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.
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, includingthose developed and sold by us, from both retail online and mail orderonline 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.
Adverse publicity associated with our products or ingredients, or those of similar companies, could adversely affect our 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.
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 partythird-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.
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 the patent for the AquaBall™ bottle. Wewe consider this patent and 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.
Risks Related to the Company
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Our operations are now primarily dependent on the business of Charlie’s, and our ability to achieve positive cash flow under our new business plan is uncertain.
ReadersAs a result of the Share Exchange, our continued operations are cautioned not to place undue reliancenow primarily dependent on forward-looking statements, asthe business of Charlie’s. Although Charlie’s generated net revenue of approximately $13.4 million during the six months ended June 30, 2019 and $20.8 million for the year ended December 31, 2018, and we anticipate substantially greater revenue in 2019, there can be no assuranceguarantee that the plans, intentionsCompany will continue to grow revenue or expectations upon which they are based will occur. By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute toachieve positive cash flow in the possibility that the predictions, forecasts, projections and other things contemplated by the forward-looking statements will not occur. Forward-looking statements in this prospectus are based on management’s beliefs and opinions at the time the statements are made. The forward-looking statements contained in this prospectus are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this prospectus are made as of the date of this prospectus and we undertake no obligation to publicly update or revise any forward-looking statements to reflect new information, future events or otherwise, except as required by applicable securities laws.future.
Overview
True Drinks Holdings, Inc. (the "Company", "us" or "we") was incorporatedOur operating results in the statepast 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 Nevada in January 2001 and is the holding company for True Drinks, Inc. (“True Drinks”), formed on January 19, 2012 in Delaware to create and commercialize all-natural, vitamin-enhanced drinks. Our primary business is the development, marketing, sale and distribution of all-natural, vitamin-enhanced drinks. As a result of our flagshipdecision 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:
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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;
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our decision in early 2018 to discontinue the production and sale of AquaBall®, that in the years ended December 31, 2018 and 2017, contributed approximately $1,767,802 and $3,581,142 in revenue, respectively;
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our previous sole reliance on sales of Bazi®, that in the years ended December 31, 2018 and 2017, contributed approximately $179,250 and $242,192 in revenue to the Company, respectively; and
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the restructuring of substantially all of our previously outstanding debt and shares of preferred stock on April 26, 2019, in connection with the Share Exchange.
Although we believe that, as a result of the Share Exchange and the restructuring of our prior debt, our cash resources are currently sufficient, our long-term liquidity and capital requirements may be difficult to predict, which may adversely affect our long-term cash position.
Prior to the Share Exchange, our core business product AquaBall™ Naturally Flavored Water,sales were significantly below levels necessary to achieve positive cash flow. In addition, we had significant liabilities, amounting to approximately $9.5 million as of June 30, 2019 and $9.8 million as of December 31, 2018. However, as a vitamin-enhanced, naturally flavored water drink packagedresult of the acquisition of Charlie’s as our wholly owned subsidiary, Charlie’s historical results of operations, and the restructuring of substantially all of our outstanding debt on April 26, 2019, we currently believe that our cash resources are sufficient to fund our operations for the next twelve months, although no assurances can be given. However, if we are required to seek additional financing in the future in order to fund our operations, retire indebtedness and otherwise carry out our business plan, there can be no assurance that such financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and in our patented stacking spherical bottles.best interests.
Our business is difficult to evaluate because we have recently significantly modified our product offerings and customer base.
As a result of the Share Exchange, we have recently modified our operations, engaging in the sale of new products in a new market through new distributors and new lines of business. There is a risk that we will be unable to successfully integrate the newly acquired businesses with our current structure. Our estimates of capital, personnel and equipment required for our newly acquired businesses are based on the historical experience of management and businesses they are familiar with. Our management has limited direct experience in operating a business of our current size, as well as one that is publicly traded.
Our products could fail to attract or retain users or generate revenue and profits.
As a result of the Share Exchange, our customer base has changed significantly. Our ability to develop, increase, and engage our new customer base and to increase our revenue depends heavily on our ability to continue to evolve our existing products and to create successful new products, both independently and in conjunction with developers or other third parties. We distribute AquaBall™ nationally through select retail channels,may introduce significant changes to our existing products or acquire or introduce new and unproven products, including using technologies with which we have little or no prior development or operating experience. If new or enhanced products fail to engage our customers, or if we are unsuccessful in our monetization efforts, we may fail to attract or retain customers or to generate sufficient revenue, operating margin, or other value to justify our investments, and our business may be adversely affected.
Our significant stockholders may have certain personal interests that may affect the Company.
Together, Brandon Stump and Ryan Stump, the founders of Charlie’s and our Chief Executive Officer and Chief Operating Officer, respectively, currently own approximately 57% of our issued and outstanding voting securities as a result of the Share Exchange. In addition, holders of our Series C Preferred own approximately 20% of our issued and outstanding voting securities. As a result, Ryan Stump and Brandon Stump and holders of shares of our outstanding Series C Preferred have the ability to exert influence over both the actions of our Board of Directors, the outcome of issues requiring approval by our stockholders, as well as the execution of management’s plans. This concentration of ownership may have effects such as grocery stores, mass merchandisers, drug stores, club storesdelaying or preventing a change in control of the Company that may be favored by other stockholders or preventing transactions in which stockholders might otherwise recover a premium for their shares over current market prices.
We will need to hire additional qualified accounting and online.administrative personnel in order to remediate material weaknesses in our internal control over financial accounting, and we will need to expend additional resources and efforts to establish and maintain the effectiveness of our internal control over financial reporting and our disclosure controls and procedures.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Sarbanes-Oxley Act of 2002. Our management is required to evaluate and disclose its assessment of the effectiveness of our internal control over financial reporting as of each year-end, including disclosing any “material weakness” in our internal control over financial reporting. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As a result of its assessment, management has determined that there were material weaknesses due to the lack of segregation of duties and sufficient internal controls (including technology-based general controls) that encompass our Company as a whole with respect to entity and transactions level controls in order to ensure complete documentation of complex and non-routine transactions and adequate financial reporting. If we continue to experience material weaknesses in our internal controls or fail to maintain or implement required new or improved controls, such circumstances could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements, or adversely affect the results of periodic management evaluations and, if required, annual auditor attestation reports. Due to these material weaknesses, management concluded that, as of December 31, 2018 and 2017, our internal control over financial reporting was ineffective. Management also concluded that our disclosure controls and procedures were ineffective as of December 31, 2018 and 2017, as well as for the quarter ended June 30, 2019. These weaknesses were first identified in our Annual Report on Form 10-K for the year ended December 31, 2012. In 2018, we reduced our staff to one employee, and outsourced our accounting and financial functions, further exacerbating our weaknesses in our internal control over financial reporting and our disclosure controls and procedures. Although the number of employees has grown as a result of the Share Exchange and the addition of Charlie’s operations, including the hiring of a new Chief Executive Officer, Chief Financial Officer and the accounting and information technology staffs of Charlie’s, we cannot assure you that we will have sufficient resources to resolve these material weaknesses. These weaknesses have the potential to adversely impact our financial reporting process and our financial reports. We alsowill need to hire additional qualified accounting and administrative personnel in order to resolve these material weaknesses.
The loss of one or more of our key personnel or our failure to attract and retain other highly qualified personnel in the future, could harm our business.
We currently depend on the continued services and performance of key members of our management team, in particular, Brandon Stump and Ryan Stump, Charlie’s founders and our Chief Executive Officer and Chief Operating Officer, respectively, and David Allen, our Chief Financial Officer. If we cannot call upon them or other key management personnel for any reason, our operations and development could be harmed. We have not yet developed a succession plan. Furthermore, as we grow, we will be required to hire and attract additional qualified professionals such as accounting, legal, finance, production, market and distribute Bazi® All Natural Energy,sales experts. We may not be able to locate or attract qualified individuals for such positions, which will affect our ability to grow and expand our business.
We rely on contractual arrangements with Don Polly, our consolidated variable interest entity for our CBD-related business operations, which may not be as effective as direct ownership in providing operational control.
We have relied and expect to continue to rely on contractual arrangements with Don Polly and its shareholders, consisting of entities wholly-owned by Brandon Stump and Ryan Stump, for the operation of our CBD-related operations. These contractual arrangements may not be as effective as direct ownership in providing us with control over our consolidated variable interest entity. For example, Don Polly and its shareholders could breach their contractual arrangements with us by, among other things, failing to conduct their operations, including maintaining our website and using the domain names and trademarks, in an acceptable manner or taking other actions that are detrimental to our interests.
If we had direct ownership of Don Polly, we would be able to exercise our rights as a liquid nutritional supplement drink,shareholder to effect changes in the board of directors of Don Polly, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we rely on the performance by Don Polly, and its shareholders of their obligations under the contracts. The shareholders of Don Polly may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate our business through the contractual arrangements with Don Polly. Therefore, our contractual arrangements with Don Polly, our consolidated variable interest entity, may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.
The shareholders of Don Polly, our consolidated variable interest entity, may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.
The equity interests of Don Polly, our consolidated variable interest entity, are held by entities controlled by Brandon Stump, our Chief Executive Officer, and Ryan Stump, our Chief Operating Officer. Their interests in Don Polly may differ from the interests of our company as a whole. These shareholders may breach, or cause Don Polly to breach, the existing contractual arrangements we have with them and Don Polly, which would have a material adverse effect on our ability to effectively control Don Polly and receive economic benefits from it. For example, the shareholders may be able to cause our agreements with Don Polly to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise, any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor.
Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and the Company. If we cannot resolve any conflict of interest or dispute between us and the shareholders of Don Polly, we would have to rely on legal proceedings, which could result in the disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
We have no commercial manufacturing capacity and rely on third-party contract manufacturers to produce commercial quantities of our products.
We do not have the facilities, equipment or personnel to manufacture commercial quantities of our products and therefore must rely on qualified third-party contract manufactures with appropriate facilities and equipment to contract manufacture commercial quantities of products. Any performance failure on the part of our contract manufacturers could delay commercialization of any of our products, depriving us of potential product revenue.
Failure by our contract manufacturers to achieve and maintain high manufacturing standards could result in product recalls or withdrawals, delays or failures in testing or delivery, cost overruns or other problems that could materially adversely affect our business. Contract manufacturers may encounter difficulties involving production yields, quality control and quality assurance. If for some reason our contract manufacturers cannot perform as agreed, we may be required to replace them. Although we believe there are a number of potential replacements, we may incur added costs and delays in identifying and obtaining any such replacements.
The inability of a manufacturer to ship orders of our products in a timely manner or to meet quality standards could cause us to miss the delivery date requirements of our customers for those items, which could result in cancellation of orders, refusal to accept deliveries or a reduction in purchase prices, any of which could have a material adverse effect as our revenue would decrease and we would incur net losses as a result of sales of the product, if any sales could be made.
We are subject to cyber-security risks, including those related to customer, employee, vendor or other company data and including in connection with integration of acquired businesses and operations.
We use information technologies to securely manage operations and various business functions. We rely on various technologies, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities, including reporting on our business and interacting with customers, vendors and employees. In addition, we collect and store certain data, including proprietary business information, and may have access to confidential or personal information that is currently distributed through select retail channels, online,subject to privacy and throughsecurity laws, regulations and customer-imposed controls. Our systems are subject to repeated attempts by third parties to access information or to disrupt our systems. Despite our security design and controls, and those of our third-party providers, we may become subject to system damage, disruptions or shutdowns due to any number of causes, including cyber-attacks, breaches, employee error or malfeasance, power outages, computer viruses, telecommunication or utility failures, systems failures, service providers, natural disasters or other catastrophic events. It is possible for such vulnerabilities to remain undetected for an extended period. We may face other challenges and risks as we upgrade and standardize our information technology systems as part of our integration of acquired businesses and operations. We have contingency plans in place to prevent or mitigate the impact of these events, however, these events could result in operational disruptions or the misappropriation of sensitive data, and depending on their nature and scope, could lead to the compromise of confidential information, improper use of our systems and networks, manipulation and destruction of data, defective products, production downtimes and operational disruptions and exposure to liability. Such disruptions or misappropriations and the resulting repercussions, including reputational damage and legal claims or proceedings, may adversely affect our results of operations, cash flows and financial condition, and the trading price of our common stock.
This risk is enhanced in certain jurisdictions with stringent data privacy laws. For example, California recently adopted the California Consumer Privacy Act of 2018 (“CCPA”), which provides new data privacy rights for consumers and new operational requirements for businesses. The CCPA includes a statutory damages framework and private rights of action against businesses that fail to comply with certain CCPA terms or implement reasonable security procedures and practices to prevent data breaches. The CCPA goes into effect in January 2020.
We are affected by extensive laws, governmental regulations, administrative determinations, court decisions and similar other constraints, which can make compliance costly and subject us to enforcement actions by governmental agencies.
The formulation, manufacturing, packaging, labeling, holding, storage, distribution, advertising and sale of our products are affected by extensive laws, governmental regulations and policies, administrative determinations, court decisions and similar constraints at the federal, state and local levels, both within the United States and in any country where we conduct business. There can be no assurance that we, or our independent distributors, will be in compliance with all of these regulations. A failure by us or our distributors to comply with these laws and regulations could lead to governmental investigations, civil and criminal prosecutions, administrative hearings and court proceedings, civil and criminal penalties, injunctions against product sales or advertising, civil and criminal liability for us and/or our principals, bad publicity, and tort claims arising out of governmental or judicial findings of fact or conclusions of law adverse to us or our principals. In addition, the adoption of new regulations and policies or changes in the interpretations of existing databaseregulations and policies may result in significant new compliance costs or discontinuation of customers.product sales, and may adversely affect the marketing of our products, resulting in decreases in revenue.
The business that we conduct outside the U.S. may be adversely affected by international risk and uncertainties.
Although our operations are based in the United States, we conduct business outside of the United States and expect to continue to do so in the future. Any business that we conduct outside of the United States is subject to additional risks that may have a material adverse effect on our ability to continue conducting business in certain international markets, including, without limitation:
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Potentially reduced protection for intellectual property rights;
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Unexpected changes in tariffs, trade barriers and regulatory requirements;
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Economic weakness, including inflation or political instability, in particular foreign economies and markets;
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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.
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.
Our principal placeAs a result of the Share Exchange, our current business is 18552 MacArthur Boulevard, Suite 325, Irvine,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, 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 (for example, through product standards that may be proposed by the FDA for nicotine and flavors), limit adult consumer choices, delay or prevent the launch of new or modified products or products with claims of reduced risk, require the recall or other removal of certain products from the marketplace (for example, a determination by the FDA that one or more products do not satisfy the statutory requirements for substantial equivalence, because the FDA requires that currently-marketed products proceed through the pre-market review process or because the FDA otherwise determines that removal is necessary for the protection of public health), restrict communications 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 one or more of these actions may also have a material adverse effect on our business. Each of our products is subject to intense competition and changes in adult consumer preferences, which may have a material adverse effect on our business.
Our products contain nicotine, which is considered to be a highly addictive substance.
Certain of our products contain nicotine, a chemical found in cigarettes, e-cigarettes, certain other vapor products and other tobacco products, which is considered to be highly addictive. The Family Smoking Prevention and Tobacco Control Act empowers the FDA to regulate the amount of nicotine found in vapor products, but may not require the reduction of nicotine yields of a vapor product to zero. Any FDA regulation may require us to reformulate, recall and or discontinue certain of the products we may sell from time to time, which may have a material adverse effect on our ability to market our products and have a material adverse effect on our business, financial condition, results of operations, cash flows and or future prospects.
Recent bans on the sales of flavored e-cigarettes directly impacts the markets in which we may sell Charlie’s Products, and may have a material adverse impact on our business.
As of the date of this prospectus, Michigan, New York and Massachusetts have temporarily banned the sale of flavored e-cigarettes, and several other states and municipalities are considering implementing similar restrictions. In addition, some cities have also implemented more restrictive measures than their state counterparts, such as San Francisco, which in June 2019, approved a new ban on the sale of flavored nicotine products, including vaping liquids and menthol cigarettes. Any ban of on the sale of flavored e-cigarettes directly limits the markets in which we may sell the Charlie’s Products. In the event the prevalence of such bans increase across the United States, our business, results of operations and financial condition will be materially harmed.
There is uncertainty related to the regulation of flavored e-cigarette liquid and vaporization products and certain other consumption accessories. Increased regulatory compliance burdens could have a material adverse impact on our business development efforts and our operations.
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 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 new laws and regulations at the state and local levels. For example, in September 2019, the Trump Administration and the FDA announced plans to prioritize the FDA's enforcement of the pre-market authorization requirements for non-tobacco flavored e-cigarette products. At the state level, over 25 states have implemented statewide regulations that prohibit vaping in public places. In January 2015, the California 92612. Our telephone numberDepartment of Health declared electronic cigarettes and certain other vaporizer products a health threat that should be strictly regulated like combustible tobacco products. Many states, provinces, and some cities have passed laws restricting the sale of e-cigarettes and certain other nicotine vaporizer products.
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 material limit our ability to sell such products, result in additional compliance expenses, and require us to change our labeling and methods of distribution, any of which could 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 (collectively, “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 that were on the market in the United States prior to August 8, 2016 have a grace period to continue to market such products, ending on May 11, 2020 whereby a premarket application, likely though the pre-market tobacco product application (“PMTA”) pathway, must be completed and filed with the FDA. Upon submission of a PMTA, products would then be able to be marketed pending the FDA’s review of the submission. Without obtaining marketing authorization by the FDA prior to May 12, 2020 or having submitted a PMTA by such date, non-authorized products would be required to be removed from the market in the United States until such authorization could be obtained, although such products may continue to be sold if a PTMA is (949) 203-2500. Our corporate website addresspending as of the May 12, 2020 deadline.
As at the date of this prospectus, 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. It is expected that the cost associated with each application would be in the hundreds of thousands of dollars. If the Company does not submit a PMTA prior to the lapse of the grace period or if the PMTA is denied, the Company would have to cease the distribution of any Charlie’s Products that qualify as Deemed Tobacco Products in the United States which would have a material adverse effect on the Company’s business, results of operations and financial condition.
http://www.truedrinks.comFailure to complete the required PTMAs for the Company’s products, an endeavor that would be extremely time consuming and financially costly, could prevent the Company from marketing and selling certain Charlie’s Products in the United States after May 12, 2020. Our Common Stock, par value $0.001 (“Common Stock and, thus, may have a material effect on the business, financial condition and results of operations. Furthermore, there can be no assurance that if the Company were to complete a PTMA for each of the affected Charlie's Products, that any application would be approved by the FDA.”)
The recent development of vapor products has not yet allowed the medical profession to study the long-term health effects attributable to the use of such products.
Because vapor products have been developed and commercialized recently, the medical profession has not yet had a sufficient period of time to study the long-term health effects attributable to vapor product use. As a result, there is currently listedno way of knowing whether or not vapor products are safe for quotationtheir intended use. If the medical profession were to determine conclusively that vapor product usage poses long-term health risks, the use of such products could decline, which could have a material adverse effect on our business, results of operations and financial condition.
The market for vapor products is a niche market, subject to a great deal of uncertainty, and is still evolving.
Vapor products, having recently been introduced to market, are still at an early stage of development, represent a niche market, are evolving rapidly and are characterized by an increasing number of market entrants. Our future sales and any future profits are substantially dependent upon the widespread acceptance and use of vapor products. Rapid growth in the use of, and interest in, vapor products is recent, and may not continue on a lasting basis. The demand and market acceptance for these products is subject to a high level of uncertainty. Therefore, we are subject to all of the business risks associated with a new enterprise in a niche market, including risks of unforeseen capital requirements, failure of widespread market acceptance of vapor products, in general or, specifically our products, failure to establish business relationships and competitive disadvantages as against larger and more established competitors.
Possible yet unanticipated changes in federal and state law could cause any of our current products, as well as products that we intend to launch, containing hemp-derived CBD oil to be illegal, or could otherwise prohibit, limit or restrict any of our products containing CBD.
We recently launched and commenced distribution of certain products containing hemp-derived CBD, and we currently intend to develop and launch additional products containing hemp-derived CBD in the future. Until 2014, when 7 U.S. Code §5940 became federal law as part of the Agricultural Act of 2014 (the “2014 Farm Act”), products containing oils derived from hemp, notwithstanding a minimal or non-existing THC content, were classified as Schedule I illegal drugs. The 2014 Farm Act expired on September 30, 2018, and was thereafter replaced by the Agricultural Improvement Act of 2018 on December 20, 2018 (the “2018 Farm Act”), which amended various sections of the U.S. Code, thereby removing hemp, defined as cannabis with less than 0.3% THC, from Schedule 1 status under the Controlled Substances Act, and legalizing the cultivation and sale of industrial-hemp at the federal level, subject to compliance with certain federal requirements and state law, amongst other things. THC is the psychoactive component of plants in the cannabis family generally identified as marihuana or marijuana. There is no assurance that the 2018 Farm Act will not be repealed or amended such that our products containing hemp-derived CBD would once again be deemed illegal under federal law.
The 2018 Farm Act delegates the authority to the states to regulate and limit the production of hemp and hemp derived products within their territories. Although many states have adopted laws and regulations that allow for the production and sale of hemp and hemp derived products under certain circumstances, currently Idaho, Mississippi and South Dakota have not adopted laws and regulations permitted by the 2018 Farm Act. No assurance can be given that such state laws may not be implemented, repealed or amended such that our products containing hemp-derived CBD would be deemed legal in those states that have not adopted regulations pursuant to the 2018 Farm Act, or illegal under the laws of one or more states now permitting such products, which in turn would render such intended products illegal in those states under federal law even if the federal law is unchanged.In the event of either repeal of federal or of state laws and regulations, or of amendments thereto that are adverse to our intended products, we may be restricted or limited with respect to those products that we may sell or distribute, which could adversely impact our intended business plan with respect to such intended products.
Additionally, the FDA has indicated its view that certain types of products containing CBD may not be permissible under the FDCA. The FDA’s position is related to its approval of Epidiolex, a marijuana-derived prescription medicine to be available in the United States. The active ingredient in Epidiolex is CBD. On December 20, 2018, after the passage of the 2018 Farm Bill, FDA Commissioner Scott Gottlieb issued a statement in which he reiterated the FDA’s position that, among other things, the FDA requires a cannabis product (hemp-derived or otherwise) that is marketed with a claim of therapeutic benefit, or with any other disease claim, to be approved by the FDA for its intended use before it may be introduced into interstate commerce and that the FDCA prohibits introducing into interstate commerce food products containing added CBD, and marketing products containing CBD as a dietary supplement, regardless of whether the substances are hemp-derived. Although we believe our existing and planned CBD product offerings comply with applicable federal and state laws and regulations, legal proceedings alleging violations of such laws could have a material adverse effect on our business, financial condition and results of operations.
Sources of hemp-derived CBD depend upon legality of cultivation, processing, marketing and sales of products derived from those plants under state law.
Hemp-derived CBD can only be legally produced in states that have laws and regulations that allow for such production and that comply with the 2018 Farm Act, apart from state laws legalizing and regulating medical and recreational cannabis or marijuana, which remains illegal under federal law and regulations. We purchase all of our hemp-derived CBD from licensed growers and processors in states where such production is legal. As described in the preceding risk factor, in the event of repeal or amendment of laws and regulations which are now favorable to the cannabis/hemp industry in such states, we would be required to locate new suppliers in states with laws and regulations that qualify under the 2018 Farm Act. If we were to be unsuccessful in arranging new sources of supply of our raw ingredients, or if our raw ingredients were to become legally unavailable, our intended business plan with respect to such products could be adversely impacted.
Because our distributors may only sell and ship our products containing hemp-derived CBD in states that have adopted laws and regulations qualifying under the 2018 Farm Act, a reduction in the number of states having such qualifying laws and regulations could limit, restrict or otherwise preclude the sale of intended products containing hemp-derived CBD.
The interstate shipment of hemp-derived CBD from one state to another is legal only where both states have laws and regulations that allow for the production and sale of such products and that qualify under the 2018 Farm Act. Therefore, the marketing and sale of our intended products containing hemp-derived CBD is limited by such factors and is restricted to such states. Although we believe we may lawfully sell any of our finished products, including those containing CBD, in a majority of states, a repeal or adverse amendment of laws and regulations that are now favorable to the distribution, marketing and sale of finished products we intend to sell could significantly limit, restrict or prevent us from generating revenue related to our products that contain hemp-derived CBD. Any such repeal or adverse amendment of now favorable laws and regulations could have an adverse impact on our business plan with respect to such products.
Due to recent expansion into the CBD industry, we may have a difficult time obtaining the various insurances that are desired to operate our business, which may expose us to additional risk and financial liability.
Insurance that is otherwise readily available, such as general liability, and directors and officer’s insurance, may become more difficult for us to find, and more expensive, due to our recent launch of certain products containing hemp-derived CBD. There are no guarantees that we will be able to find such insurances in the future, or that the cost will be affordable to us. If we are forced to go without such insurances, it may prevent us from entering into certain business sectors, may inhibit our growth, and may expose us to additional risk and financial liabilities.
We face significant competition from existing suppliers of products similar to ours. If we are not able to compete with these companies effectively, we may not be able to achieve profitability.
We face intense competition from numerous resellers, manufacturers and wholesalers of e-liquids similar to those developed and sold by us, from both retail and online providers. We face competition from direct and indirect competitors, which arguably includes “big tobacco,” “big pharma,” and other known and established or yet to be formed vapor product manufacturing companies, each of whom pose a competitive threat to our current business and future prospects. We compete against “big tobacco,” who offers not only conventional tobacco cigarettes and electronic cigarettes, but also smokeless tobacco products such as “snus” (a form of moist ground smokeless tobacco that is usually sold in sachet form that resembles small tea bags), chewing tobacco and snuff. “Big tobacco” has nearly limitless resources, global distribution networks in place and a customer base that is fiercely loyal to their brands. Furthermore, we believe that “big tobacco” is likely to devote more attention and resources to developing and offering electronic cigarettes or other vapor products as the market for electronic cigarettes grows. Because of their well-established sales and distribution channels, marketing depth, financial resources, and proven expertise navigating complex regulatory landscapes, “big tobacco” is better positioned than small competitors like us to capture a larger share of the vapor markets. We also face competition from companies in the vapor market that are much larger, better funded, and more established than us.
Companies with greater capital and research capabilities could re-formulate existing products or formulate new products that could gain wide marketplace acceptance, which could have a depressive effect on our future sales. In addition, aggressive advertising and promotion by our competitors may require us to compete by lowering prices because we do not have the resources to engage in marketing campaigns against these competitors, and the economic viability of our operations likely would be diminished.
Adverse publicity associated with our products or ingredients, or those of similar companies, could adversely affect our sales and revenue.
Adverse publicity concerning any actual or purported failure by us to comply with applicable laws and regulations regarding any aspect of our business could have an adverse effect on the OTCQBpublic perception of the symbol TRUU.Company. This, in turn, could negatively affect our ability to obtain financing, endorsers and attract distributors or retailers for our products, which would have a material adverse effect on our ability to generate sales and revenue.
Our distributors’ and customers’ perception of the safety and quality of our products or even similar products distributed by others can be significantly influenced by national media attention, publicized scientific research or findings, product liability claims and other publicity concerning our products or similar products distributed by others. Adverse publicity, whether or not accurate, that associates consumption of our products or any similar products with illness or other adverse effects, will likely diminish the public’s perception of our products. Claims that any products are ineffective, inappropriately labeled or have inaccurate instructions as to their use, could have a material adverse effect on the market demand for our products, including reducing our sales and revenue.
Our products may not meet health and safety standards or could become contaminated.
We have adopted various quality, environmental, health and safety standards. We do not have control over all of the third parties involved in the manufacturing of our products and their compliance with government health and safety standards. Even if our products meet these standards, they could otherwise become contaminated. A failure to meet these standards or contamination could occur in our operations or those of our manufacturers, distributors or suppliers. This could result in expensive production interruptions, recalls and liability claims. Moreover, negative publicity could be generated from false, unfounded or nominal liability claims or limited recalls. Any of these failures or occurrences could negatively affect our business and financial performance.
The sale of our products involves product liability and related risks that could expose us to significant insurance and loss expenses.
We face an inherent risk of exposure to product liability claims if the use of our products results in, or is believed to have resulted in, illness or injury. Our products contain combinations of ingredients, and there is little long-term experience with the effect of these combinations. In addition, interactions of these products with other products, prescription medicines and over-the-counter drugs have not been fully explored or understood and may have unintended consequences. While our third-party manufacturers perform tests in connection with the formulations of our products, these tests are not designed to evaluate the inherent safety of our products.
Any product liability claim may increase our costs and adversely affect our revenue and operating income. Moreover, liability claims arising from a serious adverse event may increase our costs through higher insurance premiums and deductibles and may make it more difficult to secure adequate insurance coverage in the future. In addition, our product liability insurance may fail to cover future product liability claims, which, if adversely determined, could subject us to substantial monetary damages.
The success of our business will depend upon our ability to create and expand our brand awareness.
The market we compete in is highly competitive, with many well-known brands leading the industry. Our ability to compete effectively and generate revenue will be based upon our ability to create and expand awareness of our products distinct from those of our competitors. It is imperative that we are able to convey to consumers the benefits of our products. However, advertising and packaging and labeling of such products will be limited by various regulations. Our success will be dependent upon our ability to convey to consumers that our products are superior to those of our competitors.
We must develop and introduce new products to succeed.
Our industry is subject to rapid change. New products are constantly introduced to the market. Our ability to remain competitive depends in part on our ability to enhance existing products, to develop and manufacture new products in a timely and cost-effective manner, to accurately predict market transitions, and to effectively market our products. Our future financial results will depend to a great extent on the successful introduction of several new products. We cannot be certain that we will be successful in selecting, developing, manufacturing and marketing new products or in enhancing existing products.
The success of new product introductions depends on various factors, including, without limitation, the following:
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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.
If we are not able to adequately protect our intellectual property, then we may not be able to compete effectively, and we may not be profitable.
Our existing proprietary rights may not afford remedies and protections necessary to prevent infringement, reformulation, theft, misappropriation and other improper use of our products by competitors. We own the formulations for our products and we consider these product formulations our critical proprietary property, which must be protected from competitors. We do not currently have any patents for our product formulations. Although trade secret, trademark, copyright and patent laws generally provide a certain level of protection, and we attempt to protect ourselves through contracts with manufacturers of our products, we may not be successful in enforcing our rights. In addition, enforcement of our proprietary rights may require lengthy and expensive litigation. We have attempted to protect some of the trade names and trademarks used for our products by registering them with the U.S. Patent and Trademark Office, but we must rely on common law trademark rights to protect our unregistered trademarks. Common law trademark rights do not provide the same remedies as are granted to federally registered trademarks, and the rights of a common law trademark are limited to the geographic area in which the trademark is actually used. Our inability to protect our intellectual property could have a material adverse impact on our ability to compete and could make it difficult for us to achieve a profit.
Compliance with changing corporate governance regulations and public disclosures may result in additional risks and exposures.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and new regulations from the SEC, have created uncertainty for public companies such as ours. These laws, regulations, and standards are subject to varying interpretations in many cases, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result, our efforts to comply with evolving laws, regulations, and standards have resulted in, and are likely to continue to result in, increased expense and significant management time and attention.
Recent Developments
The Share Exchange
On April 26, 2019 (the “Closing Date”), the Company entered into a Securities Exchange Agreement with each of the members (“Members”) of Charlie’s, and certain direct investors (“Direct Investors”), pursuant to which the Company acquired all outstanding membership interests of Charlie’s beneficially owned by the Members in exchange for the issuance by the Company of units, with such units consisting of an aggregate of (i) 15,655,538,349 shares of common stock (which includes the issuance of an aggregate of 1,396,305 shares of a newly created class of Series B Convertible Preferred Stock, par value $0.001 per share (“Series B Preferred”), convertible into an aggregate of 13,963,047,716 shares of common stock, issued to certain individuals in lieu of common stock); (ii) 206,249 shares of a newly created class of Series A Convertible Preferred Stock, par value $0.001 per share (“Series A Preferred”), convertible into an aggregate of 4,654,349,239 shares of common stock; and (iii) warrants to purchase an aggregate of 3,102,899,493 shares of common stock (the “Investor Warrants”) (the “ShareExchange”). As a result of the Share Exchange, Charlie’s became a wholly owned subsidiary of the Company.
In connection with the Share Exchange, the Company also entered into registration rights agreements (the “Registration Rights Agreements”) with each of the Members and Direct Investors, pursuant to which the Company agreed to use its best efforts to file a registration statement with the SEC no later than 30 days after the Closing Date in order to register, on behalf of the Members and Direct Investors, the shares of common stock, shares of common stock issuable upon conversion of the Series A Preferred and Series B Preferred, and shares of common stock issuable upon exercise of the Investor Warrants.
Immediately prior to, and in connection with, the Share Exchange, Charlie’s consummated a private offering of membership interests that resulted in gross proceeds to Charlie’s of approximately $27.5 million (the “Charlie’s Financing”). Katalyst Securities LLC (“Katalyst”) acted as the sole placement agent in connection with the Charlie's Financing pursuant to an Engagement Letter entered into by and between Katalyst, Charlie's and the Company on February 15, 2019, which was amended on April 16, 2019 (“Amended Engagement Letter”). As consideration for its services in connection with the Charlie’s Financing and Share Exchange, the Company issued to Katalyst and its designees five-year warrants to purchase an aggregate of 930,869,848 shares of common stock at a price of $0.0044313 per share (the “Placement Agent Warrants”). The Placement Agent Warrants have substantially the same terms as those set forth in the Investor Warrants. As additional consideration for advisory services provided in connection with the Charlie’s Financing and the Share Exchange, the Company issued an aggregate of 902,661,671 shares of common stock (the “Advisory Shares”), including to Scot Cohen, a member of the Company’s Board of Directors, pursuant to a subscription agreement.
The Share Exchange resulted in a change of control of the Company, with the Members and Direct Investors owning approximately 85.7% of the Company’s outstanding voting securities immediately after the Share Exchange, and the Company’s current stockholders beneficially owning approximately 14.3% of the issued and outstanding voting securities, which includes the Advisory Shares. 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, collectively own approximately 57% of the Company’s issued and outstanding voting securities as a result of the Share Exchange.
The Share Exchange is accounted for as a reverse recapitalization in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) because the primary assets of the Company were nominal following the close of the Share Exchange. Charlie’s was determined to be the accounting acquirer based upon the terms of the Share Exchange and other factors including: (i) Charlie’s stockholders and other persons holding securities convertible, exercisable or exchangeable directly or indirectly for Charlie’s membership units owned approximately 49%, on a fully diluted basis, of the Company’s outstanding securities immediately following the effective time of the Share Exchange (ii) individuals associated with Charlie’s now hold a majority of the seats on the Company’s Board of Directors and (iii) Charlie’s management holds all key positions in the management of the combined Company. Accordingly, the historical financial statements of True Drinks became the Company's historical financial statements including the comparative prior periods. All references in the unaudited condensed consolidated financial statements to the number of shares and per-share amounts of common stock have been retroactively restated to reflect the exchange rate.
Additional information about the Company, the Share Exchange and the Charlie’s Financing are contained in the Company’s Current Report on Form 8-K filed with the SEC on April 30, 2019, as amended on May 1, 2019 and July 11, 2019.
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 consumer e-cigarette and vaping systems.
Launch of CBD Products
In June 2019, we introduced, through Don Polly, full-spectrum hemp extract and CBD isolate wellness products across a variety of formats and with different strengths. Our initial launch consisted of six vapor, eight tincture and two topical product variations. The newly released products were launched under the Pachamama™ brand by way of a licensing agreement between Don Polly and Charlie’s, entered on April 25, 2019. In the near term, we expect to expand the hemp-derived CBD-based products line to include additional CBD isolate products and THC- free, broad spectrum hemp extract products currently in development.
Pachamama™ CBD products are currently available in the U.S., Mexico, U.K., South Africa and Switzerland, and we expect to continue expanding both our domestic and international distribution efforts.
Filing of Amended and Restated Charter; Automatic Conversion of Series B Preferred
On 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.
Current Capital Structure
Following the Share Exchange and the filing of the Amended and Restated Charter, our authorized capital stock currently consists of 50.0 billion shares of common stock, and 5.0 million shares of preferred stock, $0.001 par value per share, of which 300,000 shares have been designated as Series A Convertible Preferred Stock (“Series A Preferred”) and 1,500,000 shares have been designated as Series B Convertible Preferred Stock (“Series B Preferred”).
As of September 23, 2019, there were 18,935,746,390 shares of common stock, 206,248 shares of Series A Preferred and no shares of Series B Preferred outstanding. Each share of Series A Preferred outstanding has a stated value of $100 per share. Subject to certain limitations, holders of outstanding shares of Series A Preferred may elect to convert those shares into that number of shares of common stock equal to the stated value of the shares of Series A Preferred held, divided by $0.0044313, or an aggregate of 4,654,349,239 shares of common stock. Holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of the Company’s stockholders, and holders of shares of Series A Preferred are entitled to vote on an as-converted basis along with holders of common stock on all matters presented to the Company’s stockholders. As such, outstanding shares of of common stock represent approximately 80% of our voting class and outstanding shares of of Series C Preferred represent approximately 20%. For additional disclosure of the Company’s capital structure, see the section of this prospectus titled “Description of our Capital Stock” below.
Corporate Information
Our principal place of business is 1007 Brioso Drive, Costa Mesa, CA 92627. Our telephone number is (949) 531-6855. Our corporate website address is https://charliesholdings.com. Our common stock is currently listed for quotation on the OTC Pink Marketplace under the symbol “CHUC.”
We are a “smaller reporting company” as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended ( the “Exchange Act”) and have elected to take advantage of certain of the scaled disclosure available to smaller reporting companies.
Common stock offered by selling stockholders | This prospectus covers the resale of a total of 26,317,060,072 shares of our common stock, consisting of: (i) 17,628,941,493 shares of common stock currently outstanding, (ii) up to 4,654,349,239 shares of common stock issuable upon conversion of outstanding shares of Series A Preferred, and (iii) 4,033,769,340 shares of common stock issuable upon exercise outstanding Warrants. |
Offering price | The selling stockholders will determine when and how they will sell the common stock offered in this prospectus. The shares of our common stock may be offered and sold byselling stockholdersat a fixed price of $0.01 per share until our common stock is quoted on the OTCQB tier of the OTC Markets (the “OTCQB”), and thereafter at prevailing market prices or privately negotiated prices or in transactions that are not in the public market. Although we have applied to have our common stock quoted on the OTCQB and we believe that upon the effective date of this registration statement our common stock will qualify of quotation on the OTCQB, we cannot assure you that our common stock will, in fact, be quoted on the OTCQB. |
Common stock outstanding | 18,935,746,390 shares. The number of outstanding shares does not include shares issuable upon conversion of outstanding shares of our conversion of Series A Preferred and/or exercise of outstanding Warrants. |
Use of proceeds | We will not receive any proceeds from the sale of the shares of common stock offered by the selling stockholders. |
Risk factors | You should read the “Risk Factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock. |
Market for our shares | Our common stock is traded on the OTC Pink Marketplace under the symbol “CHUC.” We have applied to have our shares of common stock quoted on the OTCQB marketplace under the same symbol. No assurance can be given that such application will be approved. |
The number of shares of common stock outstanding is based on an aggregate of 18,935,746,390 shares outstanding as of September 23, 2019, and excludes:
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206,249 shares of Series A Preferred convertible into 4,654,349,239 shares of common stock;
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outstanding warrants, including the Warrants, to purchase 4,033,769,340 shares of common stock, with a weighted average exercise price of $ 0.044313;
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61,824,826 shares of common stock reserved for issuance upon exercise of outstanding stock options issued under our 2013 Stock Incentive Plan (the “2013 Plan”), with a weighted average exercise price of $0.02 per share; and
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1,107,254,205 shares of common stock reserved for issuance upon exercise of stock options available under our 2019 Omnibus Incentive Plan (the “2019 Plan ”). No awards have been granted under the 2019 Plan.
Unless otherwise indicated in this prospectus, all share and per share figures reflect the exchange of membership interests of Charlie’s then outstanding for certain of the Company’s securities upon the consummation of the Share Exchange on April 26, 2019; however, the share and per share numbers in the audited financial statements of Charlie’s for the year ended December 31, 2018 included in this prospectus are not adjusted to give effect to the Share Exchange.
SUMMARY HISTORICAL FINANCIAL DATA OF CHARLIE’S CHALK DUST, LLC
The following tables set forth a summary of Charlie’s historical financial data as of, and for the periods ended on, the dates indicated, as, following the Share Exchange, we are now primarily dependent on the business of Charlie’s. We have derived the statements of operations data for the years ended December 31, 2018 and 2017 from the audited financial statements of Charlie’s included elsewhere in this prospectus. The statements of operations data for the six-months ended June 30, 2019 and 2018 and the balance sheet data as of June 30, 2019 have been derived from Charlie’s unaudited financial statements included elsewhere in this prospectus and have been prepared on the same basis as the audited financial statements. In the opinion of our management, the unaudited data reflects all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation of results as of and for these periods. You should read this data together with our financial statements and related notes included elsewhere in this prospectus and the sections in this prospectus entitled “Risk Factors,” “Unaudited Pro Forma Condensed Combined Financial Information,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Charlie’s Chalk Dust, LLC,” and our financial statements and related notes appearing elsewhere in this prospectus. Our historical results for any prior period are not indicative of our future results, and our results for the six-months ended June 30, 2019 may not be indicative of our results for the year ending December 31, 2019.
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Statements of Operations Data: | | | |
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Net revenue | $20,840,794 | $12,233,925 | $ 13,466,000 | $ 10,919,000 |
Cost of goods sold | 8,514,790 | 5,475,051 | 5,596,000 | 4,220,000 |
Gross profit | 12,326,004 | 6,758,874 | 7,870,000 | 6,699,000 |
Operating expenses: | | | | |
Selling and marketing | 2,904,456 | 1,862,441 | 1,577,000 | 1,500,000 |
Product development | 95,180 | 116,040 | 15,000 | 30,000 |
General and administrative | 2,126,945 | 1,523,334 | 7,014,000 | 986,000 |
Total operating expenses | 5,126,581 | 3,501,815 | 8,606,000 | 2,516,000 |
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Income (loss) from operations | 7,199,423 | 3,257,059 | (736,000) | 4,183,000 |
Other income | 453 | 9,410 | 178,000 | - |
Net income | $7,199,876 | $3,266,469 | $ (558,000) | $ 4,183,000 |
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Earnings per Unit(1) | | | | |
Basic and diluted earnings per unit | $7,200 | $3,266 | $ 0.0 | $ 0.03 |
Basic and diluted weighted average number of units outstanding | 1,000 | 1,000 | 2,211,436 | 14,104,089 |
(1)
See Note 1 to each of our audited and unaudited condensed financial statements, respectively, included elsewhere in this prospectus for an explanation of the methods used to calculate the historical net income (loss) per share, basic and diluted, and the number of shares used in the computation of the per share amounts.
Balance Sheet data: | |
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Cash | $5,120,000 |
Working capital | (214,000) |
Total assets | 10,341,000 |
Membership Equity | $299,000 |
Investing in our common stock involves a high degree of risk. In addition to the information, documents or reports included or incorporated by reference in this prospectus and, if applicable, any prospectus supplement or other offering materials, you should carefully consider the risks described below in addition to the other information contained in this prospectus, before making an investment decision. Our business, financial condition or results of operations could be harmed by any of these risks. As a result, you could lose some or all of your investment in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks not currently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business operations.
Risks Related to the Company
Our operations are now primarily dependent on the business of Charlie’s, and our ability to achieve positive cash flow under our new business plan is uncertain.
As a result of the Share Exchange, our continued operations are now primarily dependent on the business of Charlie’s. Although Charlie’s generated net revenue of approximately $13.4 million during the six months ended June 30, 2019 and $20.8 million for the year ended December 31, 2018, and we anticipate substantially greater revenue in 2019, there can be no guarantee that the Company will continue to grow revenue or achieve positive cash flow in the future.
Our operating results in the past will not reflect our operating results in the future, which makes it difficult to evaluate our future business, prospects, and forecast revenue.
Until recently, our business was comprised primarily of the development, marketing, sale and distribution of all-natural, vitamin-enhanced drinks. As a result of our decision to consummate the Share Exchange, our future revenue will substantially differ from past revenue, and our operating results will vary significantly compared to past operating results. It is too early to predict whether consumers will accept, and continue to use on a regular basis, our new products, due in part to the fact that we have had limited recent operating history as a combined entity with Charlie’s. Factors that will significantly affect our operating results include, without limitation, the following:
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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;
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our decision in early 2018 to discontinue the production and sale of AquaBall®, that in the years ended December 31, 2018 and 2017, contributed approximately $1,767,802 and $3,581,142 in revenue, respectively;
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our previous sole reliance on sales of Bazi®, that in the years ended December 31, 2018 and 2017, contributed approximately $179,250 and $242,192 in revenue to the Company, respectively; and
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the restructuring of substantially all of our previously outstanding debt and shares of preferred stock on April 26, 2019, in connection with the Share Exchange.
Although we believe that, as a result of the Share Exchange and the restructuring of our prior debt, our cash resources are currently sufficient, our long-term liquidity and capital requirements may be difficult to predict, which may adversely affect our long-term cash position.
Prior to the Share Exchange, our core business product sales were significantly below levels necessary to achieve positive cash flow. In addition, we had significant liabilities, amounting to approximately $9.5 million as of June 30, 2019 and $9.8 million as of December 31, 2018. However, as a result of the acquisition of Charlie’s as our wholly owned subsidiary, Charlie’s historical results of operations, and the restructuring of substantially all of our outstanding debt on April 26, 2019, we currently believe that our cash resources are sufficient to fund our operations for the next twelve months, although no assurances can be given. However, if we are required to seek additional financing in the future in order to fund our operations, retire indebtedness and otherwise carry out our business plan, there can be no assurance that such financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and in our best interests.
Our business is difficult to evaluate because we have recently significantly modified our product offerings and customer base.
As a result of the Share Exchange, we have recently modified our operations, engaging in the sale of new products in a new market through new distributors and new lines of business. There is a risk that we will be unable to successfully integrate the newly acquired businesses with our current structure. Our estimates of capital, personnel and equipment required for our newly acquired businesses are based on the historical experience of management and businesses they are familiar with. Our management has limited direct experience in operating a business of our current size, as well as one that is publicly traded.
Our products could fail to attract or retain users or generate revenue and profits.
As a result of the Share Exchange, our customer base has changed significantly. Our ability to develop, increase, and engage our new customer base and to increase our revenue depends heavily on our ability to continue to evolve our existing products and to create successful new products, both independently and in conjunction with developers or other third parties. We may introduce significant changes to our existing products or acquire or introduce new and unproven products, including using technologies with which we have little or no prior development or operating experience. If new or enhanced products fail to engage our customers, or if we are unsuccessful in our monetization efforts, we may fail to attract or retain customers or to generate sufficient revenue, operating margin, or other value to justify our investments, and our business may be adversely affected.
Our significant stockholders may have certain personal interests that may affect the Company.
Together, Brandon Stump and Ryan Stump, the founders of Charlie’s and our Chief Executive Officer and Chief Operating Officer, respectively, currently own approximately 57% of our issued and outstanding voting securities as a result of the Share Exchange. In addition, holders of our Series C Preferred own approximately 20% of our issued and outstanding voting securities. As a result, Ryan Stump and Brandon Stump and holders of shares of our outstanding Series C Preferred have the ability to exert influence over both the actions of our Board of Directors, the outcome of issues requiring approval by our stockholders, as well as the execution of management’s plans. This concentration of ownership may have effects such as delaying or preventing a change in control of the Company that may be favored by other stockholders or preventing transactions in which stockholders might otherwise recover a premium for their shares over current market prices.
We will need to hire additional qualified accounting and administrative personnel in order to remediate material weaknesses in our internal control over financial accounting, and we will need to expend additional resources and efforts to establish and maintain the effectiveness of our internal control over financial reporting and our disclosure controls and procedures.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Sarbanes-Oxley Act of 2002. Our management is required to evaluate and disclose its assessment of the effectiveness of our internal control over financial reporting as of each year-end, including disclosing any “material weakness” in our internal control over financial reporting. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As a result of its assessment, management has determined that there were material weaknesses due to the lack of segregation of duties and sufficient internal controls (including technology-based general controls) that encompass our Company as a whole with respect to entity and transactions level controls in order to ensure complete documentation of complex and non-routine transactions and adequate financial reporting. If we continue to experience material weaknesses in our internal controls or fail to maintain or implement required new or improved controls, such circumstances could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements, or adversely affect the results of periodic management evaluations and, if required, annual auditor attestation reports. Due to these material weaknesses, management concluded that, as of December 31, 2018 and 2017, our internal control over financial reporting was ineffective. Management also concluded that our disclosure controls and procedures were ineffective as of December 31, 2018 and 2017, as well as for the quarter ended June 30, 2019. These weaknesses were first identified in our Annual Report on Form 10-K for the year ended December 31, 2012. In 2018, we reduced our staff to one employee, and outsourced our accounting and financial functions, further exacerbating our weaknesses in our internal control over financial reporting and our disclosure controls and procedures. Although the number of employees has grown as a result of the Share Exchange and the addition of Charlie’s operations, including the hiring of a new Chief Executive Officer, Chief Financial Officer and the accounting and information technology staffs of Charlie’s, we cannot assure you that we will have sufficient resources to resolve these material weaknesses. These weaknesses have the potential to adversely impact our financial reporting process and our financial reports. We will need to hire additional qualified accounting and administrative personnel in order to resolve these material weaknesses.
The loss of one or more of our key personnel or our failure to attract and retain other highly qualified personnel in the future, could harm our business.
We currently depend on the continued services and performance of key members of our management team, in particular, Brandon Stump and Ryan Stump, Charlie’s founders and our Chief Executive Officer and Chief Operating Officer, respectively, and David Allen, our Chief Financial Officer. If we cannot call upon them or other key management personnel for any reason, our operations and development could be harmed. We have not yet developed a succession plan. Furthermore, as we grow, we will be required to hire and attract additional qualified professionals such as accounting, legal, finance, production, market and sales experts. We may not be able to locate or attract qualified individuals for such positions, which will affect our ability to grow and expand our business.
We rely on contractual arrangements with Don Polly, our consolidated variable interest entity for our CBD-related business operations, which may not be as effective as direct ownership in providing operational control.
We have relied and expect to continue to rely on contractual arrangements with Don Polly and its shareholders, consisting of entities wholly-owned by Brandon Stump and Ryan Stump, for the operation of our CBD-related operations. These contractual arrangements may not be as effective as direct ownership in providing us with control over our consolidated variable interest entity. For example, Don Polly and its shareholders could breach their contractual arrangements with us by, among other things, failing to conduct their operations, including maintaining our website and using the domain names and trademarks, in an acceptable manner or taking other actions that are detrimental to our interests.
If we had direct ownership of Don Polly, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of Don Polly, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we rely on the performance by Don Polly, and its shareholders of their obligations under the contracts. The shareholders of Don Polly may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate our business through the contractual arrangements with Don Polly. Therefore, our contractual arrangements with Don Polly, our consolidated variable interest entity, may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.
The shareholders of Don Polly, our consolidated variable interest entity, may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.
The equity interests of Don Polly, our consolidated variable interest entity, are held by entities controlled by Brandon Stump, our Chief Executive Officer, and Ryan Stump, our Chief Operating Officer. Their interests in Don Polly may differ from the interests of our company as a whole. These shareholders may breach, or cause Don Polly to breach, the existing contractual arrangements we have with them and Don Polly, which would have a material adverse effect on our ability to effectively control Don Polly and receive economic benefits from it. For example, the shareholders may be able to cause our agreements with Don Polly to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise, any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor.
Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and the Company. If we cannot resolve any conflict of interest or dispute between us and the shareholders of Don Polly, we would have to rely on legal proceedings, which could result in the disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
We have no commercial manufacturing capacity and rely on third-party contract manufacturers to produce commercial quantities of our products.
We do not have the facilities, equipment or personnel to manufacture commercial quantities of our products and therefore must rely on qualified third-party contract manufactures with appropriate facilities and equipment to contract manufacture commercial quantities of products. Any performance failure on the part of our contract manufacturers could delay commercialization of any of our products, depriving us of potential product revenue.
Failure by our contract manufacturers to achieve and maintain high manufacturing standards could result in product recalls or withdrawals, delays or failures in testing or delivery, cost overruns or other problems that could materially adversely affect our business. Contract manufacturers may encounter difficulties involving production yields, quality control and quality assurance. If for some reason our contract manufacturers cannot perform as agreed, we may be required to replace them. Although we believe there are a number of potential replacements, we may incur added costs and delays in identifying and obtaining any such replacements.
The inability of a manufacturer to ship orders of our products in a timely manner or to meet quality standards could cause us to miss the delivery date requirements of our customers for those items, which could result in cancellation of orders, refusal to accept deliveries or a reduction in purchase prices, any of which could have a material adverse effect as our revenue would decrease and we would incur net losses as a result of sales of the product, if any sales could be made.
We are subject to cyber-security risks, including those related to customer, employee, vendor or other company data and including in connection with integration of acquired businesses and operations.
We use information technologies to securely manage operations and various business functions. We rely on various technologies, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities, including reporting on our business and interacting with customers, vendors and employees. In addition, we collect and store certain data, including proprietary business information, and may have access to confidential or personal information that is subject to privacy and security laws, regulations and customer-imposed controls. Our systems are subject to repeated attempts by third parties to access information or to disrupt our systems. Despite our security design and controls, and those of our third-party providers, we may become subject to system damage, disruptions or shutdowns due to any number of causes, including cyber-attacks, breaches, employee error or malfeasance, power outages, computer viruses, telecommunication or utility failures, systems failures, service providers, natural disasters or other catastrophic events. It is possible for such vulnerabilities to remain undetected for an extended period. We may face other challenges and risks as we upgrade and standardize our information technology systems as part of our integration of acquired businesses and operations. We have contingency plans in place to prevent or mitigate the impact of these events, however, these events could result in operational disruptions or the misappropriation of sensitive data, and depending on their nature and scope, could lead to the compromise of confidential information, improper use of our systems and networks, manipulation and destruction of data, defective products, production downtimes and operational disruptions and exposure to liability. Such disruptions or misappropriations and the resulting repercussions, including reputational damage and legal claims or proceedings, may adversely affect our results of operations, cash flows and financial condition, and the trading price of our common stock.
This risk is enhanced in certain jurisdictions with stringent data privacy laws. For example, California recently adopted the California Consumer Privacy Act of 2018 (“CCPA”), which provides new data privacy rights for consumers and new operational requirements for businesses. The CCPA includes a statutory damages framework and private rights of action against businesses that fail to comply with certain CCPA terms or implement reasonable security procedures and practices to prevent data breaches. The CCPA goes into effect in January 2020.
We are affected by extensive laws, governmental regulations, administrative determinations, court decisions and similar other constraints, which can make compliance costly and subject us to enforcement actions by governmental agencies.
The formulation, manufacturing, packaging, labeling, holding, storage, distribution, advertising and sale of our products are affected by extensive laws, governmental regulations and policies, administrative determinations, court decisions and similar constraints at the federal, state and local levels, both within the United States and in any country where we conduct business. There can be no assurance that we, or our independent distributors, will be in compliance with all of these regulations. A failure by us or our distributors to comply with these laws and regulations could lead to governmental investigations, civil and criminal prosecutions, administrative hearings and court proceedings, civil and criminal penalties, injunctions against product sales or advertising, civil and criminal liability for us and/or our principals, bad publicity, and tort claims arising out of governmental or judicial findings of fact or conclusions of law adverse to us or our principals. In addition, the adoption of new regulations and policies or changes in the interpretations of existing regulations and policies may result in significant new compliance costs or discontinuation of product sales, and may adversely affect the marketing of our products, resulting in decreases in revenue.
The business that we conduct outside the U.S. may be adversely affected by international risk and uncertainties.
Although our operations are based in the United States, we conduct business outside of the United States and expect to continue to do so in the future. Any business that we conduct outside of the United States is subject to additional risks that may have a material adverse effect on our ability to continue conducting business in certain international markets, including, without limitation:
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Potentially reduced protection for intellectual property rights;
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Unexpected changes in tariffs, trade barriers and regulatory requirements;
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Economic weakness, including inflation or political instability, in particular foreign economies and markets;
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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.
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, 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 (for example, through product standards that may be proposed by the FDA for nicotine and flavors), limit adult consumer choices, delay or prevent the launch of new or modified products or products with claims of reduced risk, require the recall or other removal of certain products from the marketplace (for example, a determination by the FDA that one or more products do not satisfy the statutory requirements for substantial equivalence, because the FDA requires that currently-marketed products proceed through the pre-market review process or because the FDA otherwise determines that removal is necessary for the protection of public health), restrict communications 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 one or more of these actions may also have a material adverse effect on our business. Each of our products is subject to intense competition and changes in adult consumer preferences, which may have a material adverse effect on our business.
Our products contain nicotine, which is considered to be a highly addictive substance.
Certain of our products contain nicotine, a chemical found in cigarettes, e-cigarettes, certain other vapor products and other tobacco products, which is considered to be highly addictive. The Family Smoking Prevention and Tobacco Control Act empowers the FDA to regulate the amount of nicotine found in vapor products, but may not require the reduction of nicotine yields of a vapor product to zero. Any FDA regulation may require us to reformulate, recall and or discontinue certain of the products we may sell from time to time, which may have a material adverse effect on our ability to market our products and have a material adverse effect on our business, financial condition, results of operations, cash flows and or future prospects.
Recent bans on the sales of flavored e-cigarettes directly impacts the markets in which we may sell Charlie’s Products, and may have a material adverse impact on our business.
As of the date of this prospectus, Michigan, New York and Massachusetts have temporarily banned the sale of flavored e-cigarettes, and several other states and municipalities are considering implementing similar restrictions. In addition, some cities have also implemented more restrictive measures than their state counterparts, such as San Francisco, which in June 2019, approved a new ban on the sale of flavored nicotine products, including vaping liquids and menthol cigarettes. Any ban of on the sale of flavored e-cigarettes directly limits the markets in which we may sell the Charlie’s Products. In the event the prevalence of such bans increase across the United States, our business, results of operations and financial condition will be materially harmed.
There is uncertainty related to the regulation of flavored e-cigarette liquid and vaporization products and certain other consumption accessories. Increased regulatory compliance burdens could have a material adverse impact on our business development efforts and our operations.
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 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 new laws and regulations at the state and local levels. For example, in September 2019, the Trump Administration and the FDA announced plans to prioritize the FDA's enforcement of the pre-market authorization requirements for non-tobacco flavored e-cigarette products. At the state level, over 25 states have implemented statewide regulations that prohibit vaping in public places. In January 2015, the California Department of Health declared electronic cigarettes and certain other vaporizer products a health threat that should be strictly regulated like combustible tobacco products. Many states, provinces, and some cities have passed laws restricting the sale of e-cigarettes and certain other nicotine vaporizer products.
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 material limit our ability to sell such products, result in additional compliance expenses, and require us to change our labeling and methods of distribution, any of which could 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 (collectively, “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 that were on the market in the United States prior to August 8, 2016 have a grace period to continue to market such products, ending on May 11, 2020 whereby a premarket application, likely though the pre-market tobacco product application (“PMTA”) pathway, must be completed and filed with the FDA. Upon submission of a PMTA, products would then be able to be marketed pending the FDA’s review of the submission. Without obtaining marketing authorization by the FDA prior to May 12, 2020 or having submitted a PMTA by such date, non-authorized products would be required to be removed from the market in the United States until such authorization could be obtained, although such products may continue to be sold if a PTMA is pending as of the May 12, 2020 deadline.
As at the date of this prospectus, 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. It is expected that the cost associated with each application would be in the hundreds of thousands of dollars. If the Company does not submit a PMTA prior to the lapse of the grace period or if the PMTA is denied, the Company would have to cease the distribution of any Charlie’s Products that qualify as Deemed Tobacco Products in the United States which would have a material adverse effect on the Company’s business, results of operations and financial condition.
Failure to complete the required PTMAs for the Company’s products, an endeavor that would be extremely time consuming and financially costly, could prevent the Company from marketing and selling certain Charlie’s Products in the United States after May 12, 2020 and, thus, may have a material effect on the business, financial condition and results of operations. Furthermore, there can be no assurance that if the Company were to complete a PTMA for each of the affected Charlie's Products, that any application would be approved by the FDA.
The recent development of vapor products has not yet allowed the medical profession to study the long-term health effects attributable to the use of such products.
Because vapor products have been developed and commercialized recently, the medical profession has not yet had a sufficient period of time to study the long-term health effects attributable to vapor product use. 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 could decline, which could have a material adverse effect on our business, results of operations and financial condition.
The market for vapor products is a niche market, subject to a great deal of uncertainty, and is still evolving.
Vapor products, having recently been introduced to market, are still at an early stage of development, represent a niche market, are evolving rapidly and are characterized by an increasing number of market entrants. Our future sales and any future profits are substantially dependent upon the widespread acceptance and use of vapor products. Rapid growth in the use of, and interest in, vapor products is recent, and may not continue on a lasting basis. The demand and market acceptance for these products is subject to a high level of uncertainty. Therefore, we are subject to all of the business risks associated with a new enterprise in a niche market, including risks of unforeseen capital requirements, failure of widespread market acceptance of vapor products, in general or, specifically our products, failure to establish business relationships and competitive disadvantages as against larger and more established competitors.
Possible yet unanticipated changes in federal and state law could cause any of our current products, as well as products that we intend to launch, containing hemp-derived CBD oil to be illegal, or could otherwise prohibit, limit or restrict any of our products containing CBD.
We recently launched and commenced distribution of certain products containing hemp-derived CBD, and we currently intend to develop and launch additional products containing hemp-derived CBD in the future. Until 2014, when 7 U.S. Code §5940 became federal law as part of the Agricultural Act of 2014 (the “2014 Farm Act”), products containing oils derived from hemp, notwithstanding a minimal or non-existing THC content, were classified as Schedule I illegal drugs. The 2014 Farm Act expired on September 30, 2018, and was thereafter replaced by the Agricultural Improvement Act of 2018 on December 20, 2018 (the “2018 Farm Act”), which amended various sections of the U.S. Code, thereby removing hemp, defined as cannabis with less than 0.3% THC, from Schedule 1 status under the Controlled Substances Act, and legalizing the cultivation and sale of industrial-hemp at the federal level, subject to compliance with certain federal requirements and state law, amongst other things. THC is the psychoactive component of plants in the cannabis family generally identified as marihuana or marijuana. There is no assurance that the 2018 Farm Act will not be repealed or amended such that our products containing hemp-derived CBD would once again be deemed illegal under federal law.
The 2018 Farm Act delegates the authority to the states to regulate and limit the production of hemp and hemp derived products within their territories. Although many states have adopted laws and regulations that allow for the production and sale of hemp and hemp derived products under certain circumstances, currently Idaho, Mississippi and South Dakota have not adopted laws and regulations permitted by the 2018 Farm Act. No assurance can be given that such state laws may not be implemented, repealed or amended such that our products containing hemp-derived CBD would be deemed legal in those states that have not adopted regulations pursuant to the 2018 Farm Act, or illegal under the laws of one or more states now permitting such products, which in turn would render such intended products illegal in those states under federal law even if the federal law is unchanged.In the event of either repeal of federal or of state laws and regulations, or of amendments thereto that are adverse to our intended products, we may be restricted or limited with respect to those products that we may sell or distribute, which could adversely impact our intended business plan with respect to such intended products.
Additionally, the FDA has indicated its view that certain types of products containing CBD may not be permissible under the FDCA. The FDA’s position is related to its approval of Epidiolex, a marijuana-derived prescription medicine to be available in the United States. The active ingredient in Epidiolex is CBD. On December 20, 2018, after the passage of the 2018 Farm Bill, FDA Commissioner Scott Gottlieb issued a statement in which he reiterated the FDA’s position that, among other things, the FDA requires a cannabis product (hemp-derived or otherwise) that is marketed with a claim of therapeutic benefit, or with any other disease claim, to be approved by the FDA for its intended use before it may be introduced into interstate commerce and that the FDCA prohibits introducing into interstate commerce food products containing added CBD, and marketing products containing CBD as a dietary supplement, regardless of whether the substances are hemp-derived. Although we believe our existing and planned CBD product offerings comply with applicable federal and state laws and regulations, legal proceedings alleging violations of such laws could have a material adverse effect on our business, financial condition and results of operations.
Sources of hemp-derived CBD depend upon legality of cultivation, processing, marketing and sales of products derived from those plants under state law.
Hemp-derived CBD can only be legally produced in states that have laws and regulations that allow for such production and that comply with the 2018 Farm Act, apart from state laws legalizing and regulating medical and recreational cannabis or marijuana, which remains illegal under federal law and regulations. We purchase all of our hemp-derived CBD from licensed growers and processors in states where such production is legal. As described in the preceding risk factor, in the event of repeal or amendment of laws and regulations which are now favorable to the cannabis/hemp industry in such states, we would be required to locate new suppliers in states with laws and regulations that qualify under the 2018 Farm Act. If we were to be unsuccessful in arranging new sources of supply of our raw ingredients, or if our raw ingredients were to become legally unavailable, our intended business plan with respect to such products could be adversely impacted.
Because our distributors may only sell and ship our products containing hemp-derived CBD in states that have adopted laws and regulations qualifying under the 2018 Farm Act, a reduction in the number of states having such qualifying laws and regulations could limit, restrict or otherwise preclude the sale of intended products containing hemp-derived CBD.
The interstate shipment of hemp-derived CBD from one state to another is legal only where both states have laws and regulations that allow for the production and sale of such products and that qualify under the 2018 Farm Act. Therefore, the marketing and sale of our intended products containing hemp-derived CBD is limited by such factors and is restricted to such states. Although we believe we may lawfully sell any of our finished products, including those containing CBD, in a majority of states, a repeal or adverse amendment of laws and regulations that are now favorable to the distribution, marketing and sale of finished products we intend to sell could significantly limit, restrict or prevent us from generating revenue related to our products that contain hemp-derived CBD. Any such repeal or adverse amendment of now favorable laws and regulations could have an adverse impact on our business plan with respect to such products.
Due to recent expansion into the CBD industry, we may have a difficult time obtaining the various insurances that are desired to operate our business, which may expose us to additional risk and financial liability.
Insurance that is otherwise readily available, such as general liability, and directors and officer’s insurance, may become more difficult for us to find, and more expensive, due to our recent launch of certain products containing hemp-derived CBD. There are no guarantees that we will be able to find such insurances in the future, or that the cost will be affordable to us. If we are forced to go without such insurances, it may prevent us from entering into certain business sectors, may inhibit our growth, and may expose us to additional risk and financial liabilities.
We face significant competition from existing suppliers of products similar to ours. If we are not able to compete with these companies effectively, we may not be able to achieve profitability.
We face intense competition from numerous resellers, manufacturers and wholesalers of e-liquids similar to those developed and sold by us, from both retail and online providers. We face competition from direct and indirect competitors, which arguably includes “big tobacco,” “big pharma,” and other known and established or yet to be formed vapor product manufacturing companies, each of whom pose a competitive threat to our current business and future prospects. We compete against “big tobacco,” who offers not only conventional tobacco cigarettes and electronic cigarettes, but also smokeless tobacco products such as “snus” (a form of moist ground smokeless tobacco that is usually sold in sachet form that resembles small tea bags), chewing tobacco and snuff. “Big tobacco” has nearly limitless resources, global distribution networks in place and a customer base that is fiercely loyal to their brands. Furthermore, we believe that “big tobacco” is likely to devote more attention and resources to developing and offering electronic cigarettes or other vapor products as the market for electronic cigarettes grows. Because of their well-established sales and distribution channels, marketing depth, financial resources, and proven expertise navigating complex regulatory landscapes, “big tobacco” is better positioned than small competitors like us to capture a larger share of the vapor markets. We also face competition from companies in the vapor market that are much larger, better funded, and more established than us.
Companies with greater capital and research capabilities could re-formulate existing products or formulate new products that could gain wide marketplace acceptance, which could have a depressive effect on our future sales. In addition, aggressive advertising and promotion by our competitors may require us to compete by lowering prices because we do not have the resources to engage in marketing campaigns against these competitors, and the economic viability of our operations likely would be diminished.
Adverse publicity associated with our products or ingredients, or those of similar companies, could adversely affect our sales and revenue.
Adverse publicity concerning any actual or purported failure by us to comply with applicable laws and regulations regarding any aspect of our business could have an adverse effect on the public perception of the Company. This, in turn, could negatively affect our ability to obtain financing, endorsers and attract distributors or retailers for our products, which would have a material adverse effect on our ability to generate sales and revenue.
Our distributors’ and customers’ perception of the safety and quality of our products or even similar products distributed by others can be significantly influenced by national media attention, publicized scientific research or findings, product liability claims and other publicity concerning our products or similar products distributed by others. Adverse publicity, whether or not accurate, that associates consumption of our products or any similar products with illness or other adverse effects, will likely diminish the public’s perception of our products. Claims that any products are ineffective, inappropriately labeled or have inaccurate instructions as to their use, could have a material adverse effect on the market demand for our products, including reducing our sales and revenue.
Our products may not meet health and safety standards or could become contaminated.
We have adopted various quality, environmental, health and safety standards. We do not have control over all of the third parties involved in the manufacturing of our products and their compliance with government health and safety standards. Even if our products meet these standards, they could otherwise become contaminated. A failure to meet these standards or contamination could occur in our operations or those of our manufacturers, distributors or suppliers. This could result in expensive production interruptions, recalls and liability claims. Moreover, negative publicity could be generated from false, unfounded or nominal liability claims or limited recalls. Any of these failures or occurrences could negatively affect our business and financial performance.
The sale of our products involves product liability and related risks that could expose us to significant insurance and loss expenses.
We face an inherent risk of exposure to product liability claims if the use of our products results in, or is believed to have resulted in, illness or injury. Our products contain combinations of ingredients, and there is little long-term experience with the effect of these combinations. In addition, interactions of these products with other products, prescription medicines and over-the-counter drugs have not been fully explored or understood and may have unintended consequences. While our third-party manufacturers perform tests in connection with the formulations of our products, these tests are not designed to evaluate the inherent safety of our products.
Any product liability claim may increase our costs and adversely affect our revenue and operating income. Moreover, liability claims arising from a serious adverse event may increase our costs through higher insurance premiums and deductibles and may make it more difficult to secure adequate insurance coverage in the future. In addition, our product liability insurance may fail to cover future product liability claims, which, if adversely determined, could subject us to substantial monetary damages.
The success of our business will depend upon our ability to create and expand our brand awareness.
The market we compete in is highly competitive, with many well-known brands leading the industry. Our ability to compete effectively and generate revenue will be based upon our ability to create and expand awareness of our products distinct from those of our competitors. It is imperative that we are able to convey to consumers the benefits of our products. However, advertising and packaging and labeling of such products will be limited by various regulations. Our success will be dependent upon our ability to convey to consumers that our products are superior to those of our competitors.
We must develop and introduce new products to succeed.
Our industry is subject to rapid change. New products are constantly introduced to the market. Our ability to remain competitive depends in part on our ability to enhance existing products, to develop and manufacture new products in a timely and cost-effective manner, to accurately predict market transitions, and to effectively market our products. Our future financial results will depend to a great extent on the successful introduction of several new products. We cannot be certain that we will be successful in selecting, developing, manufacturing and marketing new products or in enhancing existing products.
The success of new product introductions depends on various factors, including, without limitation, the following:
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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.
If we are not able to adequately protect our intellectual property, then we may not be able to compete effectively, and we may not be profitable.
Our existing proprietary rights may not afford remedies and protections necessary to prevent infringement, reformulation, theft, misappropriation and other improper use of our products by competitors. We own the formulations for our products and we consider these product formulations our critical proprietary property, which must be protected from competitors. We do not currently have any patents for our product formulations. Although trade secret, trademark, copyright and patent laws generally provide a certain level of protection, and we attempt to protect ourselves through contracts with manufacturers of our products, we may not be successful in enforcing our rights. In addition, enforcement of our proprietary rights may require lengthy and expensive litigation. We have attempted to protect some of the trade names and trademarks used for our products by registering them with the U.S. Patent and Trademark Office, but we must rely on common law trademark rights to protect our unregistered trademarks. Common law trademark rights do not provide the same remedies as are granted to federally registered trademarks, and the rights of a common law trademark are limited to the geographic area in which the trademark is actually used. Our inability to protect our intellectual property could have a material adverse impact on our ability to compete and could make it difficult for us to achieve a profit.
Compliance with changing corporate governance regulations and public disclosures may result in additional risks and exposures.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and new regulations from the SEC, have created uncertainty for public companies such as ours. These laws, regulations, and standards are subject to varying interpretations in many cases, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result, our efforts to comply with evolving laws, regulations, and standards have resulted in, and are likely to continue to result in, increased expense and significant management time and attention.
Risks Related to Our Common Stock
A limited trading market currently exists for our securities, and we cannot assure you that an active market will ever develop, or if developed, will be sustained.
There is currently a limited trading market for our common stock on the OTC Pink Marketplace and an active trading market for our common stock may not develop. Consequently, we cannot assure you when and if an active-trading market in our shares will be established, or whether any such market will be sustained or sufficiently liquid to enable holders of shares of our common stock to liquidate their investment in our Company. If an active public market should develop in the future, the sale of unregistered and restricted securities by current stockholders may have a substantial impact on any such market.
Sales of a substantial number of shares of our common stock, or the perception that such sales may occur, may adversely impact the price of our common stock.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception that such sales may occur, may adversely impact the price of our common stock, even if there is no relationship between such sales and the performance of our business. As of September 23, 2019, we had 18,935,746,390 shares of common stock outstanding, as well as outstanding options to purchase an aggregate of 61,824,826 shares of our common stock at a weighted average exercise price of $0.01 per share, up to 4,654,349,239 shares of common stock issuable upon conversion of outstanding shares of Series A Preferred and outstanding warrants to purchase up to an aggregate of 4,033,769,340 shares of our common stock at a weighted average exercise price of $0.044313 per share. The exercise and/or conversion of such outstanding derivative securities may result in further dilution to our stockholders.
If we issue additional shares of common stock in the future, it will result in the dilution of our existing stockholders.
Our Charter currently authorizes the issuance of up to 50.0 billion shares of common stock, of which approximately 18.9 billion shares are currently issued and outstanding. In addition, we have reserved approximately 9.8 billion shares for issuance upon conversion and/or exercise of our outstanding shares of Series A Preferred, warrants and stock options, as well as for issuance as awards under our 2019 Omnibus Incentive Plan. The issuance of any additional shares of our common stock, including those shares issuable upon conversion and/or exercise of our outstanding derivative securities, will result in significant dilution to our stockholders and a reduction in value of our outstanding common stock. Further, any such issuance may result in a change of control of our corporation.
Holders of Series A Convertible Preferred Stock have substantial rights and ranks senior to our common stock.
On February 18, 2015,Our common stock ranks junior as to dividend rights, redemption rights, conversion rights and rights in any liquidation, dissolution or winding-up of the Company filedto the CertificateSeries A Preferred. Upon liquidation, dissolution or winding-up of Designation, Preferences, Rights and Limitationsthe Company, the holders of the Series C ConvertibleA Preferred Stock withare entitled to a liquidation preference equal to the Nevada Secretaryoriginal purchase price of State, designating 50,000Series 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 Company'sholders thereof. As a result, if we, in the future, issue common stock or grant any rights to purchase our common stock or other securities convertible into our common stock for a per share price less than the then existing conversion price of the Series A Preferred, an adjustment to the then current conversion price would occur. This reduction in the conversion price could result in substantial dilution to our then-existing common stockholders as well as give rise to a beneficial conversion feature reported on our statement of operations. Either or both of which could adversely affect the price of our common stock.
The price of our securities could be subject to wide fluctuations and your investment could decline in value.
The market price of the securities of a company such as ours with little name recognition in the financial community can be subject to wide price swings. The market price of our common stock may be subject to wide changes in response to quarterly variations in operating results, announcements of new products by us or our competitors, reports by securities analysts, volume trading, or other events or factors. In addition, the financial markets have experienced significant price and volume fluctuations for a number of reasons, including the failure of certain companies to meet market expectations. These broad market price swings, or any industry-specific market fluctuations, may adversely affect the market price of our securities.
Companies that have experienced volatility in the market price of their stock have been the subject of securities class action litigation. If we were to become the subject of securities class action litigation, it could result in substantial costs and a significant diversion of our management’s attention and resources.
Because our common stock may be classified as “penny stock,” trading may be limited, and the share price could decline. Moreover, trading of our common stock, if any, may be limited because broker-dealers would be required to provide their customers with disclosure documents prior to allowing them to participate in transactions involving our common stock. These disclosure requirements are burdensome to broker-dealers and may discourage them from allowing their customers to participate in transactions involving our common stock.
We have issued preferred stock with rights senior to our common stock, and may issue additional preferred stock in the future.
Our Charter authorizes the issuance of up to 5.0 million shares of preferred stock, par value $0.001 per share, without stockholder approval and on terms established by our directors, of which 300,000 shares have been designated as Series A Preferred and 1.5 million shares have been designated as Series B Preferred. We may issue additional shares of preferred stock in the future in order to consummate a financing or other transaction, in lieu of the issuance of shares of our common stock. The rights and preferences of any such class or series of preferred stock would be established by our Board of Directors in its sole discretion and may have dividend, voting, liquidation and other rights and preferences that are senior to the rights of the common stock.
You may not be able to hold our securities in your regular brokerage account.
In the case of publicly-traded companies, it is common for a broker to hold securities on your behalf, in “street name” (meaning the broker is shown as the holder on the issuer’s records and then you show up on the broker’s records as the person the broker is holding for). Due to regulatory uncertainties, certain brokers may not agree to hold securities of companies whose products include hemp-derived CBD for their customers, meaning that you may not be able to take advantage of the convenience of having all your holdings reflected in one place.
You should not rely on an investment in our common stock for the payment of cash dividends.
Because of our previous significant operating losses and because we intend to retain future profits, if any, to expand our business, we have never paid cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. You should not make an investment in our common stock if you require dividend income. Any return on investment in our common stock would only come from an increase in the market price of our stock, which is uncertain and unpredictable.
The selling stockholders will only be able to sell their shares of our common stock registered herein at a fixed price of $0.01 per share until our common stock is quoted on the OTCQB tier of the OTC Markets.
Our shares of common stock are currently quoted on the OTC Pink Marketplace, and we have applied to have our common stock quoted on the OTCQB. Until our common stock is quoted on the OTCQB, the shares of common stock offered pursuant to this prospectus may only be resold by the selling stockholders at a fixed price of $0.01 per share, which price may be materially higher or lower than the current trading price of shares of our common stock. There is no assurance our application to the OTCQB will be approved, and, if we are unsuccessful in securing a quotation for our common stock on the OTCQB, the shares of common stock offered pursuant to this prospectus will continue to be offered at a fixed price of $0.01 per share, irrespective of the market price of our common stock.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements contained in this prospectus other than statements of historical facts, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about:
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anticipated trends and challenges in our business and the markets in which we operate;
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the impact of regulation of our nicotine-based and CBD-based products;
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the accuracy of our estimates regarding expenses, future revenue and capital requirements;
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our ability to anticipate market needs or develop new or enhanced products to meet those needs;
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our expectations regarding market acceptance of our products;
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the success of competing products by others that are or become available in the market in which we sell our products;
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our ability to protect our proprietary information and trademarks;
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our ability to manage additional expansion into international markets;
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our ability to maintain or broaden our business relationships and develop new relationships with strategic alliances, suppliers, customers, distributors or otherwise;
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our ability to secure a quotation for our common stock on the OTCQB; and
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other risks and uncertainties, including thosedescribed under “Risk Factors” and elsewhere in this prospectus.
These forward-looking statements are only predictions and we may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, so you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results. We have included important factors in the cautionary statements included in this prospectus, that could cause actual future results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
You should read this prospectus with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION The following unaudited pro forma condensed combined financial statements are presented to illustrate the estimated effects of the transaction between Charlie’s Chalk Dust, LLC, a Delaware limited liability company (“Charlie’s” or the “Company”) and True Drinks Holdings, Inc. (“True Drinks”) which was accounted for as a reverse recapitalization under U.S. GAAP (the “Merger”).
On April 26, 2019 (the “Closing Date”), the Company entered into a Securities Exchange Agreement with each of the members (“Members”) of Charlie’s, and certain direct investors (“Direct Investors”), pursuant to which we acquired all outstanding membership interests of Charlie’s beneficially owned by the Members in exchange for the issuance by the Company of units, with such units consisting of an aggregate of (i) 15,655,538,349 shares of common stock (which includes the issuance of an aggregate of 1,396,305 shares of a newly created class of Series B Convertible Preferred Stock, par value $0.001 per share (“Series B Preferred”), convertible into an aggregate of 13,963,047,716 shares of common stock, issued to certain individuals in lieu of common stock); (ii) 206,249 shares of a newly created class of Series A Convertible Preferred Stock, par value $0.001 per share (“Series A Preferred”), convertible into an aggregate of 4,654,349,239 shares of common stock; and (iii) warrants to purchase an aggregate of 3,102,899,493 shares of common stock (the “Series C PreferredInvestor Warrants”) (the “ShareExchange”). Each shareAs a result of Series C Preferred hasthe Share Exchange, Charlie’s became a stated valuewholly owned subsidiary of $100 per sharethe Company.
Immediately prior to, and in connection with, the Share Exchange, Charlie’s consummated a private offering of membership interests that resulted in net proceeds to Charlie’s of approximately $27.5 million (the “Stated ValueCharlie’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 is convertible, atbetween Katalyst, Charlie’s and the optionCompany 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 each respective holder, into that number of930,869,848 shares of Common Stock equal to the Stated Value, divided by $0.15at a price of $0.0044313 per share (the “Conversion SharesPlacement Agent Warrants”). The Company also hasPlacement Agent Warrants have substantially the option to require conversionsame terms as those set forth in the Investor Warrants.
The Share Exchange resulted in a change of control of the Series C Preferred into Conversion SharesCompany, with the Members and Direct Investors owning approximately 85.7% of the Company’s outstanding voting securities immediately after the Share Exchange, and the Company’s current stockholders beneficially owning approximately 14.3% of the issued and outstanding voting securities, which includes the Advisory Shares. Together, Brandon Stump and Ryan Stump, the founders of Charlie’s and the Company’s newly appointed Chief Executive Officer and Chief Operating Officer, respectively, own approximately 57% of the Company’s issued and outstanding voting securities as a result of the Share Exchange.
The Share Exchange is accounted for as a reverse recapitalization in accordance with accounting principles generally accepted in the event:United States (“U.S. GAAP”) because the primary assets of the Company were nominal following the close of the Share Exchange. Charlie’s was determined to be the accounting acquirer based upon the terms of the Share Exchange and other factors including: (i) there are sufficient authorizedCharlie’s stockholders and other persons holding securities convertible, exercisable or exchangeable directly or indirectly for Charlie’s membership units now own approximately 49%, on a fully diluted basis, of the Company’s outstanding securities immediately following the effective time of the Merger, (ii) individuals associated with Charlie’s now hold a majority of the seats on the Company’s Board of Directors and (iii) Charlie’s management holds all key positions in the management of the combined Company. Accordingly, the historical financial statements of True Drinks became the Company's historical financial statements including the comparative prior periods. All references in the unaudited condensed consolidated financial statements to the number of shares and per-share amounts of Common Stock reserved as Conversion Shares; (ii)common stock have been retroactively restated to reflect the Conversion Shares are registeredexchange rate.
The following unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2019 and the year ended December 31, 2018(collectively, the “Pro Forma Statements”)have been prepared in compliance with the requirements of Regulation S-X under the Securities Act using accounting policies in accordance with U.S. GAAP. The unaudited pro forma condensed combined financial information is based on Charlie’s and True Drinks’ historical consolidated financial statements as adjusted, to give effect to Charlie’s reverse recapitalization of 1933, as amended (the “True Drinks and Charlie’s Financing.
Accounting policies used in the preparation of the Pro Forma Statements are based on the audited consolidated financial statements of Charlie’s for the year ended December 31, 2018 and the six months ended June 30, 2019.
The pro forma adjustments are based on estimates and currently available information and assumptions that Charlie’s management believes are reasonable. The notes to the Pro Forma Statements provide a discussion of how such adjustments were derived and presented in the Pro Forma Statements. Changes in facts and circumstances or discovery of new information may result in revised estimates. As a result, there may be material adjustments to the Pro Forma Statements. Certain historical True Drinks and Charlie’s financial statement caption amounts have been reclassified or combined to conform to Charlie’s presentation and disclosure requirements.
The Pro Forma Statements should be read together with True Drink’s historical financial statements, which are included in True Drink’s latest Annual Report on Form 10-K filed with the Securities Actand Exchange Commission (“SEC”) on April 1, 2019 and the June 30, 2019 results included in the Company’s report on Form 10-Q filed with the SEC on August 14, 2019, and Charlie’s historical information included in the Company’s 8K/A filed on July 10, 2019.
The unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2019 and the year ended December 31, 2018 give effect to these transactions as if they had occurred on January 1, 2018.
Because Charlie’s was treated as the acquirer under the reverse recapitalization, Charlie’s and True Drink’s assets and liabilities were recorded at their precombination carrying amounts in the unaudited pro forma condensed combined financial information. The historical consolidated financial statements have been adjusted in the unaudited pro forma combined condensed consolidated financial statements to give effect to pro forma events that are: (1) directly attributable to the Merger; (2) factually supportable; and (3) with respect to the unaudited pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results of Charlie’s and True Drinks following the Merger.
The Pro Forma Statements do not give effect to the potential impact of current financial conditions, regulatory matters, operating efficiencies or other savings or expenses, if any, that may be associated with the integration of the two companies. The Pro Forma Statements are preliminary and have been prepared for illustrative purposes only and is not necessarily indicative of the financial position or results of operations in future periods or the Conversion Sharesresults that actually would have been realized had True Drinks and Charlie’s been a combined organization during the specified periods. The actual results reported in periods following the transaction may differ significantly from those reflected in the pro forma condensed combined financial information presented herein for a number of reasons, including, but not limited to, differences between the assumptions used to prepare this pro forma condensed combined financial information.
The assumptions and estimates underlying the unaudited adjustments to the pro forma condensed combined financial statements are freely tradable, without restriction, under Rule 144described in the accompanying notes, which should be read together with the pro forma condensed combined financial statements.
Unaudited Pro Forma Combined Statement of Income – Year Ended December 31, 2018
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Revenue: | $20,840,794 | $1,947,052 | $(1,436,113) | (f) | $21,351,733 |
Cost of revenue | 8,514,790 | 1,228,448 | (728,025) | (f) | 9,015,213 |
Gross profit | 12,326,004 | 718,604 | (708,088) | | 12,336,520 |
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Operating expenses: | | | | | |
Selling and marketing | 2,904,456 | 411,371 | - | | 3,315,827 |
General and administrative | 2,126,945 | 10,997,813 | 1,128,327 | (b) | 14,253,085 |
Product development | 95,180 | - | - | | 95,180 |
| 5,126,581 | 11,409,184 | 1,128,327 | | 17,664,092 |
Operating income (loss) | 7,199,423 | (10,690,580) | (1,836,415) | | (5,327,572) |
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Other income (expense): | | | | | |
Change in fair value of derivative liabilities | - | 8,883,383 | (8,883,383) | (a) | - |
Impairment of goodwill | - | (1,898,000) | - | | (1,898,000) |
Interest expense | - | (813,545) | 813,545 | (a) | - |
Other income | 453 | 639,443 | - | | 639,896 |
Total other income (expense) | 453 | 6,811,281 | (8,069,838) | | (1,258,104) |
Income (loss) before provision for income taxes | 7,199,876 | (3,879,299) | (9,906,253) | | (6,585,676) |
Provision for income taxes | - | - | (2,159,963) | (c) | (2,159,963) |
Net income (loss) | 7,199,876 | (3,879,299) | (12,066,216) | | (8,745,639) |
Dividends on preferred stock | - | (260,688) | 260,688 | (a) | (1,650,000) |
| - | - | (1,650,000) | (e) | |
Net income (loss) attributable to common shareholders | $7,199,876 | $(4,139,987) | $(13,455,528) | | $(10,395,639) |
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Net loss per common share: | | | | | |
Basic and diluted | | $(0.02) | | | (0.00) |
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Weighted average common shares outstanding: | | | | | |
Basic and diluted | | 230,204,655 | 4,591,184,190 | (d) | 4,821,388,845 |
Unaudited Pro Forma Combined Statement of Income – Six Months Ended June 30, 2019
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Revenue: | $13,466,000 | $28,014 | $- | | $13,494,014 |
Cost of revenue | 5,596,000 | 14,145 | - | | 5,610,145 |
Gross profit | 7,870,000 | 13,869 | - | | 7,883,869 |
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Operating expenses: | | | | | |
Selling and marketing | 1,577,000 | 20,692 | - | | 1,597,692 |
General and administrative | 7,029,000 | 217,543 | 564,164 | (b) | 7,810,707 |
| 8,606,000 | 238,235 | 564,164 | | 9,408,399 |
Operating income (loss) | (736,000) | (224,366) | (564,164) | | (1,524,530) |
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Other income (expense): | | | | | |
Change in fair value of derivative liabilities | 178,000 | (975,430) | 797,430 | (a) | - |
Interest expense | - | (192,932) | 192,932 | (a) | - |
Other income | - | 353,972 | - | | 353,972 |
Total other income (expense) | 178,000 | (814,390) | 990,362 | | 353,972 |
Income (loss) before provision for income taxes | (558,000) | (1,038,756) | 426,198 | | (1,170,558) |
Provision for income taxes | - | - | 167,400 | (c) | 167,400 |
Net income (loss) | (558,000) | (1,038,756) | 593,598 | | (1,003,158) |
Dividends on preferred stock | - | (64,279) | 64,279 | (a) | (825,000) |
| | | (825,000) | (e) | |
Net income (loss) attributable to common shareholders | $(558,000) | $(1,103,035) | $(167,123) | | $(1,828,158) |
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Net loss per common share: | | | | | |
Basic and diluted | | $(0.00) | | | (0.00) |
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Weighted average common shares outstanding: | | | | | |
Basic and diluted | | 486,287,708 | 4,591,184,190 | (d) | 5,077,471,898 |
Notes to the Unaudited Pro Forma Condensed Combined Financial Information
Note 1 — Basis of Presentation
The unaudited pro forma condensed combined financial information was prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of SEC Regulation S-X and presents the pro forma results of operations of the Securities Act;combined companies based upon the historical data of True Drinks Holdings, Inc. (“True Drinks”) and Charlies Chalk Dust, LLC, a Delaware limited liability company (“Charlie’s”).
Basis of Presentation
The unaudited pro forma condensed consolidated financial statements were prepared in accordance with the regulations of the SEC. The unaudited pro forma condensed consolidated statement of operations for the six months ended June 30, 2019 and the year ended December 31, 2018 assumes that the Merger occurred on January 1, 2018 and combines the historical results of Charlie’s and True Drinks.
For accounting purposes, Charlie’s is considered to be the acquiring company and the Merger will be accounted for as a reverse recapitalization of True Drinks by Charlie’s because the primary assets of True Drinks, which include cash and other assets and liabilities, will be nominal following the close of the merger. Under reverse recapitalization accounting, the assets and liabilities of True Drinks will be recorded, as of the completion of the merger, at their fair value which is expected to approximate book value because of the short-term nature of the instruments. No goodwill or intangible assets are expected to be recognized and any excess consideration transferred over the fair value of the net assets of True Drinks following determination of the actual purchase consideration for True Drinks will be reflected as an adjustment to equity. Consequently, the financial statements of Charlie’s reflect the operations of the acquirer for accounting purposes together with a deemed issuance of shares, equivalent to the shares held by the former stockholders of the legal acquirer and a recapitalization of the equity of the accounting acquirer. The historical financial statements of True Drinks and Charlie’s, which are provided elsewhere in this registration statement, have been adjusted to give pro forma effect to events that are (i) directly attributable to the Merger, (ii) factually supportable, and (iii) with respect to the average closing pricestatements of operations, expected to have a continuing impact on the combined results.
To the extent there are significant changes to the business following completion of the Company's Common StockMerger, the assumptions and estimates set forth in the unaudited pro forma condensed consolidated financial statements could change significantly. Accordingly, the pro forma adjustments are subject to further adjustments as additional information becomes available and as additional analyses are conducted following the completion of the Merger. There can be no assurances that these additional analyses will not result in material changes to the estimates of fair value.
Note 2 — Preliminary purchase price allocation
The following is at least $0.62the preliminary estimate of the value of assets acquired and liabilities assumed by Charlie’s in the Merger, which closed on April 26, 2019:
Cash and cash equivalents | $401 |
Accounts receivable | 1,173 |
Inventory, net | 25,657 |
Accounts payable and accrued expenses | (710,615) |
Debt - short term | (3,394,497) |
Net liabilities acquired | $(4,077,881) |
Note 3 — Pro forma adjustments
The pro forma adjustments are based on preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma condensed combined financial information:
(a) Represents the elimination of True Drink’s change in fair value of derivative liabilities, interest expense and dividends on preferred stock in connection with the transaction.
(b) The Company granted 705,204,430 unvested common shares to certain employees of Charlie’s. These shares vest over a 2-year period. The fair value of a share of common stock was $0.0032 which is based upon a valuation prepared by the Company on the date of the Merger. The Company will record $0.6 million and $1.1 million during the six months ended June 30, 2019 and year ended December 31, 2018, respectively.
(c) Represents the pro forma tax impact of Charlie’s assumed conversion from an LLC to a C-Corp using an estimated tax rate of 30% applied to Charlie’s net income.
(d) Represents the increase in the weighted average shares of 4,591,184,190 shares due to the Transactions.
(e) Represents the recording of a $0.83 million and $1.65 million 8% dividend of the Series A Preferred for the six months ended June 30, 2019 and year ended December 31, 2018, respectively. The dividend was calculated as follows:
206,248.18 - Total Series A Preferred issued as of March 31, 2019
X $100 per Series A share for 10 consecutive trading days.
$20,624,818
X 8%
$1,650,000 on an annual basis
or $412,500 on a quarterly basis
(f) To eliminate intercompany revenue and cost of revenue related to transactions between True Drinks and the Company during the twelve months ended December 31, 2018.
DESCRIPTION OF OUR BUSINESS
Series C Offering
On February 20, 2015 (theAs used in this prospectus, unless otherwise stated or the context otherwise requires, references to the “Initial Investment DateCompany,” “we,” “us,” “our,” or similar references mean Charlie’s Holdings, Inc. (formerly True Drinks Holdings, Inc.), its subsidiaries and consolidated variable interest entity on a consolidated basis. References to “Charlie’s” and “CCD” refer to Charlie’s Chalk Dust, LLC, a California limited liability company and wholly-owned subsidiary of the Company, and “Don Polly” refers to Don Polly, LLC, a Nevada limited liability company that is owned by entities controlled by Brandon Stump and Ryan Stump, the Company’s Chief Executive Officer and Chief Operating Officer, respectively, and a consolidated variable interest for which the Company is the primary beneficiary.
Overview
Our objective is to become a 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 accredited investors (the “premium vapor, tincture and topical products containing hemp-derived cannabidiol (“InvestorsCBD”) and we currently intend to develop and launch additional products containing hemp-derived CBD in the future. Prior to the Share Exchange, our primary business was the development, marketing, sale and distribution of all-natural, vitamin-enhanced drinks, including AquaBall® Naturally Flavored Water and Bazi® All Natural Energy(“Bazi”). We continue to sell limited amounts of Bazi, but have ceased all production and sales of AquaBall® Naturally Flavored Water.
We intend to expand our operations and seek revenue and profit growth by increasing the sales of our nicotine based e-cigarette liquid by offering additional product and expanding sales territories, as well as from our recently launched manufacturing and distribution of CBD based products.
Recent Developments
Share Exchange
On April 26, 2019, the Company (then known as True Drinks Holdings, Inc.), entered into a Securities PurchaseExchange Agreement with each of the members of Charlie’s on that date (the “Purchase Agreement”) wherein the Investors agreed to purchase up to 43,000 shares of Series C Preferred for $100 per share, over the course of three separate closings (the “Series C Offering”). The Company issued an aggregate total of 18,000 shares of Series C Preferred on the Initial Investment Date, 15,000 shares on April 1, 2015 and 10,000 shares on May 29, 2015. As additional consideration for participating in the Series C Offering, each Investor received five-year warrants (the “Warrants”), exercisable for $0.15 per share, to purchase that number of shares of the Company's Common Stock equal to 35% of the Conversion Shares issuable upon conversion of each Investor’s shares of Series C Preferred (the “Warrant Shares”).
In addition to the Purchase Agreement, the Company and the Investors entered into a Registration Rights Agreement (the “Registration Rights AgreementCharlie’s Members”), pursuant to which the Company agreed to file a Registration Statement on Form S-1 withacquired all outstanding membership interests beneficially owned by the Securities and Exchange CommissionCharlie’s Members in order to register the Warrant Shares issuable upon exerciseexchange for certain units consisting of the Warrants, and the Conversion Shares issuable upon conversionCompany’s securities (the “Share Exchange”). As a result, Charlie’s became a wholly owned subsidiary of the Shares, underCompany. Following the Securities Act.
Amendment to Series C Certificateconsummation of Designation.the Share Exchange, the primary business operations of the Company consisted of those of Charlie’s and, more recently, Don Polly. See “Prospectus Summary - The Share Exchange.”
On March 26, 2015,The Share Exchange resulted in a change of control of the Company, filedwith the FirstMembers and Direct Investors owning approximately 85.7% of the Company’s outstanding voting securities immediately after the Share Exchange, and the Company’s current stockholders beneficially owning approximately 14.3% of the issued and outstanding voting securities, which includes the Advisory Shares. Together, Brandon Stump and Ryan Stump, the founders of Charlie’s and the Company’s newly appointed Chief Executive Officer and Chief Operating Officer, respectively, own approximately 57% of the Company’s issued and outstanding voting securities as a result of the Share Exchange.
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 CertificateCharter; Automatic Conversion of Designation, Preferences, RightsSeries B Preferred
On June 28, 2019, we amended and Limitationsrestated our Articles of Incorporation (the “Series C AmendmentAmended and Restated Charter”) with the Nevada Secretary of State in order 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 the Company’s preferred stock designated as Series C Preferred from 50,000 to 90,000Directors and to permit the transactions contemplated by the Note Paymentsholders of a majority of our outstanding voting securities on May 8, 2019, and the Note Exchange, as described below.
Note PaymentsAmended and Note Exchange.
Following the filing of the Series C Amendment, on March 27, 2015, the Company and the Investors entered into an amendment to the Purchase Agreement (the “Purchase Agreement Amendment”) wherein the Company sold to one of the Investors an additional 27,000 shares of Series C Preferred for gross proceeds of $2.7 million, which the Company subsequently used to satisfy approximately $2.7 million of the Company’s $3.8 million in outstanding secured promissory notes (the “Notes”) (the “Note Payments”). As additional consideration for the purchase of the additional shares of Series C Preferred, the Investor received additional Warrants to purchase Warrant Shares equal to 35% of the Conversion Shares underlying the shares of Series C Preferred issued in connectionRestated Charter was filed with the Purchase Agreement Amendment.
Following the Note Payments, the Company and each of the holders (the “Holders”) of the Notes remaining after the Note Payments entered into Note Exchange Agreements (the “Exchange Agreements”), wherein the Holders agreed to exchange all remaining principal and accrued interest of any such Notes into shares of Series C PreferredNevada on substantially similar terms to those offered in the Series C Offering (the “Note ExchangeJune 28, 2019.”).
Expansion of and Appointment of Neil LeVecke to the Board of Directors
On February 18, 2015, the Company’s Board of Directors approved an increase to the size of the Board from four seats to five. On February 20, 2015, in connection with the Company’s execution of the Purchase Agreement, Neil LeVecke was appointed to serve as a member of the Board.
Resignation of Carl Wistreich and Lou Imbrogno from the Board of Directors
On March 10, 2015, Carl Wistreich and Lou Imbrogno each resigned from the Company’s Board of Directors.
Increase of Authorized Common Stock
On June 10, 2015, the Company filed an amendment to its Articles of Incorporation with the Nevada Secretary of State to increase the total authorized shares of the Company's Common Stock from 120.0 million shares to 200.0 million shares.
Our History
Bazi Intl. Prior to Merger with True Drinks, Inc.
Bazi Intl. was formed in 2001, under the name “Instanet, Inc.” In August 2010, we changed our name to Bazi International, Inc. Until January 18, 2010, our principal channel of distribution was through a multilevel distributor network, which we terminated in January 2010 in favor of a retail and direct-to-consumer, online sales model. Bazi Intl. continued to distribute Bazi® online and through our existing database of customers, but as a result of the termination of our multilevel distributor model, most of our top distributors ended their relationship with the Company during the first quarter of 2010, causing sales of Bazi® to decrease throughout 2011 and into 2012. As a result, Bazi Intl. began suffering from a lack of sufficient capital necessary to adequately market Bazi® and support the Company’s existing retail and distribution partners.
True Drinks, Inc. Prior to Merger with the Bazi Intl.
True Drinks, Inc. (formerly GT Beverage Company, Inc.) was formed on January 19, 2012 to develop, market and sell AquaBall™ Naturally Flavored Water. In February and March of 2012, True Drinks, Inc. acquired GT Beverage Company, LLC. GT Beverage Company, LLC was formed in May 2008 to create and commercialize its Sportastic® brand sports drink, sold in round plastic bottles with registered trade dresses such as baseball and soccer designs. However, in January 2012, GT Beverage Company, LLC ceased its sports drink operations. In April 2012, True Drinks began packaging and selling AquaBall™ Naturally Flavored Water in its patented interlocking round plastic bottles, with depictions of characters from major entertainment companies, as permitted by licensing agreements with these companies.
True Drinks, Inc. Merges into Bazi Intl.
On June 7, 2012, True Drinks, Inc., Bazi Acquisition Sub Inc. ("Merger Sub"), a Delaware corporation and a wholly-owned subsidiary of Bazi International, Inc. (“Bazi Intl.”), and Bazi Intl. entered into an agreement and tax-free plan of merger (the “Merger Agreement”), wherein Merger Sub merged with and into the Company and True Drinks continued as the surviving corporation (the “Merger”). As a result of the Merger, True Drinks became a wholly-owned subsidiaryfiling of the Company. The Merger closed on October 15, 2012 (the “Closing Date”). As a resultAmended and Restated Charter and the increase of Merger, True Drinks, Inc.’s former shareholders owned approximately 95.5% of the combined post-Merger entity viaour authorized common stock to 50.0 billion shares, all 1,396,305 outstanding shares of Series AB 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 (“Series A Preferred”) issued as part of the Merger. The Company subsequently changed its name from “Bazi International, Inc.” to “True Drinks Holdings, Inc.” The Merger was accounted for as a public company “reverse merger,” and, as such, the consolidated financial statements reported herein reflect the operations of True Drinks, Inc. within the capital structure of Bazi Intl. Bazi Intl. was originally incorporated in the state of Nevada in January 2001.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.”
E-Liquids
E-liquids used to produce vapor in vaping devices are sold separately for use in refillable tanks of open system vaporizers. Liquids are available in differing nicotine concentrations (0 mg, 3 mg and 6 mg per milliliter) to suit user preferences. Liquids are available in a variety of flavors, including our proprietary blends. Liquid solution consists of flavoring and/or nicotine dissolved in one or several hygroscopic components, which turns the water in the solution into the smoke-like vapor when heated. The most commonly used hygroscopic components are propylene glycol (“PG”), vegetable glycerin (“VG”) or polyethylene glycol 400. VG imparts sweetness and produces vapor clouds, while PG produces more “throat hit”, which simulates the feeling of smoking. Our proprietary brands of e-liquids are manufactured by ISO Class 7 certified manufacturers in the United States, which helps ensure their purity and quality.
Charlie’s e-liquid products are produced under seven brand names distinguished by their flavor profiles, packaging art and ingredient transparency. All products are packaged in plastic drip containers that are typically available in seven sizes ranging from 10 mil to 100ml, as well as bulk concentrate formats.
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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.
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CCD3. Launched in 2016, is a sea salt caramel ice cream flavor.
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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.
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Meringue. The third brand launched in 2016, based on creative character stories, currently includes three flavors.
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Campfire™. Outdoors and Smores flavor inspired by camp vibes.
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Stumps™. Line of four flavors inspired by the founders and their families broadly released in 2017 across various formats. Currently active in select markets.
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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 marketbroadly 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 distribute30ml bottles. During 2019, we plan to broadly release NIC salt extensions of the Meringue and Black, Gold and White Label Charlie’s Chalk Dust brands.
Don Polly
Don Polly is a company under common ownership with the Company, and was established in April 2019 for the specific purpose of developing, marketing and distributing proprietary and innovative hemp-derived cannabidiol (“CBD”), non-THC, wellness products. Don Polly is owned by two limited liabilities companies, of which one is wholly-owned by Brandon Stump, the Company’s Chief Executive Officer, and the other is wholly-owned by Ryan Stump, the Company’s Chief Operating Officer. In June 2019, Charlie’s entered into a Licensing Agreement with Don Polly, pursuant to which Charlie's granted Don Polly a limited right and license to use certain of Charlie’s trademarks, copyrights and original artwork, in connection with Don Polly’s branded CBD products, as well as a Services Agreement pursuant to which Charlie’s provides certain services to Don Polly related to the sales, marketing, brand development of Don Polly products.
As a result, the Company and Don Polly launched a line of premium vapor, tincture and topical products containing hemp-derived CBD in June 2019, which we refer to the “Don Polly Products” and “Don Polly Product Line”. Don Polly’s efforts have been focused on developing and producing high quality CBD products made from single-strain-sourced hemp extract and high purity CBD isolate crystals. In addition, good manufacturing practices and quality control parameters are of the utmost importance to the Don Polly Products, which contribute to the differentiation of the Don Polly Products in the CBD product industry. The Don Polly Products consist of full-spectrum and isolate CBD products across three categories including vapor, tinctures, and topicals.
Isolate CBD Products
Our CBD isolate products contain a minimum purity of 99% isolate crystals, tested by independent, third-party facilities to ensure it is free of pesticides and heavy metals. Vape, as a CBD delivery method, has grown in popularity due to the high level of bioavailability and reported therapeutic responses. In response to demand for CBD infused e-liquids from our existing distribution channels, we launched a new line of CBD infused vapor products in June 2019. We refer to these products as the “Don Polly Vape Product Line” or the “Don Polly Isolate Products.” The Don Polly Vape Product Line is currently available in 30ml chubby bottles across three flavors (Minty Mango, Grape Berry and Strawberry Watermelon) and two strengths (250mg and 500mg). We are continuing to research and develop isolate products as both vape line extensions and in other product categories.
Full Spectrum CBD Products
Our full spectrum hemp extract comes from whole plant extraction which retains the plant’s natural compounds. This extraction method ensures each product preserves the holistic benefits of the plant including minimal amounts of THC (0.3% or less), which allows for optimal absorption of the plant’s nutrients. While CBD alone is a beneficial cannabinoid, full spectrum products provide the body access to all the plant’s cannabinoids, allowing the end user to achieve a wide range of therapeutic benefits. The full spectrum products are formulated with single-source and single strain hemp extracts. Don Polly believes this sourcing practice yields various compounds that move away fromwork 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 are currently developing certain broad spectrum products, which, ultimately, will allow us to launch products which match the consumer accessibility of our CBD isolate products with the experience and benefits of our full spectrum products.
True Drinks –Legacy Product -- Bazi®
Prior to the Share Exchange, we marketed and distributed products, including AquaBall® and Bazi®, offering a healthful, natural alternative to high sugar, high calorie and nutritionally deficient beveragesbeverages. A discussed below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we ceased producing AquaBall® in early 2018. We continue to healthful, natural alternatives. Our mission is to bring integrity back tomarket and sell Bazi®, but on a very limited basis and only as we sell 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, AquaBall™ Naturally Flavored Water, is a naturally flavored water beverage, enhanced with vitamins B3, B5, B6, B12 and C. 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 the 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 the AquaBall™ brand is our licensing agreements with Disney Consumer Products, Inc. (“Disney”) and Marvel Entertainment (“Marvel”), allowing each AquaBall™ 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 each AquaBall™ the presence associated with these brands.
Each AquaBall™ is packaged in our patented 12 ounce stackable, spherical PET bottle, and wrapped with colorful, eye-catching labels featuring popular Disney characters and various Marvel Superheroes. AquaBall™ currently comes in fruit punch, grape, orange and berry flavors and is sold in mass-market retailers throughout the United States. AquaBall is also sold in Canada, Australia and New Zealand. AquaBall™ is also available for purchase online at http://www.aquaballdrink.com. During the year ended December 31, 2014, AquaBall™ sales accounted for approximately 95% 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, 2014, Bazi® sales accounted for approximately 5% of the Company’s total revenues..
Manufacturing and Distribution
Manufacturing
Charlie’s Product Line. We use a limited number of third partieswork closely with contract manufacturing partners in the United States, Ireland and Scotland to supply and manufacture our products. Our e-liquid and NIC salts products are manufactured to meet our proprietary formula specifications in facilities that are ISO Class 7 certified, which helps ensure their purity and quality. In 2018, we sourced 97% of our products from three suppliers in the United States. While we have developed long-standing relationships with our manufacturing sources and take great care to ensure that they share our commitment to quality, we do not have any long-term term contracts with these parties for the production of our product lines. We maintain redundancies in our supply chain and are aware of several alternative sources for our products.
Don Polly Product Line. Our hemp-derived, CBD-based Don Polly Products are manufactured with contract manufacturers to meet our formula specifications. While we do not have co-packing agreementsany long-term contracts with 7-Up Bottling in Modesto, California, Mountain Pure in Palestine, Texas,these parties, we are strengthening our supplier partnerships as well as identifying additional supplier and Adirondack Beverages in Scotia, New York to package up to 4.0 million cases per year.contract manufacturing opportunities.
Bazi®. Bazi® hashad been manufactured by Arizona Packaging and Production since 2007. Presently, we are not manufacturing Bazi Product, although we continue to sell existing inventory.
Retail Distribution
We utilize a direct-to-retailer distribution strategy to key national accounts for sales of AquaBall™ Naturally Flavored Water, including distribution to Sam’s Club, Rite-Aid, Harris Teeter Supermarkets, Value Merchandisers, and stores under the Safeway, Inc. and The Kroger Company brands nationwide. We also distribute AquaBall™ through regional distributorsCharlie’s Product Line.Once manufactured, Charlie’s Products are directly distributed throughout the United States suchand in more than 80 countries, primarily the United Kingdom, Italy, Spain, Belgium, Australia, Sweden and Canada. We distribute our products to more than 2,100 specialty retailers through direct sales and to distributors and wholesalers both in the United States and internationally. Retailers of our products include specialty retailers throughout the United States and in 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 75 key distribution and large retail accounts in the United States, Mexico, the United Kingdom, Switzerland and South Africa. Like the Charlie’s Product Line, we will distribute Don Polly Products directly to retailers, as Drink King in New York Citywell as through the use of distributors and Polar Beverages in New England. Additionally, our licensing agreement with Disney Consumer Products, Inc. and Marvel Entertainment allows usthird-party wholesalers. We also expect to work with Disney and Marvel’s dedicatedutilize direct-to-consumer sales teams who, in turn, work with top retailers to assist us with securing shelf-space for AquaBall™ and accomplishing our long-term sales objectives.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 Company’s ecommerceDon Polly Product Line is offered for sale directly to consumers under our Pachamama brand through our in-house, e-commerce platform on our website www.enjoypachamama.com.
Bazi®. Our e-commerce platform allows current and future consumers to purchase AquaBall™ Naturally Flavored Water and Bazi® Energy Shot by visitingthrough http://www.drinkbazi.com. All sales of Bazi® Energy Shot are made through our webpages, http://www.aquaballdrink.comonline platform, and, http://www.drinkbazi.com. We drive traffic 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
The Company’sCharlie’s Product Line.We have a 15-person sales team, based in the United States, that promotes our Charlie’s Products globally. Salespeople seek to form long-term “360” collaborative relationships with their clients, partnering with them on sell-through efforts, providing access to Charlie’s marketing and creative teams and advising and educating them on the Charlie’s Product Line and other industry-related issues. Currently, we advertise our products primarily through direct customer engagement through social media channels, print media, directed Internet marketing, industry tradeshows and collaborative events with retail partners. Historically, participation at industry-specific tradeshows played a large role in our marketing and distribution strategy. However, in 2018 we began shifting resources to collaborative events, and, instead, our marketing team is now focusing its efforts on fostering relationships with key distributors and retailers by launching customer-specific marketing campaigns, in-person visits to new customer accounts and other forms of direct customer engagement. In 2018, approximately 30% of our sales were to customers outside of the United States.
We intend to strategically expand our advertising activities in 2019 and increase our public relations efforts to gain industry awareness as well as editorial coverage for our brands. Some of our competitors promote their brands through print media and through celebrity endorsements and have substantial resources to devote to such efforts. We believe that our and our competitors’ efforts have helped increase our sales, our product acceptance and general industry awareness.
Don Polly Product Line. Since the launch of the Don Polly products in June 2019, we have employed similar sales and marketing efforts are directed from our corporate officesused for the Charlie’s Product Line, and intend to utilize those sales and marketing efforts in Irvine, California, utilizing our own staff, as well as outside resources retained to build market awareness and shelf placement of our products. The Company manages key national accounts through our in-house national sales team. Most notably, the Company began distribution of AquaBall™ near term.Naturally Flavored Water to all Rite Aid locations in June 2014, and began shipping product on a rotational basis to Sam’s Club in July 2014. The Company has signed on with certain DSD (direct store delivery) distributors throughout the United States in 2014 and continuing into 2015. The Company has agreements with Polar Beverages in New England, Drink King covering New York City, RBI Distributing in Iowa, and other regional distributors with more being signed in 2015.
OurBazi®While Bazi is sold online athttp://www.drinkbazi.com, a large portion of its sales teams workare made to secure national distribution with theserecurring customers through multiple avenues including joint sales meetings with Disney and Marvel sales personnel dedicated to these national accounts. The Company sales team also manages our national broker networks. The networks focus on areas such as regional grocery chains and the convenience store channel.a subscription basis.
As of July 6, 2015, the Company was not dependent upon any major customers.
Source and Availability of Raw Materials
We currently utilizeCharlie’s Product Line.Our manufacturing partners source the ingredients 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 certain product packaging and are responsible for managing various third-party supplier relationships.
Don Polly Product Line. For our full spectrum CBD products we currently source the individual components and CBD from several suppliers. Each are delivered to our primary manufacturer for storage prior to manufacturing. Our primary manufacturer for isolate CBD products handles all raw materials for the AquaBall™ Naturally Flavored Water, and relymaterial sourcing internally.
Bazi®.During 2018, we relied significantly on one supplier for 100% of our purchases of certain raw materials for Bazi®. Bazi, Inc. has sourced these raw materials from this supplier since 2007, and does not anticipate any issues with the supply of these raw materials. Presently, we are not producing Bazi product.
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, be, better established, larger and better financed than our Company.
We plan to compete primarily on the basis of product quality, brand recognition, brand loyalty, service, marketing, and advertising. We are subject to highly competitive conditions in all aspects of our business. The competitive environment and our competitive position can be significantly influenced by weak economic conditions, erosion of consumer confidence, competitors’ introduction of low-priced products or innovative products, cigarette excise taxes, higher absolute prices and larger gaps between price categories, and product regulation that diminishes the ability to differentiate tobacco products.
We also compete with otheragainst “big tobacco”, U.S. cigarette manufacturers of functional beverages,both conventional tobacco cigarettes and with manufacturers of more traditional beverages,electronic cigarettes like Altria Group, Inc., Lorillard, Inc. and Reynolds American, Inc. We compete against big tobacco who offers not only conventional tobacco cigarettes and electronic cigarettes but also smokeless tobacco products such as juice“snus” (a form of moist ground smokeless tobacco that is usually sold in sachet form that resembles small tea bags), chewing tobacco and soda.snuff. Big tobacco has nearly limitless resources, global distribution networks in place and a customer base that is fiercely loyal to their brands. Furthermore, we believe that big tobacco will devote more attention and resources to developing and offering electronic cigarettes as the market for electronic cigarettes grows. Because of their well-established sales and distribution channels, marketing expertise and significant resources, big tobacco may be better positioned than small competitors like us to capture a larger share of the electronic cigarette market.
Our primaryDon Polly Product Line. The market for CBD-based hemp products is rapidly growing and is highly competitive. The competition for AquaBall™consists of publicly and privately-owned companies, which tend to be highly fragmented in terms of both geographic market coverage and products offered. With the Company’s leading brand status, innovation capabilities, existing sales and marketing platform, established distribution channels and high-quality manufacturing, Management believes the Company is well-positioned to capitalize on favorable long-term trends in the $1.2 billion market forhemp-based, CBD wellness products marketed directly to children, including CapriSun®, Tum-E Yummies, Good to Grow, Tummy Ticklers, Kool-aid 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. segment.
Bazi®.Bazi® competitors include Steaz®, Guayaki Yerba Mate, POM Wonderful®, as well as sports and energy drinks including Gatorade®, Red Bull®, 5-Hour Energy®, RockStar®, Monster®, Powerade®, Accelerade® and All Sport®. Indirect competition for the AquaBall™ and Bazi® includes soft drinks and juice products, such as Sunny Delight® and other fruit drinks. These competitors can use their resources and scale to rapidly respond to competitive pressures and changes in consumer preferences by introducing new products, reducing prices or increasing promotional activities. Many of our competitors have longer operating histories and have substantially greater financial and other resources than we do. They, therefore, have the advantage of established reputations, brand names, track records, back office and managerial support systems and other advantages that we cannot duplicate in the near future.future, if ever. Moreover, many competitors, by virtue of their longevity and capital resources, have established lines of distribution to which we do not have access, and are not likely to duplicate in the near term, if ever.
Intellectual Property
We rely on the AquaBall™ patent, AquaBall™ and Bazi® trademarks and licensing agreements to market our products and make them standout 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. In 2016 and 2017, we took impairment charges 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
WeCharlie’s Product Line.Charlie's is currently active in exploring several long-term licensing arrangements with several well-known industry participants. The goal of such relationships is to acquire additional revenue streams as well as to introduce the Charlie’s Chalk Dust and Pachamama™ brands to a wider consumer base.
Don Polly Product Line. On April 25, 2019, the Company and Charlie’s entered into a three-yearLicense Agreement (the “License Agreement”) with Don Polly. As previously noted, Don Polly is classified as a variable interest entity for which the Company is the primary beneficiary, and is owned by entities controlled by Brandon Stump and Ryan Stump, the Company’s Chief Executive Officer and Chief Operating Officer, respectively. Pursuant to the License Agreement, Charlie’s provides Don Polly with a limited right and license to use certain of Charlie’s intellectual property rights, including certain trademarks, copyrights and original artwork, in connection with certain of Don Polly’s branded CBD products. In exchange for such license, Don Polly (i) pays Charlie’s monthly royalties amounting to 75% of its net profits, (ii) uses its best efforts to market, promote and advertise its products, (iii) provides Charlie’s with most favored nations pricing in the event that Charlie’s wishes to sell products sold by Don Polly, (iv) provide Charlie’s with the exclusive right of first refusal to purchase Don Polly, including all of its assets and liabilities, for a purchase price of $111,618 on or before December 31, 2025, and (v) will not license any intellectual property from any other source other than Charlie’s in connection with its design, manufacture, advertisement, promotion distribution and sale of CBD infused products within the agreed upon territory. The License Agreement will continue in perpetuity unless terminated in accordance with its terms.
Concurrently with the execution of the License Agreement, Charlie’s and Don Polly also entered into a Services Agreement (the “Services Agreement”), pursuant to which Charlie’s provides certain services to Don Polly, including, without limitation, (i) the development and creation of Don Polly’s sales, marketing, brand development and customer service strategies and (ii) performing sales, branding, marketing and other business functions at the request of Don Polly. Charlie’s will perform such services in the capacity of a contractor, and all materials and work product created by Charlie’s in its capacity as such will be the property of Don Polly. As consideration for the Services provided by Charlie’s, Don Polly (i) pays Charlie’s 25% of its net profits on a quarterly basis, and (ii) reimburse Charlie’s for all out-of-pocket business expenses that are preapproved in writing by Don Polly. The Services Agreement will continue in perpetuity unless terminated in accordance with its terms.
True Drinks -- Legacy Products.We previously had a licensing agreement with Disney Consumer Products, Inc. (“Disney”) and an 18-month licensing agreement with Marvel Characters, B.V. ("Marvel") (the “Licensing AgreementsDisney License”) in 2012. Each Licensing Agreement allows, which allowed us to feature popular Disney and Marvel characters on AquaBall™ AquaBall®Naturally Flavored Water, allowing AquaBall™ AquaBall®to stand out among other beverages marketed towards children. UnderAs discussed in the terms and conditions of the Licensing Agreements, we worksection entitled “Recent Developments” above, in connection with the discontinued production of AquaBall®, we notified Disney and Marvel teamsof our desire 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. The terms ofterminate the Disney Licensing Agreement (“License in early 2018.Disney Agreement”) stipulatesAs a royalty rateresult of 4% onour decision to discontinue the salesproduction of AquaBall™ Naturally Flavored Water adorned with Disney characters, paid quarterly, with a total royalty guarantee of $231,600 over the term ofAquaBall® and terminate the Disney Agreement which hasLicense, and considering amounts due, Disney drew from a term ending dateletter of July 15, 2015. In addition,credit funded by Red Beard in the Company is requiredamount of $378,000 on or about June 1, 2018. Subsequently, Disney agreed to spend 1%a settlement and release of sales on advertising and promotional opportunities. The Company is requiredall claims related to make common marketing fund contributions totaling $96,188 over the life of the Disney Agreement. The Company and Disney are currentlyLicense in discussions to extend this agreement.
The terms of the Marvel Licensing Agreement (“Marvel Agreement”) stipulates a royalty rate of 5% on the sales of AquaBall™ Naturally Flavored Water adorned with Marvel characters, paid quarterly. The Company recently extended the Marvel Agreement through the end of 2015. The total royalty guaranteeconsideration for the period from January 1, 2015 through December 31, 2015 is $150,000.payment to Disney of $42,000.
Government Regulations
The production, distributionCharlies’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.
On May 10, 2016, the FDA issued the “Deeming Regulations” which came into effect August 8, 2016. The Deeming Regulations amended the definition of “tobacco products” to include e-liquid, e-cigarettes and other vaping products. Deemed Tobacco Products include, but are not limited to, e-liquids, atomizers, batteries, cartomizers, clearomisers, tank systems, flavors, bottles that contain e-liquids and programmable software. Beginning August 8, 2016, Deemed Tobacco Products became subject to all FDA regulations applicable to cigarettes, cigarette tobacco, and other tobacco products which require:
| ● | a prohibition on sales to those younger than 18 years of age and requirements for verification by means of photographic identification; |
| ● | health and addictiveness warnings on product packages and in advertisements; |
| ● | a ban on vending machine sales unless the vending machines are located in a facility where the retailer ensures that individuals under 18 years of age are prohibited from entering at any time; |
| ● | registration with, and reporting of product and ingredient listings to, the FDA; |
| ● | no marketing of new tobacco products prior to FDA review; |
| ● | no direct and implied claims of reduced risk such as "light", "low" and "mild" descriptions unless FDA confirms (a) that scientific evidence supports the claim and (b) that marketing the product will benefit public health; |
| ● | ban on free samples; and |
In addition, the Deeming Regulations requires any Deemed Tobacco Product that was not commercially marketed as of the “grandfathering” date of February 15, 2007, to obtain premarket approval before it can be marketed in the United States. Premarket approval could take any of the following three pathways: (1) submission of a premarket tobacco product application (“PMTA”) and receipt of a marketing authorization order; (2) submission of a substantial equivalence report and receipt of a substantial equivalence order; or (3) submission of a request for an exemption from substantial equivalence requirements and receipt of an substantial equivalence exemption determination. The Company cannot predict if any of the products in the Charlie's Product Line, all of which would be considered “non-grandfathered”, will receive the required premarket approval from the FDA if the Company were to undertake obtaining premarket approval through any of the available pathways.
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 PTMAs, Modified Risk Tobacco Product (“MRTP”) applications and reports to demonstrate Substantial Equivalence (“SE”). The FDA also plans to finalize guidance on how it intends to review PMTAs for ENDS. The agency also will continue efforts to assist industry in complying with federal tobacco regulations through online information, meetings, webinars and guidance documents”.
As at the date of this prospectus, 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:
| ● | | the levying of substantial and increasing tax and duty charges; |
| ● | | restrictions or bans on advertising, marketing and sponsorship; |
| ● | | the display of larger health warnings, graphic health warnings and other labeling requirements; |
| ● | | restrictions on packaging design, including the use of colors and generic packaging; |
| ● | | restrictions or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines; |
| ● | | requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituents levels; |
| ● | | requirements regarding testing, disclosure and use of tobacco product ingredients; |
| ● | | increased restrictions on smoking in public and work places and, in some instances, in private places and outdoors; |
| ● | | elimination of duty free allowances for travelers; and |
| ● | | encouraging litigation against tobacco companies. |
If e-liquid, e-cigarettes or other vaping products are subject to one or more significant regulatory initiatives enacted under the FCTC, the Company’s business, results of operations and financial condition could be materially and adversely affected.
European Union
On April 3, 2014, the European Union issued the “New Tobacco Product Directive” and is intended to regulate “tobacco products”, including cigarettes, roll-your-own tobacco, cigars and smokeless tobacco, and “electronic cigarettes and herbal products for smoking”, including e-cigarettes, e-liquid, refill containers, liquid holding tanks and e-liquid bottles sold directly to consumers. The New Tobacco Product Directive became effective May 20, 2016.
The New Tobacco Product Directive introduces a number of new regulatory requirements for e-cigarettes, e-liquid and other vaping products, which includes the following: (i) restricts the amount of nicotine that e-cigarettes and e-liquid can contain; (ii) requires e-cigarettes, e-liquid and refill containers to be sold in child and tamper-proof packaging and nicotine liquids to contain only “ingredients of high purity”; (iii) provides that e-cigarettes, e-liquid and other vaping products must deliver nicotine doses at “consistent levels under normal conditions of use” and come with health warnings, instructions for their use, information on “addictiveness and toxicity”, an ingredients list, and information on nicotine content; (iv) significantly restricts the advertising and promotion of e-cigarettes, e-liquid and other vaping products; and (v) requires e-cigarette, e-liquid and other vaping product manufacturers and importers to notify EU Member States before placing new products on the market and to report annually such to Member States (including on their sales volumes, types of users and their “preferences”). Failure to make annual reports to Member State Competent Authorities or to properly notify prior to a substantive change to an existing product or introduction of a new product could result in the Company’s inability to market or sell its products and cause material adverse effect on the Company’s business, results of operations and financial condition.
The New Tobacco Product Directive requires Member States to transpose into law New Tobacco Product Directive provisions by May 20, 2016. An “EU directive” requires Member States to achieve particular results. However, it does not dictate the means by which they do so. Its effect depends on how Member States transpose the New Tobacco Product Directive into their national laws. Member States may decide, for example, to introduce further rules affecting e-cigarettes, e-liquid and other vaping products (for example, age restrictions) provided that these are compatible with the principles of free movement of goods in the Treaty on the Functioning of the European Union. The Tobacco Product Directive also includes provisions that allow Member States to ban specific e-cigarettes, e-liquid and other vaping products or specific types of e-cigarettes, e-liquid and other vaping products in certain circumstances if there are grounds to believe that they could present a serious risk to human health. If at least three Member States impose a ban and it is found to be duly justified, the European Commission could implement a European Union wide ban. Similarly, the New Tobacco Product Directive provides that Member States may prohibit a certain category of tobacco, flavoring or related products on grounds relating to a specific situation in that Member State for public health purposes. Such measures must be notified to the European Commission to determine whether they are justified.
There are also other national laws in Member States regulating e-cigarettes, e-liquid and other vaping products. It is not clear what impact the new Tobacco Product Directive will have on these laws.
Canada
On September 27, 2017, Health Canada released a Notice to the Industry that portions of Bill S-5 related to the sale of vaping products that are marketed without health or therapeutic claims are to be enacted immediately upon Royal Assent. In effect, this both legitimizes the sale of vaping products within Canada and creates an initial regulatory framework. Health Canada has taken the stance that vaping products that are not marketed as therapeutic are to be considered consumer products and subject to the requirements of the Canada Consumer Product Safety Act (“CCPSA”). Under the CCPSA, there is a “general prohibition” on products that are classified as “very toxic” under the Consumer Chemicals and Containers Regulations, 2001 (“CCCR, 2001”). Health Canada has reviewed the toxicity of nicotine containing products and has determined that “vaping liquids containing equal to or more than 66 mg/ml (6.6%) nicotine meet the classification of "very toxic" under the CCCR, 2001 and will be prohibited from import, advertising or sale under Section 38 of the CCCR, 2001. None of the Company’s e-liquid products for sale fall under this classification of “very toxic” and are therefore able to be marketed for sale within Canada. Health Canada has also determined that products containing any nicotine that falls below the “very toxic” classification to be regulated as “toxic” under the CCCR, 2001. This classification requires the use of childproof packaging, specific labeling requirements and pictograms as outlined in the CCCR, 2001.
At present, the Company has made efforts to ensure that its e-liquid products that are being marketed in Canada are in full compliance with the recommendations of Health Canada and will expect no interruption to business upon Royal Ascent of Bill S-5.
Health Canada had also stated an intent to develop additional regulations under the authority of the CCPSA, however, at this time it is unclear what those additional regulations may be or how they will affect the Company’s business. If e-liquid, e-cigarettes or other vaping products are subject to one or more significant regulatory initiatives enacted under the Bill S-5 or otherwise, the Company’s business, results of operations and financial condition could be materially and adversely affected.
Currently in Canada, electronic smoking products (i.e., electronic products for the vaporization and administration of inhaled doses of nicotine including electronic cigarettes, cigars, cigarillos and pipes, as well as cartridges of nicotine solutions and related products) fall within the scope of the Food and Drugs Act. All of these products require market authorization prior to being imported, advertised or sold in Canada. Market authorization is granted by Health Canada following successful review of scientific evidence demonstrating safety, quality and efficacy with respect to the intended purpose of the health product. To date, no electronic smoking product has been authorized for sale by Health Canada.
In the absence of evidence establishing otherwise, an electronic smoking product delivering nicotine is regulated as a “new drug” under Division 8, Part C of the Food and Drug Regulations. In addition, the delivery system within an electronic smoking kit that contains nicotine must meet the requirements of the Medical Devices Regulations. Appropriate establishment licenses issued by Health Canada are also needed prior to importing, and manufacturing electronic cigarettes. Products that are found to pose a risk to health and/or are in violation of the Food and Drugs Act and related regulations may be subject to compliance and enforcement actions in accordance with the Health Products and Food Branch Inspectorate’s Compliance and Enforcement Policy (POL-0001). According to Health Canada regulations, it is not permissible to import, advertise or sell electronic smoking products without the appropriate authorizations, and persons that violate these regulations are subject to repercussions from Health Canada, including but not limited to, seizure of the products.
Since no scientific evidence demonstrating safety, quality and efficacy with respect to the intended purpose of e-cigarettes, e-liquid or other vaping products has been submitted to Health Canada to date, there is the possibility that in the future Health Canada may modify or retract the current prohibitions currently in place. However, there can be no assurance that the Company will be in total compliance, remain competitive, or financially able to meet future requirements and regulations imposed by Health Canada.
To date, Health Canada has not imposed any restrictions on e-cigarettes, e-liquid and other vaping products that do not contain nicotine. e-cigarettes, e-liquid and other vaping products that do not make any health claim and do not contain nicotine may legally be sold in Canada. Thus, vendors can openly sell nicotine-free e-cigarettes, e-liquid and other vaping products. However, there are vape shops operating throughout Canada selling e-cigarettes, e-liquid and other vaping products containing nicotine without any implications from Health Canada. e-cigarettes, e-liquid and other vaping products are subject to standard product regulations in Canada, including the Canada Consumer Product Safety Act and the Consumer Packaging and Labelling Act.
At present, neither the Tobacco Act (which regulates the manufacture, sale, labelling and promotion of tobacco products) nor the Tobacco Products Labelling Regulations (Cigarettes and Little Cigars) (which governs how cigarettes can be advertised and marketed) apply to e-cigarettes, e-liquid and other vaping products. The application of these federal laws to e-cigarettes, e-liquid and other vaping products would have a material adverse effect on the Company’s business, results of operations and financial condition.
Company’s efforts to mitigate risks associated with new and evolving regulation.
The Company is constantly seeking to stay in compliance with all existing and reasonably expected future regulations. The Company, through its internal compliance team, market consultants and technicians and testing labs hopes to stay in accordance with all standards whether set forth in the New Tobacco Products Directive or the Deeming Regulations. Making sure that all e-liquid products meet and exceed the standards set forth by each market’s regulatory body is of the highest concern for the Company. Staying in compliance with all marketing and packaging directives is imperative to maintaining access to the markets. Although these processes are costly and time consuming, it is imperative for the Company’s success that these steps are taken and constantly kept up to date. Failure to comply in a timely fashion to any particular directive or regulation could have material adverse effects on the results of business operations.
Don Polly Product Line
Don Polly’s CBD products are subject to various state and federal laws regarding the production and sales of hemp-based products. Section 12619 of the Agriculture Improvement Act of 2018 (“2018 Farm Bill”) removed “hemp,” as defined in the Agricultural Marketing Act of 1946 (the “1946 Agricultural Act”), from the classification of “marijuana,” which is generally prohibited as a Schedule I drug under the Controlled Substances Act of 1970 (“CSA”). Under the 1946 Agricultural Act (as amended by the 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 [applicable law]; (vi) a procedure for submitting the information, as applicable, to the Secretary of Agriculture (the “Secretary”) not more than 30 days after the date on which the information is received; and (vii) a certification that the State or Indian tribe has the resources and personnel to carry out the practices and procedures described in clauses (i) through (vi).” Further, a hemp producer in a State or the territory of an Indian tribe for which a State or Tribal plan is approved shall be determined to have negligently violated the State or Tribal plan, including by negligently— “(i) failing to provide a legal description of land on which the producer produces hemp; (ii) failing to obtain a license or other required authorization from the State department of agriculture or Tribal government, as applicable; or (iii) producing Cannabis sativa L. with a delta-9 THC concentration of more than 0.3 percent on a dry weight basis.” A hemp producer that negligently violates a State or Tribal plan 3 times in a 5-year period shall be ineligible to produce hemp for a period of 5 years beginning on the date of the third violation. If the State department of agriculture or Tribal government in a State or the territory of an Indian tribe for which a State or Tribal plan, as applicable, determines that a hemp producer in the State or territory has violated the State or Tribal plan with a culpable mental state greater than negligence— “(i) the State department of agriculture or Tribal government, as applicable, shall immediately report the hemp producer to —(I) the Attorney General; and (II) the chief law enforcement officer of the State or Indian tribe, as applicable.” In the case of a State or Indian tribe for which a State or Tribal plan is not approved, the production 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 [applicable law]; and (ii) products derived from those plants; (D) a procedure to comply with the enforcement procedures; (E) a procedure for conducting annual inspections of, at a minimum, a random sample of hemp producers to verify that hemp is not produced in violation of this subtitle; and (F) such 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.
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 three months ended March 31, 2015 ofCharlie’s Product Line and the yearDon Polly Product Line.
For the years ended December 31, 2014. We are working with certain third parties on the2017 and 2018, Charlie’s recorded product development expenses of possible future products, but these projects are funded by the respective third parties. During 2012, we developed our AquaBall™ proprietary formula along with Wild Flavors, Inc., an independent third party contracted by the Company. We launched distribution$116,040 and sales of the AquaBall™ in June 2012. The AquaBall™ did not require FDA or other regulatory approval. Following the initial launch of the AquaBall™, we continued research and development efforts to add more flavors to the AquaBall™ line, and modify the AquaBall™ into a zero sugar, zero calorie product. We launched the zero sugar, zero calorie line in early 2013, as well as new flavors, such as strawberry lemonade and berry. We are working on a formula that can be preservative free and produced using either a hot-fill or aseptic process.
During 2006, Bazi® was developed and was launched in January 2007. This product did not require FDA or other regulatory approval. During 2009, new ingredients and productions methods were researched to integrate into existing products or new products. Since 2012, Bazi® has been and is now being sold solely online in 12, 24, 36, 48 and 144 packs.$95,180, respectively.
Employees
We had eleven57 full-time employees across Charlie’s Holdings Inc., Charlie’s Chalk Dust LLC and one part-time employeeDon Polly LLC as of July 6, 2015.June 30, 2019.
Compliance with Environmental Laws
In California, in connection with sales of Bazi®, we are required to collect redemption values from our retail customers and to remit such redemption values to the State of California Department of Resources Recycling and Recovery based upon the number of cans and bottles of certain carbonated and non-carbonated products sold. In certain other states where our products are sold, we are also required to collect deposits from our customers and to remit such deposits to the respective jurisdictions based upon the number of cans and bottles of certain carbonated and non-carbonated products sold in such states.
office located at 1007 Brioso Drive, Costa Mesa, CA 92627. The lease began on October 1, 2015, and for a term of three years with a monthly base lease rate of $15,474. We are headquartered in Irvine, California and lease our office on a one-year lease, which term was most recentlyhave not yet renewed in July 2013. Total rent expense for the year ended December 31, 2014 was approximately $52,000. Total remaining payments on the lease through July 31, 2015for our corporate headquarters, and instead are approximately $4,648.currently making month-to-month payments. We also occupy the following spaces:
● | Approximately 3,306 square feet of multi-tenant industrial space located at 1701 E. Edinger, Suite E13, Santa Ana, CA 92705, used for general office and warehouse space. The lease began on April 1, 2018, and for a term of three years, with a monthly base lease rate of $3,306. |
● | Approximately 11,100 square feet of industrial space located at 5331 Production Drive, Huntington Beach, CA 92649, used for warehousing and shipping operations. The lease began on June 1, 2019, and for a term of three years, with a monthly base lease rate of $12,987. |
● | Certain of Don Polly’s operations are operated from a 7,366 square foot facility in Denver Colorado. The facility offers multi-use space, housing both warehouse and administrative functions. The lease commenced on April 1, 2019, and for a term of 38 months, with a monthly base lease rate of $10,435. |
We believe that our facilities are sufficient to meet our current needs and that suitable additional space will be available as and when needed.
Legal Proceedings
From time to time, claims are made against the Company in the ordinary course of business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties, and unfavorable outcomes could occur. In the opinion of management, the resolution of these matters, if any, will not have a material adverse impact on the Company’s financial position or results of operations. Other than as set forth below, there are no additional pending or threatened legal proceedings at this time.
Delhaize America Supply Chain Services, Inc. v. True Drinks, Inc. On May 8, 2018, Delhaize America Supply Chain Services, Inc. (“Delhaize”) filed a complaint against the Company in the General Court of Justice Superior Court Division located in Wake County, North Carolina alleging breach of contract, among other causes of action, related to contracts entered into by and between the two parties. Delhaize is seeking in excess of $25,000 plus interest, attorney’s fees and costs. We believe the allegations are unfounded and are defending the case vigorously. We believe the probability of incurring a material loss to be remote.
The Irvine Company, LLC v. True Drinks, Inc. On September 10, 2018, The Irvine Company, LLC (“Irvine”) filed a complaint against the Company in the Superior Court of Orange County, located in Newport Beach, California, alleging breach of contract related to the Company’s early termination of its lease agreement with Irvine in May 2018. Pursuant to the Complaint, Irvine sought to recover approximately $74,000 in damages from the Company. In November 2018, the Company and Irvine agreed to settle the lawsuit for an aggregate of $15,750.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
On July 1, 2011,Our objective is to become a lawsuit was filedleader 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, District Court,as well as over 80 countries worldwide. Charlie’s primary international markets include the Southern DistrictUnited Kingdom, Italy, Spain, Belgium, Australia, Sweden and Canada. In June 2019, we launched distribution, through Don Polly, of Ohio, Cincinnati Division, against GT Beverage Company, LLCcertain premium vapor, tincture and topical products containing hemp-derived cannabidiol (“GT LLCCBD”) and we currently intend to develop and launch additional products containing hemp-derived CBD in the future. Prior to the Share Exchange (defined below), our primary business was the development, marketing, sale and distribution of all-natural, vitamin-enhanced drinks, including AquaBall® Naturally Flavored Water and Bazi® All Natural Energy (“Bazi”). We continue to sell limited amounts of Bazi, but have ceased all production and sales of AquaBall® Naturally Flavored Water.
Weintend to expand our operations and seek revenue and profit growth by Dominion Liquid Technologies, LLC. The lawsuit allegedincreasing the sales of our nicotine based e-cigarette liquid by offering additional product and expanding sales territories, as well as from our recently launched manufacturing and distribution of CBD based products.
For the quarters ended June 30, 2019 and 2018, our revenues from operations were $6,819,000 and $5,486,000 respectively. Net loss for the quarter ended June 30, 2019 was $3,033,000 as compared to a net income of $2,125,000 for the quarter ended June 30, 2018. Significant transaction related costs of approximately $4.7 million were expensed in the quarter ended June 30, 2019 generating the large loss and are detailed in the discussion that GT LLC breached termsfollows. For the quarter ended June 30, 2019, both the Charlie’s and Don Polly operations reported net income, however that net income was not sufficient to offset the transaction related costs.
For the six months ended June 30, 2019 and 2018, our revenues from operations were $13,466,000 and $10,919,000, respectively. Net loss for the six months ended June 30, 2019 was $558,000 as compared to a net income of a 2010 co-packing agreement, which governed$4,183,000 for the relationship betweensix months ended June 30, 2018. Significant transaction related costs of approximately $4.7 million were expensed in the parties. In July 2014,six months ended June 30, 2019 generating the Company settled this lawsuit for $350,000. The settlementlarge loss and are detailed in the discussion that follows. For the six months ended June 30, 2019, both the Charlie’s and Don Polly operations reported net income, however that net income was fully accrued for, and was paid for with 1,166,667 restricted shares of Common Stock.not sufficient to offset the transaction related costs.
Recent Developments
Share Exchange
On April 22, 2014,26, 2019 (the “Closing Date”), we entered into a lawsuit was filedSecurities Exchange Agreement with each of the members (“Members”) of Charlie’s, and certain direct investors (“Direct Investors”), pursuant to which we acquired all outstanding membership interests of Charlie’s beneficially owned by the Members in exchange for the Superior Court of California, County of Orange, againstissuance by the Company by Advantage Salesof units, with such units consisting of an aggregate of (i) 15,655,538,349 shares of common stock (which includes the issuance of an aggregate of 1,396,305 shares of a newly created class of Series B Convertible Preferred Stock, par value $0.001 per share (“Series B Preferred”), convertible into an aggregate of 13,963,047,716 shares of common stock, issued to certain individuals in lieu of common stock); (ii) 206,249 shares of a newly created class of Series A Convertible Preferred Stock, par value $0.001 per share (“Series A Preferred”), convertible into an aggregate of 4,654,349,239 shares of common stock; and Marketing, LLC. The plaintiff initially seeks damages(iii) warrants to purchase an aggregate of $92,064 for outstanding invoices. This lawsuit was settled in January 2015 for the payment3,102,899,493 shares of $69,000 in cash, payable over three installments.common stock (the “
We are currently not involved in any litigation that we believe could haveInvestor Warrants”) (the “ShareExchange”). As a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledgeresult of the executive officersShare Exchange, Charlie’s became a wholly owned subsidiary of the Company or any of our subsidiaries, threatened against or affecting the Company, or our Common Stock in which an adverse decision could have a material adverse effect.
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 “SECCompany.”). 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. 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.comImmediately 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”). Information containedKatalyst 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 our website is not partFebruary 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 this annual report on Form 10-K. Our SEC filings (including any amendments) will be made available free930,869,848 shares of charge on common stock at a price of $0.0044313 per share (the “www.truedrinks.comPlacement 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”), as soon as reasonably practicable after we electronically file such material with, or furnish itincluding to Scot Cohen, a member of the SEC. Company’s Board of Directors, pursuant to a subscription agreement.
MARKET PRICE OF COMMON STOCK AND OTHER STOCKHOLDER MATTERSThe Share Exchange resulted in a change of control of the Company, with the Members and Direct Investors owning approximately 85.7% of the Company’s outstanding voting securities immediately after the Share Exchange, and the Company’s current stockholders beneficially owning approximately 14.3% of the issued and outstanding voting securities, which includes the Advisory Shares. Together, Brandon Stump and Ryan Stump, the founders of Charlie’s and the Company’s newly appointed Chief Executive Officer and Chief Operating Officer, respectively, own approximately 57% of the Company’s issued and outstanding voting securities as a result of the Share Exchange.
Market Information
Our Common Stock is traded on the OTCQB marketplace under the name True Drinks Holdings, Inc., and quoted on the OTCQB marketplace under the symbol TRUU.
The following table sets forth high and low bid prices for our Common Stock for the calendar quarters indicated as reported by the OTCQB. These prices represent quotations between dealers without adjustment for retail markup, markdown, or commission and may not represent actual transactions.
* | Bid price reflects the 1-for-100 reverse split of our Common Stock, which reverse split took effect on January 22, 2013. |
HoldersLaunch of CBD Products
At July 6, 2015, thereIn 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 53,718,049 shareslaunched 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 Common Stock outstanding,domestic and approximately 320 shareholdersinternational distribution efforts.
Filing of recordAmended and Restated Charter; Automatic Conversion of our Common Stock. At July 6, 2015, there were 1,342,870 shares of our Series B Preferred and 82,148 shares of our Series C Preferred outstanding, held by 33 and 10 shareholders of record, respectively.
Dividends
We did not declare any dividends onOn 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 for three months ended March 31, 2015 or the year ended December 31, 2014. Our Board of Directors does not intendfrom 7.0 billion to distribute dividends in the near future. Instead, we plan to retain any earnings to finance the development50.0 billion shares. The Amended and expansion ofRestated Charter was approved by 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 resultsholders 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.
Charlie’s Holdings, Inc.
Results of Operations for the Three Months Ended June 30, 2019 Compared to the Three Months Ended June 30, 2018.
| For the three months ended | | |
| | |
| | | | |
($ in thousands) | | | | |
Revenues: | | | | |
Product revenue, net | $6,819 | $5,486 | $1,333 | 24% |
Total revenues | 6,819 | 5,486 | 1,333 | 24% |
Operating costs and expenses: | | | | |
Cost of goods sold - product revenue | 2,846 | 2,054 | 792 | 39% |
General and administrative | 6,374 | 524 | 5,850 | 1116% |
Sales and marketing | 810 | 783 | 27 | 3% |
Total operating costs and expenses | 10,030 | 3,361 | 6,669 | 198% |
Loss from operations | (3,211) | 2,125 | (5,336) | -251% |
Other income: | | | | |
Change in fair value of derivative liabilities | 178 | - | 178 | 100% |
Total other income | 178 | - | 178 | 100% |
Net income (loss) | $(3,033) | $2,125 | $(5,158) | -243% |
Operating Income (Loss)
We had operating losses of approximately $3,211,000 for the three months ended June 30, 2019, due, primarily to approximately $4.7 million of transaction related costs, including costs incurred in connection with the Share Exchange, but offset by revenue derived from our branded nicotine-based e-cigarette liquid business and CBD products. For the three months ended June 30, 2018, we had operating income of approximately $2,125,000 from our branded nicotine-based e-cigarette liquid business. For the quarter ended June 30, 2019, both the Charlie’s and Don Polly operations reported total net income of approximately $1,163,000, however that net income was not enough to offset the transaction related costs. The details of the operating (losses) and income are as follows:
Revenue
Revenue for the three months ended June 30, 2019 increased approximately $1,333,000, or 24.3%, to approximately $6,819,000, as compared to approximately $5,486,000 for same period last year due to the release of additional e-liquid flavors and formats, growth in customer base and sales territories and improved traction with existing customers which accounted for approximately $289,000 of the revenue increase. In addition, in June 2019 we introduced a CBD product line which generated approximately $1,022,000 of incremental revenue during the three months ended June 30, 2019.
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 $792,000, or 38.6%, to approximately $2,846,000, or 41.7% of revenue, for the three months ended June 30, 2019, as compared to approximately $2,054,000, or 37.4% of revenue, for the same period in 2018. This 11% percent increase in the cost of revenue is due to an increase in the sales mix to distributors and marginally lower average wholesale prices, slightly offset by relatively stable manufacturing costs.
Sales and Marketing Expenses
For the three months ended June 30, 2019, total sales and marketing expenses increased approximately $27,000, or 3.4%, to approximately $810,000 as compared to approximately $783,000 for the same period in 2018, which was primarily due to increased salary expense for the addition of personnel.
General and Administrative Expenses
For the three months ended June 30, 2019, total general and administrative expenses increased approximately $5,848,000 to approximately $6,369,000 as compared to approximately $524,000 for the same period in 2018. Costs relating to the completion of our stock exchange transaction on April 26, 2019 accounted for a significant part of the $5.8 million increase, including $3.0 million of non-cash stock-based compensation and $1.6 million of employee bonuses. The remaining $1.2 million increase is primarily due to professional fees and increased salaries associated with conducting business as a public company and certain step-up costs related to new business activities, including the launch of CBD products.
Income (Loss) from Operations
We had a net loss from operations of approximately $3,211,000 for the three months ended June 30, 2019, as compared to net income from operations of approximately $2,125,000 for the same period in 2018. Net (loss) Income is determined by adjusting income from operations by the following items:
Change in fair value of derivative liabilities
For the three months ended June 30, 2019 and 2018, the change in fair value of derivative liabilities was $178,000 and $0 respectively. The derivative liability is associated with the issuance of the Investor Warrants and the Placement Agent Warrants in connection with the Share Exchange and the gain for the quarter ended June 30, 2019 reflects the effect of the change in stock price on the liability associated with the issuance of these warrants. There were no warrants outstanding on June 30, 2018.
Other (Loss) Income
For the three months ended June 30, 2019 and 2018, other income was $1,000 and $0, respectively.
Net Income (Loss)
For the three months ended June 30, 2019, we had a net loss of $3,033,000 as compared to net income of $2,125,000 for the same period in 2018.
Charlie’s Holdings, Inc.
Results of Operations for the Six Months Ended June 30, 2019 Compared the Six Months ended June 30, 2018.
| | | |
| | |
| | | | |
($ in thousands) | | | | |
Revenues: | | | | |
Product revenue, net | $13,466 | $10,919 | $2,547 | 23% |
Total revenues | 13,466 | 10,919 | 2,547 | 23% |
Operating costs and expenses: | | | | |
Cost of goods sold - product revenue | 5,596 | 4,220 | 1,376 | 33% |
General and administrative | 7,029 | 1,016 | 6,013 | 592% |
Sales and marketing | 1,577 | 1,500 | 77 | 5% |
Total operating costs and expenses | 14,202 | 6,736 | 7,466 | 111% |
Loss from operations | (736) | 4,183 | (4,919) | -118% |
Other income: | | | | |
Change in fair value of derivative liabilities | 178 | - | 178 | 100% |
Total other income | 178 | - | 178 | 100% |
Net income (loss) | $(558) | $4,183 | $(4,741) | -113% |
Operating Income
We had operating losses of approximately $736,000 for the six months ended June 30, 2019, due, primarily to approximately $4.7 million of transaction related costs, including costs incurred in connection with the Share Exchange, but offset by revenue derived from our branded nicotine-based e-cigarette liquid business and CBD products. For the six months ended June 30, 2018, we had operating income of approximately $4,183,000 from our branded nicotine-based e-cigarette liquid business. For the six months ended June 30, 2019, both the Charlie’s and Don Polly operations reported total net income of approximately $3,638,000, however that net income was not enough to offset the transaction related costs. The details of the operating (losses) and income are as follows:
Revenue
Revenue for the six months ended June 30, 2019 increased approximately $2,547,000, or 23.3%, to approximately $13,466,000, as compared to approximately $10,919,000 for comparable period due to the release of additional e-liquid flavors and formats, growth in customer base and sales territories and improved traction with existing customers which accounted for approximately $1,525,000 of the revenue increase. In addition, in June 2019 we introduced a CBD product line which generated approximately $1,022,000 in revenue during the three months ended June 30, 2019.
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 $1,376,000, or 32.6%, to approximately $5,596,000, or 41.6% of revenue, for the six months ended June 30, 2019, as compared to approximately $4,220,000, or 38.6% of revenue, for the same period in 2018. This 7.8% percent increase in the cost of revenue is due to an increase in the sales mix to distributors and marginally lower average wholesale prices, slightly offset by relatively stable manufacturing costs.
Sales and Marketing Expenses
For the six months ended June 30, 2019, total sales and marketing expenses increased approximately $77,000, or 5.1%, to approximately $1,577,000 as compared to approximately $1,500,000 for the same period in 2018, which was primarily due to increased salary expense for the addition of personnel.
General and Administrative Expenses
For the six months ended June 30, 2019, total general and administrative expenses increased approximately $6,003,000 to approximately $7,019,000 as compared to approximately $1,016,000 for the same period in 2018. Costs relating to the completion of the Share Exchange on April 26, 2019 accounted for a significant part of the $6.0 million increase, including $3.0 million of non-cash stock-based compensation and $1.6 million of employee bonuses. The remaining $1.2 million increase is primarily due to professional fees and increased salaries associated with conducting business as a public company and certain step-up costs related to new business activities, including the launch of CBD products.
Income (Loss) from Operations
We had a net loss from operations of approximately $736,000 for the six months ended June 30, 2019 as compared to net income from operations of approximately $4,183,000 for the same period in 2018. Net (loss) Income is determined by adjusting income from operations by the following items:
Change in fair value of derivative liabilities
For the six months ended June 30, 2019 and 2018, the change in fair value of derivative liabilities was $178,000 and $0 respectively. The derivative liability is associated with the issuance of the Investor Warrants and the Placement Agent Warrants in connection with the Share Exchange and the gain for the quarter ended June 30, 2019 reflects the effect of the change in stock price on the liability associated with the issuance of these warrants. There were no warrants outstanding on June 30, 2018.
Other Income
For the six months ended June 30, 2019 and 2018, other income was $1,000 and $0, respectively.
Net (Loss) Income
For the six months ended June 30, 2019, we had a net loss of $558,000 as compared to net income of $4,183,000 for the same period in 2018.
Effects of Inflation
Inflation has not had a material impact on our business.
Liquidity and Capital Resources
As of June 30, 2019, we had negative working capital of approximately $214,000, which consisted of current assets of approximately $9,309,000 and current liabilities of approximately $9,523,000. This compares to working capital of approximately $704,000 at December 31, 2018. The current liabilities, as presented in the balance sheet at June 30, 2019 included elsewhere in this Report, primarily include approximately $1,548,000 of accounts payable and accrued expenses, approximately $142,000 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 $249,000 of lease liabilities and $7,584,000 of derivative liability associated with the Member Warrants.
Our cash flows and financial condition, operatingcash equivalents balance at June 30, 2019 was approximately $5,120,000.
For the six months ended June 30, 2019 we generated cash from operations of $247,000, as compared to $3,615,000 for the same period in 2018. This decline in the cash generated from operations is due primarily to an increase in accounts receivable and increase in prepaid expenses and payments of employee bonuses of approximately $1,700,000.
For the six months ended June 30, 2019 we used cash for investment activities of $182,000 as compared to $5,000 for the same period in 2018. The cash used for investment activities is primarily used for the purchase of fixed assets.
For the six months ended June 30, 2019 we generated cash from financing activities, of $4,751,000 as compared to a use of cash of $3,402,000 for the same period in 2018. In 2019, we generated financing cash from the Charlie’s Financing, which was offset by Member distributions to the former Members of Charlie’s, as compared to the 2018 period during which we used cash for Member distributions to the former Members of Charlie’s. The Charlie’s Member distributions were all prior to or part of the Share Exchange and no further distributions will be made as Charlie’s is now a wholly-owned subsidiary of the Company.
Our plans and growth depend on our ability to increase revenues and continue our business development efforts. We currently anticipate that our current cash position will be enough to meet our working capital requirements to continue our sales and marketing efforts for at least 12 months. If in the future our plans or assumptions change or prove to be inaccurate, we may need to raise additional funds through public or private debt or equity offerings, financings, corporate collaborations, or other factors asmeans.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements other than operating lease commitments.
Basis of Presentation
The unaudited interim condensed consolidated financial statements contained within this prospectus and the Boarddisclosure in this Management’s Discussion and Analysis of Directors considers relevant. There is no assurance that future dividends will be paid,Financial Condition and if dividends are paid, there is no assuranceResults of Operations with respect to the amount of any such dividend.
We pay dividends on our Series B Preferred stock quarterly.
Transfer Agent
Our Transfer Agentperiod ended June 30, 2019 and Registrar for our Common Stock is Corporate Stock Transfer located in Denver, Colorado.
As a “smaller reporting company” as defined by2018 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission we are not required to provide this information.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements”). Certain information and the related notes and other financial information appearing elsewhere in this Registration Statement. Readers are also urged to carefully review and consider the variousfootnote disclosures made by us which attempt to advise interested parties of the factors which affect our business, including (without limitation) the disclosures made under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” and in the audited consolidated financial statements and related notesnormally included in the Annual Report on Form 10-K filed April 2, 2015.
Critical Accounting Polices and Estimates
Discussion and analysis of our financial condition and results of operations are based upon financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparationStates of theseAmerica (“U.S. GAAP”) have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented in this prospectus not misleading.
Amounts related to disclosure of December 31, 2018 balances within the interim condensed consolidated financial statements requires uswere derived from the audited 2018 financial statements and notes thereto of Charlie’s. These financial statements and the notes hereto should be read in conjunction with the audited December 31, 2018 financial statements and notes thereto contained herein. In the opinion of the Company, all adjustments, including normal recurring adjustments necessary to make estimatespresent fairly the financial position, results of operations, and judgments that affectcash flows of the reported amountsCompany for the interim period have been included. The results of operations for the interim period are not necessarily indicative of the results for any subsequent interim period or for the full year.
The Share Exchange is accounted for as a reverse recapitalization under U.S. GAAP because the primary assets liabilities,of the Company were nominal following the close of the Share Exchange. Charlie’s was determined to be the accounting acquirer based upon the terms of the Share Exchange and other factors including: (i) Charlie’s stockholders and other persons holding securities convertible, exercisable or exchangeable directly or indirectly for Charlie’s membership units now own approximately 49%, on a fully diluted basis, of the Company’s outstanding securities immediately following the effective time of the Share Exchange, (ii) individuals associated with Charlie’s now hold a majority of the seats on the Company’s Board of Directors and (iii) Charlie’s management holds all key positions in the management of the combined Company.
The disclosure in this prospectus with respect to the period ended June 30, 2019 and 2018, including the unaudited condensed consolidated financial statements contained herein, are based on Charlie’s historical financial statements and the Company’s financial activity beginning April 26, 2019, as adjusted, to give effect to Charlie’s reverse recapitalization of the Company and the Charlie’s Financing. In addition, from the period April 26, 2019 until June 30, 2019, there were minimal costs and revenue associated with the Bazi product line which are included in the interim condensed consolidated financial statements. We do not intend to continue to produce and sell the Bazi product line, and these costs and expenses are nominal and 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 believedwill continue to be reasonable underso in the circumstances, thefuture. The operating results of Don Polly for the quarter ended June 30, 2019 are also included.
Historical financial information presented prior to April 26, 2019 is that of Charlie’s only, while financial information presented after April 26, 2019 includes Charlie’s, Don Polly, Bazi Drinks and the Company, which formincludes the basis for making judgments abouttransactions associated with the carrying valuesShare Exchange and Charlie’s Financing completed prior to the Share Exchange, along with ongoing corporate costs.
Critical Accounting Policies
Included below is a discussion of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates.
We believe that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.
The accounting policies identified as critical are as follows:
Revenue RecognitionLiquidity and Capital Resources
In accordance with ASC Topic 605 (Staff Accounting Bulletin 104 “Revenue Recognition in Financial Statements”), revenue is recognizedAs of June 30, 2019, we had negative working capital of approximately $214,000, which consisted of current assets of approximately $9,309,000 and current liabilities of approximately $9,523,000. This compares to working capital of approximately $704,000 at the point of shipment, at which time title is passed. Net sales include sales of products, sales of marketing tools to independent distributors and freight and handling charges. With the exception of retail customers, we receive the net sales price from all of our ordersDecember 31, 2018. The current liabilities, as presented in the formbalance sheet at June 30, 2019 included elsewhere in this Report, primarily include approximately $1,548,000 of cash or credit card payment prior to shipment. Retailaccounts payable and accrued expenses, approximately $142,000 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 $249,000 of lease liabilities and $7,584,000 of derivative liability associated with approved credit have been extended payment terms of net 30 days, with a few exceptions.the Member Warrants.
Allowance for Doubtful Accounts
We estimate losses on receivables based on known troubled accountsOur cash and historical experience of losses incurred. Based on our estimations, we recorded an allowance for doubtful accounts ofcash equivalents balance at June 30, 2019 was approximately $155,000 and $162,000 at March 31, 2015 and December 31, 2014, respectively.
Inventory Valuation
Inventories are stated at the lower of cost or market on a first-in first-out basis. Inventory is periodically reviewed and obsolete inventories are written off. No inventory was written off as obsolete for the period ended March 31, 2015 or December 31, 2014. Prior to inventory becoming obsolete, inventory which is close to expiration is donated to charitable organizations.
Stock Based Compensation$5,120,000.
The Company recognizesFor the costsix months ended June 30, 2019 we generated cash from operations of employee services received in exchange for awards of equity instruments based on the grant-date 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. The fair value of options granted are estimated at the date of grant using a Black-Scholes option 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 GT Beverage Company, LLC’s 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. No impairment was deemed necessary during the quarter ended March 31, 2015 or the year ended December 31, 2014.
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$247,000, 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
Comparison of Fiscal Years Ended December 31, 2014 and 2013
Net sales for the year ended December 31, 2014 were $4,693,414 compared to $2,649,473 during$3,615,000 for the same period in 2013,2018. This decline in the cash generated from operations is due primarily to an increase of 77%. Thisin accounts receivable and increase in net salesprepaid expenses and payments of employee bonuses of approximately $1,700,000.
For the six months ended June 30, 2019 we used cash for investment activities of $182,000 as compared to $5,000 for the same period in 2018. The cash used for investment activities is attributableprimarily used for the purchase of fixed assets.
For the six months ended June 30, 2019 we generated cash from financing activities, of $4,751,000 as compared to a use of cash of $3,402,000 for the same period in 2018. In 2019, we generated financing cash from the Charlie’s Financing, which was offset by Member distributions to the continued executionformer Members of Charlie’s, as compared to the 2018 period during which we used cash for Member distributions to the former Members of Charlie’s. The Charlie’s Member distributions were all prior to or part of the Share Exchange and no further distributions will be made as Charlie’s is now a wholly-owned subsidiary of the Company.
Our plans and growth depend on our ability to increase revenues and continue our business development efforts. We currently anticipate that our current cash position will be enough to meet our working capital requirements to continue our sales and marketing efforts for at least 12 months. If in the future our plans or assumptions change or prove to be inaccurate, we may need to raise additional funds through public or private debt or equity offerings, financings, corporate collaborations, or other means.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements other than operating lease commitments.
Basis of Presentation
The unaudited interim condensed consolidated financial statements contained within this prospectus and the disclosure in this Management’s Discussion and Analysis of Financial Condition and Results of Operations with respect to the period ended June 30, 2019 and 2018 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented in this prospectus not misleading.
Amounts related to disclosure of December 31, 2018 balances within the interim condensed consolidated financial statements were derived from the audited 2018 financial statements and notes thereto of Charlie’s. These financial statements and the notes hereto should be read in conjunction with the audited December 31, 2018 financial statements and notes thereto contained herein. In the opinion of the Company, all adjustments, including normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows of the Company for the interim period have been included. The results of operations for the interim period are not necessarily indicative of the results for any subsequent interim period or for the full year.
The Share Exchange is accounted for as a reverse recapitalization under U.S. GAAP because the primary assets of the Company were nominal following the close of the Share Exchange. Charlie’s was determined to be the accounting acquirer based upon the terms of the Share Exchange and other factors including: (i) Charlie’s stockholders and other persons holding securities convertible, exercisable or exchangeable directly or indirectly for Charlie’s membership units now own approximately 49%, on a fully diluted basis, of the Company’s outstanding securities immediately following the effective time of the Share Exchange, (ii) individuals associated with Charlie’s now hold a majority of the seats on the Company’s Board of Directors and (iii) Charlie’s management holds all key positions in the management of the combined Company.
The disclosure in this prospectus with respect to the period ended June 30, 2019 and 2018, including the unaudited condensed consolidated financial statements contained herein, are based on Charlie’s historical financial statements and the Company’s financial activity beginning April 26, 2019, as adjusted, to give effect to Charlie’s reverse recapitalization of the Company and the Charlie’s Financing. In addition, from the period April 26, 2019 until June 30, 2019, there were minimal costs and revenue associated with the Bazi product line which are included in the interim condensed consolidated financial statements. We do not intend to continue to produce and sell the Bazi product line, and these costs and expenses are nominal and will continue to be so in the future. The operating results of Don Polly for the quarter ended June 30, 2019 are also included.
Historical financial information presented prior to April 26, 2019 is that of Charlie’s only, while financial information presented after April 26, 2019 includes Charlie’s, Don Polly, Bazi Drinks and the Company, which includes the transactions associated with the Share Exchange and Charlie’s Financing completed prior to the Share Exchange, along with ongoing corporate costs.
Critical Accounting Policies
Included below is a discussion of critical accounting policies used in the preparation of our business plan, including salesfinancial statements. While all these significant accounting policies impact our financial condition and results of AquaBall™ Naturally Flavored Wateroperations, we view certain of these policies as critical. Policies determined to key retail accounts duringbe critical are those policies that have the year ended December 31, 2014, including entrance intomost significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates.
We believe that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our consolidated results of operations, financial position or liquidity for the club channel with significant sales at Sam’s Club and distribution to 280 Wal-Mart stores.
periods presented in this report.The percentage that each product category represented of our net sales isaccounting policies identified as critical are as follows:
Product Category | | Year Ended
December 31,
2014
% of Sales
| |
AquaBall™ | | | 95 | % |
Bazi® | | | 5 | % |
Gross profit for the year ended December 31, 2014 was $291,712, as compared to $521,762 for the year ended December 31, 2013. Gross profit as a percentage of revenue (gross margin) during the year ended December 31, 2014 was 6%. This figure was affected by the high costs of our raw materials due to the low volume of product manufactured during the year. Additionally, the Company’s entrance into the club channel on a national level in November 2014 resulted in a negative gross margin for the fourth quarter. However, we expect our margins on sales in the club channel to increase in 2015 due to increased volumes and the anticipated consistency of the club business.
Sales, General and Administrative Expense
Sales, general and administrative expenses were $8,838,209 for the year ended December 31, 2014 as compared to $5,925,895 for the year ended December 31, 2013. This increase is primarily due to increases in costs related to sales such as freight for shipping orders to customers and license fees. There were also significant increases in marketing expenditure, and slight increases in payroll related expenses such as health insurance for employees during the 2014 period.
Interest expense for the year ended December 31, 2014 was $202,773 as compared to $1,824,074 for the year ended December 31, 2013. The decrease was due to the Company’s repayment and conversion of its 2012 convertible note financing beginning in the fourth quarter of 2013, as well as the recording of shares issued and lender’s fees in connection with the issuance of the convertible notes being recorded to interest expense, and the commencement of certain private placements in June 2013. The 2013 figure includes $1,332,543 in accretion of the debt discount on notes payable created by the embedded conversion feature of the notes and the warrants issued with the notes to investors. In 2014, the interest figure was related to notes payable, a large portion of which originated in the fourth quarter.
Our net loss for the year ended December 31, 2014 was $8,116,603 as compared to a net loss of $7,122,135 for the year ended December 31, 2013. On a per share basis, our loss was $0.23 and $0.26 per share for the years ended December 31, 2014 and December 31, 2013, respectively. Although we experiences an increase in net sales during the year ended December 31, 2014 as compared to the same period in 2013, the increased period over period losses are primarily the result of the decrease in gross margins on sales as AquaBall™ Naturally Flavored Water entered the club channel, and the increase in sales and marketing expenses during the 2014 period. As explained above, we expect our margins on sales in the club channel to increase in 2015 due to increased volumes and the anticipated consistency of the club business.
Comparison of the Three Months Ended March 31, 2015 and March 31, 2014
Net Sales
Net sales for the three months ended March 31, 2015 were $774,601 compared to $650,532 for the three months ended March 31, 2014, a 19% increase. The increase in sales for the three months ended March 31, 2015 is principally attributable to utilization of key direct store distributors in areas such as New York and certain areas in the Mid-West. While no assurances can be given, management anticipates continued growth in the sale of AquaBall™ as the Company executes its business plan, and realizes sales from current distribution agreements negotiated and closed in recent periods.
The percentage that each product category represented of our net sales is as follows:
Product Category | | Three Months Ended
March 31, 2015
(% of Sales)
|
AquaBall™ | | | 95 | % |
Bazi® | | | 5 | % |
Gross profit for the three months ended March 31, 2015 was $153,874, compared to $121,231 for the three months ended March 31, 2014. Gross profit as a percentage of revenue (gross margin) during three months ended March 31, 2015 was 20%. Gross margins were flat due to a similar package mixture during the first quarters of 2015 and 2014.
Sales, General and Administrative Expense
Sales, general and administrative expenses were $2,074,412 for the three months ended March 31, 2015, as compared to $1,562,334 for the three months ended March 31, 2014. The total for 2015 consists of approximately $450,000 in stock issued for services, a large increase over 2014. The total also includes increased marketing expenditures totaling approximately $275,000 in the first three months of 2015, compared to $85,000 in 2014.
Change in Fair Value of Derivative Liabilities
The Company recorded a loss for the change in fair value of derivative liabilities for the three months ended March 31, 2015 of $142,922.
Interest expense for the three months ended March 31, 2015 was $207,737, as compared to $37,130 for the three months ended March 31, 2014. Interest expense for 2015 consists of interest and fees due on promissory notes generated in late 2014 which were all either repaid or converted into shares of Series C Preferred in connection with the Note Exchange during the three months ended March 31, 2015.
There is no income tax expense recorded for the three months ended March 31, 2015 and 2014, due to the Company's net losses. As of March 31, 2015, the Company has tax net operating loss carryforwards and a related deferred tax asset, offset by a full valuation allowance.
Our net loss for the three months ended March 31, 2015 was $2,271,197, as compared to a net loss of $3,603,769 for the three months ended March 31, 2014. On a per share basis, our loss was $0.05 and $0.13 per share for the three months ended March 31, 2015 and 2014, respectively.
Liquidity and Capital Resources
As of June 30, 2019, we had negative working capital of approximately $214,000, which consisted of current assets of approximately $9,309,000 and current liabilities of approximately $9,523,000. This compares to working capital of approximately $704,000 at December 31, 2018. The current liabilities, as presented in the balance sheet at June 30, 2019 included elsewhere in this Report, primarily include approximately $1,548,000 of accounts payable and accrued expenses, approximately $142,000 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 $249,000 of lease liabilities and $7,584,000 of derivative liability associated with the Member Warrants.
Our cash and cash equivalents balance at June 30, 2019 was approximately $5,120,000.
For the six months ended June 30, 2019 we generated cash from operations of $247,000, as compared to $3,615,000 for the same period in 2018. This decline in the cash generated from operations is due primarily to an increase in accounts receivable and increase in prepaid expenses and payments of employee bonuses of approximately $1,700,000.
For the six months ended June 30, 2019 we used cash for investment activities of $182,000 as compared to $5,000 for the same period in 2018. The cash used for investment activities is primarily used for the purchase of fixed assets.
For the six months ended June 30, 2019 we generated cash from financing activities, of $4,751,000 as compared to a use of cash of $3,402,000 for the same period in 2018. In 2019, we generated financing cash from the Charlie’s Financing, which was offset by Member distributions to the former Members of Charlie’s, as compared to the 2018 period during which we used cash for Member distributions to the former Members of Charlie’s. The Charlie’s Member distributions were all prior to or part of the Share Exchange and no further distributions will be made as Charlie’s is now a wholly-owned subsidiary of the Company.
Our plans and growth depend on our ability to increase revenues and continue our business development efforts. We currently anticipate that our current cash position will be enough to meet our working capital requirements to continue our sales and marketing efforts for at least 12 months. If in the future our plans or assumptions change or prove to be inaccurate, we may need to raise additional funds through public or private debt or equity offerings, financings, corporate collaborations, or other means.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements other than operating lease commitments.
Basis of Presentation
The unaudited interim condensed consolidated financial statements contained within this prospectus and the disclosure in this Management’s Discussion and Analysis of Financial Condition and Results of Operations with respect to the period ended June 30, 2019 and 2018 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented in this prospectus not misleading.
Amounts related to disclosure of December 31, 2018 balances within the interim condensed consolidated financial statements were derived from the audited 2018 financial statements and notes thereto of Charlie’s. These financial statements and the notes hereto should be read in conjunction with the audited December 31, 2018 financial statements and notes thereto contained herein. In the opinion of the Company, all adjustments, including normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows of the Company for the interim period have been included. The results of operations for the interim period are not necessarily indicative of the results for any subsequent interim period or for the full year.
The Share Exchange is accounted for as a reverse recapitalization under U.S. GAAP because the primary assets of the Company were nominal following the close of the Share Exchange. Charlie’s was determined to be the accounting acquirer based upon the terms of the Share Exchange and other factors including: (i) Charlie’s stockholders and other persons holding securities convertible, exercisable or exchangeable directly or indirectly for Charlie’s membership units now own approximately 49%, on a fully diluted basis, of the Company’s outstanding securities immediately following the effective time of the Share Exchange, (ii) individuals associated with Charlie’s now hold a majority of the seats on the Company’s Board of Directors and (iii) Charlie’s management holds all key positions in the management of the combined Company.
The disclosure in this prospectus with respect to the period ended June 30, 2019 and 2018, including the unaudited condensed consolidated financial statements contained herein, are based on Charlie’s historical financial statements and the Company’s financial activity beginning April 26, 2019, as adjusted, to give effect to Charlie’s reverse recapitalization of the Company and the Charlie’s Financing. In addition, from the period April 26, 2019 until June 30, 2019, there were minimal costs and revenue associated with the Bazi product line which are included in the interim condensed consolidated financial statements. We do not intend to continue to produce and sell the Bazi product line, and these costs and expenses are nominal and will continue to be so in the future. The operating results of Don Polly for the quarter ended June 30, 2019 are also included.
Historical financial information presented prior to April 26, 2019 is that of Charlie’s only, while financial information presented after April 26, 2019 includes Charlie’s, Don Polly, Bazi Drinks and the Company, which includes the transactions associated with the Share Exchange and Charlie’s Financing completed prior to the Share Exchange, along with ongoing corporate costs.
Critical Accounting Policies
Included below is a discussion of critical accounting policies used in the preparation of our financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates.
We believe that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.
The accounting policies identified as critical are as follows:
Revenue Recognition
The Company recognizes revenues in accordance with Accounting Standards Codification (“ASC”) 606 – Contracts with Customers. Revenues are generated from contracts with customers that consist of sales to retailers and distributors. Contracts with customers are generally short term in nature with the delivery of product as a single performance obligation. Revenue from the sale of product is recognized at the point in time when the single performance obligation has been satisfied and control of the product has transferred to the customer. In evaluating the timing of the transfer of control of products to customers, The Company considers several indicators, including significant risks and rewards of products, the right to payment, and the legal title of the products. Based on the assessment of control indicators, sales are generally recognized when products are received by customers. Shipping generally occurs prior to the transfer of control to the customer and is therefore accounted for as a fulfillment expense. In circumstances where shipping and handling activities occur after the customer has obtained control of the product, the Company has elected to account for shipping and handling activities as a fulfillment cost rather than an additional promised service. Contract durations are generally less than one year, and therefore costs paid to obtain contracts, which generally consist of sales commissions, are recognized as expenses in the period incurred. Revenue is measured by the transaction price, which is defined as the amount of consideration expected to be received in exchange for providing goods to customers. The transaction price is adjusted for estimates of known or expected variable consideration, which includes refunds and returns as well as incentive offers and promotional discounts on current orders. Sales returns are generally not material to the financial statements, and do not comprise a significant portion of variable consideration. Estimates for sales returns are based on, among other things, an assessment of historical trends, information from customers, and anticipated returns related to current sales activity. These estimates are established in the period of sale and reduce revenue in the period of the sale. Variable consideration related to incentive offers and promotional programs are recorded as a reduction to revenue based on amounts the Company expects to collect. Estimates are regularly updated and the impact of any adjustments are recognized in the period the adjustments are identified. In many cases, key sales terms such as pricing and quantities ordered are established at the time an order is placed and incentives have very short-term durations.
Amounts billed and due from customers are short term in nature and are classified as receivables since payments are unconditional and only the passage of time related to credit terms is required before payments are due. The Company does not grant payment financing terms greater than one year. Payments received in advance of revenue recognition are recorded as deferred revenue.
Accounts Receivable
Accounts receivable is recorded at the invoiced amount and does not bear interest. We determine the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions and set up an allowance for doubtful accounts when collection is uncertain. Customers’ accounts are written off against the allowance when all attempts to collect have been exhausted. Recoveries of accounts receivable previously written off are recorded as income when received. As of June 30, 2019, and December 31, 2018, the allowance for bad debt totaled $115,000 and $151,000, respectively.
Inventories
Inventories primarily consist of finished goods and are stated at the lower of cost (determined by the average cost method) or net realizable value. We calculate estimates of excess and obsolete inventories determined primarily by reviewing inventory on hand, historical sales activity, industry trends and expected net realizable value. As of June 30, 2019 and December 31, 2018, the reserve for excess and obsolete inventories totaled $62,000 and $74,000, respectively.
Stock-Based Compensation
We account for all stock-based compensation using a fair value-based method. The fair value of financial instruments granted to employees is estimated on the date of the grant using the Black-Scholes option-pricing model and the related stock-based compensation expense is recognized over the vesting period during which an employee is required to provide service in exchange for the award. The fair value financial instruments granted to non-employees is measured and expensed as the options vest.
Income taxes
Income taxes are computed under the liability method. This method requires the recognition of deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and are reflected in the consolidated financial statements in the period of enactment. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized.
Financial statement effects of a tax position are initially recognized when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that meets the more-likely-than-not threshold of being realized upon ultimate settlement with a taxing authority. We recognize potential accrued interest and penalties related to unrecognized tax benefits as income tax expense.
Charlie’s Holdings, Inc. (Formerly True Drinks Holdings, Inc.)
Results of Operations for the Year Ended December 31, 2018 compared to the Year Ended December 31, 2017.
As discussed in detail in “Prospectus Summary- The Share Exchange” the Company entered into a Securities Exchange Agreement with each of the members of Charlie’s, and certain direct investors, pursuant to which the Company acquired all outstanding membership interests of Charlie’s beneficially owned by its members in exchange for Company securities (the “ShareExchange”). As a result, Charlie’s became a wholly owned subsidiary of the Company.Since the date of the Share Exchange, the Company’s primary business is the development, marketing and distribution of high-quality nicotine-based and CBD-based vapor products. The Company now distributes its vapor products both domestically and internationally through select distributors, specialty retailers and third-party online resellers.The information in this section is for historical purposes only, and is not an accurate description of the company’s financial condition and results of operations following the share exchange.
Net Sales
Net sales for the year ended December 31, 2018 were $1,947,052 compared to $3,823,334 during the same period in 2017, a decrease of 49.1%. This decrease is the result of management’s decision to cease sales of AquaBall®, with all remaining AquaBall® inventory being sold in the quarter ending June 30, 2018.
The percentage that each product category represented of our net sales is as follows:
Product Category | Year Ended December 31, 2018 (% of Sales) |
AquaBall® | 91% |
Bazi® | 9% |
During the year ended December 31, 2018, the Company terminated the Bottling Agreement and ceased production of AquaBall®. As a result, the Company’s operations have been reduced. Accordingly, total sales for the year ended December 31, 2018 are not indicative of future sales or results, and will be substantially lower in the current fiscal year compared to the year ended December 31, 2018. Specifically, we do not anticipate material revenue subsequent to the year ended December 31, 2018, relative to the revenue recognized in the year ended December 31, 2018, in the absence of the consummation of a transaction.
Gross Profit and Gross Margin
Gross profit for the year ended December 31, 2018 was $718,604 as compared to a gross profit of $771,190 for the year ended December 31, 2017. Gross profit as a percentage of revenue (gross margin) during the year ended December 31, 2018 was 36.9%, compared to 20.2% for the same period in 2017. This increase in gross profit margin was a result of the sale of all remaining inventory of AquaBall to Red Beard after management’s decision to cease sales of AquaBall®. This sale was priced at AquaBall®’s regular sales price, thus resulting in greater gross margin.
Sales, Marketing, General and Administrative Expense
Selling, marketing, general and administrative expense was $11,409,184, or 586% of net sales, for the year ended December 31, 2018, as compared to $10,699,331, or 280% of net sales for the year ended December 31, 2017. This year over year increase of $709,853 was primarily the result of the cessation of sales of AquaBall® Naturally Flavored Water. Approximately $10.05 million of the total expense for 2018 was related to the recording of the fair value of stock issuable to a related party. These results are not indicative of future selling, general and administrative expense, which expense is currently anticipated to be substantially lower. The Company currently has one employee, and currently anticipates limited expenditures in the immediate future, consisting of those costs necessary to maintain its current operations and to pay costs and expense necessary to comply with the reporting requirements under the Exchange Act.
Interest Expense
Interest expense for the year ended December 31, 2018 was $813,545 as compared to $158,419 for the year ended December 31, 2017.
Other Income
Other income for the year ended December 31, 2018 was $6,811,281, as compared to $1,995,567 for the year ended December 31, 2017. We recorded a gain on the change in fair value of derivative liabilities of $8,883,383 for the year ended December 31, 2018 compared to a gain of $2,331,888 for the year ended December 31, 2017. Also, in 2018, we recorded an impairment charge of $1,898,000 to goodwill compared to an impairment charge of $130,000 on our spherical bottle patent in 2017.
Net Loss
Our net loss for the year ended December 31, 2018 was $3,879,299 as compared to a net loss of $12,447,143 for the year ended December 31, 2017. This year-over-year decrease in loss of $8,567,844 consists of a decrease in operating loss of approximately $3,752,130 due to management’s decision to cease production and sales of AquaBall® and the corresponding reduction in personnel, as well as selling, general and administrative expense combined with the net effects of recording non-cash items related to the issuance of promissory notes and Common Stock related to the Niagara Settlement. On a basic and diluted per share basis, our loss was $0.01 per share for the year ended December 31, 2018, as compared to loss of $0.07 per share for the year ended December 31, 2017. We expect to continue to incur a net loss in subsequent periods throughout fiscal 2019 in the absence of the consummation of a transaction.
Liquidity and Capital Resources
Our auditors have included a paragraph in their report on our consolidated financial statements, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014,2018, indicating that there is substantial doubt as to the ability of the Company to continue as a going concern. The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. For the three months ended March 31, 2015,2019, the Company incurred ahad net loss of $2,271,197. At March 31, 2015, the Company has$1,038,756, negative working capital of $2,355,142$4,077,881, and an accumulated deficit of $20,629,277. $53,159,404.
Although, during the year ended December 31, 2014,2018 and the three months ended March 31, 2019, the Company raised approximately $1.9$1.0 million resulting from financing activities, including the sale of shares of Series B Preferred,certain Senior Secured Promissory Notes and the Food Labs Note, and received approximately $4.0$5.6 million in promissory notes, and, duringnet proceeds as a result of the quarter ended March 31, 2015 raised approximately $4.5 million from the sale of shares of Series C Preferred, as discussed below,Share Exchange in April 2019, additional capital will beis necessary to advance the marketability of the Company's products to the point at which the Company can sustaincontinue 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 condensed consolidated financial statements do not include any adjustments that mightwill result in the event the Company is unsuccessful in its plans.securing the capital necessary to execute our business plan.
The Company has historically financed its operations through sales of equity and debt securities, and, to a lesser degree,extent, cash flow provided by sales of AquaBall™.its products. Despite recent sales of preferred stock and the issuance of certain Senior Secured Promissory Notes, the Food Labs Note and the Red Beard LOC, as described below,well as the Company’s receipt of approximately $5.6 million as a result of the Share Exchange, funds generated from sales of shares of our preferred stock or other equity or debt securities and cash flow provided by AquaBall™ sales may beare 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. In the event we are unable to obtain additional financing, we will not be able to fund our working capital requirements, and therefore will be unable to continue as a going concern.
Series C Offering, Note Payments and Note Exchange
Capital Raising Activities
As described underSecured Note Financing. On July 26, 2017, we commenced an offering of Senior Secured Promissory Notes (the “Recent DevelopmentsSecuredNotes” on page 7 of this Prospectus, on February 20, 2015,) in the Company and certain Investors entered into Purchase Agreements wherein the Investors agreed to purchaseaggregate principal amount of up to 43,000 shares of newly created shares of Series C Preferred for $100 per share,$1.5 million to be purchased over the course of three separate closings.certain accredited investors (the “SecuredNote Financing”). The Company issued an aggregate total of 18,000 shares of Series C Preferred on the Initial Investment Date of February 20, 2015, 15,000 shares on April 1, 2015 and 10,000 shares on May 29, 2015.amount available was subsequently raised to $2.3 million. As additional consideration for participating in the Series C Offering, each InvestorSecured Note Financing, investors received Warrants,five-year warrants, exercisable for $0.15 per share.share, to purchase that number of shares of our common stock equal to 50% of the principal amount of the Secured Notes purchased by the investor, divided by $0.15 per share (the “Warrants”). We offered and sold Secured Notes in the aggregate principal amount of $2,465,000 and issued Warrants to purchase up to 8.2 million shares of common stock to participating investors.
On March 27, 2015,The Secured Notes (i) bore interest at a rate of 8% per annum, (ii) had a maturity date of 1.5 years from the date of issuance, and (iii) were subject to a pre-payment and change in control premium of 125% of the principal amount of the Secured Notes at the time of pre-payment or change in control, as the case may be. To secure the Company’s obligations under the Secured Notes, the Company and the Investors entered into the Purchase Agreement Amendment wherein the Company soldgranted to one of the Investors 27,000 additional shares of Series C Preferred for gross proceeds of $2.7 million, which the Company subsequently used to satisfy approximately $2.7 millionparticipating investors a continuing security interest in substantially all of the Company’s $3.8assets pursuant to the terms and conditions of a Security Agreement (the “Security Agreement”). Subsequent to the quarter ended March 31, 2019, on April 26, 2019, Red Beard purchased the Secured Notes, and thereafter converted all amounts due under the Secured Notes into shares of common stock, thereby terminating the Secured Notes.
2018 Note Issuance.Subsequent to the three months ended March 31, 2018, inconnection with the Settlement with Niagara, and in order to make the Cash Payment, the Company issued to Red Beard a senior secured convertible promissory note (the “Red Beard Note”) in the principal amount of $2.25 million, in outstanding Notes. As additional consideration for the purchase of the additional shares of Series C Preferred, the Investor received additional Warrantswhich was subsequently reduced to purchase Warrant Shares equal to 35% of the Conversion Shares underlying the shares of Series C Preferred issued$813,887 in connection with the Purchase Agreement Amendment.sale to Red Beard of all of the Company’s remaining
AquaBall®inventory.The Red Beard Note accrued interest at a rate of 5% per annum. Pursuant to the terms of the Red Beard Note, Red Beard had the right, at its sole option, to convert the outstanding balance due into that number of fully paid and non-assessable shares of the Company’s common stock equal to the outstanding balance divided by 0.005 (the “Conversion Option”); provided, however, that the Company had the right, at its sole option, to pay all or a portion of the accrued and unpaid interest due and payable to Red Beard upon its exercise of the Conversion Option in cash. Pursuant to the terms of the Red Beard Note, such Conversion Option was not to be exercisable unless and until such time as the Company has amended its Articles of Incorporation to increase the number of authorized shares of common stock from 300.0 million to at least 2.0 billion,which occurred on November 15, 2018. On April 26, 2019, in connection with the consummation of the Share Exchange, Red Beard elected to convert all amounts due under the Red Beard Note into shares of common stock.
Following theFood Labs Note Payments,. On September 18, 2018, the Company and eachentered into an agreement with Food Labs, pursuant to which the Company issued to Food Labs a promissory note in the principal amount of $50,000. The Food Labs Note (i) accrued interest at a rate of 5% per annum, (ii) included an additional lender’s fee equal to $500, or 1% of the Holdersprincipal amount, and (iii) was scheduled to mature on December 31, 2019. As disclosed above, on April 26, 2019, in connection with the Share Exchange, Red Beard purchased the Food Labs Note from Food Labs, and thereafter converted all amounts due under the Food Labs Note into shares of common stock, resulting in the termination of the Notes remaining afterFood Labs Note.
Red Beard Line-of-Credit. On November 19, 2018, the Note PaymentsCompany entered into Exchange Agreements, wherein the Holders agreedRed Beard LOC with Red Beard, effective October 25, 2018, pursuant to exchange all remainingwhich the Company could borrow up to $250,000 ;provided, however, that Red Beard could, in its sole discretion, decline to provide additional advances under the Red Beard LOC upon written notice the Company of its intent to decline to make such advances. Interest accrued on the outstanding principal and accruedof the Red Beard LOC at a rate of 8% per annum;provided, however, upon the occurrence of an Event of Default, as defined in the Red Beard LOC, the accrual of interest would have increased to a rate of any such Notes10% per annum. Prior to the Maturity Date, Red Beard had the right, at its sole option, to convert the Outstanding Balance due under the Red Beard LOC into that number of shares of Series C Preferred common stock equal to the Outstanding Balance divided by $0.005, which it elected to do on substantially similar termsApril 26, 2019 in connection with the consummation of the Share Exchange.
The Share Exchange. On April 26, 2019, subsequent to those offeredthe quarter ended March 31, 2019, the Company received approximately $5.6 million in the Series C Offering. Asnet proceeds as a result of the execution of the Exchange Agreements and the consummation of the Note Exchange, the Company issued to the Holders an aggregate total of 12,148 shares of Series C Preferred and Series C Warrants to purchase approximately 2.8 million shares of Common Stock.
As of March 31, 2015, the Company has issued 57,148 shares of Series C Preferred and Series C Warrants to purchase an aggregate total of 13.3 million shares of Common Stock (including the Additional Warrants) during the Series C Offering, resulting in gross proceeds of $4.5 million and satisfaction of all amounts owed under the Notes.Share Exchange.
Line-of-Credit Facility
The Company entered into a line-of-credit agreement with a financial institution on June 30, 2014. The terms of the agreement allow the Company to borrow up to the lesser of $1.5 million or 85% of the sum of eligible accounts receivables. At March 31, 2015, the total outstanding on the line-of-credit approximated $130,000 and the Company had approximately $0 available to borrow. The line-of-credit bears interest at Prime rate (3.25% as of March 31, 2015) plus 4.50% per annum as well as a monthly fee of 0.50% on the average amount outstanding on the line.
Off-Balance Sheet Items
We had no off-balance sheet items as of March 31, 2015.
Charlie’s Chalk Dust, LLC
Results of Operations for the Year Ended December 31, 2018 compared to the Year Ended December 31, 2017.
| For the twelve months ended December 31, |
| | |
Revenue | $20,840,794 | 100.0% | $12,233,925 | 100.0% |
Costs and expenses: | | | | |
Cost of revenue | 8,514,790 | 40.9% | 5,475,051 | 44.8% |
Sales and Marketing | 2,904,456 | 13.9% | 1,862,441 | 15.2% |
Product Development | 95,180 | 0.5% | 116,040 | 0.9% |
General and Administrative | 2,126,945 | 10.2% | 1,523,334 | 12.5% |
Total Expenses | 13,641,371 | 65.5% | 8,976,866 | 73.4% |
Operating income | 7,199,423 | 34.5% | 3,257,059 | 26.6% |
Interest income | 453 | 0.0% | 9,410 | 0.1% |
Net income | $7,199,876 | 34.5% | $3,266,469 | 26.7% |
Operating Income
Charlie’s had operating income of approximately $7,199,000 for the year ended December 31, 2018. The years’ operating income was derived from its branded nicotine based e-cigarette liquid business. For the year ended December 31, 2017, Charlie’s had operating income of approximately $3,527,000 from its branded nicotine e-cigarette liquid business. The details of the operating income are as follows:
Revenue
Revenue for the twelve months ended December 31, 2018 increased approximately $8,607,000, or 70.4%, to approximately $20,841,000, as compared to approximately $12,234,000 for same period last year due to introduction of new e-cigarette liquids and increasing the customer base and sales territories.
Cost of Revenue
Cost of revenue, which consists of direct costs of materials, direct labor, third party subcontractor services, and other overhead costs increased approximately $3,040,000, or 27.0%, to approximately $8,515,000, or 40.9% of revenue, for the year ended December 31, 2018, as compared to approximately $5,475,000, or 44.8% of revenue, for the same period in 2017. This 3.9% percent decrease in the cost of revenue is due to lower production costs on increased volume and the addition of more profitable customers.
Sales and Marketing Expenses
For the year ended December 31, 2018, total sales and marketing expenses increased approximately $1,042,000, or 55.9%, to approximately $2,904,000 as compared to approximately $1,862,000 for the same period in 2017. The increase was primarily due to increased salary expense for the addition of personnel and increased commission costs on the increased sales.
Product Development
For the year ended December 31, 2018, product development was approximately $95,000 as compared to approximately $116,000 for the same period in 2017. The decrease in expense of $21,000 is due primarily lower product registration activity in 2018.
General and Administrative Expenses
For the year ended December 31, 2018, total general and administrative expenses increased approximately $604,000, or 39.7%, to approximately $2,127,000 as compared to approximately $1,523,000 for the same period in 2017, which was primarily due to increased salary expense for the addition of personnel and professional fees associated with exploring strategic alternatives.
Income from Operations
Charlie’s had net income from operations of approximately $7,199,000 for the year ended December 31, 2018 as compared to net income from operations of approximately $3,257,000 for the same period in 2017. Net Income is determined by adjusting income from operations by the following items:
Other Income
For the years ended December 31, 2018 and 2017, other income was $453 and $9,410, respectively.
Net Income
For the year ended December 31, 2018, Charlie’s had net income of $7,200,000 as compared to $3,266,000 for the same period in 2017. Charlie’s is a limited liability company and this net income is before tax as taxes are the responsibility to the members of Charlie’s.
Effects of Inflation
Inflation has not had a material impact on the Charlie’s business.
Liquidity and Capital Resources
As of December 31, 2018, Charlie’s had working capital of approximately $704,000, which consisted of current assets of approximately $2,101,000 and current liabilities of approximately $1,396,000. This compares to working capital of approximately $1,459,000 at December 31, 2017. The current liabilities as presented in the balance sheet at December 31, 2018 primarily include approximately $1,217,000 of accounts payable and accrued expenses and approximately $180,000 of deferred revenue associated with product shipped but not yet received by customers (see our revenue recognition policy below in the critical accounting policy paragraph).
Our cash and cash equivalents balance at December 31, 2018 was approximately $305,000.
For the year ended December 31, 2018 we generated cash from operations of $7,784,000 as compared to $3,021,000 for the same period in 2017.
There have been no disagreements withCharlie’s plans and growth depend on its ability to increase revenues and continue its business development efforts. Charlie’s currently anticipates that its current cash position will be enough to meet its working capital requirements to continue our independent registeredsales and marketing efforts for at least 12 months. If in the future Charlie’s plans or assumptions change or prove to be inaccurate, we may need to raise additional funds through public accounting firm in regards to accounting and financial disclosure.or private debt or equity offerings, financings, corporate collaborations, or other means.
DIRECTORS,DIRECTORS AND EXECUTIVE OFFICERS PROMOTERS AND CONTROL PERSONS
Directors and Executive Officers
The following sets forth certain information regarding each of our directors and executive officers:officers as of the date of this prospectus.
Name | | Age | | Position |
Brandon Stump(1) | | 33 | | | | President, Chief Executive Officer and Director Chairman(Principal Executive Officer) |
David Allen (2) | | 64 | | | | Chief Financial Officer Treasurer and Secretary (Principal Financial Officer) |
Ryan Stump (3) | | 30 | | Chief Operating Officer and Director |
Mitchell Brantley III (4) | | 57 | | Chief Marketing Officer |
Adam Mirkovich (5) | | 34 | | Chief Information Officer |
Scot Cohen | | 50 | | |
Keith Stump (6) | | 58 | | Director |
Jeffrey Fox (7) | | 56
| | Director |
Directors hold office until(1) | Mr. Stump was appointed to serve as the Company’s Chief Executive Officer and as a director on the Board on April 26, 2019 in connection with the Share Exchange, effective immediately following Mr. Van Boerum’s resignation as Principal Executive Officer. The Company’s Board appointed Brandon Stump as Chairman on May 8, 2019. |
(2) | Mr. Allen was appointed to serve as the Company’s Chief Financial Officer on April 26, 2019 in connection with the Share Exchange, effective immediately following Mr. Van Boerum’s resignation as Principal Financial Officer. |
(3) | Mr. Stump was appointed to serve as the Company’s Chief Operating Officer and as a director on the Board on April 26, 2019 in connection with the Share Exchange. |
(4) | Mr. Brantley was appointed to serve as the Company’s Chief Marketing Officer on May 8, 2019. |
(5) | Mr. Mirkovich was appointed to serve as the Company’s Chief Information Officer on May 20, 2019. |
(6) | Mr. Stump was appointed to the Company's Board of Directors on June 7, 2019. |
| |
(7) | Mr. Fox was appointed to the Company’s Board of Directors on July 16, 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:
Lance Leonard,Brandon Stump, Chief Executive Officer and DirectorChairman.. Mr. Leonard has 22 years of consumer product experience. He began his career in 1990 with M&M/Mars working in the confection division holding a series of sales and management roles within the United States. In 2000, he joined Nestle where he managed both national account teams and division sales including leading the Costco wholesale National Account team. HeStump was appointed Western Zone Manager for Nestle Watersas Chief Executive Officer of the Company on April 26, 2019 in 2006 where he had responsibility for all salesconnection with the Share Exchange. Mr. Stump is a co-founder of Charlie’s, and marketing in 17 western states. In 2009, Mr. Leonard was appointed Director of Global Customers at Nestle Waters where he helped develop their go-to-market strategies in emerging markets and was responsible for managing one billion dollars in global sales. Mr. Leonard left Nestle to becomehas served as the Chief Executive Officer of True Drinks,Charlie’s since its inception in 2014. Prior to co-founding Charlie’s, Mr. Stump co-founded his first business, the Ohio House in 2011, with his brother Ryan Stump. Since then, he has gone on to co-found both The Chadwick House and Buckeye Recovery Network, both established in 2017, as well as The Mend California, established in 2018. These programs provide a continuum of care and services to men and women from the country promoting emotional, physical and spiritual development.
As a co-founder of Charlie’s, the Board of Directors believes that Mr. Stump’s substantial entrepreneurial, marketing, sales and industry experience provide the Board with valuable expertise that will assist the Company in continuing to grow its revenue and to enter into new markets for its products.
David Allen, Chief Financial Officer and Secretary.Mr. Allen was appointed as the Company’s Chief Financial Officer on April 26, 2019, upon consummation of the Share Exchange. Mr. Allen brings over 22 years of experience as the Chief Financial Officer of public companies. From September 2018 to May 2019, Mr. Allen served as Chief Financial Officer of Iconic Brands, Inc. (OTCQB: ICNB). Prior to that, from December 2014 to January 2018, Mr. Allen served as the Chief Financial Officer of WPCS International, Inc., a design-build engineering firm focused on the deployment of wireless networks and related services. WPCS International was listed on Nasdaq, and Mr. Allen oversaw its financial reporting obligations and SEC compliance. From 2004 to 2017, Mr. Allen served as Chief Financial Officer of Bailey’s Express, Inc., a privately held trucking corporation, which filed for Chapter 11 bankruptcy in July 16, 2012,2017. Mr. Allen currently serves as the Chapter 11 Plan Administrator for the bankruptcy case. From June 2006 to June 2013, Mr. Allen served as the Chief Financial Officer and Executive Vice President of Administration at Converted Organics, Inc., a company organized to convert food waste into organic fertilizer. At Converted Organics, he was responsible for SEC reporting, audit, insurance and taxes. In June 2019, Mr. Allen was appointed to the Board in October 2012. Heof Directors and serves as audit committee chairman of MariMed, Inc. (OTC:MRMD). Mr. Allen is currently an Assistant Professor of Accounting at Southern Connecticut State University, a position he has held since 2017, and for the 12 years prior to that he was an Adjunct Professor of Accounting at SCSU and Western Connecticut State University. Mr. Allen is a nativelicensed CPA and holds a Bachelor’s Degree in Accounting and a Master’s Degree in Taxation from Bentley College.
Ryan Stump, Chief Operating Officer and Director. Mr. Stump was appointed as the Company’s Chief Marketing Officer on April 26, 2019 in connection with the Share Exchange. Mr. Stump has served as the Chief Operating Officer of Charlie’s since 2014, during which time he has been responsible for all global operations of Charlie’s. Prior to joining Charlie’s, Mr. Stump worked as an Associate Territory Manager and then as a Territory Manager for ConMed, a medical sales device company, from 2010 to 2013. Mr. Stump also co-founded and continues to be engaged with multiple companies, including The Ohio House since 2011, the Buckeye Recovery Network since 2017, and The Mend California since 2018. Mr. Stump earned a B.S. and received his bachelor’s degreeB.A. in Sports Marketing and Marketing from California State University, Fresno.Duquesne University.
The Board of Directors believes that Mr. Leonard’s extensiveStump’s experience in the food and beverage industry, particularly hisoperating high growth companies, as well as entrepreneurial experience, with organizational design, allow him to uniquely contributewill be valuable to the Board as it manages the Company’s short-term and long-term business plan.anticipated continued growth.
Daniel Kerker,Mitchell Brantley III, Chief FinancialMarketing Officer.Mr. Brantley was appointed as the Company’s Chief Marketing Officer. on May 8, 2019. Mr. Kerker isBrantley currently serves as an Advisor to Spudsy, a professional with over 15 years of experience in financeprivately held company focused on developing and accounting in both private and public entities. He spent seven yearsselling certain healthy snacks, where he also served 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.President from August 2018 to December 2018. Prior to joining True Drinks,Spudsy in August 2018, Mr. Brantley served as Interim President for Goldthreads Herbs, a company focused on the development and sale of plant-based tonics, from March 2018 to July 2018. In addition, starting in November 2017, Mr. Brantley worked as a consultant to companies in the fast moving consumer goods space, providing strategic and marketing advice. From April 2013 until November 2017, Mr. Brantley served as the General Manager of BioNutritonal Research Group, Inc., – Power Crunch, a producer of smart nutrition bars, drinks and powders. From September 2011 until April 2013, Mr. Kerker spent two years workingBrantley served as interim CFOVice President of Coast Brands, LLC, which provided brand representation and secured regional and national distribution for Environmental Packaging Technologiesunderdeveloped and emerging beverage and snack brands. Mr. Brantley has also held leadership positions for distributors of Quaker Oats, Cadbury Schweppes and Snapple brand products. Mr. Brantley holds a B.S. in Houston, Texas,Business and Regeneca, Inc.Marketing from California State University, Fullerton.
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 Irvine, California.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. Kerker becameMirkovich served as the Chief FinancialOperating Officer of True Drinks on March 1, 2012.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. KerkerMirkovich served as the Director of Supply Chain and Operations at Space Jam Juice, LLC, a distributor of premium vapor products. From November 2010 to April 2013, Mr. Mirkovich served as the Product Lifecycle Management (“PLM”) Program Manager for Niagara Bottling, LLC, a leading bottled water manufacturer. While there, he led the product revision, introduction, and discontinuance practices for customers’ private labeled water, flavored, and carbonated beverages. Prior to his role in PLM Management, Mr. Mirkovich served as a member of the Supply Chain Logistics team at Niagara Bottling, providing strategic support of company expansion activities and tactical support of purchasing, production planning, and multi-region logistics in North American operations. Mr. Mirkovich earned a Bachelor of Science degree in FinanceBusiness Administration and Economics 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.Chapman University.
Kevin Sherman, Chief Marketing Officer. 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. Prior to joining True Drinks, Mr. Sherman was the Vice President Strategy and Network Development and President of Retail for Bazi, Inc. He was instrumental in the development of Bazi’s All-Natural formula 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.
Board of Directors
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 privateaprivate equity fund based in Hong Kong. Mr. Cohen also is the Founder of Petro River Oil, LLC and Chairman of Petro River Oil Corp,Corp. (OTCBB: PTRC), a publicly traded oil and gas producer with assets in Kansas and Oklahoma, and Petro Spring, a global oil and gas technology solutions provider. Prior to creating V3 Capital Partners, Mr. Cohen was the Founder and Managing Partner at Iroquois Capital Opportunity Fund, a special situations private equity investment fund, and a Co-Founder of Iroquois Capital, a hedge fund with investments in small and micro-cap private and public companies. Mr. Cohen currently serves as a director on the Board of Directors of Wrap Technologies, Inc. (NASDAQ: WRTC), and is active in philanthropic activities with numerous charities including the Jewish Enrichment Council 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 assist the Company’s efforts to raise capitalexpand and to fundimplement its business plan.
Keith Stump, Director. Mr. Stump has over 35 years of sales and management experience. He joined Charlie’s in January 2018 as a Strategic Advisor, where he has predominantly focused on sales, marketing and scaling the continued implementationbusiness, including through organizational alignments, process improvement, leadership/management training and development. Prior to joining Charlie’s, Mr. Stump served as a partner and Vice President of Sales in Blue Technologies, Inc., an office technology and Managed IT Service provider headquartered in Cleveland, Ohio, which he co-founded in 1995. While at Blue Technologies, Inc., Mr. Stump was responsible for the sales performance of the Company’s business plan.
Neil LeVecke, Director.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. LeVecke isStump was instrumental in helping Blue Technologies, Inc. become one of the President of LeVecke Corporation, a wholesale distributor and bottler of spirits and wine products. Representing a third generationTop 10 Konica Minolta providers in the family business, he has worked every positioncountry, as well as one of the Top 75 Office Technologies Dealers in the company since startingUnited States. Mr. Stump serves on several not-for-profit boards, which serve those in 1993. Mr. LeVecke graduatedrecovery from Loyola Marymount University in 1990.addiction and developmental disabilities.
The Board of Directors believes that Mr. LeVecke’s 22 years in the wholesale beverage distributingStump’s sales, marketing, management experience and bottling industry experience, as well as entrepreneurial experience, will providebe valuable to the Board as it manages the Company’s anticipated continued growth.
Jeffrey Fox, Director. Mr. Fox has been a leading business strategist, brand marketing authority and general management executive for some of the world's largest restaurant and consumer companies including roles as Chief Brand & Concept Officer for Pizza Hut, Co-founder of Collider LLC, a cultural marketing strategy firm, Managing Director of the California office of advertising agency Foote, Cone and Belding (FCB), various positions with invaluable insightthe Yum! Brands and guidance aswithin Sony's interactive and PlayStation video game divisions, and Hill & Knowlton Public Relations. Jeff is currently a member of two board of directors -- Cicis Pizza and Flix Brewhouse. Jeff holds a bachelor's degree in Journalism from San Diego State University and received a master's degree in Mass Communications from California State University, Northridge.
The Board of Directors believes that Mr. Fox’s strong experience in brand building across several diverse Fortune 100 consumer product companies will be significantly valuable to the Company as it continues to 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.
Lance Leonard, Chief Executive Officer and Director. See above.
world.
There
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.
”) resigned from their positions as directors on the Company’s Board, leaving Messrs. Sherman and Cohen as the remaining directors. In addition, Ryan and Brandon Stump were appointed as new directors immediately after the resignations of the Former Directors. Certain disclosure which follows regarding corporate governance refers to the Company’s Board and corporate governance policies and procedures prior to the resignation of the Former Directors, and does not reflect the Company’s corporate governance policies and procedures subsequent to such resignations.
BOARD OF DIRECTORS
Board of Directors; Attendance at Meetings
The Board held sevenfour meetings and acted one time by unanimous written consent five times during the year ended December 31, 2014.2018. Each director attended at least 75% of Board meetings during the year ended December 31, 2014.2018. 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.
The Board believes that a majorityPrior to the resignations of its members should be independent directors. Thethe Former Directors, the Board has determined that other thanMs. Cappello and Mr. Leonard, all of its current directors areLeVecke were independent directors as defined by the rules and regulations of the NASDAQNasdaq 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
Due to the lackAs of independent directors currently serving onDecember 31, 2018, the Board of Directors, the Company currently does not havehad a standing Audit Committee, Compensation Committee orand Nominating and Corporate Governance Committee. At this time, the full Board of Directors handles matters otherwise delegated to these committees. The Board appointsappointed the members and chairpersons of each committee, and, at such time as additional independent directors are appointed tothese committees. The majority of the members of these committees had been determined by the Board eachto be independent. Each committee will be re-established to administerhad a written charter approved by the duties and responsibilities set forth in each committee’s written charter.Board. Copies of each committee charter arewere available on the Company’s website at www.truedrinks.com/investor-relations/investor-relations/ and by clicking on the “Corporate Governance”“Corporate Governance” tab.
Effective April 26, 2019, as a result of the resignations of the Former Directors, the Board no longer has an active Audit Committee, Compensation Committee and 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.
Audit Committee
As of December 31, 2018, the Audit Committee consisted of Messrs. Scot Cohen (Chair) and Neil LeVecke and Ms. Cappello.
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 of December 31, 2018, the Compensation Committee consisted of Ms. Cappello (Chair) and Mr. Scot Cohen.
The Compensation Committee determined the Company’s general compensation policies and practices. The Compensation Committee also reviewed and approved compensation packages for the Company’s officers and, based upon such review, recommended overall compensation packages for the officers to the Board. This committee also reviewed and determined equity-based compensation for the Company’s directors, officers, employees and consultants and administered the Company’s 2013 Stock Incentive Plan.
Nominating and Corporate Governance Committee
As of December 31, 2018, the Nominating and Corporate Governance Committee consisted of Mr. LeVecke (Chair) and Ms. Cappello. The Nominating and Corporate Governance Committee was 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
TheAs of December 31, 2018, the Board currently separatesseparated the roles of ChiefPrincipal Executive Officer and Chairman of the Board in recognition of the differences between the two roles. The ChiefPrincipal 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 ChairmanChair of the Board provides guidance to the ChiefPrincipal 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 Chairman of the Board based on criteria that it deems to be in the best interest of the Company and its stockholders,stockholders.
Upon consummation of the Share Exchange, Brandon Stump was appointed as the Company’s Principal Executive Officer, and therefore one person may,shortly thereafter was appointed as Chairman of the Board. The Board felt that this was in the future, serve as bothCompany’s and its stockholder’s best interests under the circumstances due to Brandon Stump’s knowledge and experience in the vapor market and due to the fact that he is the co-founder and Chief Executive Officer and Chairman of the Board.Charlie’s.
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. RiskPrior to April 26, 2019, risk assessment iswas 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 meetmet privately in executive sessions with representatives of the Company’s independent registered public accountants.accountants during and prior to the year ended December 31, 2018. The Board also provides risk oversight through its periodic reviews of the financial and operational performance of the Company.
Section 16(a) Beneficial Ownership Reporting Compliances
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") requires the Company’s directors, executive officers and beneficial owners of more than 10% of the Company’s Common Stock to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended December 31, 2014, all Section 16(a) filing requirements were complied with in a timely manner.
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 filedwas attached as an exhibit to this prospectus.our Annual Report on Form 10-K, filed with the SEC on April 1, 2019.
Section 16(a) Beneficial Ownership Reporting Compliances
Section 16(a) of the Exchange Act requires our officers, directors, and persons who beneficially own more than ten percent of our common stock to file reports of ownership and changes in ownership with the SEC. Officers, directors, and greater-than-ten-percent stockholders are also required by the SEC to furnish us with copies of all Section 16(a) forms that they file.
Based solely upon a review of these forms that were furnished to us, we believe that our officers and directors timely filed all reports due under Section 16(a) during the year ended December 31, 2018 except the following:
● | James Greco, a member of the Company’s Board of Directors, filed a Form 5 disclosing one late transaction. |
The following table sets forth information with respect to compensation earned by the Company’s Chief Executive Officer, Chief Financial Officer, and Chief Marketing Officer. There was not any other executive officer who served in 2014 and whose annual compensation exceeded $100,000 during such year (collectively the “Named Executive Officers”):
Summary Compensation Table
Name and Principal Position | Year | | Salary ($) | | | Bonus ($) | | | Stock Awards ($) | | | Option Awards ($) (1) | | | Non-Equity Incentive Plan Compensation ($) | | | All Other Compen- sation ($) | | | Total ($) | |
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Lance Leonard, Chief Executive Officer, Director | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Daniel Kerker, Chief Financial Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Kevin Sherman, Chief Marketing Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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The following table sets forth the compensation paid to the following persons for our fiscal years ended December 31, 2018 and 2017:(a) | our principal executive officer; |
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(b) | our most highly compensated executive officers who were serving as an executive officer at the end of the fiscal year ended December 31, 2018 who had total compensation exceeding $100,000 (together, with the principal executive officer, the “Named Executive Officers”); and |
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(c) | any additional individuals who would have been considered Named Executive Officers, but for the fact that they were not serving in such capacity at the end of our most recently completed fiscal year. |
Name and Principal Position | | Year | | | | | Non-Equity Incentive Plan Compensation ($) | All Other Compensation ($) | |
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Robert Van Boerum (1) | | 2018 | $103,654 | $- | $- | $9,517 | $- | $- | $113,171 |
Former Principal Executive Officer and Principal Financial Officer | | 2017 | $170,108 | $- | $- | $118,131 | $- | $- | $288,239 |
James J. Greco, (2) | | 2018 | $109,495 | $- | $- | $37,935 | $- | $- | $147,430 |
Former Director and Former Chief Executive Officer | | 2017 | $63,462 | $- | $125,000 | $189,009 | $- | $- | $377,471 |
Kevin Sherman, (3) | | 2018 | $67,832 | $- | $- | $107,916 | $- | $- | $175,748 |
Director and Former President and Chief Executive Officer | | 2017 | $268,621 | $- | $- | $307,140 | $- | $36,000 | $611,761 |
(1) | The Company uses a Black-Scholes option-pricing model (the “Black-Scholes Model”)Mr. Van Boerum was appointed to estimateserve as the fair valueCompany’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 stock option grant. The use of a valuation model requiresShare Exchange. Mr. Van Boerum currently provides consulting services to the companyCompany in order to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based onaid in the historical volatilitytransition of the company’s stock price. In the future the average expected life will be based on the contractual termCompany and its management as a result of the option and expected employee exercise and post-vesting employment termination behavior. Currently it is based on the simplified approach provided by SAB 107. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of the grant. The following were the factors used in the Black Sholes Model to calculate the compensation expense: Share Exchange. |
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For(2)
| James J. Greco served as Chief Executive Officer of the year ended
December
31, 2014 Company from April 2017 to May 15, 2018, and resigned from his role as a member of the Company’s Board of Directors on April 26, 2019, effective upon consummation of the Share Exchange. |
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(3) | | | | |
Risk-free rateKevin Sherman served as President and Chief Marketing Officer of return
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| | | the Company through April 25, 2018. |
Stock Option Grants
Robert Van Boerum. Mr. Van Boerum was 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 received a base salary of $14,583.33 per month. Mr. Van Boerum was also eligible for an annual bonus equal to 30% of his salary, which bonus was to be awarded at the sole discretion of the Company’s Compensation Committee and was eligible to earn stock option compensation at the discretion of the Compensation Committee. During the year ended December 31, 2014, we issued2017, the following stock optionsCompensation Committee did not award a bonus to our Named Executive Officers:
Name | Grant Date | | All Other Option Awards: Number of Securities Underlying Options (#) | | | Exercise or Base Price of Option Awards ($/ Sh) | |
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None ofMr. Van Boerum for the stock options issued to our Named Executive Officers during the year endedperiod through December 31, 2014 were exercised. On July 1, 2015, each Named Executive Officer agreed to cancel all of their outstanding options.2016.
Employment Agreements
Effective July 15, 2012,-58-
Pursuant to its terms, the Company appointed Lance Leonard as its Chief Executive Officer and Daniel Kerker as its Chief Financial Officer. Mr. Leonard is employed as the Chief Executive Officer of True Drinks, Inc., our wholly owned subsidiary. The Company assumed the EmploymentVan Boerum Agreement that True Drinks entered into with Mr. Leonard on July 16, 2012 (the “Leonard Agreement”) effective October 15, 2012. The term of the Leonard Agreement is for a period of three years, which shall extend automatically for successive one-year periods unless either party terminates the Leonard Agreement. Mr. Leonard shall receive a base salary in an annual amount of $250,000 and shall be eligible to receive annual bonuses, which, subject to certain conditions, shall be (a) $75,000 for the first year, (b) $125,000 for the second year and (c) $175,000 for the third year of Mr. Leonard’s employment. Mr. Leonard shall also be entitled to earn stock option compensation equal to a total of 1,228,695 shares of the Company’s Common Stock over the term of the agreement. Mr. Leonard’s employment may be terminated during the nine month period following the effective date of the Leonard Agreement at any time, in the sole discretion of the Company, and may thereaftercould be terminated for “Performance Cause”, if the Company consistently fails to meet reasonable performance expectations, or for “Cause”,“Cause,” if Mr. LeonardVan Boerum (a) iswas convicted of any fraud or embezzlement, (b) commitsafter written notice, willfully breached or habitually neglected his duties and responsibilities, (c) committed acts of dishonesty, gross negligence or willful misconduct, or (c) violates(d) violated 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 terminatesterminated Mr. Leonard’sVan Boerum’s employment for reasons other than for Cause, the Company shallwould have been required to pay a severance in an amount equal to one yearsix months of Mr. Leonard’sVan Boerum’s base salary,salary.
Mr. Van Boerum was appointed to serve as the Company’s Principal Executive Officer and ifPrincipal Financial Officer upon Mr. Greco’s resignation, and did not enter into a new employment agreement in connection with such appointments. As stated above, Mr. Van Boerum resigned from these positions on April 26, 2019, effective upon consummation of the Leonard Agreement is terminated within nine months of its effective date, Mr. Leonard’s base salary for the remainder of such nine month period.Share Exchange.
James J. Greco.Mr. Kerker isGreco was employed as the Company’s Chief FinancialExecutive Officer of True Drinks. The Company assumed thepursuant to an Employment Agreement, that True Drinks entered into withdated April 13, 2017 (the “Greco Agreement”), under which Mr. Kerker on March 1, 2012 (the “Kerker Agreement”) 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 shall receive aGreco was entitled to an annual base salary of $12,500 per month until$250,000, payable in accordance with the earlierCompany’s existing payroll practices beginning in October 2017. Under the terms and conditions of September 1, 2012 or the Company achieving $1,000,000Greco Agreement, Mr. Greco received: (i) a guaranteed bonus 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 shall also receive an annual bonus as approved by the Board and shall be entitled to earn stock option compensation to acquire a totalform of 430,0431,302,084 shares of the Company’s Common Stock over restricted common stock (the term“Bonus Award”), which Bonus Award vested in full on December 31, 2017; (ii) stock options to purchase up to 6,300,315 shares of the agreement.Company’s common stock, an amount equal to 2% of the Company’s issued and outstanding shares of common stock (including preferred stock on an as-converted basis), which options will vest annually over a four-year period beginning on the date of the Greco Agreement, or in full upon a Change of Control (as defined in the Greco Agreement); and (iii) stock options to purchase up to 9,450,474 shares of the Company’s common stock, vesting of which will begin in 2018 and vest annually over three years, conditioned on the Company’s achievement of certain performance goals.
Pursuant to the Greco Agreement, Mr. Kerker’sGreco’s employment may becould have been terminated for “Cause”,“Cause,” if Mr. KerkerGreco (a) iswas convicted of any fraud or embezzlement, (b) after written notice, willfully breachesbreached or habitually neglectsneglected his duties and responsibilities, (c) commitscommitted acts of dishonesty, gross negligence or willful misconduct or (d) violatesviolated any law or regulation relating to the business operations of the Company that may have had a material adverse effect on the Company. If the Company terminatesterminated Mr. Kerker’sGreco’s employment for reasons other than for Cause, the Company shallwould have been required to pay a severance in an amount equal to six monthsthree times Mr. Greco’s monthly base salary per year of service, capped at a maximum amount equal to Mr. Kerker’s baseGreco’s annual salary.
As stated above, Mr. Greco resigned from his position as Chief Executive Officer on May 15, 2018.
Kevin Sherman. Mr. Sherman iswas employed as the Chief Marketing Officer of True Drinks. The Company entered into anCompany’s President pursuant to a two-year employment agreement, with Mr. Shermandated November 25, 2015 (the “Sherman Agreement”) effective October 1, 2014. The term. Under the terms and conditions of the Sherman Agreement, is for a period of three years, which shall extend automatically for successive one-year periods unless the Sherman Agreement is terminated by either party. Mr. Sherman shall receivereceives: (i) a base salary of $14,583.33$22,917 per month.month, subject to certain adjustments in the event the Company achieved certain monthly sales objectives (“Target Objectives”); (ii) a $3,000 per month housing allowance, subject to termination in the event the Company achieved any of the Target Objectives; (iii) a ‘retention bonus’ of $100,000, of which $50,000 was paid to Mr. Sherman shallin November 2015 and the remaining $50,000 was paid in March, 2016; and (iv) an aggregate total of approximately 3.8 million shares of restricted common stock, subject to certain vesting conditions (“Restricted Shares”), which Restricted Shares represented approximately 1.7% 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 ended as of July 2017.
Mr. Sherman was also receiveeligible for an annual bonus equal to 30% of his base salary, payable in restricted shares of the Company’s common stock, which bonus was to be awarded at the sole discretion of the Company’s Compensation Committee. During the year ended December 31, 2017, the Compensation Committee did not award a bonus to Mr. Sherman for the period through December 31, 2016.
In addition to the annual bonus, in the event of a change in control transaction, as approved bydefined in the Board and shallSherman Employment Agreement, Mr. Sherman was to be entitled to earn stock option compensation.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.
Pursuant to the Sherman Agreement, Mr. Sherman’s employment maycould be terminated for “Cause”,“Cause,” if Mr. Sherman (a) iswas convicted of any fraud or embezzlement, (b) after written notice, willfully breachesbreached or habitually neglectsneglected his duties and responsibilities, (c) commitscommitted acts of dishonesty, gross negligence or willful misconduct or (d) violatesviolated any law or regulation relating to the business operations of the Company that may have had a material adverse effect on the Company. If the Company terminatesterminated Mr. Sherman’s employment for reasons other than for Cause, the Company shallwould have been required to pay a severance in an amount equal to six months of Mr. Sherman’s base salary.
As stated above, Mr. Sherman resigned from his position as President and Chief Marketing Officer on April 25, 2018.
Other than as set forth above, there arewere no arrangements or understandings between our executive officersNamed Executive Officers and any other person pursuant to which they were appointed as officers. Neitherofficers as of the IncomingDecember 31, 2018. None of our Named Executive Officers hasas of December 31, 2018 had a family relationship that is required to be disclosed under Item 401(d) of Regulation S-K.
Director Compensation
PursuantIn previous years, pursuant to the Company’s Director Compensation Plan, non-employee directors (“Outside Directors”) shall receivereceived (a) a $30,000 annual cash 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. The Chairman of the Board also receives an additional $20,000 annual retainer. Directors that arewere also employees of the Company dodid not receive additional compensation for serving on the Board.
The following table discloses certain information concerning the compensation of the Company’s non-employee directors for the year ended December 31, 2014:2018:
Name | | Fees earned or Paid in Cash ($) | | | Option Awards ($) | | | Stock Awards ($) | | | Total ($) | |
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Name | Fees earned or Paid in Cash ($) | | | |
Ramona Cappello (1) | $- | $- | $- | $- |
Neil LeVecke (1) | $- | $- | $- | $- |
Scot Cohen (2) | $- | $21,344 | $- | $21,344 |
James Greco (1) | $- | $- | $- | $- |
Kevin Sherman | $- | $- | $- | $- |
(1) | Mr.As stated above, Ms. Cappello and Messrs. LeVecke was appointed toand Greco resigned from their positions as member of the Company’s Board on April 26, 2019, effective upon consummation of Directors on February 18, 2015, and, as such, received no director compensation duringthe Share Exchange. |
(2) | During the year ended December 31, 2014. |
(2) | Mr. Lane did not stand for re-election at the Company’s 2014 Annual Meeting2018, Scot Cohen was granted options to purchase 7,114,826 shares of Stockholders. |
(3) | Messrs. Wistreich and Imbrogno each resigned from common stock, which options had a value on grant date of $21,344, as a Director of the Board of Directors on March 10, 2015.Directors. |
Outstanding Equity Awards as of December 31, 20142018
| Option Awards |
Name | Number of Securities Underlying Unexercised Options (#) Exercisable | | Number of Securities Underlying Unexercised Options (#) Unexercisable (1) | | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) (1) | | Option Exercise Price ($) | | Option Expiration Date |
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The following table sets forth all equity awards held by our Named Executive Officers at December 31, 2018:
(1) All options listed in this table were canceled on July 1, 2015 and are no longer outstanding. | |
Name | Number of shares or units of stock that have not vested (#) | Market Value of shares or units of stock that have not vested ($) | Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested (#) | Equity incentive plan awards: Market or Payout value of unearned shares, units or other rights that have not vested ($) |
Robert Van Boerum | 4,329,219(1) | $- | - | $- |
James J. Greco | 12,644,921(2) | $- | - | $- |
Kevin Sherman | 35,971,988(3) | $- | - | $- |
(1) | Non-vested shares vest as follows: 818,925 on September 30, 2019, 338,000 on September 30, 2020, and 3,172,294 upon a change of control transaction. Mr. Van Boerum was appointed to serve as the Company’s Principal Executive Officer and Principal Financial Officer effective May 15, 2018, following Mr. Greco’s resignation as Chief Executive Officer. Mr. Van Boerum resigned from his position as Principal Executive Officer and Principal Financial Officer on April 26, 2019. |
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(2) | Non-vested shares vest as follows: 12,644,921 upon a change of control transaction. Mr. Greco resigned from his position as Chief Executive Officer on May 15, 2018. |
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(3) | Non-vested shares vest as follows: 35,971,988 upon a change of control transaction. Mr. Sherman resigned from his position as President and Chief Marketing Officer on April 25, 2018 but continues to serve on the Company’s Board of Directors. |
Equity Compensation Plan Information
The following table includes information as of December 31, 2018 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)) |
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Equity compensation plans approved by stockholders | 20,000,000 | $0.030 | - |
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Equity compensation plans not approved by stockholders | 71,759,826 | $0.015 | - |
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Total | 91,759,826 | $0.018 | - |
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.
OptionsDuring the year ended December 31, 2018, the Company did not issue any restricted stock awards pursuant to Purchasethe 2013 Plan; however, the Company issued an aggregate total of 11,999,998 shares34,652,903 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 Common Stockthe outstanding stock options held by Mr. Sherman that were issued under the 2013 Plan, duringin the year ended December 31, 2014, whichaggregate amount of 35,971,988, to extend the expiration date of such stock options were subsequently canceled on July 1, 2015.by five years.
Stock Option Exercises and Stock Vested
There were no options exercised2019 Omnibus Incentive Plan. The 2019 Omnibus Incentive Plan (the “2019 Plan”) was adopted by the Named Executive OfficersCompany’s Board of Directors on May 8, 2019, subject to stockholder approval and registration or Directors duringqualification of the year ended December 31, 2014.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.
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, 2014.2018.
None.
We are filing the registration statement of which this prospectus forms a part to permit holders of the shares of our common stock described in the section entitled “Selling Stockholders” to resell such shares. We will not receive any proceeds from the resale of any shares offered by this prospectus by the selling stockholders.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the OTC Pink Marketplace under the symbol “CHUC.” Prior to July 3, 2019, our common stock was traded on the OTC Pink Marketplace under the symbol “TRUU.”
The following table sets forth high and low sales prices for our common stock for the calendar quarters indicated as reported by the OTC Pink Marketplace. These prices represent quotations between dealers without adjustment for retail markup, markdown, or commission and may not represent actual transactions.
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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 (through September 25, 2019) | $ 0.04 | $ 0.01 |
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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 |
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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 September 23, 2019, there were 18,935,746,390 shares of our common stock outstanding, and approximately437stockholders of record. At September 23, 2019, there were 206,249 shares of our Series A Preferred outstanding held by 120 stockholders of record.
Transfer Agent
Our Transfer Agent and Registrar for our common stock is Corporate Stock Transfer located in Denver, Colorado.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
As of July 6, 2015, we had threeThe Company currently has two classes of voting stocksecurities issued and outstanding: (i) Common Stock; common stock and (ii) Series B Preferred; and (iii) Series CA Preferred. The following tables set forth information regarding sharescontain the beneficial ownership of Series B Preferred and Common Stock beneficiallyour outstanding voting securities owned as of July 6, 2015 by:
| (i) | Each of our officers and directors; |
| (ii) | All officer and directors as a group; and |
| (iii) | Each person known by us to beneficially own five percent or more of the outstanding shares of our Series BA Preferred Series C Preferred and Common Stock. Percent ownership is calculated based on 1,342,870 sharescommon stock. of Series B Preferred, 82,148 shares of Series C Preferred and 53,718,049 shares Common Stock outstanding at July 6, 2015. |
Percent ownership is calculated based on 206,249 shares of Series A Preferred and 18,935,746,390 shares common stock outstanding as ofSeptember 23, 2019.
For purposes of this section, beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage of ownership by that person in each table below, shares of voting common stock subject to rights held by that person to acquire such shares currently or within 60 days are deemed outstanding. Such shares are not deemed outstanding for the purpose of computing the percentage of ownership by any other person.
Beneficial Ownership of Series BA Preferred
Name and Address (1) | | Series B Convertible Preferred Stock (2)(3) | | | % Ownership of Class (4) | |
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Total Officers and Directors (1) | | | | | | | | |
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First Bank & Trust as custodian of Ronald L. Chez IRA 820 Church Street Evanston Illinois, 60201 | | | | | | | | |
V3 Capital Partners LLC 20 East 20th Street, Apt. 6 New York, NY 10003 | | | | | | | | |
Wolfson Equities LLC 1 State Street Plaza, 29th Floor New York, NY 10004 | | | | | | | | |
Joe Kolling 58 Beacon Bay Newport Beach, CA 92660 | | | | | | | | |
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% |
* | Less than 1%.
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(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 18552 MacArthur Blvd., Suite 325, Irvine, CA 92612. 1007 Brioso Drive, Costa Mesa, California 92627. |
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(2) | Subject toBased on Company records as of September 23, 2019. Mr. Smith is a manager of Red Beard, and has dispositive power and voting power over the limitations in the Certificate of Designation, each share of Series B Preferred is convertible into that number of shares of Common Stock equal to the Stated Value, divided by the Conversion Price, as defined in the Certificate of Designation. As of July 6, 2015, the Conversion Price was $0.25.securities reported herein.
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(3) | PursuantBased 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 Certificatebeneficial owner of Designation,the 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 9.99% of the Company’s outstanding Common Stock after such conversion. The Certificate of Designation also entitles each share of Series B Preferred to vote, on an as converted basis, along with the Common Stock; provided, however, that the Series B 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.reported herein.
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(4) | Beneficial ownership is determined in accordance withBased on Company records as of September 23, 2019. Sander Gerber, Authorized Signor for Hudson Bay Capital Management, LP may be deemed to be the rulesbeneficial owner of all shares of common stock underlying the SEC and generally includes voting or investment power with respect to securities. common stock held by Hudson Bay Capital Management, LP.
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(5) | Includes 3,750Based on Company records as of September 23, 2019. Steve Derby, Managing Member of SDS Capital Partners II, LLC may be deemed to be the beneficial owner of all shares held directly by Mr. Cohen, 118,750 shares of common stock underlying the common stock held by V3SDS Capital Partners and 12,500II, LLC.
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(6) | Based on Company records as ofSeptember 23, 2019. Jacob Gottlieb, Chief Executive Officer of Altium Growth Fund, LP may be deemed to be the beneficial owner of all shares of common stock underlying the common stock held by the Scot Jason Cohen Foundation. Mr. Cohen is the Managing Partner of V3 Capital Partners and is an officer of the Scot Jason Cohen Foundation.Altium Growth Fund, LP. |
Name and Address (1) | | Series C Convertible Preferred Stock | | | % Ownership of Class (2) | |
Vincent C. Smith, Jr. Annuity Trust 2015-1 2560 East Chapman Avenue, Suite 173 Orange, CA 92869 | | | | | | | | |
Chris Turoci 974 Sandstone Dr. Glendora, CA 91740 | | | | | | | | |
* | Less than 1%.
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(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.
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(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 Common Stock
Name, Address and Title (if applicable) (1) | | 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 | |
Executive Officers and Directors |
Brandon Stump | | | | | | |
Chief Executive Officer and Director | 9,379,218,889 | - | - | - | 9,379,218,889 | 49.5% |
Ryan Stump | | | | | | |
Chief Operating Officer and Director | 4,019,665,353 | | | | 4,019,665,353 | 21.2% |
David Allen | | | | | | |
Chief Financial Officer | - | - | - | - | - | 0.0% |
Mitch Brantley | | | | | | |
Chief Marketing 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 | 72.1% |
Name, Address and Title (if applicable) (1) | | Number of Shares (1) | | | % Ownership of Class (2) | |
Lance Leonard President, Chief Executive Officer and Director | | | | | | | | |
Daniel Kerker Chief Financial Officer, Treasurer and Secretary | | | | | | | | |
Kevin Sherman Chief Marketing Officer | | | | | | | | |
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Total officers and directors (4) | | | | | | | | |
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MKM Opportunity Master Fund, Ltd (5) 28 West 44th Street, 16th Floor New York, NY 10036 | | | | | | | | |
First Bank & Trust as custodian of Ronald L. Chez IRA (6)(7) 820 Church Street Evanston Illinois, 60201 | | | | | | | | |
V3 Capital Partners LLC (8) 20 East 20th Street, Apt. 6 New York, NY 10003 | | | | | | | | |
Wolfson Equities, LLC (9) 1 State Street Plaza, 29th Floor New York, NY 10004 | | | | | | | | |
Vincent C. Smith, Jr. Annuity Trust 2015-1 (10) 2560 East Chapman Avenue, Suite 173 Orange, CA 92869 | | | | | | | | |
Chris Turoci (11) 974 Sandstone Dr. Glendora, CA 91740 | | | | | | | | |
Joe Kolling (12)
58 Beacon Bay
Newport Beach, CA 92660
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Greater Than 5% Stockholders |
Vincent C. Smith (5)
| | | | | | |
17595 Harvard Avenue, Suite C511 | | | | | | |
Irvine, California 92614 | 2,214,058,642 | 761,627,520 | 513,130,526 | - | 3,488,816,688 | 17.3% |
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 | 17.0% |
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 | 8.6% |
(1) | Beneficial ownershipUnless otherwise indicated, the address for each stockholder is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. All entries exclude beneficial ownership of shares issuable pursuant to options that have not vested or that are not otherwise exercisable as of the date hereof or which will not become vested or exercisable within 60 days of July 6, 2015.1007 Brioso Drive, Costa Mesa, California 92627. |
(2) | Percentages are rounded to nearest one-tenth of one percent. Percentages are based on 53,718,049 shares of Common Stock outstanding. Shares of Common Stock underlying shares of Series B Preferred, Series C Preferred, options, warrants and/or any other type of derivative security that is presently exercisable or exercisable within 60 days is deemed to be beneficially owned by the holder thereof 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.
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(3) | Comprised of 461,850 shares held of record, of 64,976 shares held of record by V3 Capital Partners, of 5,430 shares held by the Scot Jason Cohen Foundation, 60,000 shares issuable upon conversion of 3,750 shares of Series B Preferred directly held by Mr. Cohen, 17,500 shares issuable upon exercise of warrants directly held by Mr. Cohen, 1,900,000 shares issuable upon conversion of 118,750 shares of Series B Preferred directly held by V3 Capital Partners, 700,000 shares issuable upon exercise of warrants directly held by V3 Capital Partners, 200,000 shares issuable upon conversion of 12,500 shares of Series B Preferred directly held by the Scot Jason Cohen Foundation and 58,334 shares issuable upon exercise of warrants directly held by the Scot Jason Cohen Foundation each of which are presently exercisable or which become exercisable within 60 days of July 6, 2015.
Mr. Cohen is the Managing Partner of V3 Capital Partners and an officer of the Scot Jason Cohen Foundation.
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(4) | Comprised of 620,964 shares of Common Stock held of record, 2,160,000 shares issuable upon conversion of 135,000 shares of Series B Preferred and 775,833 shares issuable upon exercise of warrants, each of which are presently exercisable or which become exercisable within 60 days of July 6, 2015.
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(5) | Based on ownership information from Amendment No. 1 to Schedule 13G filed by MKM Opportunity Master Fund, Ltd. (“MKM Opportunity”) on October 15, 2014. Includes shares held by MKM Opportunity, MKM Capital Advisors, LLC (“MKM Capital”) and David Skriloff.
MKM Capital serves as investment manager to MKM Opportunity, and, as such, may be deemed to hold an indirect beneficial interest in the shares of Common Stock that are directly beneficially owned by MKM Opportunity. David Skriloff is the managing member of MKM Capital and the portfolio manager of MKM Opportunity, and, as such, may be deemed to hold an indirect beneficial interest in the shares of Common Stock that are directly beneficially owned by MKM Opportunity. Based on the foregoing, David Skriloff and MKM Capital hold shared dispositive power of shares owned by MKM Opportunity. Each Reporting Person disclaims beneficial ownership of all securities other than those owned of record by such Reporting Person.
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(6) | Pursuant to the Certificate of Designation shares of the Series A Preferred (“Series BA COD”), shares of Series A Preferred may not be converted or exercised, as applicable, to the extent that the holder and its affiliates would own more than 4.99% (or 9.99% upon the election of any holder of Series A Preferred) of the Company’s outstanding Common Stock common stock after such conversion (the “Maximum PercentageSeries 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 Maximum Percentage Limitation.Company’s voting power (the “Series A Voting Limitation”). Although the percentage ownership reflects the limitationsOwnership percentages in the Certificate of Designation, the securities reported reflects the number of shares of Common Stock that would be issuable upon full conversionthis table were calculated in accordance with Section 13(d) of the Series B PreferredExchange Act, and full exercise of warrants held by Mr. Chez. Absent the Maximum Percentage Limitation, the Mr. Chez’s total holdings of Common Stock (assuming exercise of Mr. Chez’s warrants, and conversion ofdo not reflect any adjustments due to the Series B Preferred in full) would be 11,397,294 shares of Common Stock inA Ownership Limitation or the aggregate, or 18.30%.Series A Voting Limitation.
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(7)(3) | BasedCertain of the warrants included in this table are subject to blockers that prevent a holder from exercising Investor Warrants or Placement Agent Warrants in the event that such exercise would result in the holder and its affiliates beneficially owning in excess of 4.99% of the Company’s issued and outstanding common stock immediately thereafter, which limit may be increased to 9.99% at the election of the holder (the “Warrant Exercise Limitation”).
Ownership percentages in this table were calculated in accordance with Section 13(d) of the Exchange Act, and do not reflect any adjustments due to the Warrant Exercise Limitation. |
(4) | Includes securities held by V3 Capital Partners and the Scot Jason Cohen Foundation. Mr. Cohen is the Managing Partner of V3 Capital Partners and an officer of the Scot Jason Cohen Foundation, and has dispositive and/or voting power over these shares. |
(5) | Includes securities held by Vincent C. Smith Annuity Trust 2015-1 (the “Smith Trust”), and LB 2, LLC (“LB 2”) and Red Beard Holdings, LLC (“Red Beard”), based on Company records and ownership information from Amendment No. 15 to Schedule 13D filed by Individual Retirement AccountsVincent C. Smith on April 25, 2016. Mr. Smith is the trustee for the benefitSmith Trust, and manager of Ronald L. Chez, Ronald L. Chez IndividuallyLB 2 and Red Beard. As such, Mr. Smith has dispositive power and voting power over, and may be deemed to be the Chez Family Foundation. Includes 6,800,000 shares issuable upon conversionbeneficial owner of 425,000 shares of Series B Preferred and 1,983,335 shares issuable upon exercise of warrants,the securities held by each of which are presently exercisable or which become exercisable within 60 days of July 6, 2015.these entities. |
(8)(6) | ComprisedBased on Company records and ownership information from Amendment No. 5 to Schedule 13D filed by Vincent C. Smith on April 25, 2016. Mr. Smith is a manager of 64,976 shares held of record, 2,460,000 shares issuable upon conversion of 153,750 shares of Series B PreferredRed Beard, and 717,500 shares issuable upon exercise of warrants, each of which are presently exercisable or which become exercisable within 60 days of July 6, 2015. has dispositive power and voting power over the securities reported herein. |
(9)(7) | ComprisedBased 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 250,968 shares held of record, 3,000,000 shares issuable upon conversion of 187,500 shares of Series B Preferred and 875,000 shares issuable upon exercise of warrants,Iroquois Master Fund with Ms. Kimberly Page, each of which are presently exercisable or which become exercisable within 60 dayswhom is a director of July 6, 2015.the Iroquois Master Fund. As such, Mr. Abbe and Ms. Page may each be deemed to be the beneficial owner of all shares of common stock underlying the common stock held by Iroquois Master Fund.
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(10) | Comprised of 44,666,667 shares issuable upon conversion of 67,000 shares of Series C Preferred and 15,633,334 shares issuable upon exercise of warrants, each of which are presently exercisable or which become exercisable within 60 days of July 6, 2015.
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(11) | Comprised of 1,513,052 shares held of record, 3,480,000 shares issuable upon conversion of 5,220 shares of Series C Preferred, 720,000 shares issuable upon conversion of 45,000 shares of Series B Preferred and 1,513,228 shares issuable upon exercise of warrants, each of which are presently exercisable or which become exercisable within 60 days of July 6. |
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