576,559 and $385,232 for the years ended December 31, 2016 and December 31, 2015, respectively.
Product returns could require us to incur significant additional expenses, which would make it difficult for us to achieve profitability.
We have not established a reserve in our financial statements for product returns. However, we may experience product returns as we focus on the AquaBall™ line of products and expand our market presence nationwide. We will continue to analyze our returns to determine if a reserve is necessary. If our reserves prove to be inadequate, we may incur significant expenses for product returns. As we gain more operating experience, we may need to establish a reserve for product returns. 

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 contained infor 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 because we do not believe they are necessary to protect our proprietary rights.formulations. Although trade secret, trademark, copyright and patent laws generally provide sucha 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 expensesexpense and significant management time and attention.
Loss of key personnel could impair our ability to operate.
Our success depends on hiring, retaining and integrating senior management and skilled employees. We are currently dependent on certain current key employees, specifically Kevin Sherman, our Chief Executive Officer and Chief Marketing Officer, who are vital to our ability to grow our business and achieve profitability. As with all personal service providers, our officers can terminate their relationship with us at will. Our inability to retain these individuals may result in our reduced ability to operate our business.
 
Risks Related to Our Common Stock
 
A limited trading market currently exists for our securities, and we cannot assure you that an active market will ever develop, or if developed, will be sustained.
 
There is currently a limited trading market for our securitiescommon stock on the OTC Pink Marketplace. AnMarketplace and an active trading market for our Common Stockcommon stock may not develop. Consequently, we cannot assure you when and if an active-trading market in our shares will be established, or whether any such market will be sustained or sufficiently liquid to enable holders of shares of our Common Stockcommon stock to liquidate their investment in our company.Company. If an active public market should develop in the future, the sale of unregistered and restricted securities by current shareholdersstockholders may have a substantial impact on any such market.
 
If, and when, then sharesSales of Common Stock underlying our outstanding derivative securities are issued, our shareholders will experience immediate anda substantial dilution in the book value of their investment.
We currently have 199,693,811 shares of Common Stock issued and outstanding. If, and when, holders of our outstanding derivative securities, which securities include Series B Convertible Preferred Stock (“Series B Preferred”), Series C Preferred, Series D Preferred and any warrants that remain outstanding after the completion of the Warrant Exchange Program, decide to exercise or convert those securities into Common Stock, the number of shares of our Common Stock issuedcommon 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 April 6, 2020, we had 18,982,290,068 shares of common stock outstanding, as well as outstanding options to purchase an aggregate of 801,325,000 shares of our common stock at a weighted average exercise price of $ 0.0044313 per share, up to 4,607,805,561 shares of common stock issuable upon conversion of outstanding shares of Series A Preferred and outstanding could increase by as much as 60%. Conversionwarrants to purchase up to an aggregate of all or a portion4,033,769,340 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 would have a substantial and material dilutive effect onmay result in further dilution to our existing stockholders and on our earnings per share.stockholders.
 
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If we issue additional shares of Common Stockcommon stock in the future, it will result in the dilution of our existing shareholders.stockholders.
 
Our Articles of Incorporation authorizeCharter currently authorizes the issuance of up to 300.0 million50.0 billion shares of Common Stock.common stock, of which approximately 18.982 billion shares are currently issued and outstanding. In addition, we have reserved approximately 10.2 billion shares for issuance upon conversion and/or exercise of our outstanding shares of Series A Preferred, warrants and stock options., as well as for issuance as awards under our 2019 Omnibus Incentive Plan. The issuance of any suchadditional shares of Common Stockour 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. If we do issue any such additional shares of Common Stock, such issuance also will cause a reduction in the proportionate ownership and voting power of all other shareholders.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
 
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TableOur common stock ranks junior as to dividend rights, redemption rights, conversion rights and rights in any liquidation, dissolution or winding-up of Contentsthe 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 and without significant revenues can be subject to wide price swings. The market price of our securitiescommon stock may be subject to wide changes in response to quarterly variations in operating results, announcements of new products by us or our competitors, reports by securities analysts, volume trading, or other events or factors. In addition, the financial markets have experienced significant price and volume fluctuations for a number of reasons, including the failure of certain companies to meet market expectations. These broad market price swings, or any industry-specific market fluctuations, may adversely affect the market price of our securities.
 
Companies that have experienced volatility in the market price of their stock have been the subject of securities class action litigation. If we were to become the subject of securities class action litigation, it could result in substantial costs and a significant diversion of our management’s attention and resources.
 
Because our Common Stockcommon stock may be classified as “penny stock,”stock”, trading may be limited, and the share price could decline. Moreover, trading of our Common Stock,common stock, if any, may be limited because broker-dealers would be required to provide their customers with disclosure documents prior to allowing them to participate in transactions involving our Common Stock.common stock. These disclosure requirements are burdensome to broker-dealers and may discourage them from allowing their customers to participate in transactions involving our Common Stock.common stock.
 
We have issued preferred stock with rights senior to our Common Stock,common stock, and may issue additional preferred stock in the future, in order to consummate a merger or other transaction necessary to continue as a going concern.future.
 
Our Articles of IncorporationCharter authorizes the issuance of up to 5.0 million shares of preferred stock, par value $0.001 per share, without shareholderstockholder approval and on terms established by our directors, of which 2.75300,000 shares have been designated as Series A Preferred and 1.5 million shares have been designated as Series B Preferred, 200,000 shares have been designated as Series C Preferred and 50,000 shares have been designated as Series D 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 Common Stock.shares of our common stock. The rights and preferences of any such class or series of preferred stock would be established by our boardBoard of directorsDirectors 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.common stock.
-26-

Our Amended and Restated Bylaws designate courts within the state of Nevada as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.
Our Amended and Restated Bylaws (“Bylaws”) require that, to the fullest extent permitted by law, and unless the Company consents in writing to the selection of an alternative forum, a state court located within the State of Nevada (or, if no state court located within the State of Nevada has jurisdiction, the federal district court for the District of Nevada), will, to the fullest extent permitted by law, be the sole and exclusive forum for each of the following:
●
any derivative action or proceeding brought on behalf of the Company;
●
any action asserting a claim of breach of a fiduciary duty owed by any director or officer or other employee of the Company to the Company or the Company’s stockholders;
●
any action asserting a claim against the Company or any director or officer or other employee of the Company arising pursuant to any provision of the Nevada Revised Statutes or the Company’s Amended and Restated Articles of Incorporation, as amended, or the Amended and Restated Bylaws; or
●
any action asserting a claim against the Company or any director or officer or other employee of the Company governed by the internal affairs doctrine.
Because the applicability of the exclusive forum provision is limited to the extent permitted by law, we believe that the exclusive forum provision would not apply to suits brought to enforce any duty or liability created by the Securities Exchange Act of 1934, as amended (“Exchange Act”), or any other claim for which the federal courts have exclusive jurisdiction, and that federal courts have concurrent jurisdiction over all suits brought to enforce any duty or liability created by the Securities Act of 1933, as amended (“Securities Act”). We note that there is uncertainty as to whether a court would enforce the provision and that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Although we believe this provision benefits us by providing increased consistency in the application of Nevada law in the types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers.
You may not be able to hold our securities in your regular brokerage account.
In the case of publicly-traded companies, it is common for a broker to hold securities on your behalf, in “street name” (meaning the broker is shown as the holder on the issuer’s records and then you show up on the broker’s records as the person the broker is holding for). Due to regulatory uncertainties, certain brokers may not agree to hold securities of companies whose products include hemp-derived CBD for their customers, meaning that you may not be able to take advantage of the convenience of having all your holdings reflected in one place.
 
You should not rely on an investment in our Common Stockcommon stock for the payment of cash dividends.
 
Because of our previous significant operating losses and because we intend to retain future profits, if any, to expand our business, we have never paid cash dividends on our Common Stockcommon stock and do not anticipate paying any cash dividends in the foreseeable future. You should not make an investment in our Common Stockcommon stock if you require dividend income. Any return on investment in our Common Stockcommon stock would only come from an increase in the market price of our stock, which is uncertain and unpredictable.
 
ITEMITEM 1B. UNRESOLVEDUNRESOLVED STAFF COMMENTS
 
None.
 
-27-
ITEM
ITEM 2. PROPERTIESPROPERTIES
 
Facilities
 
The Company leases office space that expire on various dates through 2024. All of the Company’s lease liabilities result from the lease of its warehouse in Santa Ana, California, which expires in 2021, its office and warehouse in Denver, Colorado, which expires in 2022, its warehouse space in Huntington Beach, California, which expires in 2022 and its corporate officeheadquarters in Irvine,Costa Mesa, California on a one-year term. which expires in 2024.
The Company movedentered into a new office in January 2016. In January 2017, the Company extended its lease from an expiration date of December 31, 2016 to September 30, 2017. Total rent expense related to the Company's operatingcommercial lease for the year ended December 31, 2016Company’s corporate headquarters (the “Lease”) in Costa Mesa, California with Brandon Stump, Ryan Stump and Keith Stump, the Company’s Chief Executive Officer, Chief Operating Officer and member of the Board. Messrs. Stump, Stump and Stump purchased the property that is the subject of the Lease in July 2019. The Lease, which was $57,179. Total remaining paymentseffective as of September 1, 2019, on a month to month basis, has been formalized to have a term of five years and a base rent rate of $22,940 per month, which rate is subject to annual adjustments based on the lease through September 30, 2017 are $28,458.
-13-
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.  
 
Insurance
 
We maintain commercial general liability insurance, including product liability coverage, and property insurance. OurThe policy providesprovided for a general liability limit of $2.0 million per occurrence and $10$10.0 million annual aggregate umbrella coverage. We also maintain Director's and Officer's insurance.
 
ITEMITEM 3. LEGALLEGAL PROCEEDINGS
 
From time to time, claims are made against the Company in the ordinary course of business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties, and unfavorable outcomes could occur. In the opinion of management, the resolution of these matters, if any, will not have a material adverse impact on the Company’s financial position or results of operations.
We Other than as set forth below, there are currently not involved in any litigation that we believe could have a material adverse effect on our financial conditionno additional pending or results of operations.threatened legal proceedings at this time.
 
ITEMC.H. Robinson Worldwide, Inc. v. True Drinks, Inc. On September 5, 2018, C.H. Robinson Worldwide (“Robinson”) filed a complaint against True Drinks, Inc. in the California Superior Court for the County of Orange located in Santa Ana, California alleging open book account, account stated, reasonable value of services received, agreement, and unjust enrichment related to shipping services provided by Robinson. Robinson has asserted $121,743 in damages plus interest, attorney’s fees and costs. We believe Robinson’s claim is substantially offset by damages caused by its failures to timely deliver products it was supposed to ship and intend to vigorously defend the complaint. The probability of any loss cannot be determined at this time.
ITEM 4. MINEMINE SAFETY DISCLOSURES
 
None.
 

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PART II
 
ITEMITEM 5. MARKETMARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
Our Common Stock common stock is traded on the OTC Pink Marketplace under the symbol “TRUU.”“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 common stock for the calendar quarters indicated as reported by the OTC Pink Marketplace. These prices represent quotations between dealers without adjustment for retail markup, markdown, or commission and may not represent actual transactions.
 
 
 
High
 
 
Low
 
2016
 
 
 
 
 
 
First Quarter ended March 31, 2016
 $0.19 
 $0.11 
Second Quarter ended June 30, 2016
 $0.20 
 $0.11 
Third Quarter ended September 30, 2016
 $0.19 
 $0.08 
Fourth Quarter ended December 31, 2016
 $0.13 
 $0.08 
 
    
    
2015
    
    
First Quarter ended March 31, 2015
 $0.25 
 $0.12 
Second Quarter ended June 30, 2015
 $0.20 
 $0.14 
Third Quarter ended September 30, 2015
 $0.40 
 $0.14 
Fourth Quarter ended December 31, 2015
 $0.22 
 $0.06 
 
 
High
 
 
Low
 
2019
 
 
 
 
 
 
First Quarter ended March 31, 2019
 $0.01 
 $0.002 
Second Quarter ended June 30, 2019
 $0.08 
 $0.004 
Third Quarter ended September 30, 2019
 $0.04 
 $0.0042 
Fourth Quarter ended December 31, 2019
 $0.01 
 $0.0014 
 
    
    
2018
    
    
First Quarter ended March 31, 2018
 $0.03 
 $0.01 
Second Quarter ended June 30, 2018
 $0.03 
 $0.01 
Third Quarter ended September 30, 2018
 $0.01 
 $0.01 
Fourth Quarter ended December 31, 2018
 $0.01 
 $0.01 
 
    
    
2017
    
    
First Quarter ended March 31, 2017
 $0.13 
 $0.07 
Second Quarter ended June 30, 2017
 $0.17 
 $0.08 
Third Quarter ended September 30, 2017
 $0.15 
 $0.07 
Fourth Quarter ended December 31, 2017
 $0.07 
 $0.01 
 
Holders
 
At March 31, 2017,April 6, 2020, there were 199,693,81118,982,290,068 shares of our Common Stockcommon stock outstanding, and approximately 220 shareholders437stockholders of record. At March 31, 2017,April 6, 2020, there were 1,292,870 shares of our Series B Preferred, 106,704204,185 shares of our Series C Preferred and 35,250 shares of our Series DA Preferred outstanding held by 29, five and 20 shareholders120 stockholders of record, respectively. record.
Dividends
We did not declare any dividends on Common Stock for the years ended December 31, 2016 and 2015. Our Board of Directors does not intend to distribute dividends in the near future. Instead, we plan to retain any earnings to finance the development and expansion of our business. The declaration, payment and amount of any future dividends will be made at the discretion of the Board of Directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the Board of Directors considers relevant. There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend.
We pay dividends on our Series B Preferred stock quarterly. 
 
Transfer Agent
 
Our Transfer Agent and Registrar for our Common Stock common stock is CorporateEquiniti Stock Transfer located in Denver, Colorado.
 
ITEMITEM 6. SELECTEDSELECTED FINANCIAL DATADATA
 
As a “smaller reporting company”, as defined by the rules and regulations of the SEC, we are not required to provide this information.
 
-29-

ITEMITEM 7. MANAGEMENT’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion and analysis in conjunction with our financial statements, including the notes thereto contained in this Annual Report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of certain factors, including those set forth under “Risk Factors Associated with Our Business” and elsewhere in this Annual Report.
   
Critical Accounting Polices and EstimatesOverview
 
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”). During 2019 we sold limited quantities 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, 2019 officials at the Centers for Disease Control and Prevention (“CDC”) reported a breakthrough in the investigation into the outbreak of vaping-related lung injuries. The CDC's principal deputy director, Dr. Anne Schuchat, stated that "vitamin E acetate is a known additive used to dilute liquid in e-cigarettes or vaping products that contain THC”, suggesting the possible culprit for the series of lung injuries across the U.S. All of Charlie's nicotine-only, e-liquid products are tested by third party laboratories which have confirmed that none of our products contain any vitamin E acetate orTetrahydrocannabinol (“THC”).
However, these developments have had a negative effect on our sales since mid-September 2019 (see further discussion below) and therefore, in response to these developments and while government regulators are formulating future polices management has adopted the following plan of operation.
First, we plan to focus on increasing the sales of our CBD related products, including topicals, tinctures and vaping liquids. We feel there is a significant upside in the CBD space, and we have begun to focus on numerous vertical markets for the sale of our isolate, full and broad-spectrum products. These vertical markets include, but aren't limited to the medical and wellness markets. In addition, we have begun conversations with various companies and organizations that, if successful, will allow us to significantly expand our marketing and distribution reach.
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 feel that the nicotine based flavored vaping products will continue to be a significant growth opportunity, once all the rightful regulatory changes have been made. We will continue with our plan to obtain marketing authorization for certain of our products through the submission of a Premarket Tobacco Application (“PMTA”), which is due in May 2020. We expect the cost associated with the preparation and submission of these PMTAs will be approximately $4.4 million. In addition, we are evaluating the potential returns associated with obtaining marketing authorization for our other nicotine based vaping products after the May 2020 deadline. 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 titled “Government Regulations”, as well as the risks and uncertainties described under “Risk Factors – Regulatory and Market Risks”.
-30-
Risks and Uncertainties
The Company operates in an environment that is subject to rapid changes and developments in laws and regulations that could have a significant impact on the Company’s ability to sell its products. Federal, state, and local governmental bodies across the United States have indicated that flavored e-cigarette liquid, vaporization products and certain other consumption accessories may become subject to new laws and regulations at the federal, state and local levels. Beginning in September 2019, certain states temporarily banned the sale of flavored e-cigarettes, and on January 2, 2020, the FDA issued an enforcement policy effectively banning the sale of flavored cartridge-based e-cigarettes marketed primarily by large manufacturers without prior authorization from the FDA. The application of any new laws or regulations that may be adopted in the future, at a federal, state, or local level, directly or indirectly implicating flavored e-cigarette liquid and products used for the vaporization of nicotine could significantly limit the Company’s ability to sell such products, result in additional compliance expenses, and/or require the Company to change its labeling and/or methods of distribution. Any ban of the sale of flavored e-cigarettes directly limits the markets in which the Company may sell its products. In the event the prevalence of such bans and/or changes in laws and regulations increase across the United States, or internationally, the Company’s business, results of operations and financial condition could be adversely impacted.
For the year ended December 31, 2019, we generated revenue of approximately $22,740,000, as compared to revenue of $20,841,000 for the year ended December 31, 2018. This $1,899,000 increase in revenue was due primarily to an $888,000 decrease in sales of our nicotine-based products and a $2,765,000 increase resulting from sales of our CBD based products, which were introduced in June of 2019. In addition, for the year ended December 31, 2019, we had approximately $22,000 of revenue from sales for Bazi. These sales are the result of selling off product after the Share Exchange and we do not expect future revenue from the sale of Bazi in its current form.
We generated a net loss for the year ended December 31, 2019 of approximately $2,146,000, as compared to net income of approximately $7,200,000 for the year ended December 31, 2018. The 2019 net loss of $2,146,000 includes non-cash stock-based compensation expense of approximately $4,135,000, non-cash employee bonus accrual of approximately $996,000, increased professional costs of approximately $150,000, and $1,681,000 of one-time employee cash compensation offset by a non-cash gain in fair value of derivative liabilities of $3,618,000, all of which were associated with the Share Exchange. In addition, the Company expensed $1,080,000 of consulting fees for the year ended December 31, 2019 as a result of the PMTA registration process. The $7,200,000 net income generated in 2018 does not include officer compensation for the current CEO and COO, as the 2018 earnings were distributed as an equity transaction as the Company was privately owned as an LLC.
Recent Developments
Share Exchange
On April 26, 2019 (the “Closing Date”), we entered into a Securities Exchange Agreement with each of the former members (“Members”) of Charlie’s, and certain direct investors in the Company (“Direct Investors”), pursuant to which we acquired all outstanding membership interests of Charlie’s beneficially owned by the Members in exchange for the issuance by the Company of units, with such units consisting of an aggregate of (i) 15,655,538,349 shares of common stock on an as-converted basis (which includes the issuance of an aggregate of 1,396,305 shares of a newly created class of Series B Convertible Preferred Stock, par value $0.001 per share (“Series B Preferred”), convertible into an aggregate of 13,963,047,716 shares of common stock, issued to certain individuals in lieu of common stock); (ii) 206,249 shares of a newly created class of Series A Convertible Preferred Stock, par value $0.001 per share (“Series A Preferred”), convertible into an aggregate of 4,654,349,239 shares of common stock; and (iii) warrants to purchase an aggregate of 3,102,899,493 shares of common stock (the “Investor Warrants”) (the “ShareExchange”). 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.
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              The Share Exchange resulted in a change of control of the Company, with the Members and Direct Investors owning approximately 86.1% of the Company’s outstanding voting securities immediately after the Share Exchange, and the Company’s current stockholders beneficially owning approximately 13.9% of the issued and outstanding voting securities, which includes the Advisory Shares. Following the Share Exchange, Ryan Stump and Brandon Stump, the founders of Charlie’s and the Company’s Chief Executive Officer and Chief Operating Officer, respectively, held in excess of 50% of the Company’s issued and outstanding voting securities.
Following the consummation of the Share Exchange, the business operations of the Company consist of those of Charlie’s, which is principally engaged in formulating, marketing and distributing branded e-cigarette liquid and other products for use in nicotine-only e-cigarette and vaping systems.
Launch of CBD Products
In June 2019, we introduced, through Don Polly, full-spectrum hemp extract and CBD isolate wellness products across a variety of formats and with different strengths. Our initial launch consisted of six vapor, eight tincture and two topical product variations. The newly released products were launched under the Pachamama™ brand by way of a licensing agreement between Don Polly and Charlie’s, entered on April 25, 2019. In the near term, we expect to expand the hemp-derived CBD-based products line to include additional CBD isolate products and THC-free, broad spectrum hemp extract products currently in development.
Pachamama™ CBD products are currently available in the U.S., Mexico, U.K. 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.
Basis of Presentation
The consolidated financial statements contained within this Annual Report and the disclosure in this Management’s Discussion and analysisAnalysis of Financial Condition and Results of Operations with respect to the years ended December 31, 2019 and 2018 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Amounts related to disclosure of December 31, 2018 balances within the 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. In the opinion of the Company, all adjustments, including normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows of the Company for the interim period have been included.
The Share Exchange is accounted for as a reverse recapitalization under U.S. GAAP because the primary assets of the Company were nominal following the close of the Share Exchange. Charlie’s was determined to be the accounting acquirer based upon the terms of the Share Exchange and other factors including: (i) Charlie’s stockholders and other persons holding securities convertible, exercisable or exchangeable directly or indirectly for Charlie’s membership units now own approximately 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.
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The disclosure in this Annual Report with respect to the years ended December 31, 2019 and 2018, including the consolidated financial statements contained herein, are based on Charlie’s historical financial statements and the Company’s financial activity beginning April 26, 2019, as adjusted, to give effect to Charlie’s reverse recapitalization of the Company and the Charlie’s Financing. In addition, from the period April 26, 2019 until December 2019, there were minimal costs and revenue associated with the Bazi product line which are included in the consolidated financial statements. We do not intend to continue to produce and sell the Bazi product line, and these costs and expenses are nominal and will continue to be so in the future. The operating results of Don Polly for the year ended December 31, 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.
Results of Operations for the Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018

 
 
For the years ended
 
 
 
 
 
 
 
 
 
December 31,   
 
 
Change
 
($ in thousands)
 
2019
 
 
2018
 
 
Amount
 
 
Percentage
 

 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Product revenue, net
 $22,740 
 $20,841 
 $1,899 
  9%
Total revenues
  22,740 
  20,841 
  1,899 
  9%
Operating costs and expenses:
    
    
    
    
Cost of goods sold - product revenue
  10,071 
  8,515 
  1,556 
  18%
General and administrative
  15,017 
  3,158 
  11,859 
  376%
Sales and marketing
  2,314 
  1,968 
  346 
  18%
Research and development
  1,102 
  - 
  1,102 
  100%
Total operating costs and expenses
  28,504 
  13,641 
  14,863 
  109%
(Loss) income from operations
  (5,764)
  7,200 
  (12,964)
  -180%
Other income:
    
    
    
    
Change in fair value of derivative liabilities
  3,618 
  - 
  3,618 
  100%
Total other income
  3,618 
  - 
  3,618 
  100%
Net (loss) income
 $(2,146)
 $7,200 
 $(9,346)
  -130%
Operating (Loss) Income
We had operating losses of approximately $5,764,000 for year ended December 31, 2019, due, primarily to approximately $5,131,000 of non-cash stock-based equity transactions incurred in connection with the Share Exchange and related employment contract bonus accruals. In addition, we incurred approximately $150,000 of increased professional fees and $1,681,000 of one-time employee cash compensation related to the Share Exchange transaction, as well as $1,080,000 of PMTA consulting fees paid in connection with seeking FDA registration of certain of our nicotine-based e-liquid products, for which we will continue to incur approximately $3.3 million in additional costs in 2020.For the year ended December 31, 2018, we had operating income of approximately $7,200,000 from our branded nicotine-based e-liquid business. The net income generated in 2018 does not include officer compensation for the current CEO and COO, as the 2018 earnings were distributed as an equity transaction as the company was privately owned as an LLC.
  Revenue
Revenue for the year ended December 31, 2019 increased approximately $1,899,000, or 9%, to approximately $22,740,000, as compared to approximately $20,841,000 for the year ended December 31, 2018 due to a $888,000 decrease in our nicotine-based product sales, offset by an increase in sales from our newly launched CBD wellness products business of $2,765,000 and $22,000 in revenue from sales of Bazi. 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 or at least remain at current levels until the regulatory environment is settled, and the recent outbreak of Coronavirus is brought under control in the markets where we participate, including the U.S. and other international markets. Although we experienced a decline of our domestic nicotine-based e-liquid sales in the United States, we currently see little effect on our international e-liquid sales and CBD product sales and expect growth in that area to resume once the recent outbreak of Coronavirus is brought under control.
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Cost of Revenue
  Cost of revenue, which consists of direct costs of materials, direct labor, third party subcontractor services, and other overhead costs increased approximately $1,556,000, or 18%, to approximately $10,071,000, or 44.3% of revenue, for the year ended December 31, 2019, as compared to approximately $8,515,000, or 40.9% of revenue, for the year ended December 31, 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 Expense
                For  the year ended December 31, 2019, total general and administrative expense increased approximately $11,859,000 to approximately $15,017,000 as compared to approximately $3,158,000 for the year ended December 31, 2018. Costs relating to the completion of the Share Exchange on April 26, 2019 accounted for a significant part of the $11.9 million increase, including $5.1 million of non-cash stock-based compensation and executive bonus accruals, $1.7 million of one-time employee cash compensation, and $150,000 of transaction related professional fees. The remaining $4.8 million increase is primarily due to PMTA consulting fees, ongoing 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 and opening our Denver location. Management has begun the process of lowering costs wherever possible in light of the regulatory environment and the effect on revenue from COVID 19.
Sales and Marketing Expense
For the year ended December 31, 2019, total sales and marketing expense increased approximately $346,000, or 18%, to approximately $2,314,000 as compared to approximately $1,968,000 for the year ended December 31, 2018, which was primarily due to enhanced marketing efforts for the launch of our CBD wellness products.
Research and Development Expense
For the year ended December 31, 2019, total research and development expense increased approximately $1,102,000, to approximately $1,102,000 as compared to approximately $0 for the year ended December 31, 2018, which was primarily due to costs incurred with the PMTA registration process.
Income (Loss) from Operations
We had a net loss from operations of approximately $5,764,000 for the year ended December 31, 2019 as compared to net income from operations of approximately $7,200,000 for the year ended December 31, 2018. Net (Loss) Income is determined by adjusting income from operations by the following items:
Change in fair value of derivative liabilities
For the year ended December 31, 2019 and 2018, the gain in fair value of derivative liabilities was $3,618,000 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 year ended December 31, 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 December 31, 2018.
Net (Loss) Income
For the years ended December 31, 2019, we had a net loss of $2,146,000 as compared to net income of $7,200,000 for the year ended December 31, 2018.
Effects of Inflation
Inflation has not had a material impact on our business.

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Liquidity and Capital Resources
As of December 31, 2019, we had negative working capital of approximately $1,566,000, which consisted of current assets of approximately $5,611,000 and current liabilities of approximately $7,177,000. This compares to working capital of approximately $704,000 at December 31, 2018. The current liabilities, as presented in the balance sheet at December 31, 2019 included elsewhere in this Annual Report on Form 10-K, primarily include approximately $2,516,000 of accounts payable and accrued expense, approximately $91,000 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 $426,000 of lease liabilities and $4,144,000 of derivative liability associated with the Member Warrants. (the derivative liability of $4,144,000 is included in determining the negative working capital of $1,366,000 but is not expected to use any cash to ultimately satisfy the liability).
Our cash and cash equivalents balance at December 31, 2019 was approximately $2,448,000.  
For the year ended December 31, 2019 we used cash from operations of $2,036,000, as compared to generating cash of $7,617,000 for the year ended December 31, 2018. This decline in the cash generated from operations is due primarily to a net loss in 2019 of $2,146,000 compared to net income of $7,200,000 in 2018 along with an increase in accounts receivable, inventories and prepaid expenses. (see cash used from financing activities below for description of Member distributions from the 2018 net income).
For the year ended December 31, 2019 we used cash for investment activities of $571,000 as compared to $16,000 for the year ended December 31, 2018. The cash used for investment activities is primarily used for the purchase of fixed assets and certain leasehold improvements for the buildout of our Don Polly operation.
For the year ended December 31, 2019 we generated cash from financing activities, of $4,751,000 as compared to a use of cash of $7,952,000 for the year ended December 31, 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.
Going Concern Uncertainty Regarding the Legal and Regulatory Environment, Liquidity and Management’s plan of operation
            Our financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company operates in a rapidly changing legal and regulatory environment; new laws and regulations or changes to existing laws and regulations could significantly limit the Company’s ability to sell its products, and/or result in additional costs. Additionally, the Company is required to apply for FDA approval to continue selling and marketing its products used for the vaporization of nicotine in the United States. There is significant cost associated with the application process and there can be no assurance the FDA will approve the application(s). In addition, the recent outbreak of Coronavirus in March 2020 has had a negative impact on the global economy and markets which could impact the Company’s supply chain and/or sales. For the year ended December 31, 2019 the Company has incurred losses from operations of $5,764,000 and a consolidated net loss of approximately $2,146,000 and the Company has negative stockholders’ equity of $547,000. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to the carrying amount and classification of recorded assets and liabilities should the Company be unable to continue operations.
Our plans and growth depend on our ability to increase revenues and continue our business development efforts, including the expenditure of approximately $4,400,000 to complete our PMTA registration process. We currently do not anticipate that our current cash position will be sufficient to meet our working capital requirements, to continue our sales and marketing efforts and complete the PMTA registration process. We are currently seeking term debt or other sources of financing in order to ensure that we have sufficient cash to operate for the next 12 months. If in the future our plans or assumptions change or prove to be inaccurate, or there is a significant change in the regulatory environment or the recent outbreak of Coronavirus continues to impact the global economy, we will need to raise additional funds through public or private debt or equity offerings, financings, corporate collaborations, or other means. There can be no assurance that such financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and in our best interests.

Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements other than operating lease commitments.

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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 based uponthose policies that have the most significant impact on our financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparationand require management to use a greater degree of these financial statements requires us to make estimatesjudgment and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates; including those related to collection of receivables, inventory obsolescence, sales returns and non-monetary transactions such as stock and stock options issued for services. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.estimates. Actual results may differ from these estimates under different assumptions or conditions. 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 following criticalperiods presented in this report.
The accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.identified as critical are as follows:
  
Revenue Recognition
 
InThe Company recognizes revenues in accordance with ASC Topic 605 (Staff Accounting Bulletin 104 “Standards Codification (“Revenue Recognition in Financial StatementsASC”), revenue 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 shipment, at which time title is passed. Net sales include salesthe 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 marketing toolscontrol to independent distributorsthe customer and freightis therefore accounted for as a fulfillment expense. In circumstances where shipping and handling charges. Withactivities occur after the exceptioncustomer has obtained control of retail customers, we receive the netproduct, 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 price from all of our orderscommissions, are recognized as expense in the formperiod incurred. Revenue is measured by the transaction price, which is defined as the amount of cashconsideration expected to be received in exchange for providing goods to customers. The transaction price is adjusted for estimates of known or credit card payment priorexpected 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 shipment. Retailthe 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, with approved creditand 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 been extended payment terms of net 30 days, with a few exceptions.very short-term durations.
 
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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.  
 
AllowanceAccounts receivable is recorded at the invoiced amount and does not bear interest. We determine the allowance for Doubtful Accounts
We estimate losses ondoubtful accounts by regularly evaluating individual customer receivables based on known troubled accounts and historical experience of losses incurred. Based on our estimations, we recordedconsidering 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 approximately $118,000accounts receivable previously written off are recorded as income when received. As of December 31, 2016.2019, and 2018, the allowance for bad debt totaled $639,000 and $151,000, respectively
 

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Inventory
The Company purchases for resale a vitamin-enhanced flavored water beverage and a liquid dietary supplement.Inventories
 
Inventories primarily consist of finished goods and are stated at the lower of cost (based on(determined by the first-in, first-outaverage cost method) or market (netnet realizable value). Cost includes shippingvalue. We calculate estimates of excess 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 ondetermined primarily by reviewing inventory on hand, historical sales activity, industry trends the retail environment, and the expected net realizable value.
The Company maintained inventory reserves of $110,000 and $0 as As of December 31, 20162019, and December 31, 2015,2018, the reserve for excess and obsolete inventories totaled $83,000 and $74,000, respectively. This 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. The prior formulation AquaBall is still being sold, but only to select accounts at a reduced price.
 
Inventory is comprised of the following:
 
 
December 31,
 2016
 
 
December 31,
2015
 
Purchased materials
 $89,358 
 $689,703 
Finished goods
  339,554 
  869,016 
Allowance for obsolescence reserve
  (110,000)
  - 
Total
 $318,912 
 $1,558,719 

Stock BasedStock-Based Compensation
 
The Company recognizes the cost of employee services received in exchangeWe account for awards of equity instruments based on the grant-dateall stock-based compensation using a fair value of those awards in accordance with ASC Topic 718, which requires compensation costs related to share-based transactions, including employee stock options, to be recognized in the financial statements based on fair value, and the SEC’s Staff Accounting Bulletin No. 107 (“SAB 107”) interpreting ASC Topic 718 and the valuation of share-based payments for public companies. The Company records compensation expense on a straight-line basis.value-based method. The fair value of optionsequity-classified awards granted areto employees is estimated aton the date of the grant using athe Black-Scholes option pricingoption-pricing model with assumptions for the risk-free interest rate, expected life, volatility, dividend yield and forfeiture rate.
Intangible Assets
Intangible assets consists of the direct costs incurred for application fees and legal expenses associated with trademarks on the Company’s products, customer first, and the estimated value of our interlocking spherical bottle patent acquired on March 31, 2012. The Company’s intangible assets are amortized over their estimated useful remaining lives. The Company evaluates the useful lives of its intangible assets annually and adjusts the lives according to the expected useful life. As AquaBall™related stock-based compensation expense is now packaged in a new bottle designed by Niagara Bottling, we have evaluated our options with our interlocking spherical bottle patent. As of December 2016, we have recorded an impairment to the bottle patent of $679,411. We have adjusted the carrying value of this patent to $250,000.
Goodwill
Goodwill represents the future economic benefits arising from other assets acquired that are individually identified and separately recognized. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but are tested for impairment at least annually.
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. The Company may engage in other similar complex debt transactions in the future, but not with the intention to enter into derivative instruments. 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. However, such new and/or complex instruments may have immature or limited markets. As a result, the pricing models used for valuation of derivatives often incorporate significant estimates and assumptions, which may impact the level of precision in the financial statements. Furthermore, depending on the terms of a derivative or embedded derivative, the valuation of derivatives may be removed from the financial statements upon conversion of the underlying instrument into some other security.
Results of Operations – Fiscal Years Ended December 31, 2016 and 2015
Net Sales
Net sales for the year ended December 31, 2016 was $2,575,448 compared to $6,121,097 during the same period in 2015, a decrease of 58%. The year over year decrease in net sales is a result of the transition from the old formulation of AquaBall™ to the new formulation manufactured by Niagara. We anticipate net sales will increase during the year ended December 31, 2017, when compared to the year ended December 31, 2016, as we expand distribution of our new, preservative-free formulation of AquaBall™.
In addition to launching the new, preservative-free formulation of AquaBall™, we revamped our sales staff during the year ended December 31, 2016. We hired Jeff Culbertson as our Executive Vice President of Sales in April, two additional national account managers to focus on sales activity in the eastern and western regions of the United States, respectively, and regional sales managers to oversee the progress of our growing direct-store-distribution (“DSD”) network. We expect our sales efforts to focus on expanding distribution with national accounts in the grocery, convenience, drug and mass retail markets, as well as continuing to build out our DSD network throughout fiscal 2017. As of March 2017, we have secured distributor partners in 44 states, and we are working actively in filling in the remaining territories. Our sales team is also, and will continue to be focused on securing distribution during the next account resets for national grocery and convenience store accountsrecognized over the next several months. We anticipate sales of our new preservative-free AquaBall™vesting period during which an employee is required to continue to increase as we gain chain authorizations and sign distributors toprovide service those accounts.
The percentage that each product category represented of our net sales is as follows:
Product Category
Year Ended
December 31, 2016
(% of Sales)
AquaBall™
92%
Bazi®
8%
Gross Profit (Loss) and Gross Margin
Gross profit for the year ended December 31, 2016 was $321,863 as compared to a gross loss of $160,990 for the year ended December 31, 2015. Gross profit as a percentage of revenue (gross margin) during the year ended December 31, 2016 was 12%. This low percentage is due primarily to discounts given on product as we transitioned out of our prior, cold-fill formulation of AquaBall™ to our new preservative-free, hot-fill formulation of AquaBall™ manufactured by Niagara in the first half of 2016. Although gross margins were relatively low during the first two quarters of fiscal 2016, gross margins increased significantly in the third and fourth quarters to 35% and 33% of revenue for the three months ended September 30, 2016 and December 31, 2016, respectively. This increase in gross profit is a great improvement for our Company, and is a direct result of our relationship with Niagara Bottling who provides finished goods to the Company and bills the Company for the product as it is shipped to customers, allowing our costs to become more consistent.
We expect margins to continue to improve during the year ended December 31, 2017 as we work to reduce inefficiencies in the manufacturing process with Niagara and increase distribution of our new preservative-free AquaBall™ in the grocery, convenience, drug and mass channels. In the past, we had a greater focus on the club channel, which had a severely negative affect on our margins. Although we have also improved our margins in the club channel, we expect a lower percentage of our overall sales to come from this channel moving forward.
Sales, General and Administrative Expense
Selling, general and marketing expenses were $8,607,958, or 334% of net sales, for the year ended December 31, 2016, as compared to $10,548,884, or 172% of net sales for the year ended December 31, 2015. This year over year decrease of $1,940,926 is primarily the result of reduced staffing levels and other employment related costs implemented in the first half of fiscal 2016 due, in part, to our relationship with Niagara which acts as an extension of our operations department by providing the Company with finished goods and only billing for those goods when shipped to customers. This structure has caused, and will continue to cause, our warehouse and fulfillment costs to decrease, as our agreement with Niagara allows us to store up to 4,000 pallets of product at their facility at no cost. Our total selling expenses decreased in hand with our reduced level of sales in 2016, as well. Additionally, our freight expenses as a percentage of sales decreased substantially as our new bottle now allows us to ship 69% more bottles per truck, and we are shipping larger orders as we are utilizing distributors rather than shipping directly to customers. This has far more than offset an increase in the average distance of our shipments, as we now ship from one production facility in Dallas, rather than three different facilities. We anticipate focusing our marketing expenses on promoting our brand at our retail locations to drive both trial and brand awareness in 2017.
Interest Expense
Interest expense for the year ended December 31, 2016 was $39,789 as compared to $257,389 for the year ended December 31, 2015. Interest expense for the 2016 period consists of interest and fees due on promissory notes issued in the third quarter of 2015.
Other Expense
Other expense for the year ended December 31, 2016 was $685,849, as compared to other expense of $2,285,629 for the year ended December 31, 2015. The 2016 total included an impairment charge of $679,411 on our spherical bottle patent while the 2015 total included a $2,285,792 charge for warrants issued in connection with a personal guaranty supporting our Bottling Agreement with Niagara Bottling.
Net Loss
Our net loss for the year ended December 31, 2016 was $5,445,563 as compared to a net loss of $11,990,563 for the year ended December 31, 2015. On a per share basis, our loss, after dividends on outstanding shares of Series B Preferred, was $0.05 and $0.16 per share for the years ended December 31, 2016 and December 31, 2015, respectively.
We expect to continue to incur a net loss in subsequent periods, and plan to fund our operations using proceeds received from capital raising activities until our operations become profitable. Although we anticipate a growth in sales and gross margins as a result of the Niagara Agreement, these increases may not occur, may take longer than anticipated, or may not be sufficient to produce net income in any subsequent quarters.
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, 2016, indicating that there is substantial doubt as to the ability of the Company to continue as a going concern. The accompanying 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 year ended December 31, 2016, the Company incurred a net loss of $5,445,563. At December 31, 2016, the Company had negative working capital of $6,162,213 and an accumulated deficit of $35,794,206. The Company had negative cash flow from operations of $5,667,413 and $10,433,069 during the year ended December 31, 2016 and 2015, respectively. Although the Company raised approximately $6 million from the sale of shares of Series C Preferred during the year ended December 31, 2016, additional capital will be necessary to advance the marketability of the Company's products to the point at which the Company can sustain operations. Management's plans are to continue to contain expenses, expand distribution and sales of its AquaBall™ Naturally Flavored Water as rapidly as economically possible, and raise capital through equity and debt offerings to execute the Company’s business plan and achieve profitability from continuing operations. The accompanying consolidated financial statements do not include any adjustments that might result in the event the Company is unsuccessful in its plans.
The Company has financed its operations through sales of equity and, to a lesser degree, cash flow provided by sales of AquaBall™. Despite recent sales of preferred stock as described below, funds generated from sales of shares of our preferred stock or other equity or debt securities, and cash flow provided by AquaBall™ sales may be insufficient to fund our operating requirements for the next twelve months. As a result, we may require additional capital to continue operating as a going concern. No assurances can be given that we will be successful.
Recent Capital Raising Activity
January 2016 Note Exchange. On January 20, 2016, the Company and holders of Secured Notes in the principal amount of $500,000 entered into Note Exchange Agreements pursuant to which the holders agreed to convert the outstanding principal balance of their Secured Notes into an aggregate total of 4,413 shares of Series C Preferred and warrants to purchase up to an agate total of 1,029,413 shares of Common Stock for $0.17 per share. Neither holder received warrants to purchase shares of the Company’s Common Stock in connection with their respective Secured Notes, and agreed to waive any unpaid interest accrued under the Secured Notes prior to the execution of the Note Exchange Agreement.
April 2016 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 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 July 13, 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.
Series D Offering and Warrant Exchange. On February 8, 2017, the Company and Series D Investors entered into the Series D Purchase Agreement, wherein the Company may offer and sell to Series D Investors up to 50,000 shares of Series D Preferred for $100 per share. As additional consideration, Series D Investors will also receive Series D 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. To date, the Company has issued an additional 5,000 shares of Series D Preferred and Series D Warrants to purchase up to an aggregate total of 6,666,669 shares of Common Stock. The issuance of the shares of Series D Preferred to date has resulted in gross proceeds to the Company of approximately $3.7 million.
Beginning on February 8, 2017, the Company and certain holders of Outstanding Warrants entered into 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. To date the Company has issued 73,106,466 shares of Common Stock, in exchange for the cancellationaward. We measure the fair value of 146,212,905 Outstanding Warrants, and expects to issue up to 74 million shares of Common Stock in exchange for the cancellation of 148 million Outstanding Warrants, including the Warrants issued in connection with the Series D Offering,liability-classified awards using a Monte Carlo valuation model. Compensation cost is recognized over the courseservice period and is remeasured at each reporting period through settlement.

Income taxes
               Income taxes are computed under the liability method. This method requires the recognition of deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and are reflected in the consolidated financial statements in the period of enactment. A valuation allowance is recorded when it is more likely than not that some of the Warrant Exchange Program.deferred tax assets will not be realized.
 
Off-Balance Sheet Items                Financial statement effects of a tax position are initially recognized when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that meets the more-likely-than-not threshold of being realized upon ultimate settlement with a taxing authority. We recognize potential accrued interest and penalties related to unrecognized tax benefits as income tax expense.
 
Research and development
We had no off-balance sheet itemsexpense the cost of research and development as of December 31, 2016.incurred.  Research and development expenses include costs incurred in funding research and development activities, license fees, and other external costs. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity is performed or when the goods have been received, rather than when payment is made.
 
ITEM 7A.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
A smaller reporting company is not required to provide the information required by this item.Not applicable.
 
ITEMITEM 8. FINANCIALFINANCIAL STATEMENTS
 
The audited consolidated financial statements of True DrinksCharlie’s Holdings, Inc., including the notes thereto, together with the report thereon of Squar Milner LLP, our independent registered public accounting firm, are included in this annual reportAnnual Report on Form 10-K as a separate section beginning on page F-1.

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ITEMITEM 9. CHANGESCHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
ITEMITEM 9A. CONTROLSCONTROLS AND PROCEDURES
 
(a)Evaluation of disclosure controls and procedures.
(a)   Evaluation of Disclosure Controls and Procedures.
 
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act) that are designed to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that this information is accumulated and communicated to our management, including our principal executive and financial officers, to allow timely decisions regarding required disclosure.
Our management, with the participation and supervision of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Annual Report on Form 10-K. In designing and evaluating the disclosure controls and procedures, management recognizedrecognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
 
Based on thatour evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2019, our disclosure controls and procedures wereare not designed at a reasonable assurance level and are not effective basedto provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
(b)  Management’s Annual Report on our material weakness in the form of lack of segregation of duties, which stems from our early stage status and limited capital resources to hire additional financial and administrative staff.
(b)Management's Annual Report on Internal Control over Financial Reporting.
Internal Control over Financial Reporting.
 
Section 404(a) of the Sarbanes-Oxley Act of 2002 requires that management document and test the Company'sCompany’s internal control over financial reporting and include in this Annual Report on Form 10-K a report on management's assessment of the effectiveness of our internal control over financial reporting.
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officerprincipal executive and our Chief Financial Officer,financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that evaluation, our Chief Executive Officerprincipal executive and Chief Financial Officer financial officerconcluded that our internal control over financial reporting was not effective based on the material weakness indicated below:
 
We lack segregation of duties, which stems from our early stage status and limited capital resources to hire additional financial and administrative staff.
 
We lack sufficient internal controls (including IT and general controls) that encompass our Company as a whole with respect to entity and transactions level controls in order to ensure complete documentation of complex and non-routine transactions and adequate financial reporting. 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.
Our plan to remediate this material weakness, subject to monetary constraints, is to hire additional personnel and/or utilize outside consultants to provide an acceptable level of segregation of duties.
 
ThisAnnual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financing reporting. Management’sreporting because we are not an “accelerated filer” or a “large accelerated filer”. Our management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to a provision in the Dodd-Frank Financial Reform Act that exempts public companies with market capitalization not exceeding $75 million from having to comply with that provisionrules of the Sarbanes-Oxley Act.SEC that permit us to provide only management’s report in this Annual Report on Form 10-K.
 
(c)(c) Changes in internal controls over financial reporting.
The Company’s Chief Executive Officer and Chief Financial Officer have determined that there have been no changes, in the Company’s internal control over financial reporting during the period covered by this report identified in connection with the evaluation described in the above paragraph that have materially affected, or are reasonably likely to materially affect, Company’s internal control over financial reporting.
 
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Charlie’s Chalk Dust, LLC as a wholly-owned subsidiary and Don Polly, LLC as a consolidated variable interest entity, the addition of a Chief Financial Officer, Chief Information Office and Corporate Controller, and additional hiring in the Company’s accounting department. The Company also employed the services of experience outside professionals in the areas of valuation, technical accounting support and legal representation. The Company believes these changes significantly improved controls over financial reporting and is continuing to assess and test its improved controls to ensure they are effective and that all material weaknesses have been adequately addressed and remediated.
 
ITEMITEM 9B. OTHEROTHER INFORMATION
 
None.
 
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PART III
 
ITEMITEM 10. DIRECTORSDIRECTORS, EXECUTIVE OFFICERS AND EXECUTIVE OFFICERSCORPORATE GOVERNANCE
 
Directors and Executive Officers
 
The following sets forth certain information regarding eachCompany’s Board of ourDirectors (the “Board”) and executive officers consist of the persons named in the table below. Each director serves for a one-year term, until his or her successor is elected and qualified, or until earlier resignation or removal. Our Bylaws provide that the authorized number of directors shall be fixed by the Board from time to time. The directors and executive officers:officers are as follows:
 
Name Age Position
Kevin Sherman
Brandon Stump(1)
 4633 
Chair and Chief Executive Officer Chief Marketing Officer and Director
Daniel Kerker44Chief Financial Officer, Treasurer and Secretary
Robert Van Boerum40Chief Operations Officer
Ramona Cappello57Chair(Principal Executive Officer)
Scot Cohen 4750 Director
Neil LeVecke
Jeffrey Fox(2)
 4956 Director
James J. Greco
Keith Stump(3)
 5958 Director
Ryan Stump(4)
30Chief Operating Officer and Director
David Allen(5)
65
Chief Financial Officer and Secretary(Principal Financial Officer)
Adam Mirkovich(6)
34Chief Information Officer
 
Directors hold office until
(1)Mr. Stump was appointed to serve as a director and the Company’s Chief Executive Officer on April 26, 2019, in connection with the Share Exchange, effective immediately following Mr. Van Boerum’s resignation as Principal Executive Officer. The Company’s Board appointed Brandon Stump as Chair on May 8, 2019.
(2)Mr. Fox was appointed to the Company’s Board on July 16, 2019.
(3)Mr. Stump was appointed to the Company's Board on June 7, 2019.
(4)Mr. Stump was appointed to serve as a director and the Company’s Chief Operating Officer on April 26, 2019, in connection with the Share Exchange.
(5)Mr. Allen was appointed to serve as the Company’s Chief Financial Officer on April 26, 2019, in connection with the Share Exchange, effective immediately following Mr. Van Boerum’s resignation as Principal Financial Officer.
(6)Mr. Mirkovich was appointed to serve as the Company’s Chief Information Officer on May 20, 2019.
Brandon Stump and Ryan Stump are brothers, and Keith Stump is their father. Other than with the next annual meetingrespect to the Stumps, there are no familial relationships between any of stockholders following their election unless they resign or are removed as provided in the bylaws. OurCompany’s executive officers serve at the discretion of our Board of Directors.and directors listed above.
 
The following biographical information regarding the foregoing directors and officers of the Company is a summary of our executive officers’ and directors’ business experience.
Executive Officerspresented below:
 
Kevin Sherman,Brandon Stump, Chair and Chief Executive Officer.Mr. Stump was appointed as a director and Chief Executive Officer Chief Marketing Officerof the Company on April 26, 2019 in connection with the Share Exchange. The Board appointed Mr. Stump as Chair on May 8, 2019. Mr. Stump is a co-founder of Charlie’s, and Director. Mr. Sherman has served as the Chief Marketing Officer, managing the brand development of AquaBall™ Naturally Flavored Water since he joined the Company in October 2012. Mr. Sherman joined the Company’s board of directors in September 2015, and was appointed as Chief Executive Officer of Charlie’s since its inception in December 2015.2014. Prior to joining True Drinks,co-founding Charlie’s, Mr. Sherman wasStump co-founded his first business, the Vice President StrategyOhio 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, Developmentboth established in 2017, as well as The Mend California, established in 2018. These programs provide a continuum of care and President of Retail for Bazi, Inc. He was instrumentalservices to men and women from around the country in the development of Bazi’s All-Natural formulapromoting emotional, physical and spearheaded the concept of all-natural energy. Prior to Bazi, Mr. Sherman served as the Senior Manager of Network Development of Product Partners LLC from May 2008 to May 2009, Chief Operating Officer of Hand & Associates from January 2008 to May 2008, and as the director of development and principal of Holy Innocents School from August 2007 to December 2007. Mr. Sherman also served as the principal of Saints Peter and Paul School from January 2004 to August 2007. Mr. Sherman holds a B.A. from Gordon College, and a M.A. from Loyola Marymount University.spiritual development.
 
Daniel Kerker, Chief Financial Officer.As a co-founder of Charlie’s, the Board of Directors believes that Mr. Kerker isStump’s substantial entrepreneurial, marketing, sales and industry experience provide the Board with valuable expertise that makes him a professional with over 15 years of experiencesignificant contributor to the Company’s continued growth in financerevenue and accounting in both private and public entities. He spent seven years as Director of Finance at Anheuser-Busch Sales of Los Angeles, an Anheuser-Busch-owned distributor with over $200 million in annual sales, leaving in 2010. Prior to joining True Drinks, Inc., Mr. Kerker spent two years working as CFOentering into new markets for Environmental Packaging Technologies in Houston, Texas, and Regeneca, Inc. in Irvine, California. Mr. Kerker became Chief Financial Officer of True Drinks on March 1, 2012. Mr. Kerker earned a Bachelor of Science in Finance from California State University, Northridge and an MBA in Finance from UCLA’s Anderson School of Management, where he was a Harold M. Williams Fellow for graduating at the top of his class and won the J. Fred Preston Award for Achievement in Finance.its products.
 
 
 
-21--39-
 
Robert Van Boerum, Chief Operations Officer.Mr. Van Boerum was appointed to serve as the Company’s Chief Operations Officer in September, 2015. Mr. Van Boerum has been an employee of the Company since 2012, and has handled a wide range of responsibilities, including marketing, operations, and information technology. Prior to his time with the Company, Mr. Van Boerum served Chief Information Officer for Regeneca International, Inc. from 2011 to 2012, and as Vice President of Corporate Strategy for AL International (JCOF) from 2009 to 2011. Mr. Van Boerum holds a B.S. in Management Information Systems form the University of Nevada- Las Vegas, and a MBA from San Diego State University.
Board of Directors
Ramona Cappello, Chair. Ms. Cappello was appointed to the Board in July 2015 and as Chair of the Board in November 2015. Ms. Cappello is currently the Chief Executive Officer Sun Harvest Salt, LLC, a company she founded in 2014. Prior to Sun Harvest Salt, Ms. Cappello served as Chief Executive Officer and co-founder of Corazonas Foods from 2006 until the sale of Corazonas Foods in 2012, departing in 2013 at the end of her contract. Ms. Cappello was also a senior executive with Mauna Loa Macadamia Nut Company until its sale to Hershey Foods, and has served in various positions for other food and beverage companies including Nestle, Celestial Seasonings and Kendall-Jackson Wineries. In addition to her responsibilities with Sun Harvest Salt, Ms. Cappello has served on the University of Southern California Board of Trustees since 2014, is a member of the USC Associates and Marshall Partners, and serves on the board of Catholic Big Brothers and Big Sisters of Los Angeles. Additionally, she currently serves on the Board of Directors for Nielsen Massey Vanillas, Inc. Ms. Cappello holds a bachelor’s degree in business from the University of Southern California Marshall School of Business, where she graduated a class valedictorian.
The Board of Directors believes Ms. Cappello’s experience in executive roles with consumer products companies and her experience in corporate governance will provide the Board with invaluable insight and guidance as the Company continues to expand the sales of the AquaBall™ Naturally Flavored Water to both existing and new retail accounts.

Scot Cohen, Director. Mr. Cohen was appointed to the Board in March 2013 and is the Founder and Managing Partner of V3 Capital Partners, a private investment firm focused on early-stage companies primarily in the consumer products industry, and Co-Manager of Red Fortune Fund, a private equity fund based in Hong Kong. Mr. Cohen also is the Founder of Petro River Oil, LLC and Chairman of Petro River Oil CorpCorp. (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 and is a Founder and the Chairman of the National Foundation for Veteran Redeployment, a 501(c)3 non-profit organization whose mission is to help unemployed veterans prepare for and enter new careers in the oil and gas industry.Council. Mr. Cohen holdsreceived 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 assistare a valuable resource to the Company’s efforts to raise capital to fund the continued implementation of the Company’sexpand and implement its business plan.
 
Neil LeVecke,Jeffrey Fox, Director.Mr. LeVeckeFox was appointed to the Board effective July 16, 2017. He has been a leading business strategist, brand marketing authority and general management executive for some of the world's largest restaurant and consumer companies including roles as Chief Brand & Concept Officer for Pizza Hut, Co-founder of Collider LLC, a cultural marketing strategy firm, Managing Director of the California office of advertising agency Foote, Cone and Belding (FCB), various positions with the Yum! Brands and within Sony's interactive and PlayStation video game divisions, and Hill & Knowlton Public Relations. He is currently a member of the Presidentboard of LeVecke Corporation,directors of Cicis Pizza and Flix Brewhouse. Mr. Fox holds a wholesale distributorbachelor's degree in Journalism from San Diego State University and bottler of spirits and wine products. Representingreceived a third generationmaster's degree in the family business, he has worked every position in the company since starting in 1993. Mr. LeVecke graduatedMass Communications from Loyola MarymountCalifornia State University, in 1990.Northridge. 
 
The Board of Directors believes that Mr. LeVecke’s 22 yearsFox’s strong experience in the wholesale beverage distributing and bottling industrybrand building across several diverse Fortune 100 consumer product companies will provide the Board with invaluable insight and guidance asbe significantly valuable to the Company as it continues to expandrapidly grow its product offerings and launch new brands and products around the sales of the AquaBall™ Naturally Flavored Water to both existing and new retail accounts.
 
James J. Greco, DirectorKeith Stump, Director.. Mr. Greco is PresidentStump has over 35 years of sales and Chief Executive Officer of Pilgrim Holdings, LLC,management experience. He joined Charlie’s in January 2018 as a positionStrategic Advisor, where he has held since October 2001.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. Greco previouslyStump served as Chief Operating Officera partner and Vice President of Newk's Franchise Company, LLC from July 2014 until October 2016,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 President from January 2016 until October 2016. Prior to his time with Newk’s Franchise Company, Mr. Greco served as the Chief Executive Officer and President of Sbarro LLC from January 2012 until October 2013, and as the Chief Executive Officer of Bruegger's Enterprises, Inc. from August 2003 to December 2011. Mr. Greco currently serves as a directorone of the Palm Beach County Food Bank, as well as an operating advisor for Lincoln Road Global Management.Top 75 Office Technologies Dealers in the United States. Mr. Greco is a member of the ConnecticutStump serves on several not-for-profit boards, which serve those in recovery from addiction and Florida bars. He earned a B.A. in Economics from Georgetown University and a J.D. from the University of Miami, School of Law. He has also completed International Studies at City University, London, England.developmental disabilities.
 
The Board of Directors believes that Mr. Greco’s extensiveStump’s sales, marketing, management experience inand industry experience, as well as entrepreneurial experience, is an asset to the food industry will assist the CompanyBoard as it seeks to expandmanages the distribution of AquaBall™ and eliminate inefficiencies in Niagara’s production process.Company’s strategic objectives.
 
Kevin Sherman, Director.  Ryan Stump, Director and Chief Operating Officer.See above. Mr. Stump was appointed as a director and the Company’s Chief Marketing Officer on April 26, 2019 in connection with the Share Exchange. Mr. Stump has served as the Chief Operating Officer of Charlie’s since 2014, during which time he has been responsible for all global operations of Charlie’s. Prior to joining Charlie’s, Mr. Stump worked as an Associate Territory Manager and then as a Territory Manager for ConMed, a medical sales device company, from 2010 to 2013. Mr. Stump also co-founded and continues to be engaged with multiple companies, including The Ohio House since 2011, the Buckeye Recovery Network since 2017, and The Mend California since 2018. Mr. Stump earned a B.S. and B.A. in Sports Marketing and Marketing from Duquesne University.
 
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The Board of Directors believes that Mr. Sherman’s long-standing serviceStump’s experience operating high growth companies, as well as entrepreneurial experience, is valuable to the Company and its predecessor, Bazi, Inc., provide the Board with the guidance necessary to continue to expandas it manages the Company’s distribution networks, and promote brand awareness of AquaBall™ Naturally Flavored Water.anticipated continued growth.
 
ThereDavid Allen, Chief Financial Officer and Secretary.Mr. Allen was appointed as the Company’s Chief Financial Officer on April 26, 2019, upon consummation of the Share Exchange. Mr. Allen brings over 22 years of experience as a Chief Financial Officer of public companies. From September 2018 to May 2019, Mr. Allen served as Chief Financial Officer of Iconic Brands, Inc. (OTCQB: ICNB). Prior to that, from December 2014 to January 2018, Mr. Allen served as the Chief Financial Officer of WPCS International, Inc., a design-build engineering firm focused on the deployment of wireless networks and related services. WPCS International was listed on Nasdaq, and Mr. Allen oversaw its financial reporting obligations and SEC compliance. From 2004 to 2017, Mr. Allen served as Chief Financial Officer of Bailey’s Express, Inc., a privately held trucking corporation, which filed for Chapter 11 bankruptcy in July 2017; he currently serves as the Chapter 11 Plan Administrator for the bankruptcy case. From June 2006 to June 2013, Mr. Allen served as the Chief Financial Officer and Executive Vice President of Administration at Converted Organics, Inc., a company organized to convert food waste into organic fertilizer. At Converted Organics, he was responsible for SEC reporting, audit, insurance and taxes. In June 2019, Mr. Allen was appointed to the Board of Directors and serves as the Audit Committee Chairman of MariMed, Inc. (OTC: MRMD). Mr. Allen is currently an Assistant Professor of Accounting at Southern Connecticut State University, a position he has held since 2017, and for the 12 years prior to that he was an Adjunct Professor of Accounting at SCSU and Western Connecticut State University. Mr. Allen is a licensed CPA and holds a Bachelor’s Degree in Accounting and a Master’s Degree in Taxation from Bentley College.
Adam Mirkovich, Chief Information Officer.Mr. Mirkovich was appointed as the Company’s Chief Information Officer on May 20, 2019. Mr. Mirkovich has over a decade of experience managing supply chains for consumer products. Mr. Mirkovich has served as an independent management consultant specializing in building and optimizing value chains for startups and growth stage companies in the beverage, nicotine vape, and nutritional supplements industries since 2013. Prior to joining the Company, Mr. Mirkovich served as the Chief Operating Officer of Orchid Ventures, Inc. (CSE: ORCD), a multi-state premium cannabis vape company, from September 2018 to April 2019. From December 2014 to February 2016, Mr. Mirkovich served as the Director of Supply Chain and Operations at Space Jam Juice, LLC, a distributor of premium vapor products. From November 2010 to April 2013, Mr. Mirkovich served as the Product Lifecycle Management Program Manager for Niagara Bottling, LLC, a leading bottled water manufacturer. While there, he led the product revision, introduction, and discontinuance practices for customers’ private labeled water, flavored, and carbonated beverages. Prior to that, Mr. Mirkovich served as a member of the Supply Chain Logistics team at Niagara Bottling, providing strategic support of company expansion activities and tactical support of purchasing, production planning, and multi-region logistics in North American operations. Mr. Mirkovich earned a Bachelor of Science degree in Business Administration and Economics from Chapman University.
 Other than as described above, there have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any director or nominee set forth above during the past ten years.
 
Board of Directors
Attendance at Meetings
The Board held four meetings, and did not act by unanimous written consent during the year ended December 31, 2016. Each director attended at least 75% of Board meetings during the year ended December 31, 2016. 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 believes that a majority of its members should be independent directors. The Board has determined that, other than Mr. Sherman and Mr. Cohen, all of its current directors are independent directors as defined by the rules and regulations of the NASDAQ Stock Market.
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
The Board has a standing Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. The Board appoints the members and chairpersons of these committees. The majority of the members of these committees have been determined by the Board to be independent. In addition, each member of these committees has been determined by the Board to be independent. Each committee has a written charter approved by the Board. Copies of each committee charter are available on the Company’s website at www.truedrinks.com/investor-relations/ and by clicking on the “Corporate Governance” tab.
Audit Committee
Members:
Mr. Scot Cohen (Chair)
Ms. Ramona Cappello
Mr. Neil LeVecke
Number of Meetings in 2016:
One
Functions:This committee assists 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. This committee is responsible for the appointment, compensation, retention and oversight of the independent accountants and for ensuring that the accountants are independent of management.
Compensation Committee
Members:
Ms. Ramona Cappello (Chair)
Mr. Scot Cohen
Number of Meetings in 2016:Two
Functions:This committee determines the Company’s general compensation policies and practices. This committee also reviews and approves compensation packages for the Company’s officers and, based upon such review, recommends overall compensation packages for the officers to the Board. This committee also reviews and determines equity-based compensation for the Company’s directors, officers, employees and consultants and administers the Company’s 2013 Stock Incentive Plan.
Nominating and Corporate Governance Committee
Members:
Mr. Neil LeVecke (Chair)
Ms. Ramona Cappello
Number of Meetings in 2016:
One
Functions:This committee is responsible for making recommendations to the Board regarding candidates for directorships and the size and composition of the Board and for overseeing the Company’s corporate governance guidelines and reporting and making recommendations to the Board concerning corporate governance matters.
Board Leadership Structure
The Board currently separates the roles of Chief Executive Officer and Chair of the Board in recognition of the differences between the two roles. The Chief Executive Officer is responsible for setting the strategic direction of the Company and the day-to-day leadership and performance of the Company, while the Chair of the Board provides guidance to the Chief Executive Officer and sets the agenda for the Board meetings and presides over meetings of the Board. However, the Board believes it should be able to freely select the Chair of the Board based on criteria that it deems to be in the best interest of the Company and its stockholders, and therefore one person may, in the future, serve as both the Chief Executive Officer and Chair of the Board.
Board Role in Risk Assessment
Management, in consultation with outside professionals, as applicable, identifies risks associated with the Company’s operations, strategies and financial statements. Risk assessment is 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 meet privately in executive sessions with representatives of the Company’s independent registered public accountants. 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 March 31, 2011.
 
Section 16(a) Beneficial Ownership Reporting CompliancesCompliance
 
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) requires our officers, directors, and persons who beneficially own more than ten percent of our Common Stock common stock to file reports of ownership and changes in ownership with the SEC. Officers, directors, and greater-than-ten-percent shareholdersstockholders 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 all reports requiredeach of our officers and directors failed to be filed by these individuals and personstimely file at least one report due under Section 16(a) were filed during the year ended December 31, 20162019.
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Code of Ethics
We have adopted a Code of Ethics that applies to all of our directors, officers and employees, a copy of which is attached as an exhibit to our Annual Report on Form 10-K, filed with the SEC on April 1, 2019.
Board Leadership Structure
The Board does not have a policy regarding the separation of the roles of the Chief Executive Officer and Chair of the Board, as the Board believes it is in the best interest of the Company’s and its stockholders to make that determination based on the position and director of the Company and the membership of the Board from time to time.
Upon consummation of the Share Exchange, Mr. Brandon Stump was appointed as a director and the Company’s Principal Executive Officer, and shortly thereafter was appointed by the Board to serve as Chair. The Board felt that this was in the best interest of the Company and its stockholders due to Mr. Stump’s knowledge and experience in the vapor market as well as the fact that he is the co-founder and Chief Executive Officer of Charlie’s. As of December 31, 2019, Mr. Stump continues to serve both as the Company’s Chief Executive Officer and as Chair of the Board.
Board Role in Risk Assessment
Management, in consultation with outside professionals, as applicable, identifies risks associated with the Company’s operations, strategies and financial statements. In addition, risk assessments were also performed through periodic reports received by the Audit Committee from management, counsel and the Company’s independent registered public accountants relating to risk assessment and management. Audit Committee members met privately in executive sessions with representatives of the Company’s independent registered public accountants during and prior to the year ended December 31, 2019. The Board also provides risk oversight through its periodic reviews of the financial and operational performance of the Company.
Director Nominations
The Board nominates directors for election at the Company’s annual meeting of stockholders and appoints new directors to fill vacancies when they arise, and has the responsibility to identify, evaluate and recruit qualified candidates to the Board for such filings were timely.nomination or appointment.

The Board of Directors identifies director nominees by first considering those current members of the Board who are willing to continue service. Current members of the Board with skills and experience that are relevant to our business and who are willing to continue service are considered for re-nomination, balancing the value of continuity of service by existing members of the Board with that of obtaining a new perspective. Nominees for director are selected by a majority of the members of the Board. Although the Company does not have a formal diversity policy, in considering the suitability of director nominees, the Board considers such factors as it deems appropriate to develop a Board that is diverse in nature and comprised of experienced and seasoned advisors. Factors considered by the Board include judgment, knowledge, skill, diversity, integrity, experience with businesses and other organizations of comparable size, including experience in the software and/or technology industries, software, intellectual property, business, finance, administration or public service, the relevance of a candidate’s experience to our needs and experience of other Board members, experience with accounting rules and practices, the desire to balance the considerable benefit of continuity with the periodic injection of the fresh perspective provided by new members, and the extent to which a candidate would be a desirable addition to the Board and any committees of the Board.

A stockholder who wishes to recommend a prospective nominee for the Board may notify the Secretary of the Company in writing with any supporting material the stockholder considers appropriate. Nominees recommended by stockholders are considered in the same way as nominees suggested from other sources. 
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In addition, the Company’s Bylaws contain provisions that address the process by which a stockholder may nominate an individual to stand for election to the Board at the Company’s annual meeting of stockholders. In order to nominate a candidate for director, a stockholder must give timely notice in writing to the Secretary of the Company and otherwise comply with the provisions of the Company’s Bylaws. Information required by the Company’s Bylaws to be in the notice include: the name, contact information and share ownership information for the candidate and the person making the nomination, and other information about the nominee that must be disclosed in proxy solicitations under Section 14 of the Exchange Act and its related rules and regulations. The Board may also require any proposed nominee to furnish such other information as may reasonably be required by the Board to determine the eligibility of such proposed nominee to serve as director of the Company. The recommendation should be sent to: Secretary, Charlie’s Holdings, Inc., 1007 Brioso Drive, Costa Mesa, California 92627. 
Board of Directors; Attendance at Meetings
The Board held five meetings and acted by unanimous written consent three times during the year ended December 31, 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.
Board Committees and Charters
 
ITEMAs 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 atwww.charliesholdings.comunder “Investors/Corporate Governance”.
Audit Committee
As of December 31, 2019, the Audit Committee consisted of Messrs. Cohen (Chair) and 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.
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ITEM 11. EXECUTIVEEXECUTIVE COMPENSATION
  
Summary Compensation Table
 
The following table sets forth the compensation paid to the following persons for our fiscal years ended December 31, 20162019 and 2015:2018:
 
(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, 20162019 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
($)
 
 
 Stock Awards
($)

 
 Option Awards
($) (1)
 
 
 Non-Equity Incentive Plan Compensation ($)
 
 
 All Other Compensation ($)
 
 
 Total ($)
 
  
 
    
    
    
    
    
    
    
Kevin Sherman, 
2016
 $229,167 
 $50,000 
 $- 
 $- 
 $- 
 $- 
 $279,167 
Chief Executive Officer, Chief Marketing Officer, Director
2015
 $181,751 
 $53,300 
 $471,691 
 $(262,795)
 $- 
 $- 
 $443,947 
 
    
    
    
    
    
    
    
Daniel Kerker2016
 $185,000 
 $5,000 
 $- 
 $- 
 $- 
 $- 
 $190,000 
Chief Financial Officer
2015
 $178,680 
 $63,959 
 $471,691 
 $(262,794)
 $- 
 $- 
 $451,536 
 
    
    
    
    
    
    
    
Robert Van Boerum2016
 $175,000 
 $5,000 
 $- 
 $- 
 $- 
 $- 
 $180,000 
Chief Operations Officer
2015
 $144,970 
 $38,433 
 $353,768 
 $(187,893)
 $- 
 $- 
 $349,278 
Name and Principal Position
 
  Year
 
 
 
Salary
($)
 
 
Bonus
($)
 
 
 
Option Awards
($) (1)
 
 
Total
($)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Brandon Stump (2)
  2019 
 $333,330(3) 
 $497,000  
 $– 
 $830,330 
Chief Executive Officer and Chair of the Board    
    
    
    
    
David Allen (4)
  2019 
 $93,750 
 $– 
 $43,500 
 $137,250 
Chief Financial Officer    
    
    
    
    
Ryan Stump (5)
  2019 
 $333,330(3) 
 $497,000
 $– 
 $830,330 
Chief Operating Officer and Director    
    
    
    
    
Former Named Executive Officers
  
    
    
    
    
Robert Van Boerum (6)
  2019 
 $67,500 
 $– 
 $– 
 $67,500 
Former Principal Executive Officer and Principal Financial Officer  2018 
 $103,654 
 $9,517 
 $– 
  113,171 
 
(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 December 31, 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 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, 2015, all Named Executive Officers exchanged their option awards2019, the Company accrued expense for restricted Common Stock awards, valued at the closing price of the Company's Common Stockamounts payable at the time pursuant to the B. Stump Employment Agreement (defined below) and the R. Stump Employment Agreement related to the cash component of grant.their bonuses of $497,000 each. These payment of these bonuses have been deferred by both employees until December 31, 2020.
(4)  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.
(5)Mr. Stump was appointed to serve as the Company’s Chief Operating Officer and as a director on April 26, 2019, in connection with the Share Exchange.
(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.
 
Employment Agreements
Kevin Sherman.Mr. Sherman is employed as the Company’s Chief Marketing Officer pursuant to a two-year employment agreement, dated November 25, 2015 (the “Sherman Agreement”).  Under the terms and conditions of the Sherman Agreement, Mr. Sherman receives: (i) a base salary of $22,917 per month, subject to certain adjustments in the event the Company achieves certain monthly sales objectives (“Target Objectives”); (ii) a $3,000 per month housing allowance, subject to termination in the event the Company achieves any of the Target Objectives; (iii) a ‘retention bonus’ of $100,000, of which $50,000 was paid to Mr. Sherman in November 2015 and the remaining $50,000 was paid in March, 2016; and (iv) an aggregate total of approximately 2.3 million shares of restricted stock, subject to certain vesting conditions (“Restricted Shares”), which Restricted Shares represented approximately 3.25% of the issued and outstanding shares of the Company’s Common Stock, including shares of Common Stock issuable upon conversion of the Company’s outstanding shares of preferred stock.
During the second half of 2016, Mr. Sherman deferred a portion of his monthly salary equivalent to a total of $100,000 annually. The deferment began at the end of July, 2016 and is still in effect as of March, 2016.
Mr. Sherman is also eligible for an annual bonus equal to 30% of his base salary, currently payable in restricted shares of the Company’s Common Stock, which bonus will be awarded at the sole discretion of the Company’s Compensation Committee. During the year ended December 31, 2016, the Compensation Committee did not award a bonus to Mr. Sherman for the period through December 31, 2015.
 
 
 
-26--44-
 
In addition to the annual bonus, in the event of a change in control transaction, as defined in the Sherman Employment Agreement, Mr. Sherman will be entitled to a bonus equal to 3.25% of the value of the transaction resulting in a change in control, minus the fair market value of all Restricted Shares issued to Mr. Sherman prior to the date of the change in control transaction.
Mr. Sherman’s employment may be terminated for “Cause”, if Mr. Sherman (a) is convicted of any fraud or embezzlement, (b) after written notice, willfully breaches or habitually neglects his duties and responsibilities, (c) commits acts of dishonesty, gross negligence or willful misconduct or (d) violates any law or regulation relating to the business operations of the Company that may have a material adverse effect on the Company. If the Company terminates Mr. Sherman’s employment for reasons other than for Cause, the Company shall pay a severance in an amount equal to six months of Mr. Sherman’s base salary.
Daniel Kerker
. Mr. Kerker is employed as the Company’s Chief Financial Officer pursuant to an Employment Agreement, dated March 1, 2012 (the “Kerker Agreement”) and effective October 15, 2012. The term of the Kerker Agreement is for a period of three years, which shall extend automatically for successive one-year periods unless the Kerker Agreement is terminated by either party. Mr. Kerker receives a base salary of $12,500 per month until the earlier of September 1, 2012 or the Company achieving $1,000,000 in monthly gross sales, in which case the base salary shall be increased (a) to $15,000 per month, or (b) if the Company achieves $2,000,000 in monthly gross sales, to $16,250 per month. Mr. Kerker is also eligible to receive an annual bonus as approved by the Board and shall be entitled to earn stock option compensation to acquire a total of 430,043 shares of the Company’s Common Stock over the term of the agreement. During the year ended December 31, 2016, the Compensation Committee did not award a bonus to Mr. Kerker for the period through December 31, 2015.
Mr. Kerker’s employment may be terminated for “Cause”, if Mr. Kerker (a) is convicted of any fraud or embezzlement, (b) after written notice, willfully breaches or habitually neglects his duties and responsibilities, (c) commits acts of dishonesty, gross negligence or willful misconduct or (d) violates any law or regulation relating to the business operations of the Company that may have a material adverse effect on the Company. If the Company terminates Mr. Kerker’s employment for reasons other than for Cause, the Company shall pay a severance in an amount equal to six months of Mr. Kerker’s base salary.
Robert Van Boerum. Mr. Van Boerum is employed as the Company’s Chief Operations Officer pursuant to a two-year employment agreement, dated September 11, 2015 (the “Van Boerum Agreement”). Under the terms and conditions of the Van Boerum Agreement, Mr. Van Boerum receives a base salary of $14,583.33 per month. Mr. Van Boerum is also be eligible for an annual bonus equal to 30% of his salary, which bonus will be awarded at the sole discretion of the Company’s Compensation Committee, and is eligible to earn stock option compensation at the discretion of the Compensation Committee. During the year ended December 31, 2016, the Compensation Committee did not award a bonus to Mr. Van Boerum for the period through December 31, 2015.
The Van Boerum Agreement may be terminated for “Cause”, if Mr. Van Boerum (a) is convicted of any fraud or embezzlement, (b) after written notice, willfully breaches or habitually neglects his duties and responsibilities, (c) commits acts of dishonesty, gross negligence or willful misconduct or (d) violates any law or regulation relating to the business operations of the Company that may have a material adverse effect on the Company. If the Company terminates Mr. Van Boerum’s employment for reasons other than for Cause, the Company shall pay a severance in an amount equal to six months of Mr. Van Boerum’s base salary.
Other than as set forth above, there are no arrangements or understandings between our Named Executive Officers and any other person pursuant to which they were appointed as officers. None of our Named Executive Officers has a family relationship that is required to be disclosed under Item 401(d) of Regulation S-K.
Director Compensation
Pursuant to the Company’s Director Compensation Plan, non-employee directors (“Outside Directors”) shall receive (a) a $30,000 annual retainer, payable in equal quarterly installments in either cash or shares of Common Stock, (b) additional committee retainers as determined by the Board and (c) reimbursement for expenses related to Board meeting attendance and committee participation. Directors that are also employees of the Company do not receive additional compensation for serving on the Board.
The following table discloses certain information on concerning the compensation of the Company’s non-employee directors for the year ended December 31, 2016:
Name (1)
 
Fees earned or
Paid in Cash
($)
 
 
Option
Awards
($)
 
 
Stock
Awards
($)
 
 
Total
($)
 
Ramona Cappello (2)
 $100,000 
 $- 
 $- 
 $100,000 
Neil LeVecke
 $30,000 
 $- 
 $- 
 $30,000 
Scot Cohen
 $30,000 
 $- 
 $- 
 $30,000 
(1)
Mr. Greco is not listed in this table, as he was appointed to the Board on February 6, 2017 and, as such, did not receive any compensation from the Company during the year ended December 31, 2016.
(2)During the year ended December 31, 2016, Ramona Cappello earned $50,000 as Chair of the Board of Directors. She also earned $50,000 in additional fees as the result of a $5,000 per month consulting agreement.
Outstanding Equity Awards as of December 31, 2016at Fiscal Year-End 2019
 
The following table sets forth all equity awards held by our Named Executive Officers at December 31, 2016.2019:
 
 
 
Stock Awards
 
Name
 
Number of shares or units of stock that have not vested (#)
 
 
Market Value of shares or units of stock that have not vested ($)
 
 
Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested (#)
 
 
Equity incentive plan awards: Market or Payout value of unearned shares, units or other rights that have not vested ($)
 
Kevin Sherman
  799,423 
(1)
 $79,942 
  - 
 $- 
Daniel Kerker
  1,798,706 
(2)
 $179,870 
  - 
 $- 
Robert Van Boerum
  1,442,779 
(2)
 $144,278 
  - 
 $- 
Name
 
Number of Securities Underlying Unexercised Options and Warrants
(#) Exercisable
 
 
Number of Securities
Underlying Unexercised Options and Warrants
(#) Unexercisable
 
 
 
Exercise
Price
($)
 
 
 
 
Expiration
Date
 
Brandon Stump
  – 
  – 
  – 
  – 
David Allen
  – 
  15,000,000(1)
 $0.0044313 
 
10/28/2029
 
Ryan Stump
  – 
  – 
  – 
  – 
Former Named Executive Officers
    
    
    
    
Robert VanBoreum
  – 
  – 
  – 
  – 
 
(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.
Executive Compensation Arrangements
Employment Agreements
Brandon Stump. On April 26, 2019, in connection with the Share Exchange and his appointment as Chief Executive Officer, the Company and Mr. Brandon Stump entered into an employment agreement (the “B. Stump Employment Agreement”) pursuant to which (i) Mr. Stump serves as the Company’s Chief Executive Officer, initially for a term of three years, renewable for one-year periods thereafter; (ii) Mr. Stump is subject to a non-competition requirement for three years after his termination; (iii) Mr. Stump is subject to a non-solicitation requirement for one year after his termination, and be entitled to receive the following compensation for his services as Chief Executive Officer: (a) an annual base salary of $500,000, which shall increase on an annual basis by an amount not less than $25,000 per year, as determined by the Compensation Committee of the Company’s Board, (b) an annual cash bonus of up to $750,000 per year, which cash bonus will be determined based on the Company’s achievement of audited gross revenue targets of $35.0 million per year, as more particularly set forth in the B. Stump Employment Agreement, (c) certain milestone based bonuses, (d) an annual award of shares of common stock having an aggregate value equal to one-half of Mr. Stump’s annual base salary in effect for such year, which shares shall vest quarterly in equal amounts over a three year period commencing on the issuance date, (e) participation in the Company’s retirement plan, if any, (f) reimbursement of all reasonable business-related expense incurred by Mr. Stump, (e) full health insurance coverage for he and his dependents, and at least $5.0 million of life insurance, (g) 21 paid vacation days per year, and (h) an automobile allowance of $750 per month.
On February 12, 2020, the B. Stump Employment Agreement was amended as follows: (i) the annual equity awards based upon, among other conditions, the Company’s market capitalization and a percentage of base salary have been eliminated; however, the awards based on financial milestones remain in full force and effect; and (ii) payment of the 2019 bonuses have been deferred, resulting in the accrual of such bonuses on the books and records of the Company. All other terms of the B. Stump Employment Agreement remain in full force and effect at this time.
-45-

The Company may terminate the B. Stump Employment Agreement in the event of Mr. Stump’s death or disability, or for Cause, as defined in the B. Stump Employment Agreement;provided, however, that at no time may the Company terminate him without Cause. Mr. Stump may terminate the B. Stump Employment Agreement at any time for any reason. In the event that his employment is terminated by him without Good Reason, as defined in the B. Stump Employment Agreement, or by the Company for Good Cause as a result of a Change in Control, he shall be entitled to the following compensation: (i) any earned but unpaid salary through the termination date, (ii) unpaid and unreimbursed expense, (iii) earned but unpaid bonuses, and (iv) any accrued vacation days;provided, however, that in the event that the B. Stump Employment Agreement is terminated by Mr. Stump for any reason, he shall also be entitled to one year’s severance, consisting of one year’s base salary, milestone bonuses and certain other benefits. In the event his employment is terminated by the Company without Cause or Mr. Stump terminates it for Good Reason, as defined in the B. Stump Employment Agreement, then he shall be entitled to the following compensation: (i) all amounts due to him through the termination date, (ii) full vesting of any and all previously granted equity-based incentive awards, and (iii) health insurance coverage for a period of 18 months after the termination date. In addition, effective upon a Change in Control, regardless of whether the B. Stump Employment Agreement is terminated, his base salary for the year in which the Change in Control occurred and any years thereafter shall automatically increase by 20% and the milestone bonuses shall automatically decrease by 30%.
As noted in the footnotes to the Summary Compensation table above, during the year ended December 31, 2019, the Company accrued expense 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 Mr. Ryan Stump entered into an employment agreement (the “R. Stump Employment Agreement”), pursuant to which (i) Mr. Stump serves as the Company’s Chief Operating Officer for a term of three years, renewable for one-year periods thereafter, during which time he shall report to the Company’s Chief Executive Officer; (ii) Mr. Stump is subject to a non-competition requirement for three years after his termination; (iii) Mr. Stump is subject to a non-solicitation requirement for one year after his termination, and be entitled to receive the following compensation for his services as Chief Operating Officer: (a) an annual base salary of $500,000, which shall increase on an annual basis by amount that is not less than $25,000 per year, as determined by the Compensation Committee of the Company’s Board, (b) an annual cash bonus of up to $750,000 per year, which cash bonus will be determined based on the Company’s achievement of a gross revenue target of $35.0 million per year, as more particularly set forth in the R. Stump Employment Agreement, (c) certain milestone based bonuses, (d) an annual award of shares of Common Stock having an aggregate value equal to one-half of Mr. Stump’s annual base salary in effect for such year, which shares shall vest quarterly in equal amounts over a three year period commencing on the issuance date, (e) participation in the Company’s retirement plan, if any, (f) reimbursement of all reasonable business-related expense incurred by Mr. Stump, (e) full health insurance coverage for he and his dependents, and at least $5.0 million of life insurance, (g) 21 paid vacation days per year, and (h) an automobile allowance of $750 per month.
On February 12, 2020, the R. Stump Employment Agreement was amended as follows: (i) the annual equity awards based upon, among other conditions, the Company’s market capitalization and a percentage of base salary have been eliminated; however, the awards based on financial milestones remain in full force and effect; and (ii) payment of the 2019 bonuses have been deferred, resulting in the accrual of such bonuses on the books and records of the Company. All other terms of the R. Stump Employment Agreement remain in full force and effect at this time.
The Company may terminate the R. Stump Employment Agreement in the event of Mr. Stump’s death or disability, or for Cause, as defined in the R. Stump Employment Agreement;provided, however, that at no time may the Company terminate him without Cause. Mr. Stump may terminate the R. Stump Employment Agreement at any time for any reason. In the event that his employment is terminated by him without Good Reason, as defined in the R. Stump Employment Agreement, or by the Company for Good Cause as a result of a Change in Control, he shall be entitled to the following compensation: (i) any earned but unpaid salary through the termination date, (ii) unpaid and unreimbursed expense, (iii) earned but unpaid bonuses, and (iv) any accrued vacation days;provided, however, that in the event that the R. Stump Employment Agreement is terminated by Mr. Stump for any reason, he shall also be entitled to one year’s severance, consisting of one year’s base salary, milestone bonuses and certain other benefits. In the event that his employment is terminated by the Company without Cause or he terminates it for Good Reason, as defined in the R. Stump Employment Agreement, then Mr. Stump shall be entitled to the following compensation: (i) all amounts due to him through the termination date, (ii) full vesting of any and all previously granted equity-based incentive awards, and (iii) health insurance coverage for a period of 18 months after the termination date. In addition, effective upon a Change in Control, regardless of whether the R. Stump Employment Agreement is terminated, his base salary for the year in which the Change in Control occurred and any years thereafter shall automatically increase by 20% and the milestone bonuses shall automatically decrease by 30%.
-46-

As noted in the footnotes to the Summary Compensation table above, during the year ended December 31, 2019, the Company accrued expense 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.
Director Compensation
The Company’s Director Compensation Plan currently provides that non-employee directors receive (a) a $60,000 annual retainer, payable in equal monthly installments in cash and (b) reimbursement for expenses related to Board meeting attendance and committee participation. In addition, directors receive a one-time grant of an option to purchase 25 million shares of the Company’s common stock at an exercise price equal to the closing price of the Company’s common stock on the date of issuance, as reported on the OTC Pink Market. Directors that were also employees of the Company did not receive additional compensation for serving on the Board.
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 for their service as a director 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 
 
(2)
(1)
Non-vestedThe 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 December 31, 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 are scheduledof 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 on September 30, 2017.
Non-vested shares are scheduled to vest evenlyannually, in equal installments, over three yearsa three-year period beginning on September 30, 2017.
June 1, 2020.
 
 
 
-28--47-
 
Outstanding Equity Awards as of December 31, 2019
The following table sets forth all equity awards held by our Named Executive Officers at December 31, 2019:
Name
 
Number of Securities Underlying Unexercised Options and Warrants
(#) Exercisable
 
 
Number of Securities
Underlying Unexercised Options and Warrants
(#) Unexercisable
 
 
 
Exercise
Price
($)
 
 
 
 
Expiration
Date
 
Brandon Stump
  – 
  – 
  – 
  – 
David Allen
  – 
  15,000,000(1)
 $0.0044313 
 
10/28/2029
 
Ryan Stump
  – 
  – 
  – 
  – 
Former Named Executive Officers
    
    
    
    
Robert VanBoreum
  – 
  – 
  – 
  – 
(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.
Equity Compensation Plan Information
 
The following table includes information as of December 31, 20162019 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))
 
 
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)
 
 
(a)
 
 
(b)
 
 
(c)
 
Equity compensation plans approved by security holders
  15,872,229 
 $0.15 
  757,771 
Equity compensation plans approved by stockholders
  801,324,826 
 $0.0044313 
  367,754,205 
    
    
Equity compensation plans not approved by security holders
  - 
Equity compensation plans not approved by stockholders
  – 
 $– 
  – 
    
    
Total
  15,872,229 
 $0.15 
  757,771 
  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 reservesinitially reserved for issuance 20.0 million shares of Common Stock 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.
 
-48-

During the year ended December 31, 2016,2018, the Company did not issue any restricted stock awards pursuant to the 2013 Plan; however, the Company issued an aggregate total of 2,000,000 restricted stock awards pursuant to the 2013 Plan. The Company also issued an aggregate total of 3,100,00034,652,903 stock option awards pursuant to the 2013 Plan during the 2018 fiscal year.
Subsequent to the year ended December 31, 2018, on May 16, 2019, the Board approved an amendment to all of the outstanding stock options held by Mr. Sherman that were issued under the 2013 Plan, in the aggregate amount of 35,971,988, to extend the expiration date of such stock options by five years.
As of the date of the Share Exchange, April 26, 2019, a total of approximately 91.7 million awards were issued under 2013 Plan, consisting entirely of outstanding stock options. As of December 31, 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.
 
Post-Employment Compensation, Pension Benefits, Nonqualified Deferred Compensation
 
There were no post-employment compensation, pension or nonqualified deferred compensation benefits earned by the Named Executive Officers during the year ended December 31, 2016.
-29-
2019.
 
ITEMITEM 12. SECURITYSECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERSSTOCKHOLDER MATTERS
 
As of March 30, 2017, we had fourThe Company currently has two classes of voting stocksecurities issued and outstanding: (i) Common Stock; common stock and (ii) Series B Preferred; (iii) Series C Preferred; and (iv) Series DA Preferred. The following tables set forth information regarding sharescontain the beneficial ownership of Series B Preferred, Series C Preferred, Series D Preferred and Common Stock beneficiallyour outstanding voting securities owned as of March 30, 2017:by:
 
(i)(i)  
Each of our officers and directors;
(ii)
All officer and directors as a group; and
(iii)(iii)  
Each person known by us to beneficially own five percent or more of the outstanding shares of our Series BA Preferred Series C Preferred, Series D Preferred and Common Stock. common stock.
 
Percent ownership is calculated based on 1,292,870204,561 shares of Series BA Preferred 106,704and 18,973,827,540 shares common stock outstanding as of January 17, 2020.
-49-

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 Series C Preferred, 35,250voting 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 Series D Preferred and 199,693,811 shares Common Stock outstanding at March 30, 2017.computing the percentage of ownership by any other person.
 
Beneficial Ownership of Series BA Preferred
Name and Address (1)
 
Series B Convertible Preferred Stock
 
 
% Ownership of Class (2)
 
Scot Cohen (3)
  135,000 
  10.44%
Total Officers and Directors (1)
  135,000 
  10.44%
 
    
    
First Bank & Trust as custodian of Ronald L. Chez IRA
820 Church Street
Evanston Illinois, 60201
  425,000 
  32.87%
Wolfson Equities LLC
1 State Street Plaza, 29th Floor
New York, NY 10004
  187,500 
  9.18%
Joe Kolling
58 Beacon Bay
Newport Beach, CA 92660
  155,556 
  14.50%
V3 Capital Partners LLC
20 East 20th Street, Apt. 6
New York, NY 10003
  118,750 
  12.03%
Name and Address (1)
 
Series A Convertible Preferred Stock
 
 
% Ownership of Class
 
Executive Officers and Directors
 
 
 
 
 
 
Scot Cohen
 
 
 
 
 
 
Director
  3,750 
  1.8%
Keith Stump
    
    
Director
  3,000 
  1.5%
Total Officers and Directors 
  6,750 
  3.3%
Greater Than 5% Stockholders
    
    
Red Beard Holdings, LLC (2)
    
    
17595 Harvard Avenue, Suite C511
    
    
Irvine, California 92614
  33,750 
  16.4%
Iroquois Capital Management, LLC (3)
    
    
125 Park Avenue, 25th Floor
    
    
New York, New York 10017
  32,813 
  15.9%
Hudson Bay Capital Management, LP (4)
    
    
777 Third Avenue, 30th Floor
    
    
New York, New York 10017
  11,250 
  5.5%
SDS Capital Partners II, LLC (5)
    
    
500 Summer Street, Suite 405
    
    
Stamford, Connecticut 06901
  11,250 
  5.5%
Altium Growth Fund, LP (6)
    
    
551 Fifth Avenue, 19th Floor
    
    
New York, New York 10176
  11,025 
  5.3%
 
(1)
Each of the Company’s officers and directors who dowill not hold shares of Series BA Preferred were excluded from this table. Unless otherwise indicated, the address for each stockholder is 18662 MacArthur Blvd., Suite 110, Irvine, CA 92612.
1007 Brioso Drive, Costa Mesa, California 92627.
(2)
Beneficial ownershipBased on Company records as ofJanuary 17, 2020. Mr. Smith is determined in accordance witha manager of Red Beard, and has dispositive power and voting power over the rules of the SEC and generally includes voting or investment power with respect to securities.securities reported herein.
(3)Includes 3,750
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 held directly byauthority 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. Cohen, 118,750Abbe 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 January17, 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 V3Hudson Bay Capital Management, LP.
(5)
Based on Company records as of January17, 2020. Steve Derby, Managing Member of SDS Capital Partners and 12,500II, LLC may be deemed to be the beneficial owner of all shares of common stock underlying the common stock held by the Scot Jason Cohen Foundation. Mr. Cohen is the Managing Partner of V3SDS Capital Partners and is an officerII, LLC.
(6)
Based on Company records as ofJanuary 17, 2020. Jacob Gottlieb, Chief Executive Officer of Altium Growth Fund, LP may be deemed to be the Scot Jason Cohen Foundation.beneficial owner of all shares of common stock underlying the common stock held by Altium Growth Fund, LP.
 
 
-30--50-
Beneficial Ownership of Series C Preferred
Name and Address (1)
 
Series C Convertible Preferred Stock
 
 
% Ownership of Class (2)
 
Red Beard Holdings, LLC
2560 East Chapman Avenue #173
Orange, CA 92869
  102,871 
  96.41%
(1)
Each of the Company’s directors and officers was excluded from this table, as none of our officers or directors hold shares of Series C Preferred.
(2)Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.
Beneficial Ownership of Series D Preferred
Name and Address (1)
 
Series D Convertible Preferred Stock
 
 
% Ownership of Class (2)
 
Scot Cohen 
  4,000 
  11.35%
Total Officers and Directors (1)
  4,000 
  11.35%
 
    
    
Red Beard Holdings, LLC
2560 East Chapman Avenue #173
Orange, CA 92869
  10,000 
  28.37%
Baker Court, LLC
P.O. Box 6923
Incline Village, NV 89450
  3,000 
  8.51%
First Bank & Trust as custodian of Ronald L. Chez IRA
820 Church Street
Evanston Illinois, 60201
  2,000 
  5.67%
(1)
Each of the Company’s officers and directors who do not hold shares of Series D Preferred were excluded from this table. Unless otherwise indicated, the address for each stockholder is 18662 MacArthur Blvd., Suite 110, Irvine, CA 92612.
(2)Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.
-31-
 
Beneficial Ownership of Common Stock
 
Name, Address and Title (if applicable) (1)
 
Shares of Common Stock (2)
 
 
Shares Issuable Upon Conversion of Preferred Stock (3)
 
 
Shares Issuable upon Exercise of Vested Stock Options
 
 
Total Number of Shares Beneficially Owned
 
 
% Ownership of Class (4)(5)
 
Kevin Sherman 
Chief Executive Officer and Director
  4,431,270 
  – 
  – 
  4,431,270 
  2.22%
Daniel Kerker 
Chief Financial Officer, Treasurer and Secretary
  4,537,869 
  – 
  – 
  4,537,869 
  2.27%
Robert Van Boerum
Chief Operations Officer
  1,000,000 
  – 
  – 
  2,923,706 
  1.46%
Ramona Cappello
Chairman
  – 
  – 
  166,667 
  166,667 
  * 
Scot Cohen (6)
Director
  7,482,448 
  4,826,667 
  – 
  12,309,115 
  6.02%
Neil LeVecke
Director
  – 
  – 
  333,334 
  333,334 
  * 
James Greco (7)
Director
  333,334 
  333,334 
  - 
  666,668 
  * 
Total officers and directors 
  19,708,627 
  5,160,001 
  500,001 
  25,368,629 
  12.35%
Vincent C. Smith (8)
2560 East Chapman Avenue #173
Orange, CA 92869
  89,591,623 
  75,247,334 
  – 
  164,838,957 
  59.95%
Vincent C. Smith Annuity Trust 2015-1 (9)
2560 East Chapman Avenue #173
Orange, CA 92869
  44,666,667 
  – 
  – 
  44,666,667 
  22.37%
Red Beard Holdings, LLC (10)
2560 East Chapman Avenue #173
Orange, CA 92869
  28,358,289 
  75,247,334 
  – 
  103,605,623 
  37.68%
First Bank & Trust as custodian of Ronald L. Chez IRA (11)
820 Church Street
Evanston Illinois, 60201
  3,092,382 
  8,133,334 
  – 
  11,225,716 
  5.40%
Name, Address and Title (if applicable) (1)
 
Shares of Common Stock
 
 
Shares Issuable Upon Conversion of Preferred A Stock (2)
 
 
Shares Issuable upon Exercise of Warrants (3)
 
 
Shares Issuable upon Exercise of Vested Stock Options
 
 
Total Number of Shares Beneficially Owned
 
 
% Ownership of Class
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Brandon Stump
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Chief Executive Officer and Director
  9,379,218,889 
  - 
  - 
  - 
  9,379,218,889 
  49.54%
Ryan Stump
    
    
    
    
    
    
Chief Operating Officer and Director
  4,019,665,353 
    
    
    
  4,019,665,353 
  21.2%
David Allen
    
    
    
    
    
    
Chief Financial Officer
  - 
  - 
  - 
  - 
  - 
  0.0%
Adam Mirkovich
    
    
    
    
    
    
Chief Information Officer
  - 
  - 
  - 
  - 
  - 
  0.0%
Scot Cohen (4)
    
    
    
    
    
    
Director
  81,240,266 
  84,625,280 
  56,416,355 
  7,244,826 
  229,526,727 
  1.2%
Keith Stump
    
    
    
    
    
    
Director
  93,086,946 
  67,700,224 
  45,133,084 
  - 
  205,920,254 
  1.1%
Executive Officers and Directors, as a group (6 persons)
  13,573,211,454 
  152,325,504 
  101,549,439 
  7,244,826 
  13,834,331,223 
  72.19%
 
Greater Than 5% Stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Vincent C. Smith (5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
17595 Harvard Avenue, Suite C511
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Irvine, California 92614
  2,216,559,416 
  761,627,520 
  513,130,526 
  - 
  3,491,317,462 
  18.4%
Red Beard Holdings, LLC (6)
    
    
    
    
    
    
17595 Harvard Avenue, Suite C511
    
    
    
    
    
    
Irvine, California 92614
  2,152,825,308 
  761,627,520 
  513,130,526 
  - 
  3,427,583,354 
  18.1%
Iroquois Capital Management, LLC (7)
    
    
    
    
    
    
125 Park Avenue, 25th Floor
    
    
    
    
    
    
New York, New York 10017
  500,232,693 
  740,471,200 
  493,643,101 
  - 
  1,734,346,994 
  9.1%
 
*Less than 1%
(1)
(1)Unless otherwise indicated, the address for each stockholder is 18662 MacArthur Blvd., Suite 110, Irvine, CA 92612.1007 Brioso Drive, Costa Mesa, California 92627.
 
(2)
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.
(3)Includes shares of Common Stock issuable upon conversion of shares of Series B Preferred, Series C Preferred and/or Series D Preferred within 60 days of March 30, 2017.
(4)Percentages are rounded to nearest one-hundredth of one percent. Percentages are based on 199,693,811 shares of Common Stock outstanding. Options or other derivative securities that are presently exercisable or exercisable within 60 days are deemed to be beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage of any other person.
(5)
Pursuant to the Certificate of Designation of the Series A Preferred (“Series A COD”), shares of Series BA 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 common stock after such conversion. 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 Certificate of DesignationSeries A COD also entitles each share of Series BA Preferred to vote, on an as converted basis, along with the Common Stock;  common stock; provided, however, that the Series BA 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.
Pursuant to Section 5 of the Third Amended and Restated Certificate of Designations, Preferences, Rights and Limitations of the Series C Convertible Preferred Stock (the “Series C Certificate of Designation”), no holder of Series C Preferred may exercise the voting rights otherwise attributable to the Series C Preferred if such holder, together with any “affiliate” of such Holder (as such term is defined in Rule 144 under the Securities Act of 1933, as amended) or any person or entity deemed to be part of a “group” with such holder (as such term is used in Section 13(d) of the Securities Exchange Act of 1934, as amendedpower (the “Exchange Act”))) would control in excess of 50% of the total voting power of the outstanding shares of capital stock of the Company at the time of such vote (the “Series A Voting Limitation”); provided, however, that any holder of shares of Series C Preferred may waive the Voting Limitation upon 60 days written notice to the Company..
 
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.
 
(6)
(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.
 
(7)
(5)
Includes securities held by Pilgrim Holdings, LLC. Mr. Greco is the PresidentLB 2, LLC (“LB 2”) and Chief Executive Officer of PilgrimRed 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 and/orpower and voting power over, and may be deemed to be the beneficial owner of the securities held by each of these shares.entities.
 
(8)
(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 the trustee for the Vincent C. Smith Annuity Trust 2015-1 (the “Smith Trust”) anda manager of Red Beard, Holdings, LLC (“Red Beard”). As such, Mr. Smithand has dispositive power and subject to certain limitations in the Series C Certificate of Designation, 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 securities common stock held by each of these entities.Iroquois Master Fund.
 
(9)Based on Company records and ownership information from Amendment No. 5 to Schedule 13D filed by Vincent C. Smith on April 25, 2016. Mr. Vincent C. Smith is the trustee of the Smith Trust, and has dispositive and/or voting power over the shares.
(10)Based on ownership information from Amendment No. 5 to Schedule 13D filed by Vincent C. Smith on April 25, 2016. Mr. Vincent C. Smith is a manager of Red Beard Holdings, LLC, and has dispositive power, and, subject to certain limitations in the Series C Certificate of Designation (as described in Note 5 above), voting power over the shares.
(11)Based on ownership information from Amendment No. 2 to Schedule 13D filed by Individual Retirement Accounts for the benefit of Ronald L. Chez, Ronald L. Chez Individually and the Chez Family Foundation on December 8, 2014.
 
 
-33--51-
  
ITEMITEM 13. CERTAINCERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
None. Certain Relationships and Related Transactions
 
ITEMOn November 19, 2019, Charlie’s entered into commercial lease for the Company’s corporate headquarters in Costa Mesa, California (the “Lease”) with Brandon Stump, Ryan Stump and Keith Stump. Messrs. Stump, Stump and Stump purchased the property that is the subject of the Lease in July 2019. The Lease, which was effective as of September 1, 2019, on a month to month basis, 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. Allen, the Company’s Chief Financial Officer after reviewing a detailed analysis of comparable properties and rent rates compiled by an independent, third-party consultant.
 Director and Executive Officer Compensation
See “Executive Compensation” and “Director Compensation” for information regarding compensation of directors and executive officers.

Employment Agreements
We have entered into employment agreements with our executive officers. For more information regarding these agreements, see “Executive Compensation — Narrative to Summary Compensation Table and Outstanding Equity Awards at 2019 Fiscal Year End”.
Independent Directors
The Board has determined that Messrs. Cohen and Fox may be considered independent directors as defined by the rules and regulations of the Nasdaq Stock Market.
In addition, the Board has determined that Mr. Cohen satisfies the definition of an “audit committee financial expert” under SEC rules and regulations. This designation does not impose any duties, obligations or liabilities on Mr. Cohen that are greater than those generally imposed on them as members of the Audit Committee and the Board, and his designation as an audit committee financial expert does not affect the duties, obligations or liability of any other member of the Audit Committee or the Board.
-52-

ITEM 14. PRINCIPALPRINCIPAL ACCOUNTANT FEES AND SERVICES
 
Set forth below areDuring the years ended December 31, 2019 and 2018, Squar Milner LLP (“Squar Milner”) served as our independent registered public accounting firm. The following table presents approximate aggregate fees billed or expected to be billed to the Companyand other expenses for professional services rendered by itsSquar Milner, our independent registered public accounting firm, Squar Milner LLP ("Squar Milner")for the audit of the Company’s annual financial statements for the years ended December 31, 20162019 and 20152018 and fees and other expenses for the professionalother services performed for the Company.rendered during those periods.
 
Audit Fees
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Audit Fees (1)
 $165,500 
 $101,000 
Audit-Related Fees (2)
 $- 
 $- 
Tax Fees (3)
 $- 
 $- 
All Other Fees (4)
 $- 
 $- 
Total
 $165,500 
 $101,000 
 
The following table presents fees for professional services billed by Squar Milner for the fiscal years ended December 31, 2016 and 2015.
(1)Audit services in 2019 and 2018 consisted of the audit of our annual consolidated financial statements, and other services related to filings and filed by us and our subsidiaries, and other pertinent matters. Squar Milner has served as our independent registered public accounting firm since 2012.
(2)Audit-related fees consisted of travel costs related to our annual audit.
(3)For permissible professional services related to income tax return preparation and compliance.
 
 
 
For the years ended
December 31,
 
 
 
2016
 
 
2015
 
Audit fees
 $68,265 
 $61,900 
Tax fees
  - 
  - 
All other fees (consent fees)
  - 
  16,300 
Total
 $68,625 
 $78,200 

 
 
-34--53-

PART IV
 
ITEMITEM 15. EXHIBITSEXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
 
Exhibit No Description
2.1
 Agreement and Plan of Merger among Bazi International, Inc., Bazi Acquisition Sub, Inc., GT Beverage Company, Inc. and MKM Capital Advisors, LLC dated as of June 7, 2012, incorporated herein by reference from Exhibit 2.1 to the Current Report on Form 8-K filed on June 21, 2012.
3.1
 Articles of Incorporation, incorporated herein by reference from Exhibit 3.01 to Form SB-2 filed on February 27, 2001.
3.1.1
 Certification of Amendment to the Articles of Incorporation incorporated herein by reference tofrom Exhibit 3.1.1 filed withto Form 10-QSB filed on November 14, 2003.
3.1.2
Amended and Restated Articles of Incorporation of Charlie’s Holdings, Inc., incorporated by reference from Exhibit 3.1 to the Current Report on Form 8-K filed July 2, 2019.
3.2
 Amended and Restated By-laws, filed withincorporated herein by reference from Exhibit 3.2 to Form 10-KSB filed on March 3, 2005, as Exhibit 3.2, and incorporated herein by reference.2005.
3.3
 Amendment to the Amended and Restated Bylaws of Bazi International, Inc., incorporated herein by reference from Exhibit 3.1 to the Current Report on Form 8-K filed on October 17, 2012.
3.3
 Amended and Restated Articles of Incorporation filed withincorporated herein by reference from Exhibit 3.1 to the Current Report on Form 8-K filed on August 2, 2010 as Exhibit 3.1, and incorporated herein by reference.2010.
3.4
 Certification of Amendment to the Article of Incorporation withincorporated herein by reference from Exhibit 3.1 to the Current Report on Form 8-K on filed May 20, 2011 as Exhibit 3.1, and incorporated herein by reference.2011.
3.5
 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.
3.6
 Certificate of Amendment to the Articles of Incorporation of True Drinks Holdings, Inc., dated February 6, 2014, incorporated herein by reference from Exhibit 3.1 to the Current Report on Form 8-K filed on February 6, 2014.
3.7
 Certificate of Amendment to the Articles of Incorporation of True Drinks Holdings, Inc., dated June 10, 2015, incorporated herein by reference from Exhibit 3.1 to the Current Report on Form 8-K filed on June 25, 2015.
3.8
 Amended and Restated By-laws, filed withincorporated herein by reference from Exhibit 3.2 to the Quarterly Report on Form 10-Q filed on August 13, 2015, as Exhibit 3.2, and incorporated herein by reference.2015.
3.9
 Certificate of Amendment to the Articles of Incorporation of True Drinks Holding, Inc. dated December 30, 2015, incorporated herein by reference from Exhibit 3.1 to the Current Report on Form 8-K, filefiled on January 7, 2016.
3.10
Certificate of Amendment of the Articles of Incorporation of True Drinks Holding, Inc. dated November 13, 2018, incorporated herein by reference from Exhibit 3.1 to the Quarterly Report on Form 10-Q filed on November 20, 2018.
3.11
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.
4.1
 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.
4.2
 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.
4.3
 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.
4.4
 
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.
-54-
4.5
 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.
4.6
 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, 20152015.
4.7
 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, 20152015.
4.8
 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, 20152015.
-35-
4.8 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.
4.9
 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, 20172017.
4.10
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.
4.11
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.
4.12
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.
4.13
Certificate of Withdrawal of the Series B Convertible Preferred Stock, dated April 26, 2019, incorporated by reference to Exhibit 3.4 to the Current Report on Form 8-K, filed April 30, 2019.
4.14
Certificate of Withdrawal of the Series C Convertible Preferred Stock, dated April 26, 2019, incorporated by reference to Exhibit 3.5 to the Current Report on Form 8-K, filed April 30, 2019.
4.15
Certificate of Withdrawal of the Series D Convertible Preferred Stock, dated April 26, 2019, incorporated by reference to Exhibit 3.6 to the Current Report on Form 8-K, filed April 30, 2019.
4.16
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.
4.17
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.
4.18
Form of Investor Warrant, dated April 26, 2019, incorporated by reference to Exhibit 3.8 to the Current Report on Form 8-K, filed April 30, 2019.
10.1
 Employment agreement with Dan Kerker, incorporated by reference to Exhibit 10.4 filed with the Annual Report on Form 10-K, filed April 5, 2013.
10.2
 Employment agreement with Kevin Sherman, incorporated by reference from Exhibit 10.3 filed with the Annual Report on Form 10-K, filed March 31, 2014.
10.3
 Form of Securities Purchase Agreement, incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K, filed November 26, 2013.
10.4
 2013 Stock Incentive Plan, incorporated by reference from Exhibit 10.17 to the Annual Report on Form 10-K, filed March 31, 2014.
10.5
 Form of Securities Purchase Agreement, dated February 20, 2015, incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K, filed February 23, 2015.
10.6
 Form of Amendment No. 1 to Securities Purchase Agreement, dated March 27, 2015, incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed on April 1, 20152015.
-55-
10.7
 Form of Common Stock Purchase Warrant, dated February 20, 2015, incorporated by reference from Exhibit 10.2 to the Current Report on Form 8-K, filed February 23, 2015.
10.8
 Form of Registration Rights Agreement, dated February 20, 2015, incorporated by reference from Exhibit 10.3 to the Current Report on Form 8-K, filed February 23, 2015.
10.9
 Form of Indemnification Agreement, dated February 20, 2015, incorporated by reference from Exhibit 10.4 to the Current Report on Form 8-K, filed February 23, 2015.
10.10
 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, 20152015.
10.11
 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, 20152015.
10.12
 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, 20152015.
10.13
 Form of Registration Rights Agreement, dated August 13, 2015, incorporated by reference from Exhibit 10.3 to the Current Report on Form 8-K, filed August 18, 20152015.
10.14
 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, 20152015.
10.15
 Form of Warrant, incorporated by reference from Exhibit 10.2 to the Current Report on Form 8-K, filed September 11, 20152015.
10.16
 Employment Agreement, by and between the Company and Robert Van Boerum, dated September 9, 2015, incorporated by reference from Exhibit 10.3 to the Current Report on Form 8-K, filed September 11, 20152015.
10.17
 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, 20152015.
10.18
 Personal Guaranty Warrant, dated October 9, 2015, incorporated by reference from Exhibit 10.3 to the Current Report on Form 8-K, filed October 27, 20152015.
10.19
 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, 20152015.
10.20
 Amendment No. 1 to Registration Rights Agreement, dated October 16, 2015, incorporated by reference from Exhibit 10.5 to the Current Report on Form 8-K, filed October 27, 20152015.
10.21
 Form of Securities Purchase Agreement, incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K, filed December 1, 20152015.
10.22
 Form of Warrant, incorporated by reference from Exhibit 10.2 to the Current Report on Form 8-K, filed December 1, 20152015.
10.23
 Form of Registration Rights Agreement, incorporated by reference from Exhibit 10.3 to the Current Report on Form 8-K, filed December 1, 20152015.
-36-
10.24 Employment Agreement, by and between True Drinks Holdings, Inc. and Kevin Sherman, dated November 25, 2015, incorporated by reference from Exhibit 10.4 to the Current Report on Form 8-K, filed December 1, 20152015.
10.25
 Form of Note Exchange Agreement, incorporated by reference to the Annual Report on Form 10-K, filed herewith.March 31, 2017.
10.26
 Form of Securities Purchase Agreement, incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K, filed April 19, 2016.
10.27
 Form of Warrant, incorporated by reference from Exhibit 10.2 to the Current Report on Form 8-K, filed April 19, 2016.
10.28
Debt Conversion Agreement by and between True Drinks Holdings, Inc. and Red Beard, LLC, dated April 26, 2019, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed April 30, 2019.
10.29
 Form of Amendment No. 1Exchange Agreement, dated April 26, 2019, incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed April 30, 2019.
10.30
Form of Registration Rights Agreement, dated April 26, 2019, incorporated by reference fromto Exhibit 10.3 to the Current Report on Form 8-K, filed April 19, 2016.30, 2019.
10.29
10.31
 Form of Amendment No.1 toEngagement Letter by and between True Drinks Holdings, Inc., Charlie’s Chalk Dust LLC and Katalyst Securities Purchase Agreement,LLC, dated July 14, 2016,February 15, 2019, incorporated by reference fromto Exhibit 10.4 to the Current Report on Form 8-K, filed April 30, 2019.
10.32
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.
-56-
10.33
Subscription Agreement, dated April 26, 2019, incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K, filed April 30, 2019.
10.34
Employment Agreement by and between True Drinks Holdings, Inc. and Brandon Stump, dated April 26, 2019, incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K, filed April 30, 2019.
10.35
Employment Agreement by and between True Drinks Holdings, Inc. and Ryan Stump, dated April 26, 2019, incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K, filed April 30, 2019.
10.36
License Agreement by and between the Company and Don Polly, LLC, dated June 5, 2019, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed July 20, 2016.June 11, 2019.
10.30
10.37
 Form of Securities PurchaseServices Agreement by and between the Company and Don Polly, LLC, dated June 5, 2019, incorporated by reference fromto Exhibit 10.2 to the Current Report on Form 8-K, filed June 11, 2019.
10.38
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 February 15, 2017.November 22, 2019.
10.3110.39
 Form of Warrant, incorporatedPromissory Note issued to Red Beard Holdings, LLC dated April 8, 2020 (incorporated by reference fromto Exhibit 10.210.1 filed with Form 8-K on April 14, 2020).
10.40
Security Agreement by and among the Company and Red Beard Holdings, LLC dated April 8, 2020 (incorporated by reference to the Current ReportExhibit 10.2 on Form 8-K filed February 15, 2017.on April 14, 2020).
10.32Form of Warrant Exchange Agreement, incorporated by reference from Exhibit 10.3 to the Current Report on Form 8-K, filed February 15, 2017.
14.1
 Code of Ethics filed with Form 10-K on March 31, 2011 and incorporated herein by reference.
14.2
 Board Charter filed with Form 10-K on March 31, 2011 and incorporated herein by reference.
21.1
 Subsidiaries of True Drinks Holdings, Inc., incorporated by reference from Exhibit 21.1 to the Annual Report on Form 10-K, filed April 2, 20152015.
23.1
Consent of Squar Milner LLP, dated June 26, 2018, filed herewith.
31.1
 Certification of CEOPrincipal Executive Officer as Required by Rule 13a-14(a)/15d-14, filed herewith.
31.2
 
Certification of CFOPrincipal Financial Officer as Required by Rule 13a-14(a)/15d-14, filed herewith.
32.1
 Certification of CEOPrincipal Executive Officer as Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code, filed herewith.
32.2
 
Certification of CFOPrincipal Financial Officer as Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code, filed herewith.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation Linkbase
101.DEF XBRL Taxonomy Extension Definition Linkbase
101.LAB XBRL Taxonomy Extension Label Linkbase
101.PRE XBRL Taxonomy Extension Presentation Linkbase
 
ITEM 16. FORM 10-K SUMMARY
None.

 
 
-37--57-

SIGNATURESSIGNATURES
 
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.
 
Registrant
Date: March 31, 2017
April 14, 2020		CHARLIE’S HOLDINGS, INC.  
By:/s/ Brandon Stump
 
True Drinks Holdings, Inc.Brandon Stump
Chief Executive Officer and Chair of the Board
/s/ Kevin Sherman(Principal Executive Officer)
  Kevin Sherman
  Chief Executive Officer (Principal Executive Officer), Chief Marketing Officer, Director
Date: March 31, 2017
/s/ Daniel KerkerDavid Allen
  Daniel Kerker
David Allen
Chief Financial Officer
(Principal Financial and Accounting Officer)
  Chief Financial Officer (Principal Financial Officer)
 
In accordance with the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
 
Date: March 31, 2017
Signature
 /s/ Kevin Sherman
Title
 Kevin Sherman
Date
/s/ Brandon Stump
Brandon Stump
 
Chief Executive Officer Chief Marketing Officer,and Director
Date: March 31, 2017(Principal Executive Officer) /s/ Ramona Cappello
Ramona Cappello
Chair
April 14, 2020
   
Date: March 31, 2017/s/ Scot Cohen
  Scot Cohen
/s/ David Allen
David Allen
 Director
Chief Financial Officer and Secretary
(Principal Financial Officer and Principal Accounting Officer)
April 14, 2020
   
Date: March 31, 2017
/s/ Ryan Stump
Ryan Stump
 /s/ Neil LeVeckeChief Operating Officer and Director
April 14, 2020
  Neil LeVecke
/s/ Scot Cohen
Scot Cohen
Director
April 14, 2020
  
/s/ Jeffrey Fox
Jeffrey Fox
Director
April 14, 2020
/s/ Keith Stump
Keith Stump
Director
April 14, 2020

 
 
 
REPORTREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors
Charlie’s Holding, Inc. and Shareholders
True Drinks Holdings, Inc.
Irvine, CASubsidiaries
 
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of True DrinksCharlie’s Holdings, Inc. and subsidiaries (the “Company”)Company) as of December 31, 20162019 and 2015, and2018, the related consolidated statements of operations, stockholders'changes in stockholders’ equity (deficit) and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Going Concern Uncertainty
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company operates in a rapidly changing legal and regulatory environment; new laws and regulations or changes to existing laws and regulations could significantly limit the Company’s ability to sell its products, and/or result in additional costs. Additionally, the Company is required to apply for FDA approval to continue selling and marketing its products used for the vaporization of nicotine in the United States. There is significant cost associated with the application process and there can be no assurance the FDA will approve the application(s). In addition, the recent outbreak of Coronavirus in March 2020 has had a negative impact on the global economy and markets which could impact the Company’s supply chain and/or sales. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on thesethe 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 Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.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. OurAs part of our audits included considerationwe are required to obtain an understanding of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes
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 supportingregarding the amounts and disclosures in the financial statements, assessingstatements. 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 statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of True Drinks Holdings, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Reverse Recapitalization
 
AsA discussed in Note 1 to the accompanying consolidated financial statements, have been prepared assuming thaton April 26, 2019, the Company will continueentered into a securities exchange agreement with the former members of Charlie’s Chalk Dust, LLC (“CCD”) (a predecessor entity) and changed its name to Charlie’s Holdings, Inc. Such agreement was accounted for as a going concern. Asreverse recapitalization, and, accordingly, the historical financial statements of and for the year ended December 31, 2016, the Company incurred a net lossreflect those of $5,445,562, has negative working capital of $6,162,213, and an accumulated deficit of $35,794,206. A significant amount of additional capital will be necessary to advance the marketability of the Company's productsCCD prior to the point at whichsecurities exchange agreement, and the Company can sustain operations. These conditions, among others, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding these matters are also described in Note 1. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.combined company for all periods following such agreement.
 
/s/ Squar Milner LLP
 
March 31, 2017
Newport Beach, CaliforniaWe have served as the Company’s auditor since 2018.
 
Irvine, California
F-1
Table of ContentsApril 14, 2020
 

 
TRUE DRINKS

CHARLIE’S HOLDINGS, INC.
CONSOLIDATED BALANCEBALANCE SHEETS
December 31, 2016(in thousands, except share and 2015per share amounts)
 
 
 
2016
 
 
2015
 
ASSETS
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
Cash and cash equivalents
 $15,306 
 $376,840 
Accounts receivable, net
  536,817 
  1,843,415 
Inventory, net
  318,912 
  1,558,719 
Prepaid expenses and other current assets
  127,258 
  75,923 
Total Current Assets
  998,293 
  3,854,897 
 
    
    
Restricted Cash
  209,570 
  209,360 
Property and Equipment, net
  11,064 
  4,530 
Patents, net
  250,000 
  1,070,588 
Goodwill
  3,474,502 
  3,474,502 
Total Assets
 $4,943,429 
 $8,613,877 
 
    
    
LIABILITIES AND STOCKHOLDERS’ DEFICIT
    
    
 
    
    
Current Liabilities:
    
    
Accounts payable and accrued expenses
 $1,258,252 
 $1,623,046 
Debt
  109,682 
  1,336,819 
Derivative liabilities
  5,792,572 
  6,199,021 
Total Current Liabilities
  7,160,506 
  9,158,886 
 
    
    
Commitments and Contingencies (Note 7)
    
    
 
    
    
Stockholders’ Deficit:
    
    
Common Stock, $0.001 par value, 300,000,000 and 120,000,000 shares authorized, 119,402,009 and 111,434,284 shares issued and outstanding at December 31, 2016 and December 31, 2015, respectively
  119,402 
  111,434 
Preferred Stock – Series B (liquidation preference of $4 per share), $0.001 par value, 2,750,000 shares authorized, 1,292,870 and 1,317,870 shares issued and outstanding at December 31, 2016 and December 31, 2015, respectively
  1,293 
  1,318 
Preferred Stock – Series C (liquidation preference $100 per share), $0.001 par value, 200,000 and 150,000 shares authorized, 109,352 and 48,853 shares issued and outstanding at December 31, 2016 and December 31, 2015, respectively
  109 
  49 
Additional paid in capital
  33,456,325 
  29,690,834 
Accumulated deficit
  (35,794,206)
  (30,348,644)
 
    
    
Total Stockholders’ Deficit
  (2,217,077)
  (545,009)
 
    
    
Total Liabilities and Stockholders’ Deficit
 $4,943,429 
 $8,613,877 
 
 
December 31,
 
 
December 31,
 
 
 
2019
 
 
2018
 
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash
 $2,448 
 $304 
Accounts receivable, net
  918 
  711 
Inventories, net
  1,516 
  658 
Prepaid expenses and other current assets
  729 
  427 
Total current assets
  5,611 
  2,100 
 
    
    
Non-current assets:
    
    
Property, plant and equipment, net
  543 
  45 
Right-of-use asset, net
  1,623 
  - 
Other assets
  71 
  42 
Total non-current assets
  2,237 
  87 
 
    
    
TOTAL ASSETS
 $7,848 
 $2,187 
 
    
    
 
    
    
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
    
    
Current liabilities:
    
    
Accounts payable and accrued expenses
 $2,516 
 $1,216 
Derivative liability
  4,144 
  - 
Lease liabilities
  426 
  - 
Deferred revenue
  91 
  180 
Total current liabilities
  7,177 
  1,396 
 
    
    
Non-current liabilities:
    
    
Lease liabilities, net of current portion
  1,218 
  - 
Total non-current liabilities
  1,218 
  - 
 
    
    
Total liabilities
  8,395 
  1,396 
 
    
    
COMMITMENTS AND CONTINGENCIES (see Note 12)
    
    
 
    
    
Stockholders' equity (deficit):
    
    
Convertible preferred stock ($0.001 par value); 1,800,000 shares authorized
    
    
Series A, 300,000 shares designated, 204,561 and 0 shares issued and outstanding as of December 31, 2019 and 2018, respectively
  - 
  - 
Series B, 1.5 million shares designated, 0 and 1.4 million shares issued and outstanding as of December 31, 2019 and 2018, respectively
  - 
  1 
Common stock ($0.001 par value); 50 billion shares authorized; 18.974 billion shares and 141 million shares issued and outstanding as of December 31, 2019 and 2018, respectively
  18,974 
  141 
Additional paid-in capital
  (17,045)
  - 
Retained earnings (accumulated deficit)
  (2,476)
  649 
Total stockholders' equity (deficit)
  (547)
  791 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 $7,848 
 $2,187 
The accompanying notes are an integral part of these consolidated financial statements.



CHARLIE’S HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
  (in thousands, except share and per share amounts)
 
 
For the years ended
 
 
 
December 31,   
 
 
 
2019
 
 
2018
 
Revenues:
 
 
 
 
 
 
Product revenue, net
 $22,740 
 $20,841 
Total revenues
  22,740 
  20,841 
Operating costs and expenses:
    
    
Cost of goods sold - product revenue
  10,071 
  8,515 
General and administrative
  15,017 
  3,158 
Sales and marketing
  2,314 
  1,968 
Research and development
  1,102 
  - 
Total operating costs and expenses
  28,504 
  13,641 
(Loss) income from operations
  (5,764)
  7,200 
Other income:
    
    
Change in fair value of derivative liabilities
  3,618 
  - 
Total other income
  3,618 
  - 
Net (loss) income
  (2,146)
  7,200 
Deemed dividend on Series A preferred stock
  (1,650)
  - 
Net (loss) earnings applicable to common stockholders
 $(3,796)
 $7,200 
 
    
    
 
Net (loss) earnings per share applicable to common stockholders
 
Basic
 $(0.00)
 $0.05 
Diluted
 $(0.00)
 $0.00 
Weighted average shares used in computing basic earnings per share
  10,648,129,286 
  141,040,886 
Weighted average shares used in computing diluted earnings per share
  10,648,129,286 
  14,104,089,886 
 
The accompanying notes are an integral part of these consolidated financial statements.
  
F-2
 
CHARLIE’S HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands)
 
TRUE DRINKS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2016 and 2015
 
 
Series A   
 
 
Series B  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Total Stockholders'
 
 
 
Convertible Preferred Stock
 
 
Convertible Preferred Stock
 
 
Common Stock
 
 
 
 
 
Additional
 
 
Retained
 
 
  Equity
 
 
 
 Shares
 
 
 Par value
 
 
 Shares
 
 
 Par value
 
 
 Shares
 
 
 Par value
 
 
Paid-in Capital
 
 
Earnings
 
 
 (Deficit)
 
Balance at January 1, 2018
  - 
 $- 
  1,396 
 $1 
  141,041 
 $141 
 $- 
 $1,401 
 $1,543 
 Cash distributions to CCD Members
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (7,952)
  (7,952)
 Net income
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  7,200 
  7,200 
Balance at December 31, 2018
  - 
  - 
  1,396 
  1 
  141,041 
  141 
  - 
  649 
  791 
 Effect of reverse merger 
  - 
  - 
  - 
  - 
  2,377,530 
  2,378 
  (2,378)
  - 
  - 
 Conversion of Series A convertible preferred stock
  (2)
  - 
  - 
  - 
  38,081 
  38 
  (38)
  - 
  - 
 Conversion of Series B convertible preferred stock
  - 
  - 
  (1,396)
  (1)
  13,963,048 
  13,963 
  (13,962)
  - 
  - 
 Issuance of preferred stock, common stock and warrants in a private offering, net of $7,762 warrant liability
  206 
  - 
  - 
  - 
  1,551,466 
  1,551 
  18,186 
  - 
  19,737 
 Offering cost related to private offering
  - 
  - 
  - 
  - 
  - 
  - 
  (4,339)
  - 
  (4,339)
 Cash distributions to CCD Members
  - 
  - 
  - 
  - 
  - 
  - 
  (17,430)
  (979)
  (18,409)
 Stock compensation
  - 
  - 
  - 
  - 
  902,662 
  903 
  2,916 
  - 
  3,819 
 Net income
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (2,146)
  (2,146)
Balance at December 31, 2019
  204 
 $- 
  - 
 $- 
  18,973,828 
 $18,974 
 $(17,045)
 $(2,476)
 $(547)
 
 
 
2016
 
 
2015
 
Net Sales
 $2,575,448 
 $6,121,097 
 
    
    
Cost of Sales
  2,253,585 
  6,282,087 
 
    
    
Gross Profit (Loss)
  321,863 
  (160,990)
 
    
    
Operating Expenses
    
    
Selling and marketing
  3,782,941 
  5,073,211 
General and administrative
  4,825,017 
  5,475,673 
Total operating expenses
  8,607,958 
  10,548,884 
 
    
    
Operating Loss
  (8,286,095)
  (10,709,874)
 
    
    
Other Income (Expense)
    
    
Change in fair value of derivative liabilities
  3,566,170 
  1,262,329 
Interest expense
  (39,789)
  (257,389)
Other expense
  (685,848)
  (2,285,629)
 
  2,840,533 
  (1,280,689)
 
    
    
Net Loss
 $(5,445,562)
 $(11,990,563)
 
    
    
Dividends on Preferred Stock
 $263,588 
 $271,838 
 
    
    
Net loss attributable to common stockholders
 $(5,709,150)
 $(12,262,401)
 
    
    
Net loss per common share
    
    
        Basic and diluted
 $(0.05)
 $(0.16)
 
    
    
Weighted average common shares
    
    
        outstanding, basic and diluted
  115,292,366 
  75,346,961 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
TRUE DRINKSCHARLIE’S HOLDINGS, INC.
CONSOLIDATED STATEMENTSTATEMENTS OF CASH FLOWS
STOCKHOLDERS’ EQUITY (DEFICIT)
For the Years Ended December 31, 2016 and 2015(in thousands)
 
 
 Common Stock
 
 
Preferred Stock Series B
 
 
Preferred Stock Series C
 
 Additional Paid-In
 
 Accumulated 
 Total Stockholders' Equity
 
 
 Shares 
 Amount 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Deficit
 
 
(Deficit)
 
Balance –
December 31, 2014
  48,622,675 
 $48,623 
  1,490,995 
 $1,491 
  - 
 $- 
 $18,388,212 
 $(18,358,081)
 $80,245 
Conversion of Preferred Stock to Common Stock
  55,947,335 
  55,947 
  (173,125)
  (173)
  (79,766)
  (79) 
  (55,695)
  - 
  - 
Issuance of Preferred Stock Series C for debt conversions, net of warrants issued
  - 
  - 
  - 
  - 
  12,148 
  12 
  835,514 
  - 
  835,526 
Issuance of Common Stock for services
  2,413,811 
  2,414 
  - 
  - 
  - 
  - 
  485,412 
  - 
  487,826 
Issuance of Preferred Stock Series C for cash, net of warrants issued
  - 
  - 
  - 
  - 
  116,471 
  116 
  8,750,478 
  - 
  8,750,594 
Stock-based compensation
  - 
  - 
  - 
  - 
  - 
  - 
  1,055,448 
  - 
  1,055,448 
Dividends declared on Preferred Stock
  - 
  - 
  - 
  - 
  - 
  - 
  (271,838)
  - 
  (271,838)
Issuance of Common Stock for Employee Bonuses
  2,187,818 
  2,188 
  - 
  - 
  - 
  - 
  216,594 
  - 
  218,782 
Issuance of Common Stock for dividends on Preferred Stock
  1,512,645 
  1,512 
  - 
  - 
  - 
  - 
  287,459 
  - 
  288,971 
Issuance of Restricted Common Stock to Employees
  750,000 
  750 
  - 
  - 
  - 
  - 
  (750)
  - 
  - 
Net Loss
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (11,990,563)
  (11,990,563)
Balance – December 31, 2015
  111,434,284 
 $111,434 
  1,317,870 
  1,318 
  48,853 
 $49 
 $29,690,834 
 $(30,348,644)
 $(545,009)
Conversion of Preferred Stock to Common Stock
  3,009,335 
  3,009 
  (25,000)
  (25)
  (3,914)
  (4) 
  (2,980)
  - 
  - 
Issuance of Preferred Stock Series C for debt conversions, net of warrants issued
  - 
  - 
  - 
  - 
  4,413 
  4 
  407,228 
  - 
  407,232 
Issuance of Common Stock for services
  200,000 
  200 
  - 
  - 
  - 
  - 
  17,800 
    
  18,000 
Issuance of Preferred Stock Series C for cash, net of warrants issued
  - 
  - 
  - 
  - 
  60,000 
  60 
  2,932,987 
  - 
  2,933,047 
Stock-based compensation
  - 
  - 
  - 
  - 
  - 
  - 
  370,695 
  - 
  370,695 
Dividends declared on Preferred Stock
  - 
  - 
  - 
  - 
  - 
  - 
  (265,009)
  - 
  (265,009)
Issuance of Common Stock for cash exercise of warrants
  300,000 
  300 
  - 
  - 
  - 
  - 
  44,700 
  - 
  45,000 
Issuance of Common Stock for dividends on Preferred Stock
  1,838,390 
  1,839 
  - 
  - 
  - 
    
  262,690 
  - 
  264,529 
Issuance of Restricted Common Stock to Employees
  2,620,000 
  2,620 
    
    
  - 
  - 
  (2,620)
  - 
  - 
Net Loss
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (5,445,562)
  (5,445,562)
Balance – December 31, 2016
  119,402,009 
 $119,402 
  1,292,870 
 $1,293 
  109,352 
 $109 
 $33,456,325 
 $(35,794,206)
 $(2,217,077)
 
 
For the years ended
 
 
 
December 31,
 
 
 
2019
 
 
2018
 
Cash Flows from Operating Activities:
 
 
 
 
 
 
Net (loss) income
 $(2,146)
 $7,200 
Reconciliation of net (loss) income to net cash (used in) provided by operating activities:
    
    
Bad debt expense
  573 
  93 
Depreciation and amortization
  73 
  18 
Change in fair value of derivative liabilities
  (3,618)
  - 
Amortization of operating lease right-of-use asset
  190 
  - 
Stock based compensation
  3,819 
  - 
Subtotal of non-cash charges
  1,037 
  111 
Changes in operating assets and liabilities:
    
    
Accounts receivable
  (780)
  129 
Inventories
  (858)
  (291)
Prepaid expenses and other current assets
  (302)
  14 
Other assets
  (29)
  (5)
Accounts payable and accrued expenses
  1,300 
  394 
Deferred revenue
  (89)
  65 
Lease liabilities
  (169)
  - 
Net cash (used in) provided by operating activities
  (2,036)
  7,617 
Cash Flows from Investing Activities:
    
    
Purchase of property, plant and equipment
  (571)
  (16)
Net cash used in investing activities
  (571)
  (16)
Cash Flows from Financing Activities:
    
    
Proceeds from issuance of common stock and warrants in a private offering, net
  23,160 
  - 
Cash distributions to CCD Members
  (18,409)
  (7,952)
Net cash provided by (used in) financing activities
  4,751 
  (7,952)
Net increase (decrease) in cash
  2,144 
  (351)
 
    
    
Cash, beginning of the year
  304 
  655 
Cash, end of the year
 $2,448 
 $304 
 
    
    
Supplemental disclosure of cash flow information
    
    
Cash paid for interest
 $- 
 $- 
Cash paid for income taxes
 $- 
 $- 
 
    
    
Supplemental disclosure of cash flow information
    
    
Effect of reverse merger 
 $2,378 
 $- 
Conversion of Series B convertible preferred stock
 $13,963 
 $- 
TRUE DRINKS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2016 and 2015
 
 
2016
 
 
2015
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
 
 
Net loss
 $(5,445,562)
 $(11,990,563)
Adjustments to reconcile net loss to net cash used in operating activities
    
    
Depreciation
  5,241 
  3,087 
Amortization
  141,177 
  148,026 
Impairment of patent
  679,411 
  - 
Provision for bad debt expense
  8,029 
  (51,769)
Change in estimated fair value of derivative liabilities
  (3,566,170)
  (1,262,329)
Fair value of warrants issued for guaranty
  -
 
  2,263,783 
Fair value of stock issued for services
  18,000 
  487,826 
Fair value of stock issued for bonuses
  - 
  218,782 
Stock based compensation
  370,695 
  1,055,448 
Changes in operating assets and liabilities:
    
    
Accounts receivable, net
  1,298,569 
  (1,447,937)
Inventory
  1,239,807 
  (195,276)
Prepaid expenses and other current assets
  (51,335)
  552,752 
Accounts payable and accrued expenses
  (365,274)
  (214,899)
Net cash used in operating activities
  (5,667,412)
  (10,433,069)
 
    
    
CASH FLOWS FROM INVESTING ACTIVITIES:
    
    
Change in restricted cash
  (210)
  (76,162)
Purchase of property and equipment
  (11,775)
  (3,030)
Net cash used in investing activities
  (11,985)
  (79,192)
 
    
    
CASH FLOWS FROM FINANCING ACTIVITIES
    
    
Proceeds from warrants exercised for cash
  45,000 
  - 
Proceeds from issuance of Series C Preferred Stock, net
  6,000,000 
  11,999,958 
Net repayments on line-of –credit facility
  (377,137)
    
Proceeds from notes payable
  - 
  1,103,817 
Repayments on notes payable
  (350,000)
  (2,883,000)
Net cash provided by financing activities
  5,317,863 
  10,220,775 
 
    
    
NET DECREASE IN CASH
  (361,534)
  (291,486)
 
    
    
CASH AND CASH EQUIVALENTS – beginning of year
  376,840 
  668,326 
 
    
    
CASH AND CASH EQUIVALENTS – end of year
 $15,306 
 $376,840 
SUPPLEMENTAL DISCLOSURES
 
 
 
 
 
 
Cash paid for interest
 $41,758 
 $179,056 
Non-cash financing and investing activities:
    
    
Conversion of preferred stock to common stock
 $2,980 
 $55,695 
Conversion of notes payable and accrued interest to Series C preferred stock
 $500,000 
 $1,214,207 
Dividends paid in common stock
 $264,529 
 $288,971 
Dividends declared but unpaid
 $265,099 
 $271,838 
Warrants issued in connection with Series C offering
 $3,066,953 
 $3,249,364 
Warrants issued in connection with debt conversions
 $92,768
 
 $378,681 
Issuance of restricted stock
 $2,620 
 $-
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
TRUE DRINKSCHARLIE’S HOLDINGS, INC.
NOTESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
NOTE 1 – ORGANIZATIONDESCRIPTION OF THE BUSINESS AND SUMMARYBASIS OF SIGNIFICANT ACCOUNTING POLICIESPRESENTATION
 
OverviewDescription 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. 
 
True Drinks Holdings, Inc. (the “Company”, “us” or “In addition to Don Polly, we”) was incorporated in the state of Nevada in January 2001 and is are also the holding company for True Drinks, Inc.two wholly-owned subsidiaries, Charlie’s Chalk Dust, LLC (“True DrinksCharlie’s” or “CCD”), a beverage company incorporated in the state of Delaware in January 2012 that specializes in all-natural, vitamin-enhanced drinks. Our primary business is the development, marketing,which activity includes production and sale and distribution of our flagship product, AquaBall™ Naturally Flavored Water, a zero-sugar, zero-calorie, preservative-free, vitamin-enhanced, naturally flavored water drink. We distribute AquaBall™ nationally through select retail channels, such as grocery stores, mass merchandisers, drug storesbranded nicotine-based e-cigarette liquid, and online. We also market and distributeBazi, Inc., which activity includes sales of all-natural energy drink Bazi® All Natural Energy, a liquid nutritional supplement drink, which is currently distributed online and through our existing databaseEnergy. At this time, we do not intend to continue sales of customers.the Bazi product in its current form.
 
Our principal placeAcquisition of business is 18662 MacArthur Boulevard, Suite 110, Irvine, California, 92612. Our telephone number is (949) 203-2500. Our corporate website address is http://www.truedrinks.com. OurTrue Drinks Holdings, Inc.
On April 26, 2019 (the “Closing Date”), we entered into a Securities Exchange Agreement with each of the former members (“Members”) of Charlie’s, and certain direct investors in the Company (“Direct Investors”), pursuant to which we acquired all outstanding membership interests of Charlie’s beneficially owned by the Members in exchange for the issuance by the Company of units, with such units consisting of an aggregate of (i) 15,655,538,349 shares of common stock on an as-converted basis (which includes the issuance of an aggregate of 1,396,305 shares of a newly created class of Series B Convertible Preferred Stock, par value $0.001 per share (“Common StockSeries B Preferred”), is currently listed for quotation on the OTC Pink Marketplace under the symbol “TRUU".
Recent Developments
January Note Exchange.
On January 20, 2016, the Company and Note Investors holding Secured Notes in the principal amount of $500,000 entered into Note Exchange Agreements pursuant to which the Note Investors agreed to convert the outstanding principal balance of their Secured Notesconvertible into an aggregate total of 4,41313,963,047,716 shares of Series C Preferred and five-year warrantscommon stock, issued to purchase up to an aggregate totalcertain individuals in lieu of 1,029,701common stock); (ii) 206,249 shares of Common Stock for $0.17 per share.
Completion of April Series C Offering
On April 13, 2016, the Company and one of the Company’s current shareholders, Red Beard Holdings, LLC (“Red Beard”), entered into a Securities Purchase Agreement, as amended (the “AprilPurchase Agreement”), wherein Red Beard, together with any other signatories to the April Purchase Agreement (collectively, the “Purchasers”), agreed to purchase up to 50,000 sharesnewly created class of Series CA Convertible Preferred Stock, (“Series C Preferred”) for $100 per share over the course of three separate closings (the “AprilSeries C Offering”).
The Company issued an aggregate total of 25,000 shares of Series C Preferred on April 13, 2016, 10,000 shares of Series C Preferred on July 15, 2016 and, between August 31, 2016 and September 13, 2016, the Company issued an aggregate total of 25,000 shares of Series C Preferred. As additional consideration for participating in the April Series C Offering, the Purchasers received five-year warrants to purchase up to an aggregate total of approximately 33.3 million shares of the Company’s Common Stock for $0.15 per share.
Creation of Series D Convertible Preferred Stock
On January 24, 2017, the Company filed the Certificate of Designation, Preferences, Rights and Limitations of the Series D Convertible Preferred Stock (the “Certificate of Designation”) with the Nevada Secretary of State, designating 50,000 shares of the Company's preferred stock, par value $0.001 per share as (“Series D ConvertibleA Preferred Stock”), 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 “Series D PreferredInvestor Warrants”) (the “ShareExchange”). As a result of the Share Exchange, Charlie’s became a wholly owned subsidiary of the Company.
 
Each sharemembership interests that resulted in net proceeds to Charlie’s 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 Securities Exchange Act of 1934, as amendedapproximately $27.5 million (the “Exchange ActCharlie’s Financing”), commencing upon. Katalyst Securities LLC (“Katalyst”) acted as the distributionsole 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 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 of930,869,848 shares of the Company’s Common Stock equal to the stated value, divided by $0.15at a price of $0.0044313 per share (the “Conversion SharesPlacement Agent Warrants”). The Certificate of Designation also givesPlacement Agent Warrants have substantially the Company the option to require the conversion of the Series D Preferred into Conversion Sharessame terms as those set forth in the event: (i) there are sufficient authorized shares of Common Stock reserved as Conversion Shares; (ii) the Conversion Shares are registered under the Securities Act of 1933, as amended (the “Securities Act”), or the 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.Investor Warrants.
 
Series D OfferingThe Share Exchange resulted in a change of control of the Company, with the Members and Direct Investors owning approximately 86.1% of the Company’s outstanding voting securities immediately after the Share Exchange, and the Company’s current stockholders beneficially owning approximately 13.9% of the issued and outstanding voting securities, which includes the Advisory Shares. Following the Share Exchange, Ryan Stump and Brandon Stump, the founders of Charlie’s and the Company’s Chief Executive Officer and Chief Operating Officer, respectively, held in excess of 50% of the Company’s issued and outstanding voting securities.
 


On February 8, 2017 (the “The Share Exchange is accounted for as a reverse recapitalization in accordance with accounting principles generally accepted in the United States (“Initial Investment Date”), the Company and certain accredited investors (the “Series D InvestorsU.S. GAAP”) entered into a Securities Purchase Agreement (the “Series D Purchase Agreement”), whereinbecause the primary assets of the Company may offer and sell to Series D Investors up to 50,000 shares of Series D Preferred for $100 per share (the “Series D Offering”). As additional consideration, Series D Investors will also receive five-year warrants (the “Series D Warrants”), to purchase up to 200%were nominal at the consummation of the Conversion Shares issuableShare Exchange. Charlie’s was determined to be the accounting acquirer based upon conversionthe terms of the Share Exchange and other factors including: (i) Charlie’s stockholders and other persons holding securities convertible, exercisable or exchangeable directly or indirectly for Charlie’s membership units now own approximately 49%, on a fully diluted basis, of the Company’s outstanding securities immediately following the effective time of the Merger, (ii) individuals associated with Charlie’s now hold a majority of the seats on the Company’s Board of Directors and (iii) Charlie’s management holds all key positions in the management of the combined Company. Accordingly, the historical financial statements of True Drinks were replaced by the Company's historical financial statements including the comparative prior periods. All references in the consolidated financial statements to the number of shares and per-share amounts of Series D Preferred purchased undercommon stock have been retroactively restated to reflect the Series D Offering for $0.15 per share. In accordance with the terms and conditions of the Series D Purchase Agreement, all Series D Warrants issued in connection with the Series D Offering will be exchanged for shares of Common Stock pursuant to the Warrant Exchange Program, as further described below.exchange rate.
On the Initial Investment Date, the Company issued to Series D Investors an aggregate total of 31,750 shares of Series D Preferred, as well as Series D Warrants to purchase up to an aggregate total of 42,333,341 shares of Common Stock. Between the Initial Investment Date and the date of this Annual Report, the Company has issued an additional 5,000 shares of Series D Preferred and Series D Warrants to purchase up to an aggregate total of 6,666,669 shares of Common Stock. The issuance of the shares of Series D Preferred to date has resulted in gross proceeds to the Company of approximately $3.7 million.
Warrant Exchange
Beginning on February 8, 2017, the Company and certain holders of outstanding Common Stock purchase warrants (the “Outstanding Warrants”), entered into Warrant Exchange Agreements (each, an “Exchange Agreement”), 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”). The Company expects to issue up to 71.7 million shares of Common Stock in exchange for the cancellation of 143.4 million Outstanding Warrants, including the Warrants issued in connection with the Series D Offering, over the course of the Warrant Exchange Program.
To date the Company has issued 73,106,453 shares of Common Stock, in exchange for the cancellation of 146,212,905 Outstanding Warrants.
  
Basis of Presentation
The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Amounts related to disclosure of December 31, 2018 balances within the consolidated financial statements were derived from the audited 2018 financial statements and notes thereto of Charlie’s. The financial information contained in the consolidated financial statements and footnotes are based on Charlie’s historical financial statements and the Company’s financial activity beginning April 26, 2019, as adjusted, to give effect to Charlie’s reverse recapitalization of the Company and the Charlie’s Financing completed prior to the Share Exchange. In addition, from the period April 26, 2019 until December 31, 2019, there were minimal costs and revenue associated with the Bazi product line which are included in the interim condensed consolidated financial statements. As noted above, we do not intend to continue to produce and sell the Bazi product line in its current form, and these costs and expenses are nominal and will continue to be so in the future. The operating results of Don Polly are also included.
Historical financial information presented prior to April 26, 2019 is that of Charlie’s only, while financial information presented after April 26, 2019 includes Charlie’s, Don Polly, Bazi Drinks and the Company, which includes the transactions associated with the share exchange and private placement transaction along with ongoing corporate costs.
Going Concern Uncertainty Regarding the Legal and Regulatory Environment, Liquidity and Management’s plan of operation
          
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in conformity with accounting principles generally acceptedthe normal course of business. The Company operates in a rapidly changing legal and regulatory environment; new laws and regulations or changes to existing laws and regulations could significantly limit the Company’s ability to sell its products, and/or result in additional costs. Additionally, the Company is required to apply for FDA approval to continue selling and marketing its products used for the vaporization of nicotine in the United StatesStates. There is significant cost associated with the application process and there can be no assurance the FDA will approve the application(s). In addition, the recent outbreak of America,Coronavirus in March 2020 has had a negative impact on the global economy and markets which contemplates continuation ofcould impact the Company as a going concern.Company’s supply chain and/or sales. For the year ended December 31, 2016,2019 the Company has incurred losses from operations of $5,764,000 and a consolidated net loss of $5,445,562. At December 31, 2016,approximately $2,146,000 and the Company has negative working capitalstockholders’ equity of $6,162,213 and an accumulated deficit of $35,794,206. 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.$547,000. These conditions, among others,factors raise substantial doubt about the Company'sCompany’s ability to continue as a going concern. Management's plans are to continue to raise capital through equity and debt offerings, and to expand sales as rapidly as economically viable. The accompanying consolidated financial statements do not include any adjustments that might result fromto the outcomecarrying amount and classification of this uncertainty.recorded assets and liabilities should the Company be unable to continue operations.
 
Management's plans depend on its ability to increase revenues and continue its business development efforts, including the expenditure of approximately $4,400,000 to complete the PMTA registration process. The Company does not anticipate that its current cash position will be sufficient to meet its working capital requirements, to continue its sales and marketing efforts and complete the PMTA registration process. The Company is currently seeking term debt or other sources of financing in order to ensure that it have sufficient cash to operate for the next 12 months. If in the future the plans or assumptions change or prove to be inaccurate, or there is a significant change in the regulatory environment or the recent outbreak of Coronavirus continues to impact the global economy, the Company will need to raise additional funds through public or private debt or equity offerings, financings, corporate collaborations, or other means. There can be no assurance that such financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and in its best interests.

Risks and Uncertainties
 
F-7
TableThe 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 Contentsflavored e-cigarettes, and several states and municipalities are considering implementing similar restrictions. Federal, state, and local governmental bodies across the United States have indicated that flavored e-cigarette liquid, vaporization products and certain other consumption accessories may become subject to new laws and regulations at the federal, state and local levels. The application of any new laws or regulations that may be adopted in the future, at a federal, state, or local level, directly or indirectly implicating flavored e-cigarette liquid and products used for the vaporization of nicotine could significantly limit the Company’s ability to sell such products, result in additional compliance expenses, and/or require the Company to change its labeling and/or methods of distribution. Any ban of the sale of flavored e-cigarettes directly limits the markets in which the Company may sell its products. In the event the prevalence of such bans and/or changes in laws and regulations increase across the United States, or internationally, the Company’s business, results of operations and financial condition could be adversely impacted.In addition, the Company is presently in the process of submitting PMTA applications for some of its nicotine-based e-liquid products. The applications are due in May 2020, which if approved, will allow the Company to continue to sell its products in the United States. The Company is also seeking additional financing in order to complete the application process. There is no assurance that regulatory approval to sell our products will be granted or that we can raise the additional financing required, and if not, this could have a significant impact on our sales.
 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Principles of Consolidation
 
The accompanying condensed        As noted above, the consolidated financial statements include the accounts of the Company, andCharlie’s Holdings, Inc., its two 100% wholly owned subsidiaries, True Drinks,Charlie’s Chalk Dust, LLC and Bazi, Inc.Inc, and GT BeverageDon Polly, LLC, a consolidated variable interest for which the Company LLC.is the primary beneficiary (see Note 7). All inter-company accountsbalances and transactions have been eliminated in the preparation of these condensed consolidated financial statements.consolidation.
 


Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United StatesU.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 datedates of the financial statements and the reported amounts of revenues and expenses 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.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.
Revenue Recognition
 
InThe Company recognizes revenues in accordance with Staff Accounting Bulletin ("Standards Codification (“SABASC"”) No. 104 “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 Recognition in Financial Statements”, revenuefrom the sale of product is recognized at the point in time when the single performance obligation has been satisfied and control of shipment,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 customer takeslegal title and assumes risk of loss, collection of the relevant receivableproducts. 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 reasonably assured, persuasive evidencetherefore 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 arrangement existsadditional 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 fixedadjusted for estimates of known or determinable. Netexpected variable consideration, which includes refunds and returns as well as incentive offers and promotional discounts on current orders. Estimates for sales includereturns 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 products, slotting fees, discountssale and freightreduce revenue in the period of the sale. Variable consideration related to incentive offers and handling charges. With approved credit, we provide wholesale customers payment terms of up to net 30 days.Amounts received for unshipped merchandisepromotional programs are recorded as customer depositsa 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 includedclassified 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 accrued expenses.advance of revenue recognition are recorded as deferred revenue.
 


Cash and Cash Equivalents
 
The Company considers all highly liquid investments purchased with original maturities of three monthsninety days 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.
Restricted Cash
At December 31, 2016, the Company had $209,570 in restricted cash with a financial institution securing a letter of credit. The letter of credit matures in August 2017 and was issued as part of the contractual obligations related to the Disney Agreement, as more fully described in Note 9, “Licensing Agreements,” below.
 
Accounts Receivable
 
The Company records its trade accountsAccounts receivable is recorded at net realizable value. This value includes an appropriatethe invoiced amount and does not bear interest. We determine the allowance for estimated sales returnsdoubtful accounts by regularly evaluating individual customer receivables 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, theconsidering a customer’s financial condition, credit history 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 reserveconditions and set up an allowance for doubtful accounts when in management’s estimation, further collection efforts would not result in a reasonable likelihoodis uncertain. Customers’ accounts are written off against the allowance when all attempts to collect have been exhausted. Recoveries of receipt, or later as proscribed by statutory regulations.
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.
All production of AquaBall™ is done by Niagara through the Niagara Agreement. Niagara handles all aspects of production including the procurement of all raw materials necessary to produce AquaBall™. We utilize two facilities currently to handle any necessary repackaging of AquaBall into six packs or 15-packs for club customers.
During 2016, 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.
We did not have any significant concentrations in either sales or accounts receivable during the year endedpreviously written off are recorded as income when received. As of December 31, 2016, while one customer represented 79% of2019 and 2018, the Company’s accounts receivableallowance for bad debt totaled $639,000 and 47% of sales during the year ended December 31, 2015. No other customers exceeded 10% of the Company’s sales or accounts receivable during the year ended December 31, 2016 or 2015.
A significant portion of our revenue comes from sales of the AquaBall™ Naturally Flavored Water. For the year ended December 31, 2016 and 2015, sales of AquaBall™ accounted for 92% and 97% of the Company’s total revenue,$151,000, respectively.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash, accounts receivable, accounts payable and accrued expenses, 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.
Inventory
The Company purchases for resale a vitamin-enhanced flavored water beverage and a liquid dietary supplement.
 
Inventories
Inventories primarily consist of finished goods and are stated at the lower of cost (based on(determined by the first-in, first-outaverage cost method) or market (netnet realizable value). Cost includes shippingvalue. We calculate estimates of excess 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 ondetermined primarily by reviewing inventory on hand, historical sales activity, industry trends the retail environment, and the expected net realizable value.
The Company maintained inventory reserves of $110,000 and $0 as As of December 31, 20162019 and December 31, 2015,2018, the reserve for excess and obsolete inventories totaled $83,000 and $74,000, respectively. This 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. The prior formulation AquaBall is still being sold, but only to select accounts at a reduced price.
 
InventoryStock-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 comprisedestimated on the date of the following:
 
 
December 31,
 2016
 
 
December 31,
2015
 
Purchased materials
 $89,358 
 $689,703 
Finished goods
  339,554 
  869,016 
Allowance for obsolescence reserve
  (110,000)
  - 
Total
 $318,912 
 $1,558,719 
Property and Equipment
Property and equipment are stated at cost. The Company provides for depreciation of property and equipmentgrant using the straight-line method based on estimated useful lives of between threeBlack-Scholes option-pricing model and ten years. Property and equipmentthe related stock-based compensation expense is not significantrecognized over the vesting period during which an employee is required to the consolidated financial statements as of orprovide service in exchange for the years ended December 31, 2016 and 2015.
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 2016 or 2015.
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 ofaward. We measure the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree,liability-classified awards using a Monte Carlo valuation model. Compensation cost is recognized over the fair value of the net assets acquiredservice period 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 theremeasured at each reporting unit below its carrying value. Such impairment evaluations compare the reporting unit’s estimated fair value to its carrying value.
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 to future 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, the carrying 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 year ended December 31, 2016 we recognized impairment on identifiable intangible assets of $679,411 related to the interlocking spherical bottle patent acquired in the acquisition of GT Beverage Company, Inc. As of December 31, 2015, no impairment had been recognized on identifiable intangible assets.through settlement.
 
Income Taxestaxes
 
The Company accounts for incomeIncome taxes in accordance with FASB Accounting Standards Codification 740 (“ASC Topic 740”). Underare computed under the asset and liability method. This method requires the recognition of ASC Topic 740, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable totemporary differences between the financial statement carrying amountsreporting basis and the tax basis of existingour assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enactedliabilities. The impact on deferred taxes of changes in tax rates in effect forand laws, if any, are applied to the year inyears during which those temporary differences are expected to be recovered or settled.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.
 
Stock-Based Compensation
Total stock-based compensation expense, for all of the Company’s stock-based awards recognized for the year ended December 31, 2016 and 2015 was $370,695 and $1,055,448, 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 useFinancial statement effects of a valuation model requires the Company to make certain assumptions with respect to selected model inputs. Expected volatilitytax position are initially recognized when it is calculatedmore likely than not, based on the historical volatilitytechnical 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 Company’s stock price over the contractual termmore-likely-than-not threshold 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 issuesbeing realized upon ultimate settlement with a remaining term equaltaxing authority. We recognize potential accrued interest and penalties related 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 suchunrecognized tax benefits 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. The Company may engage in other similar complex debt transactions in the future, but not with the intention to enter into derivative instruments. 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. However, such new and/or complex instruments may have immature or limited markets. As a result, the pricing models used for valuation of derivatives often incorporate significant estimates and assumptions, which may impact the level of precision in the financial statements. Furthermore, depending on the terms of a derivative or embedded derivative, the valuation of derivatives may be removed from the financial statements upon conversion of the underlying instrument into some other security.
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.
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, 2016 and 2015, the Company had 198,957,185 and 120,573,694 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, 2016 and 2015, 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 Developmentincome tax expense.
 
Research and development
               We expense the cost of research and development as incurred.  Research and development expenses include costs incurred in funding research and development activities, license fees, and other external costs. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity is performed or when the goods have been received, rather than when payment is made.
Segments
Operating segments are identified as incurred.components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business in one operating segment.
The following tabledisaggregates revenue from our single operating segment by geographic market and customer type for the periods ending December 31, 2019 and 2018, respectively:

 
 
December 31,
2019
 
 
December 31,
2018
 
Geographic Market
 
 
 
 
 
 
International
  24.0%
  28.0%
United States
  76.0%
  72.0%
 
    
    
Customer Type
    
    
Retailers
  36.0%
  45.0%
Distributors
  64.0%
  55.0%
 
 
RecentRecently Issued Accounting Pronouncements
 
In May 2014, the FASB issued ASU No. 2014-09 “RevenueRevenue from Contracts with Customers,” which amended the FASBCustomer
The Financial Accounting Standards CodificationBoard (“ASCFASB”) and created a new Topic ASC 606, “Revenueissued Accounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers” (“Customers (Topic 606).ASC 606”). This amendment prescribes that an entity shouldThe 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 to 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 services.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 amendment supersedes the revenue recognition requirementsamendments in ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance throughout the Industry Topics of the Codification. For the Company’sthis update were effective for annual and interim reporting periods the mandatory adoption date of ASC 606 isbeginning after December 15, 2017.
The Company adopted this guidance on January 1, 2018 and there will be two methods of adoption allowed, either a full retrospective adoption or ausing the modified retrospective adoption. In August 2015,transition method. Prior periods were not adjusted and, based on the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09Company’s implementation assessment, no cumulative-effect adjustment was made to the first quarteropening balance of 2018. 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 March 2016, April 2016, May 2016, and DecemberFebruary 2016, the FASB issued ASU 2016-08,2016-02, 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 2016-10,2016-02 was effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption was 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 2016-12, and ASU 2016-20, respectively, as clarifications to ASU 2014-09. ASU 2016-08 clarifies how to identify the unit of accounting for the principal versus agent evaluation, how2018-11, Leases (Topic 842): Targeted Improvements, which provides entities an optional transition method to apply the control principle to certain typesguidance under Topic 842 as of arrangements, such as service transactions, and reframed the indicators in the guidance to focus on evidence that an entity is acting as a principaladoption date, rather than as an agent.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. 
Improvements to Non-Employee Share-Based Payment Accounting
In June 2018, the FASB issued ASU 2016-10 clarifies2018-07 “Improvements to Non-employee Share-Based Payment Accounting”, which simplifies the existingaccounting for share-based payments granted to non-employees for goods and services. Under the ASU, most of the guidance on identifying performance obligations and licensing implementation. ASU 2016-12 adds practical expedients relatedsuch payments to non-employees would be aligned with the transitionrequirements for contract modifications and further defines a completed contract, clarifies the objective of the collectability assessment and how revenue is recognized if collectability is not probable, and when non-cash considerations should be measured. ASU 2016-20 corrects or improves guidance in thirteen narrow focus aspects of the guidance.share-based payments granted to employees. The amendments are effective dates for these ASUs are the same as the effective date for ASU No. 2014-09, for the Company’s annualfiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning January 1, 2018. These ASU’s also require enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows. The Company will adopt the new revenue standards in its first quarter of 2018.after December 15, 2020. The Company has not selected a transition method. The Company is still completingearly adopted the assessment of the impact of these ASUs on its consolidated financial statements; however at the current time the Company does not expect thatnew standard effective January 1, 2019 and the adoption of these ASUs willthis standard did not have a material impact on itsthe Company’s condensed consolidated financial statements, financial condition or results of operations.statements.
 


Income Taxes
In July 2015,December 2019, the FASB issued ASU No. 2015-11, “Inventory2019-12, “Income Taxes (Topic 330)740): Simplifying the Measurement of Inventory”Accounting for Income Taxes (“ASU 2015-11”2019-12”)., which is intended to simplify various aspects related to accounting for income taxes. ASU 2015-11 requires that inventory within2019-12 removes certain exceptions to the scope of this standard be measured at the lower of costgeneral principles in Topic 740 and net realizable value. Net realizable valuealso clarifies and amends existing guidance to improve consistent application. This guidance is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this update do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. ASU 2015-11 will be effective for the Company’s annualfiscal years, and interim reporting periods within those fiscal years, beginning January 1, 2017,after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this ASU; however the Company does not expect that the adoption of ASU 2015-11 will have a material impactstandard on its consolidated financial statements financial condition or results of operations.and related disclosures.
  
On February 25, 2016,NOTE 3 – FAIR VALUE MEASUREMENTS
In accordance with ASC 820 (Fair Value Measurements and Disclosures), the FASB issued ASU 2016-2, "Leases" (Topic 842),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 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 liabilitiesare either directly or indirectly observable
Level 3 - Unobservable inputs for the rights to use those assets forinstrument requiring the lease term and obligations to make lease payments createddevelopment of assumptions by those leases that have terms of greater than 12 months. The recognition, measurement, and presentation of expenses 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 reporting periods within that year, and early adoption is permitted. Management has not yet determined the effect of this ASU on the Company's financial statements.
 
 
In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which simplifies the accounting for share-based payment transactions, including the income tax consequences, an option to recognize gross share-based compensation expense with actual forfeitures recognized as they occur, as well as certain classifications in the statement of cash flows. This guidance will be effective for fiscal years beginning after December 15, 2016, and early adoption is permitted. The Company is currently evaluating the effect this guidance will have on our financial statements and related disclosures.
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. ASU 2016-15 is effective forfollowing table classifies the Company’s annual and reporting periods beginning January 1, 2018. The Company is currently evaluatingliabilities measured at fair value on a recurring basis into the effect this guidance will have on our financial statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally describedfair value hierarchy as restricted cash or restricted cash equivalents. ASU 2016-18 will become effective for us beginning April 1, 2018, or fiscal 2019. ASU 2016-18 is required to be applied retrospectively. Upon the adoption, amounts described as restricted cash will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows.
NOTE 2 – STOCKHOLDERS’ 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 A Preferred. On January 18, 2013, upon the filing of the Amendment to the Articles of Incorporation, the Company converted 1,544,565 shares of Series A Preferred issued to former True Drinks shareholders into 25,304,017 shares of the Company’s Common Stock. In February 2015, the Company filed a Certificate of Elimination with the State of Nevada to eliminate the Series A Preferred Stock.
Series B Preferred. Each share of the Company’sSeries 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 was 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 BConversion 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, 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, 2016, the Company declared $263,588 in dividends on outstanding shares of its Series B Preferred. The Company issued a total of 1,838,390 shares of Common Stock to pay $264,529 of cumulative unpaid dividends. As of December 31, 2016, there remained $66,0802019 (amount in cumulative unpaid dividends on the Series B Preferred.thousands):
 
F-13
 
 Fair Value at December 31, 2019      
 
 
Total
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liability - Warrants
  4,144 
  - 
  - 
  4,144 
Total liabilities
 $4,144 
 $- 
 $- 
 $4,144 
 
Series C Preferred. Each share of Series C Preferred has a stated value of $100 per share, and is convertible, at the option of each respective holder, into that number of shares of Common Stock equal to $100, divided by $0.15 per share (the “Series CConversion 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 of 1933,There were no transfers between Level 1, 2 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 days.
Issuances
During 2015, the Company and certain accredited investors entered into securities purchase agreements to purchase up to 117,648 shares of Series C Preferred Stock. The Company issued an aggregate total of 116,471 shares of Series C Preferred during 2015 for prices ranging from $100 per share to $113.33 per share for a total gross proceeds of approximately $12 million. As additional consideration for participating in this offering, the purchasers were issued five-year warrants to purchase an aggregate total of 26,449,913 shares of Common Stock, exercisable at $0.15 per share. Each warrant contains a price-protection feature that adjusts the exercise price in the event of certain dilutive issuances of securities. Such price-protection feature is determined to be a derivative liability and, as such, the value of all such warrants issued, totaling $3,249,364, was recorded to derivative liabilities3 during the year ended December 31, 2015.2019.
 
On March 27, 2015, holders of outstanding notes totaling $1,147,000 and accrued interest totaling $67,207 agreed to exchange all remaining principal and accrued interest into shares of Series C Preferred on substantially similar terms to those offeredThe following table presents changes in the February 2015 offering of Series C Preferred. As a result of the execution of certain Exchange Agreements and the consummation of March Note Exchange, the Company issued an aggregate total of 12,148 shares of Series C Preferred and five-year warrants to purchase an aggregate total of 2,834,536 shares of Common StockLevel 3 liabilities measured at fair value for $0.15 per share. Each warrant issued in connection with the March Note Exchange contains a price-protection feature that adjusts the exercise price in the event of certain dilutive issuances of securities. Such price-protection feature results in the warrants being classified as a derivative liability and, as such, the value of all warrants issued in connection with the March Note Exchange, totaling $378,681, was recorded to derivative liabilities during the year ended December 31, 2015.
On October 9, 2015, the Company issued2019. Both observable and unobservable inputs were used to Vincent C. Smith a five-year warrant to purchase 17,500,000 shares of Common Stock for $0.188 per share as consideration for the execution of a personal guaranty of True Drinks’ obligations under the Niagara Agreement. The warrant contains a price-protection feature that adjusts the exercise price in the event of certain dilutive issuances of securities. Such price-protection feature is determined to be a derivative liability and, as such, the value of the warrant issued totaling $2,263,783, was recorded to derivative liabilities and is included in other expense in the accompanying consolidated statements of operations as of December 31, 2015.
During the year ended December 31, 2015, the Company issued 2,413,811 shares of Common Stock in connection with certain consulting agreements. The Company expenseddetermine the fair value of the Common Stock issued of $487,826.
On April 22, 2015,positions that the Company cancelled 2,593,912 options to certain former Directors ofhas classified within the Company. The Company replaced these stock optionsLevel 3 category. Unrealized gains and losses associated with 2,594,914 warrants, 1,120,478 of these warrants had an exercise price of $0.25 per share, and 1,474,436 ofliabilities within the warrants had an exercise price of $0.38 per share. The expiration date of 1,120,478 of the warrants is November 12, 2016, and the expiration date on 1,474,436 of the warrants is March 9, 2018.
On October 9, 2015, the Company issued five-year warrants for 884,209 shares at an exercise price of $0.19 per shareLevel 3 category include changes in exchange for services. The warrants vest over a 12-month period. As of December 31, 2015, 221,053 warrant shares had vested and $19,895 was expensed accordingly.
On November 25, 2015, the Company and certain accredited investors entered into securities purchase agreements to purchase up to 30,000 shares of Series C Preferred for $100 per share over the course of three separate closings. The Company issued an aggregate total of 10,000 shares of Series C Preferred and five-year warrants to purchase 2,333,333 shares of Common Stock, exercisable at $0.15 per share, on November 25, 2015, 10,000 shares of Series C Preferred and five-year warrants to purchase 2,333,333 shares of Common Stock, exercisable at $0.15 per share, on December 16, 2015, and 10,000 shares of Series C Preferred and five-year warrants to purchase 2,333,333 shares of Common Stock, exercisable at $0.15 per share, on January 19, 2016. Each warrant contains a price-protection feature that adjusts the exercise price in the event of certain dilutive issuances of securities. Such price-protection feature is determined to be a derivative liability and, as such, the value of all such warrants issued was recorded to derivative liabilities with $548,022 being recorded between November and December 2015, and $210,275 recorded in January 2016.
On January 20, 2016, the Company and holders of Secured Notes in the principal amount of $500,000 entered into Note Exchange Agreements, pursuant to which these holders exchanged the outstanding principal balance of their Secured Notes into an aggregate total of 4,413 shares of Series C Preferred and five-year warrants to purchase up to an aggregate total of 1,029,413 shares of Common Stock for $0.17 per share. Each warrant contains a price-protection feature that adjusts the exercise price in the event of certain dilutive issuances of securities. Such price-protection feature is determined to be a derivative liability and, as such, the value of all such warrants issued, totaling $92,768, was recorded to derivative liabilities.
During 2016, the Company issued 60,000 shares of Series C Preferred for $100 per share over the course of three separate closings.
As additional consideration for participating in the April Series C Offering, the Purchasers received five-year warrants to purchase up to an aggregate total of approximately 33.3 million shares of Common Stock for $0.15 per share. At the completion of the April Series C Offering, the Company had issued warrants to purchase up to an aggregate total of approximately 33.4 million shares of Common Stock. Each warrant contains a price-protection feature that adjusts the exercise price in the event of certain dilutive issuances of securities. Such price-protection feature is determined to be a derivative liability and, as such, the value of all such warrants issued, totaling $2,856,678, was recorded to derivative liabilities.
NOTE 3 – STOCK OPTIONS AND WARRANTS
Warrants
A summary of the Company’s warrant activity for the years ended December 31, 2016 and 2015 is presented below:
 
 
Warrants
Outstanding
 
 
Weighted Average
Exercise Price
 
Outstanding, December 31, 2014
  16,375,270 
 $0.40 
Granted
  50,543,837 
  0.16 
Exercised
  - 
  - 
Expired
  - 
  - 
Outstanding, December 31, 2015
  66,919,107 
 $0.18 
Granted
  36,696,083 
  0.15 
Exercised
  (300,000)
  0.15 
Expired
  (1,918,774)
  1.23 
Outstanding, December 31, 2016
  101,396,416 
 $0.15 
As of December 31, 2016, 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.)
 
  99,494,347 
 $0.15 
  4.11 
  427,633 
 $0.19 
  4.22 
  737,218 
 $0.25 
  1.69 
  737,218 
 $0.38 
  1.69 
  101,396,416 
 $0.15 
  4.07 
Non-Qualified Stock Options
The Company granted options to purchase an aggregate total of 3,460,000 shares of Common Stock during the year ended December 31, 2016. The options vest evenly over a four-year period.
The weighted average estimated fair value per share of the stock options at grant date was $0.06 per share. Such fair valuesthat were estimated using the Black-Scholes stock option pricing modelattributable to both observable (e.g., changes in market interest rates) and the following weighted average assumptions.unobservable (e.g., changes in unobservable long- dated volatilities) inputs (amount in thousands).   
 
 
 
2016Warrant Liability
 
Expected lifeBalance at January 1, 2019
 
2.5 years
$- 
Estimated volatilityAddition
  75.07,762
Change in fair value
(3,618%)
Risk-free interest rateBalance at December 31, 2019
 0.66$%
Dividends
-4,144 
Stock option activity during the year ended December 31, 2016 is summarized as follows:
 
 
Options Outstanding
 
 
Weighted Average
Exercise Price
 
Options outstanding at December 31, 2015
  - 
 $- 
Exercised
  - 
  - 
Granted
  3,820,000 
  0.15 
Forfeited
  720,000 
  0.15 
Expired
  - 
  - 
Options outstanding at December 31, 2016
  3,100,000 
 $0.15 
Cancellation of Stock Options and Issuance of Restricted Stock.Between June and July 2015, the Company and each of the holders of all outstanding options to purchase shares of the Company’s Common Stock agreed to cancel or forfeit their options, such that, as of July 10, 2015, no options to purchase shares of the Company’s Common Stock were outstanding.
The cancellation of the stock options and issuance of restricted stock was accounted for as a modification in accordance with the provisions of ASC Topic 718Compensation – Stock Compensation.The Company recorded approximately $1,055,000 of stock based compensation in connection with the transaction.
Restricted Common Stock Awards
The Company granted a total of 2,000,000 shares of restrictedCommon Stock pursuant to the terms and conditions of the Company’s 2013 Stock Incentive Plan to certain employees. The shares were valued at $0.061 per share and a total of $122,000 will be expensed over the vesting period. There were 500,000 shares which vested on the grant date with the remaining shares vesting over 3 years.During the year ended December 31, 2016, the Company issued 2,620,000 shares of restricted stock under the plan. As of December 31, 2016, a total of 5,079,908 shares were unvested out of the total of 16,142,229 granted shares.
The Company granted a total of 2,000,000 shares of restrictedCommon Stock pursuant to the terms and conditions of the Company’s 2013 Stock Incentive Plan to certain employees. The shares were valued at $0.061 per share and a total of $122,000 will be expensed over the vesting period. There were 500,000 shares which vested on the grant date with the remaining shares vesting over 3 years.During the year ended December 31, 2016, the Company issued 2,620,000 shares of restricted stock under the plan.

A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in the Monte Carlo simulation measuring the Company’s restricted common stock activity for the years ended December 31, 2016 and 2015 is presented below:
Restricted Common Stock Awards
Outstanding, December 31, 2014
-
Granted
19,491,375
Forfeited
-
Outstanding, December 31, 2015
19,491,375
Granted
2,000,000
Forfeited
(5,349,146)
Outstanding, December 31, 2016
16,142,229
NOTE 4 – INTANGIBLE ASSETS
The Company has incurred costs to trademark eight of its current products and marketing nomenclatures. During 2015, the Company purchased a patent in relation to the purchase of GT Beverage, and also assumed the trademarks of Bazi Intl. Patents and trademarksderivative liabilities that are being amortized over the lesser of their remaining life or 15 years.
Intangible assets are:
 
 
December 31,
2016
 
 
December 31,
2015
 
Patents and trademarks
 $1,027,438 
 $1,706,849 
Accumulated amortization
  (777,438)
  (636,261)
 
 $250,000 
 $1,070,588 
Amortization expense for the year ended December 31, 2016 and 2015 was $141,177 and $148,768, respectively. In 2016, the Company stopped using the bottle associated with the spherical bottle patent. The Company is evaluating its options for the patent. As such, the Company estimated the valuecategorized within Level 3 of the patent using a discounted cash flows approach. This valuation lead to the Company recording an impairment charge of $679,411 to the Patent. For these assets, amortization expense over the next five years and thereafter is expected to be as follows:
 
 
Patent and Trademark Amortization
 
2017
 $37,975 
2018
  37,975 
2019
  37,975 
2020
  37,975 
2021
  37,975 
2022 and thereafter
  60,125 
 
 $250,000 
NOTE 5 – INCOME TAXES
The Company does not have significant income tax expense or benefit for the year ended December 31, 2016 or 2015. 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, 2016 and 2015. Such tax net operating loss carryforwards (“NOL”) approximated $33.0 million at December 31, 2016. 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, 2016 and 2015 are as follows:
 
 
2016
 
 
2015
 
Income tax expense (benefit) at statutory rate
 $(1,851,491)
 $(4,076,791)
Change in valuation allowance
  1,851,491 
  4,076,791)
Income tax expense
 $- 
 $- 
The components of income tax expense (benefit) attributable to continuing operations are as follows:
 
 
2016
 
 
2015
 
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, 2016 and 2015 as follows:
 
 
2016
 
 
2015
 
Deferred tax asset –NOL’s
 $13,200,000 
 $11,040,000 
Less valuation allowance
  (13,200,000)
  (11,040,000)
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.
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, though management believes the impact would be minimal, if any. 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 positionsfair value hierarchy as of December 31, 2016. 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 6 – DEBT
A summary of convertible notes payable as of December 31, 2016 and 20152019 is as follows:
 
 
 
AmountAs of December 31, 2019
 
Outstanding, December 31, 2014Exercise price
 $4,030,0000.0044 
BorrowingsContractual term (years)
  1,470,0004.32 
RepaymentsVolatility (annual)
  (3,498,00070.0)%
Conversions to Series C Preferred StockRisk-free rate
  (1,147,0001.7)%
Outstanding, December 31, 2015Dividend yield (per share)
  $0855,000%
Borrowings
-
Repayments
(355,000)
Conversions to Series C Preferred Stock
(500,000)
Outstanding, December 31, 2016
$-
 
A summaryNOTE 4 – STOCK-BASED COMPENSATION
On April 26, 2019, in connection with employment agreements with its CEO and COO, the line-of-creditCompany 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 ofDecember 31, 3019, was approximately $1.4 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 year ending December 31, 2019, the Company recorded an expense of $316,000for 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 1 above), the Company issued an aggregate of 902.7 million shares of common stock (the “Advisory Shares”), including to a member of the Company’s Board of Directors, pursuant to a subscription agreement. The fair value of a share of common stock was $0.0032 which is based upon a valuation prepared by the Company on the date of the Share Exchange. The Company recorded stock-based compensation of approximately $2.9 million on the grant date.


Prior to the Share Exchange, Charlie’s employees held Member units, which were automatically converted into 7.1 million shares of common stock and 69,815 shares of Series B Preferred (or 698.1 million shares of common stock equivalents) due to the effect of the Share Exchange. The 705.3 million shares of common stock will vest over a two-year period. The fair value of a share of common stock was $0.0032 which is based upon a valuation prepared by the Company on the date of the Share Exchange. The Company recorded stock-based compensation of approximately $752,000during the year endedDecember 31, 2019.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and Equipment detail as of December 31, 20162019 and 2015 is2018 are as follows (amount in thousands):
 
 
December 31,
 
 
December 31,
 
 
 
2019
 
 
2018
 
Machinery and equipment
 $96 
 $64 
Trade show booth
  171 
  144 
Office equipment
  118 
  26 
Leasehold improvements
  440 
  20 
 
  825 
  254 
Accumulated depreciation
  (282)
  (209)
 
 $543 
 $45 
Depreciation and amortization expense totaled $73,000 and $18,000, respectively, during the years ended December 31, 2019 and 2018.
NOTE 6 - CONCENTRATIONS
Vendors
The Company’s concentration of purchases are as follows:
 
Amount
Outstanding, December 31, 2014
$233,000
Net Borrowings
249,000
Outstanding, December 31, 2015
$482,000
Net Repayments
(372,000)
Outstanding, December 31, 2016
$110,000
In March 2015, the Company paid off approximately $2.7 million of the Company’s $3.8 million in outstanding promissory notes. Following these payments, the Company and each of the holders of the remaining notes entered into Exchange Agreements, wherein the holders agreed to exchange the remaining principal of $1,147,000 and accrued interest of any such notes into shares of Series C Preferred on substantially similar terms to those offered in connection with the issuance of shares of Series C Preferred and warrants consummated in February 2015.
 
 
For the year ended
 
 
 
December 31,  
 
 
 
2019
 
 
2018
 
Vendor A
  57%
  74%
Vendor B
  16%
  15%
 
As described under Note 2, “Shareholder’s Equity” above, in September 2015,During the Company began a private offering to certain accredited investors of: (i) Secured Notes inyear ended December 31, 2019, purchases from two vendors represented 73% of total inventory purchases. During the aggregate principal amountyear ended December 31, 2018, purchases from two vendors represented 89% of up to $2.5 million; and (ii) and Note Warrants to purchase that number of shares equal to 15% of the principal amount of the Secured Note purchased by each investor, divided by the ten-day average closing price of the Company’s Common Stock. Each Secured Note accrues interest at a rate of 12% per annum, and will mature one year from the date of issuance. total inventory purchases.
As of December 31, 2015,2019 and 2018, amounts owed to these vendors totaled $58,000 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:
 
 
December 31,
 
 
 
2019
 
 
2018
 
Customer A
  18%
  6%

One customer made up more than 10% of net accounts receivable at December 31, 2019. Customer A owed the Company had issued Secured Notesa total of $211,000, representing 23% of net receivables. No customer exceeded 10% of total net sales for the years ended December 31, 2019 and 2018, respectively.




NOTE 7 – DON POLLY, LLC.
Don Polly, LLC is a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, the Company’s Chief Executive Officer and Chief Operating Officer, respectively, and a consolidated variable interest for which the Company is the primary beneficiary. Don Polly formulates, sells and distributes the Company’s CBD product lines.
We evaluate our ownership, contractual and other interests in entities that are not wholly-owned to determine if these entities are variable interest entities (“VIEs”), and, if so, whether we are the primary beneficiary of the VIE. In determining whether we are the primary beneficiary of a VIE and therefore required to consolidate the VIE, we apply a qualitative approach that determines whether we have both (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of, or the rights to receive benefits from, the VIE that could potentially be significant to that VIE. We continuously perform this assessment, as changes to existing relationships or future transactions may result in the aggregate principal amountconsolidation or deconsolidation of $855,000a VIE. Effective April 25, 2019, we consolidated the financial statements of Don Polly and Note Warrantsit is considered a VIE of the Company. Since the Company has been determined to purchase an aggregate totalbe the primary beneficiary of 280,265 shares of Common Stock. On January 20, 2016, Secured NotesDon Polly, we have included Don Polly’s assets, liabilities, and operations in the aggregate principal amountaccompanying consolidated financial statements of $500,000 were exchanged for shares of Series C Preferred and warrants. See Note 2 “Stockholder’s Equity” above.the Company.
 
In September 2015,Don Polly operates under exclusive licensing and service contracts with the Company issued promissory notes to certain related parties in the aggregate principal amount of $100,000. The notes expired on October 31, 2015 and were paid. Upon repayment,whereby the Company paid a lender's fee toreceives 75% of net income from the related parties equal to 10%licensing agreement and 25% of net income from the service agreement, therefore, as the Company receives 100% of the principal amount.net income or incurs 100% of the net loss of the VIE, no non-controlling interests are recorded.
 
Line-of-Credit FacilityNOTE 8 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
The Company entered into a line-of-credit agreement with a financial institution on June 30, 2014. The terms of the agreement allow the Company to borrow up to the lesser of $1.5 million or 85% of the sum of eligible accounts receivables. At December 31, 2016, the total outstanding on the line-of-credit was $109,682Accounts payable and the Company did not have any availability to borrow. The line-of-credit bears interest at Prime rate (3.5%accrued expenses as of December 31, 2016) plus 4.5%2019 and 2018 are as follows (amount in thousands):
 
 
December 31,
 
 
December 31,
 
 
 
2019
 
 
2018
 
Accounts payable
 $673 
 $901 
Accrued compensation
  1,635 
  288 
Insurance payable
  - 
  20 
Other accrued expenses
  208 
  7 
 
 $2,516 
 $1,216 
NOTE 9 – EARNING PER SHARE BASIC AND FULLY DILUTED
Basic earnings per annum, as well as a monthly fee of 0.50% on the average amount outstanding on the line, andcommon share is securedcomputed by dividing net income by the accounts receivablesweighted 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 are funded against. The line-of-credit matures on July 31, 2017.it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock. Diluted weighted average common shares include common stock potentially issuable under the Company’s convertible preferred stock, warrants and vested and unvested stock options.
 
 


The following table sets forth the computation of earnings per share (in thousands): 

 
 
  For the years ended
 
 
 
  December 31,
 
 
 
2019
 
 
2018
 
Net (loss) earnings applicable to common shareholders- basic
 $(3,796)
 $7,200 
 
    
    
Net (loss) earnings applicable to common shareholders - diluted
 $(3,796)
 $7,200 
 
    
    
Weighted average shares outstanding - basic
  10,648,129 
  141,041 
Series B convertible preferred shares
  - 
  13,963,048 
Weighted average shares outstanding - diluted
  10,648,129 
  14,104,089 
 
F-18
 
 
  For the years ended
 
 
 
  December 31,
 
 
 
2019
 
 
2018
 
Options
  801,325 
  85,991 
Series A convertible preferred shares
  4,616,268 
  - 
Warrants
  4,033,769 
  - 
Total
  9,451,362 
  85,991 
 
NOTE 710 – STOCKHOLDERS’ EQUITY
Series A Preferred
On April 25, 2019, in connection with the Share Exchange, the Company filed the Certificate of Designation, Preferences and Rights of the Series A Convertible Preferred Stock (the “Series A COD”), with the Nevada Secretary of State of the State, designating 300,000 shares of its preferred stock as Series A Convertible Preferred Stock. Each share of Series A Preferred has a stated value of $100 per share (the “Series A Stated Value”). The Series A Preferred rank senior to all of the Company’s outstanding securities. At December 31, 2019, there were a total of 204,561 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.
Conversion of Preferred Shares
                For the year ended December 31,2019 the Company issued approximately 38,081,000 common stock conversion shares as 1,687 shares of Series A preferred were converted into common shares.

Deemed Dividends on Series A Preferred Stock
                As a result of the issuance of preferred stock, we have a deemed dividend of approximately $1,650,000 which is due on April 26, 2020 and is payable in cash, or if certain equity conditions are met, it is payable in common shares of the Company.
                In the event the Equity Conditions are satisfied, and the Corporation elects to pay the Dividend Amount in shares of Common Stock, the number of shares of Common Stock to be issued to each Holder shall be determined by dividing the Dividend Amount payable to each Holder on the applicable payment date as set forth above, and rounding up to the nearest whole share, by the Dividend Conversion Price. The term Dividend Conversion Price shall mean 90% of the VWAP of the Corporation’s Common Stock for the five (5) Trading Days prior to the Dividend Payment Date, as adjusted for any stock dividend, stock split, stock combination or other similar transaction during such five (5) Trading Day period. “Equity Conditions” means that each of the following conditions is satisfied: (i) the number of authorized but unissued and otherwise unreserved shares of Common Stock is sufficient for such issuance; (ii) such shares of Common Stock are registered for resale by the Holders and may be sold by the Holders pursuant to an effective registration statement or all such shares may be sold without volume restrictions pursuant to Rule 144 under the 1933 Act;(iii) the Common Stock is listed or quoted (and is not suspended from trading) on an Eligible Market; (iv) the average daily dollar value of shares of Common Stock traded on the Eligible Market for the ten (10) Trading Days prior to the Dividend Payment Date is greater than $500,000; and (v) such issuance would be permitted in full without violation Section 4(e) below or the rules or regulations of any Eligible Market.
                If the equity conditions are not met and the Company does not wish to pay the dividends in cash it will have to seek waivers from the Series A preferred shareholders.
Series B Preferred
On April 26, 2019, in connection with the Share Exchange, the Company filed the Certificate of Designation, Preferences and Rights of the Series B Convertible Preferred Stock (the “Series B COD”), with the Secretary of State of the State of Nevada, designating 1.5 million shares of its preferred stock as Series B Preferred. At the time of the filing of the Series B COD, the Series B Preferred ranked junior to the Series A Preferred and senior to all of the Company’s other outstanding securities.
The Series B Preferred was structured to act as a common stock equivalent, and, on June 28, 2019, the Company amended and restated its Articles of Incorporation (the “Amended and Restated Charter”) to (i) change our corporate name to Charlie’s Holdings, Inc. and (ii) increase the number of shares authorized as common stock from 7.0 billion to 50.0 billion shares. The Amended and Restated Charter was approved by our Board of Directors and holders of a majority of our outstanding voting securities on May 8, 2019, and the Amended and Restated Charter was filed with the State of Nevada on June 28, 2019. As a result of the filing of the Amended and Restated Charter and the increase of our authorized common stock to 50.0 billion shares, all 1,396,305 outstanding shares of Series B Preferred automatically converted into a total of 13,963,047,716 shares of common stock in accordance with the Series B COD.
At December 31, 2019, no shares of Series B Preferred were outstanding.
Prior to the filing of the Amended and Restated Charter, holders of the Series B Preferred were entitled to vote on an as-converted basis along with holders of the Company’s common stock on all matters presented to the Company’s stockholders. In addition, pursuant to the Series B COD, the Company was not permitted to take the following actions without obtaining the prior consent of at least 50% of the holders of the outstanding Series B Preferred, voting separately as a single class: (i) amend the provisions of the Series B COD so as to adversely affect holders of the Series B Preferred, (ii) increase the authorized number of shares of Series B Preferred, or (iii) effect any distribution with respect to junior stock, unless the Company also provides such distribution to holders of the Series B Preferred.


Common Stock
On June 28, 2019, the Company filed the Amended and Restated Charter to change the name of the Company to “Charlie’s Holdings, Inc.”, as well as to increase the number of shares of the Company’s common stock authorized for issuance from 7.0 billion shares to 50.0 billion shares.
Warrants
On April 26, 2019, pursuant to the Share Exchange as described in Notes 1 and 3, the Companyissued warrants to purchase approximately 4 billion shares of common stock, consisting of the Investor Warrants issued to the new investors and the Direct Investors, and the Placement Agent Warrants issued to Katalyst. The warrants have a 5-year term and an exercise price of $0.0044313, subject to adjustment for anti-dilution events. Due to the exercise features of these warrants they are not indexed to the Company’s own stock and are therefore not afforded equity treatment in accordance with ASC Topic 815,Derivatives and Hedging(“ASC 815”). ASC 815 requires the Company to assess the fair value of warrant liabilities at each reporting period and recognize any change in the fair value as items of other income or expense (see Note 3).
NOTE 11 – STOCK 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 December 31, 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.
               On May 8, 2019, our Board of Directors approved the Charlie’s Holdings, Inc. 2019 Omnibus Incentive Plan (the “2019 Plan”), and the 2019 Plan was subsequently approved by holders of a majority of our outstanding voting securities on the same date. The 2019 Plan will supersede and replace the Prior Plan and no new awards will be granted under the Prior Plan. Any awards outstanding under the Prior Plan on the date of stockholder approval of the 2019 Plan will remain subject to the terms in the Prior Plan, including those granted under the Prior Plan Amendment, and any shares subject to outstanding awards under the Prior Plan that subsequently expire, terminate, or are surrendered or forfeited for any reason without issuance of shares will automatically become available for issuance under the 2019 Plan. Up to 1,107,254,205 stock options may be granted under the 2019 Plan. The shares of common stock issuable under the 2019 Plan will consist of authorized and unissued shares, treasury shares, and shares purchased on the open market or otherwise.
The following table summarizes stock option activities during the year ended December 31, 2019 (all option amounts are in thousands):

 
 
Stock Options
 
 
Weighted Average Exercise Price
 
 
Weighted Average Remaining Contractual Life
(in years)
 
 
Aggregate Intrinsic Value
 
Outstanding at January 1, 2019
  85,991 
 $0.02 
  1.12 
 $- 
Options granted
  788,882 
  0.02 
  9.49 
  - 
Options forfeited/expired
  (73,548)
  0.02 
  - 
  - 
Outstanding at December 31, 2019
  801,325 
 $0.01 
  9.41 
 $- 
Options vested and exercisable at December 31, 2019
  61,825 
 $0.02 
  4.47 
 $- 
During the year ended December 31, 2019, the Company modified 49.4 million option to extend its maturity date. All options were fully vested as of the modification date. The Company accounted for the modification as a Type I (probable-to-probable) modification. Any additional compensation related to this modification was considered immaterial.


During the year ended December 31, 2019, the Company granted 739.5 million optionunder the 2019 Plan. The fair value of the option on the grant date was approximately $1.1 million based on the following assumptions:
October 28, 2019
Exercise price
$0.0044
Expected term (years)
5.79
Volatility (annual)
70.0%
Risk-free rate
1.7%
Dividend yield (per share)
0%
As of December 31, 2019, there was approximately $1.0 million of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the 2019 Plan. That cost is expected to be recognized over a weighted average period of 2.5 years. For the year ended December 31, 2019 the Company recorded compensation expense of $178,000 related to the issuance of stock options.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Leases
 
The Company leases office space under agreements classified as operating leases that expire on various dates through 2024. All of the Company’s lease liabilities result from the lease of its corporateheadquarters in Costa Mesa, California, which expires in 2024, its warehouse in Santa Ana, California, which expires in 2021, its office and warehouse in Irvine,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 one-yearstraight-line basis over the lease term. The currentCompany entered into a commercial lease for the Company’s corporate headquarters (the “Lease”) in Costa Mesa, California with Brandon Stump, Ryan Stump and Keith Stump, the Company’s Chief Executive Officer, Chief Operating Officer and member of the Board. Messrs. Stump, Stump and Stump purchased the property that is the subject of the Lease in July 2019. The Lease, which was effective as of September 1, 2019, on a month to month basis, has been formalized to have a term of five years and a base rent rate of $22,940 per month, which rate is setsubject to expireannual adjustments based on September 30, 2017. Total rent expense relatedthe consumer price index, as may be mutually agreed upon by the parties to the Company's operating leaseLease. The terms of the Lease were negotiated and approved by the independent members of the Board, and executed by Mr. David Allen, the Company’s Chief Financial Officer after reviewing a detailed analysis of comparable properties and rent rates compiled by an independent, third-party consultant. The total amount paid to related parties for the year ended December 31, 2016 was $57,159. Total remaining payments on2019 is $115,000.

At December 31, 2019, the Company had operating lease through September 30, 2017 are $28,458.liabilities of approximately $1,644,000 and right of use assets of approximately $1,623,000, which were included in the consolidated balance sheet.
 


The Company maintains employment agreements with certain key members of management. The agreements provide for minimum base salaries, eligibility for stock options, performance bonuses and severance payments.following summarizes quantitative information about the Company’s operating leases (amount in thousands):
 
Legal Proceedings
For the Year Ended
December 31, 2019
Operating leases
   Operating lease cost
$271
   Variable lease cost
-
Operating lease expense
271
Short-term lease rent expense
-
Total rent expense
$271
 
For the Year Ended
December 31, 2019
Operating cash flows from operating leases
$169
Weighted-average remaining lease term – operating leases (in years)
3.8
Weighted-average discount rate – operating leases
12.0%
Maturities of our operating leases, excluding short-term leases, are as follows:
Year Ended December 31, 2020
$600
Year Ended December 31, 2021
577
Year Ended December 31, 2022
400
Year Ended December 31, 2023
275
Year Ended December 31, 2024
206
Total
2,058
Less present value discount
(414)
Operating lease liabilities as of December 31, 2019
$1,644

Legal proceedings
From time to time, claims are made against the Company may be involved in various claims and counterclaims and legal actions arising in the ordinary course of business, which could result in litigation. Claims and associated litigationbusiness. Other than as set forth below, there 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 positionno additional pending or results of operations.
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations.
NOTE 8 – 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 itemthreatened legal proceedings 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;this time.
 
 -             C.H. Robinson Worldwide, Inc. v. True Drinks, Inc.On September 5, 2018, C.H. Robinson Worldwide (“Level 2Robinson: Inputs, other than”) filed a complaint against True Drinks, Inc. in the quoted pricesCalifornia Superior Court for the County of Orange located in active markets,Santa Ana, California alleging open book account, account stated, reasonable value of services received, agreement, and unjust enrichment related to shipping services provided by Robinson. Robinson has asserted $121,743 in damages plus interest, attorney’s fees and costs. We believe Robinson’s claim is substantially offset by damages caused by its failures to timely deliver products it was supposed to ship and intend to vigorously defend the complaint. The probability of any loss cannot be determined at this time.



NOTE 13- INCOME TAXES

The Company was classified as a partnership through the Closing Date, and therefore, not subject to entity level tax.  After the Closing Date, the Company is taxed as a C corporation and files a consolidated return with True Drinks, Inc.
The tax effects of temporary differences and tax loss and credit carry forwards that give rise to significant portions of deferred tax assets and liabilities at December 31, 2019 are observable either directly or indirectly;comprised of the following (in thousands):
 
 
As of December 31,
 
 
 
2019
 
 
2018
 
Deferred tax assets:
 
 
 
 
 
 
Bad Debt
  133 
  - 
Inventory
  9 
  - 
Lease liability
  385 
  - 
Stock compensation
  349 
  - 
Transaction costs
  808 
  - 
Net operation loss
  698 
  - 
Derivatives
  268 
  - 
Total deferred income tax assets
  2,650 
  - 
 
    
    
Deferred income tax liabilities:
    
    
ROU assets
  (384)
  - 
Fixed assets
  (20)
  - 
Total deferred income tax liabilities
  (404)
  - 
 
    
    
Net deferred income tax assets
  2,246 
  - 
Valuation allowance
  (2,246)
  - 
Deferred tax asset, net of allowance
  (0)
 $- 

At December 31, 2019, the Company had federal and state net operating loss carry forwards for income tax purposes of approximately $73.5 million. The effect of an ownership change would be the imposition of an annual limitation on the use of net operating loss carryforwards (“NOL”) attributable to periods before the change. Any limitation may result in expiration of a portion of the NOL carryforwards before utilization. The Company has not performed a detailed analysis to determine the realizability of the NOL under Section 382 of the IRC..As such, deferred tax assets related to NOLs incurred before the Closing Date of $71M relating to True Drinks, Inc. have not been recorded.  NOLs incurred after the Closing Date of $2.5M will begin to expire in 2029.
 
 -             Level 3: Unobservable inputsIn assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which therethose temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and taxing strategies in making this assessment. Based on the review of positive and negative evidence, the Company has provided a full valuation allowance against its deferred tax assets as it is little or no market data, which require the reporting entity to develop its own assumptions.more likely than not that they may not be realized.
 
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when estimating fair value.

 
The Company assesses its recurring fair value measurementsexpected tax expense (benefit) based on the U.S. federal statutory rate is reconciled with actual tax expense (benefit) as definedfollows:
Year ended December 31, 2019
Year ended December 31, 2018
Statutory federal income tax rate
21.0%
-%
Non-taxable Income
15.1%
-%
State taxes, net of federal tax benefit
20.6%
-%
Non-deductible expenses
(1.3%)
-%
Derivatives
27.2%
-%
Change in valuation allowance
(81.3%)
-%
Income taxes provision (benefit)
1.3%
-%

(in thousands)
 
As of December 31,
 
 
 
2019
 
 
2018
 
Current
 
 
 
 
 
 
US Federal
 $- 
 $- 
US State
  - 
  - 
Total current provision
  - 
  - 
Deferred
    
    
US Federal
  1,331 
  - 
US State
  443 
  - 
Total deferred benefit
  1,774 
  - 
Change in valuation allowance
  (1,745)
  - 
Total provision for income taxes
 $29 
 $- 

ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by FASB ASC 810. Liabilities measured at estimated fair value ontaxing authorities. As of December 31, 2019, and 2018, there were no uncertain tax positions. The Company’s policy for recording interest and penalties associated with uncertain tax positions is to record such expense as a recurring basis include derivative liabilities. Transfers between fair value classifications occur when there are changes in pricing observability levels. Transferscomponent of financial liabilities among the levels occur at the beginning of the reporting period.income tax expense. There were no transfers between Level 1, Level 2 and/amounts accrued for penalties or Level 3interest during the year ended December 31, 2016. 2019. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.

The Company hadis subject to U.S. federal and state taxes in the normal course of business, and its income tax returns are subject to examination by the relevant tax authorities.  Tax years 2016-2018 are still open for examination by Federal tax authorities and tax years 2015-2018 are generally open for examination by state tax authorities.  The Company is under IRS audit for 2017, however no Level 1 or 2 fair value measurements during 2016 or 2015.material adjustments have currently been identified that would affect the tax provision as stated. 
 
  
 
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 December 31, 2016 and 2015:
  
 
 
 
 
 
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
 
Derivative liabilities - December 31, 2016
 $5,792,572 
 $- 
 $- 
 $5,792,572 
Derivative liabilities - December 31, 2015
 $6,199,021 
 $- 
 $- 
 $6,199,021 
The following table presents the changes in recurring fair value measurements included in net loss for the years ended December 31, 2016 and 2015:
 
 
Recurring Fair Value Measurements
 
 
 
Changes in Fair Value
Included in Net Loss
 
 
 
Other Income
 
 
Other Expense
 
 
Total
 
Derivative liabilities - December 31, 2016
 $3,566,170 
 $- 
 $3,566,170 
Derivative liabilities - December 31, 2015
 $1,262,329 
 $- 
 $1,262,329 
The table below sets forth a summary of changes in the fair value of our Level 3 financial liabilities for the year ended December 31, 2016:
 
 
December 31, 2015
 
 
 
 
Recorded new Derivative Liabilities
 
 
Reclassification of Derivative Liabilities
 
 
Change in Estimated Fair Value Recognized in Results of Operations
 
 
December 31, 2016
 
Derivative liabilities
 $6,199,021 
 $3,159,721 
 $- 
 $(3,566,170)
 $5,792,572 
The table below sets forth a summary of changes in the fair value of our Level 3 financial liabilities for the year ended December 31, 2015:
 
 
December 31, 2014
 
 
 
 
Recorded new Derivative Liabilities
 
 
Reclassification of Derivative Liabilities
 
 
Change in Estimated Fair Value Recognized in Results of Operations
 
 
December 31, 2015
 
Derivative liabilities
 $1,569,522 
 $5,891,828 
 $- 
 $(1,262,329)
 $6,199,021 
NOTE 9 – LICENSING AGREEMENTS
We first entered into licensing agreements with Disney Consumer Products, Inc. and an 18-month licensing agreement with Marvel Characters, B.V. (collectively, the “Licensing Agreements”) in 2012. Each Licensing Agreement allows us to feature popular Disney and Marvel characters on AquaBall™ Naturally Flavored Water, allowing AquaBall™ to stand out among other beverages marketed towards children. Under the terms and conditions of the Licensing Agreements, we work with the Disney and Marvel teams to create colorful, eye-catching labels that surround the entire spherical shape of each AquaBall™. Once the label designs are approved, we work with Disney and Marvel to set retail calendars, rotating the placement of different AquaBall™ designs over the course of the year.
In 2015, the Company and Disney entered into a renewed Licensing Agreement, which extended the Company’s license with Disney through March 31, 2017 (the “Disney Agreement”). The terms of the Disney Agreement entitle 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 $450,870 over the period from April 1, 2015 through March 31, 2017. In addition, the Company is required to make a ‘common marketing fund’ contribution equal to 1% of sales due annually during the agreement. The Company is required to spend a total of $820,000 on advertising and promotional opportunities over the term of the Disney Agreement. During the year ended December 31, 2016, the Company paid a total of $129,597 to Disney pursuant to the Disney Agreement.
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 requires 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.The total royalty paid to Marvel during the year ended December 31, 2016 was $100,000.
NOTE 10 –14- SUBSEQUENT EVENTS
 
The Company has evaluated events subsequent to December 31, 2019 to assess the need for potential recognition or disclosure in this report. Such events were evaluated through the date the accompanying consolidatedthese financial statements were issued and determined that no subsequent event activity required additional disclosure.available to be issued. Based upon this evaluation the following items were noted.
 
On February 12, 2020, the Company, entered into a form of Amended and Restated Employment Agreement with both the Company’s Chief Executive Officer and Chief Operating Officer, respectively.
The terms of the Amended Employment Agreements have been amended as follows: (i) the annual equity awards based upon, among other conditions, the Company’s market capitalization and a percentage of base salary have been eliminated; however, the awards based on financial milestones remain in full force and effect; and (ii) payment of the 2019 bonuses has been deferred, resulting in the accrual of such bonuses on the books and records of the Company. All other terms of the respective Employment Agreements will remain in full force and effect subject to further review by the Board as it deems necessary and appropriate.
On March 11, 2020, the World Health Organization designated the ongoing and evolving coronavirus (COVID-19) outbreak as a pandemic. The outbreak has caused substantial disruption in international and U.S. economies and markets as it continues to spread. The outbreak is having a temporary adverse impact on our industry as well as our business, with regards to certain supply chain disruptions and sales volume. While the disruption from COVID-19 is currently expected to be temporary, there is uncertainty around the duration.  The financial impact of this matter on our business cannot be reasonably estimated at this time, however, if repercussions of the outbreak are prolonged, it will have an adverse impact on our business.
On April 8, 2020, the Company. and its wholly-owned subsidiaries, Charlie's Chalk Dust, LLC and its variable interest entity, Don Polly LLC, issued a secured promissory note ("Note") to one of the Company's largest stockholder's, Red Beard Holdings, LLC (the "Lender") in the principal amount of $750,000, which Note is secured by all assets of the Company pursuant to the terms of a Security Agreement entered into by and between the Company and the Lender (the "Note Financing").
The Note requires the payment of principal and guaranteed interest in the amount of at least $75,000 on or before the earlier date of (i) a Liquidity Event, as defined under the terms of the Note; or (ii) October 1, 2020. The Company intends to use the proceeds from the Note Financing for general corporate purposes, and its working capital requirements, pending availability of long-term working capital.

 
 
 
F-21F-22