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OFFON

CHARLIE'S HOLDINGS, INC.

(CHUC)
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CHARLIE : S HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

08/16/2021 | 07:05am EDT

The following discussion of the financial condition and results of operations of Charlie's Holdings, Inc. should be read in conjunction with the financial statements and the notes to those statements appearing elsewhere in this Quarterly Report on Form 10-Q (this "Report"). Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should read the "Risk Factors" section in this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

As used in this Report, unless otherwise stated or the context otherwise requires, references to the "Company", "we", "us", "our", or similar references mean Charlie's Holdings, Inc. (formerly True Drinks Holdings, Inc.), its subsidiaries and consolidated variable interest entity on a consolidated basis. References to "Charlie's" and "CCD" refer to Charlie's Chalk Dust, LLC, a California limited liability company and wholly-owned subsidiary of the Company, and "Don Polly" refers to Don Polly, LLC, a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, the Company's Chief Executive Officer and Chief Operating Officer, respectively, and a consolidated variable interest ("VIE") for which the Company is the primary beneficiary.



Overview


Our objective is to become a significant leader in the rapidly growing, global e-cigarette and e-liquid segments of the broader nicotine related products industry. Through Charlie's, we formulate, market and distribute premium, nicotine-based vapor products. Charlie's products are mostly produced domestically through contract manufacturers for sale through select distributors, specialty retailers and third-party online resellers throughout the United States, as well as more than 80 countries worldwide. Charlie's primary international markets include the United Kingdom, Italy, Spain, Belgium, Australia, Sweden and Canada. In June 2019, we launched distribution, through Don Polly, of certain premium vapor, tincture and topical wellness products containing hemp-derived cannabidiol ("CBD") and we currently intend to develop and launch additional products containing hemp-derived CBD in the future.



Operational Plan


Considering industry-specific hurdles, as well as the potential for future regulatory changes, management has targeted opportunities for growth and has adopted the following operational plan.

First, we plan to increase the sales of our hemp-derived products, including topicals and ingestibles. We feel there is a significant upside in the hemp-derived products space, and we have begun to focus on numerous vertical markets for the sale of our isolate, full and broad-spectrum products. These vertical markets include but aren't limited to the medical and wellness markets. We have recently enhanced our focus on our direct-to-consumer business and have allocated additional financial resources to increase e-commerce sales of hemp-derived products.

Secondly, we continue to see a significant opportunity for sales growth in international markets for our e-liquid and other vapor products. Presently, approximately 20% of our vapor product sales come from the international market and we are well positioned to increase those sales in the countries that we presently sell, and in additional overseas markets, as we have already built an international distribution platform.

Most importantly, we feel that e-liquid and other vapor products will continue to provide a significant growth opportunity domestically. During the quarter ended March 31, 2021, we launched our Pachamama tobacco-free nicotine Disposable product line, which will provide access to additional sales channels and broaden our customer base. We are continuing with our plan to obtain marketing authorization for certain of our products through the completion of a Premarket Tobacco Application ("PMTA"), which we submitted in September 2020. Obtaining a marketing order from the United States Food and Drug Administration ("FDA") would, in our opinion, help to remediate the disruption caused by any perceived health issues related to vaping, and further position the Company as a trusted, industry leader. We feel that a significant amount of our competitors will not have the resources and/or expertise to complete the extensive and costly PMTA process and that once complete, we will be able to benefit from being one of only a select group of companies operating in the flavored vapor products space.




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Recent Developments



Reverse Stock Split


Our Board of Directors approved a reverse stock split of our authorized, issued, and outstanding shares of common stock, par value $0.001 per share (the "Common Stock"), at a ratio of 1-for-100 (the "Reverse Split"). The Reverse Split was effective as of June 16, 2021 (the "Effective Date"). All share and per share amounts in this Report have been retroactively adjusted to account for the reverse stock split.




March 2021 Private Placement



On March 19, 2021, the Company entered into Securities Purchase Agreements by and between the Company and certain family trusts in which Mr. Brandon Stump, the Company's Chief Executive Officer, and Mr. Ryan Stump, the Company's Chief Operating Officer are trustees and beneficiaries (the "Purchase Agreements"), for the private placement of an aggregate of 3,517,000 shares of its Common Stock, at a purchase price per share of $0.853 (the "Private Placement"), which Private Placement was consummated on March 22, 2021. The Private Placement resulted in gross proceeds to the Company of approximately $3.0 million. The Private Placement was undertaken pursuant to Rule 506 promulgated under the Securities Act of 1933, as amended, and was consummated in a transaction approved by the Company's independent directors in accordance with Rule 16b-3(d)(1) of the Securities Exchange Act of 1934, as amended.

Red Beard Holdings, LLC Note Payable

On April 1, 2020, the Company, Charlie's and its VIE, Don Polly, issued a secured promissory note (the "Red Beard Note") to one of the Company's largest stockholders, Red Beard Holdings, LLC ("Red Beard") in the principal amount of $750,000 (the "Principal Amount"), requiring a guaranteed minimum interest amount of $75,000 ("Minimum Interest"), which Red Beard Note is secured by all assets of the Company pursuant to the terms of a Security Agreement entered into by and between the Company and Red Beard (the "Red Beard Note Financing"). Red Beard Note was subsequently amended on August 27, 2020, September 30, 2020, October 29, 2020, December 1, 2020, and January 19, 2021, ultimately increasing Principal Amount to $1,400,000 and Minimum Interest to $150,000.

On March 24, 2021, the Company and Red Beard entered into a Satisfaction and Release (the "Red Beard Release"), pursuant to which the Company made a payment to Red Beard in the amount of $1.55 million in exchange for an acknowledgment of satisfaction and full release of the Company by Red Beard from liability and obligations arising under the Red Beard Note.

Small Business Administration Loan Programs

On April 30, 2020, Charlie's, a wholly owned subsidiary of the Company, received approval to enter into a U.S. Small Business Administration ("SBA") Promissory Note (the " Charlie's PPP Loan") with TBK Bank, SSB (the "SBA Lender"), pursuant to the Paycheck Protection Program ("PPP") of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") as administered by the SBA (the "PPP Loan Agreement").

The Charlie's PPP Loan provides for working capital to CCD in the amount of $650,761. The Charlie's PPP Loan was set to mature on April 30, 2022 and accrued interest at a rate of 1.00% per annum. Payments of principal and interest were deferred for six months from the date of the Charlie's PPP Loan, or until November 30, 2020. Interest, however, continued to accrue during that time.

On April 14, 2020, Don Polly also obtained a loan pursuant to the PPP enacted under the CARES Act (the "Polly PPP Loan" and together with the Charlie's PPP Loan, the "PPP Loans") from Community Banks of Colorado, a division of NBH Bank (the "Polly Lender"). The Polly PPP Loan obtained by Don Polly provided for working capital to Don Polly in the amount of $215,600. The Polly PPP Loan was set to mature on April 14, 2022 and accrued interest at a rate of 1.00% per annum. Payments of principal and interest was deferred for six months from the date of the Polly PPP Loan, or until November 14, 2020. Interest continued to accrue during that time.




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The aforementioned PPP Loans were made under the PPP enacted by Congress under the CARES Act. The CARES Act (including the guidance issued by SBA and U.S. Department of the Treasury) provides that all or a portion of the PPP Loans may be forgiven upon request from the respective borrower to the SBA Lender or the Polly Lender, as the case may be, subject to requirements in the PPP Loans and under the CARES Act.

On February 19, 2021 Don Polly received notice from the Polly Lender, that the Polly PPP Loan was fully repaid, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the U.S. Small Business Administration. There is no further action required on the part of Don Polly to satisfy this liability.

On March 17, 2021, Don Polly obtained a second draw PPP loan ("Polly PPP Loan 2") under the CARES Act from Polly Lender. The Polly PPP Loan 2 obtained by Don Polly provides general working capital in the amount of $184,200. The Polly PPP Loan 2 will mature on March 17, 2026 and will accrue interest at a rate of 1.00% per annum. Payments of principal and interest will be deferred for six months from the date of the Polly PPP Loan 2, however interest will continue to accrue during this time.

On April 28, 2021, Charlie's received notice from SBA Lender that the Charlie's PPP Loan was fully repaid, and its promissory note was cancelled as a result of the loan forgiveness process set forth by the U.S. Small Business Administration. There is no further action required on the part of Charlie's to satisfy this liability.

On June 24, 2020, SBA authorized (under Section 7(b) of the Small Business Act, as amended) an Economic Injury Disaster Loan ("EID Loan") to Don Polly in the amount of $150,000. Installment payments, including principal and interest of $731 monthly will begin twelve months from date of the EID Loan. The balance of principal and interest will be payable thirty years from the date of the EID Loan and interest will accrue at the rate of 3.75% per annum.



PMTA


During the quarter ended September 30, 2020, the FDA's Center for Tobacco Products informed us that our PMTA has received a valid submission tracking number, passed the FDA's filing review phase, and recently entered the substantive review phase. To date, Charlie's has invested over $4.4 million for our initial PMTA submission. We engaged a team of more than 200 professionals, including doctors, scientists, biostatisticians, data analysts, and numerous contract research organizations to create our comprehensive PMTA submission. This news highlights our progress toward achieving full regulatory compliance and our goal of providing customers with a trusted product portfolio.



Impact of COVID-19


The outbreak of a novel strain of coronavirus ("COVID-19", or, "Coronavirus") has had a negative impact on the global economy and the markets in which we operate. Beginning in March 2020, the Company transitioned nearly all employees to a remote working environment for their safety and to protect the integrity of Company operations. We have updated certain sales, accounting and administrative processes, and corresponding information technology platforms, in an effort to help facilitate the virtual work environment in which we now operate. During the six months ended June 30, 2021, we engaged in periodic, informal testing of our business operations, and we do not believe that our financial position, work efficiency and overall operational integrity have been materially affected. However, we recognize that a certain degree of employee enthusiasm, teamwork, creativity, and support is normally generated by being present at a physical location, and we believe that prolonged remote working may have a negative impact over time on our business, and on employee productivity. Our Denver, CO office and Huntington Beach, CA warehouse locations have fully returned to on premise status, while our corporate headquarters in Costa Mesa, CA remains remote for many employees. We will continue to monitor the COVID-19 situation in all regions we operate and will maintain strict adherence to local health guidelines and mandates. We may have to take further actions that we determine are in the best interests of our employees or as required by federal, state, or local authorities.






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Risks and Uncertainties



The Company operates in an environment that is subject to rapid changes and developments in laws and regulations that could have a significant impact on the Company's ability to sell its products. Federal, state, and local governmental bodies across the United States have indicated that flavored e-cigarette liquid, vaporization products and certain other consumption accessories may become subject to new laws and regulations at the federal, state and local levels. Beginning in September 2019, certain states temporarily banned the sale of flavored e-cigarettes, and on January 2, 2020, the FDA issued an enforcement policy effectively banning the sale of flavored cartridge-based e-cigarettes marketed primarily by large manufacturers without prior authorization from the FDA. The application of any new laws or regulations that may be adopted in the future, at a federal, state, or local level, directly or indirectly implicating flavored e-cigarette liquid and products used for the vaporization of nicotine could significantly limit the Company's ability to sell such products, result in additional compliance expenses, and/or require the Company to change its labeling and/or methods of distribution. Any ban of the sale of flavored e-cigarettes directly limits the markets in which the Company may sell its products. In the event the prevalence of such bans and/or changes in laws and regulations increase across the United States, or internationally, the Company's business, results of operations and financial condition could be adversely impacted. In addition, the Company is presently seeking to obtain marketing authorization for certain of its nicotine-based e-liquid products. Our PMTA applications were submitted in September 2020 on a timely basis, which if approved, will allow the Company to continue to sell its products in the United States. The Company may also require additional financing in the future to support potential PMTA related expenses and general working capital. There is no assurance that regulatory approval to sell our products will be granted or that we can raise the additional financing required, and if not, this could have a significant impact on our sales.

On March 11, 2020, the World Health Organization designated the ongoing and evolving COVID-19 outbreak as a pandemic. The outbreak has caused substantial disruption in international and U.S. economies and markets as it continues to evolve. The outbreak is having a temporary adverse impact on our industry as well as our business, with regards to certain supply chain disruptions and sales volume. While the disruption from COVID-19 is currently expected to be temporary, there is uncertainty around the duration.



Basis of Presentation


The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented in this Report not misleading.

Amounts related to disclosure of December 31, 2020 balances within the interim condensed consolidated financial statements were derived from audited financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 2020, filed with the SEC on April 5, 2021. The operating results of Don Polly are also included.

Current Operating Trends and Financial Highlights

Management currently considers the following events, trends and uncertainties to be important in understanding the Company's results of operations and financial condition for the most recent calendar quarter and full year:

Regarding results from operations for the quarter ended June 30, 2021, we generated revenue of approximately $5,433,000, as compared to revenue of $4,163,000 for the three months ended June 30, 2020. This $1,270,000 increase in revenue was due primarily to a $1,100,000 increase in sales of our nicotine-based vapor products, as well as a $170,000 increase in sales of our hemp-derived wellness products.

We generated a net income for the three months ended June 30, 2021 of approximately $19,764,000, as compared to net loss of approximately $644,000 for the three months ended June 30, 2020. The net income for the three months ended June 30, 2021 includes non-cash stock-based compensation expense of approximately $165,000 and a non-cash gain in fair value of derivative liabilities of $19,274,000.




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Regarding results from operations for the six months ended June 30, 2021, we generated revenue of approximately $9,794,000, as compared to revenue of $8,568,000 for the six months ended June 30, 2020. This $1,226,000 increase in revenue was due primarily to a $1,383,000 increase in sales of our nicotine-based vapor products but was offset by a $157,000 decrease in sales of our hemp-derived wellness products.

We generated a net loss for the six months ended June 30, 2021 of approximately $373,000, as compared to net loss of approximately $4,560,000 for the six months ended June 30, 2020. The net loss for the six months ended June 30, 2021 includes non-cash stock-based compensation expense of approximately $524,000 and a non-cash loss in fair value of derivative liabilities of $828,000.

A review of the three-month period ended June 30, 2021 follows:



                                 For the three months ended
                                          June 30,                            Change
                                   2021                2020          Amount        Percentage
($ in thousands)
Revenues:
Product revenue, net          $        5,433       $      4,163     $   1,270             30.5 %
Total revenues                         5,433              4,163         1,270             30.5 %
Operating costs and
expenses:
Cost of goods sold -
product revenue                        2,794              1,732         1,062             61.3 %
General and administrative             2,457              2,428            29              1.2 %
Sales and marketing                      350                353            (3 )           -0.8 %
Research and development                   -                408          (408 )         -100.0 %
Total operating costs and
expenses                               5,601              4,921           680             13.8 %
Loss from operations                    (168 )             (758 )         590            -77.8 %
Other income (expense):                    -                  -
Interest expense                          (3 )              (76 )          73            -96.1 %
Change in fair value of
derivative liabilities                19,274                180        19,094          10607.8 %
Gain on debt extinguishment              658                  -           658              100 %
Other income                               3                 10            (7 )          -70.0 %
Total other income                    19,932                114        19,818          17384.2 %
Net income (loss)             $       19,764       $       (644 )   $  20,408          -3168.9 %





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Results of Operations for the Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020



Revenue


Revenue for the three months ended June 30, 2021 increased approximately $1,270,000 or 30.5%, to approximately $5,433,000, as compared to approximately $4,163,000 for same period in 2020 due to a $1,100,000 increase in sales of our nicotine-based vapor products and a $170,000 increase in sales of our hemp-derived wellness products. The increase in our nicotine-based vapor product sales is directly related to the launch of our Pachamama Disposable product line, which offers users a variety of flavors containing tobacco-free nicotine in a compact, disposable format. However, ongoing uncertainty surrounding the FDA's application review timeline, following the PMTA submission deadline, as well as the addition of vapor products to the Prevent All Cigarette Trafficking Act ("PACT Act") (See Regulatory and Market Risks) continue to affect buying patterns in the domestic vapor products market as customers reduce inventories of non-PMTA submitted products and adjust their business models to suit recent changes in regulation. Beginning in late February 2020, sales of our hemp-derived wellness products began to experience a decrease as the effects of the global COVID-19 pandemic caused disruptions in the global economy and altered buying patterns for certain consumer discretionary goods. During the quarter ended March 31, 2021, we began to streamline our hemp-derived wellness product offering and narrow our sales and marketing focus, targeting our highest value customer types with the most desired product offerings.



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 $1,062,000, or 61.3%, to approximately $2,794,000, or 51.4% of revenue, for the three months ended June 30, 2021, as compared to approximately $1,732,000, or 41.6% of revenue, for the same period in 2020. This cost, as a percent of revenue, increased substantially due to a higher sales mix consisting of our Pachamama Disposable product line, which carries a lower margin per unit relative to our other vapor products. Cost of revenue was also negatively affected by a larger than normal provision for inventory obsolescence related to certain of our hemp-derived wellness products.

General and Administrative Expenses

For the three months ended June 30, 2021, total general and administrative expense increased approximately $29,000 to $2,457,000 as compared to approximately $2,428,000 for the same period in 2020. Notably, this change is primarily comprised of increases of approximately $242,000 of non-commission-based salary and benefits, $144,000 in consulting fees as well as $80,000 in other general and administrative expenses. The increase in non-commission-based salary and benefits was the result of additional headcount needed to support growth in our business, including the addition of our new President Henry Sicignano III, as well as a restructured compensation program for our sales team that reduced the amount of variable compensation paid on sales and increased the fixed portion. The increase in consulting fees was the result of an internal project focused on the creation of a solution "network" necessary to effectively meet the requirements of both the Consolidated Appropriations Act of 2021 and the PACT Act. These increase was offset by reductions in non-cash stock-based compensation and bad debt expense of approximately $318,000 and $177,000, respectively. The reduction in non-cash, stock-based compensation is primarily due to the conclusion of the vesting period for shares of Common Stock awarded to several employees in conjunction with Share Exchange in April 2019 (as defined in Note 3 of Item 1, Part 1 of this Report).




Sales and Marketing Expense



For the three months ended June 30, 2021, total sales and marketing expense decreased approximately $3,000, or 0.8%, to approximately $350,000 as compared to approximately $353,000 for the same period in 2020, which was primarily due to an enhanced focus on digital marketing and less emphasis on the use of costlier point-of-sale materials. Sales commissions increased marginally due to revenue growth across our businesses, however the increase was mitigated by a restructuring of our sales team and compensation program at the beginning of 2021.




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Research and Development Expense

For the three months ended June 30, 2021, there were no research and development costs as compared to $408,000 for the same period in 2020, which was primarily due to reduced costs associated with our PMTA registrations.



Loss from Operations


We had operating losses of approximately $168,000 for the three months ended June 30, 2021, due primarily to an increase in non-commission-based salary and benefits expenses and consulting fees related to growth and regulatory compliance initiatives. We also incurred certain general and administrative expenses that contributed to the loss from operations including a $165,000 expense related to non-cash, stock-based compensation. Net loss is determined by adjusting loss from operations by the following items:



    ?   Change in Fair Value of Derivative Liabilities. For the three months ended
        June 30, 2021, and 2020, the gain in fair value of derivative liabilities
        was $19,274,000 and $180,000 respectively. The derivative liability is
        associated with the issuance of the Investor Warrants and the Placement
        Agent Warrants (as defined in Note 3 of this Report) in connection with
        the Share Exchange. The gain for the quarter ended June 30, 2021, reflects
        the effect of the significant decrease in stock price as of June 30, 2021,
        compared to March 31, 2021. Due to the limited supply of shares currently
        freely trading, our stock price may experience volatility and therefore,
        considerable fluctuations in the value of our warrant derivative liability
        in the future. We had 40,337,693 warrants outstanding as of June 30, 2021.




    ?   Interest Expense. For the three months ended June 30, 2021, and 2020, we
        recorded interest expense related to notes payable of $3,000 and $76,000,
        respectively.




    ?   Gain on debt extinguishment. For the three months ended June 30, 2021, and
        2020, we recorded a debt extinguishment gain of $658,000 and $0,
        respectively, including principal and accrued interest, related to the
        forgiveness of the Charlie's PPP Loan.

    ?   Other Income. For the three months ended June 30, 2021, and 2020, we
        recorded other income of $3,000 and $10,000, respectively.




Net Income (Loss)



For the three months ended June 30, 2021, we had net income of $19,764,000 as compared to a net loss of $644,000 for the same period in 2020.




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A review of the six-month period ended June 30, 2021 follows:



                                   For the six months ended
                                           June 30,                           Change
                                    2021               2020          Amount        Percentage
($ in thousands)
Revenues:
Product revenue, net            $      9,794       $      8,568     $   1,226             14.3 %
Total revenues                         9,794              8,568         1,226             14.3 %
Operating costs and expenses:
Cost of goods sold - product
revenue                                4,737              3,695         1,042             28.2 %
General and administrative             4,675              6,427        (1,752 )          -27.3 %
Sales and marketing                      770                924          (154 )          -16.7 %
Research and development                   9              2,631        (2,622 )          -99.7 %
Total operating costs and
expenses                              10,191             13,677        (3,486 )          -25.5 %
Loss from operations                    (397 )           (5,109 )       4,712            -92.2 %
Other income (expense):
Interest expense                         (31 )              (76 )          45            -59.2 %
Change in fair value of
derivative liabilities                  (828 )              610        (1,438 )         -235.7 %
Gain on debt extinguishment              875                  -           875              100 %
Other income                               8                 15            (7 )          -46.7 %
Total other income                        24                549          (525 )          -95.6 %
Net loss                        $       (373 )     $     (4,560 )   $   4,187            -91.8 %



Results of Operations for the Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020



Revenue


Revenue for the six months ended June 30, 2021 increased approximately $1,226,000 or 14.3%, to approximately $9,794,000, as compared to approximately $8,568,000 for same period in 2020 due to a $1,383,000 increase in sales of our nicotine-based vapor products, but was offset by $157,000 decrease in sales of our hemp-derived wellness products. The increase in our nicotine-based vapor product sales is directly related to the launch of our Pachamama Disposable product line, which offers users a variety of flavors containing tobacco-free nicotine in a compact, disposable format. However, ongoing uncertainty surrounding the FDA's application review timeline, following the PMTA submission deadline, as well as the addition of vapor products to the PACT Act continue to affect buying patterns in the domestic vapor products market as customers reduce inventories of non-PMTA submitted products and adjust their business models to suit recent changes in regulation. Beginning in late February 2020, sales of our CBD wellness products began to experience a decrease as the effects of the global COVID-19 pandemic caused disruptions in the global economy and altered buying patterns for certain consumer discretionary goods. During the quarter ended March 31, 2021, we began to streamline our hemp-derived wellness product offering and narrow our sales and marketing focus, targeting our highest value customer types with the most desired product offerings.



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 $1,042,000, or 28.2%, to approximately $4,737,000, or 48.4% of revenue, for the six months ended June 30, 2021, as compared to approximately $3,695,000, or 43.1% of revenue, for the same period in 2020. This cost, as a percent of revenue, increased due to a higher sales mix consisting of our Pachamama Disposable product line, which carries a lower margin per unit relative to our other vapor products. Cost of revenue was also negatively affected by a larger than normal provision for inventory obsolescence during the quarter ended June 30, 2021, which was related to certain of our hemp-derived wellness products.




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General and Administrative Expenses

For the six months ended June 30, 2021, total general and administrative expense decreased approximately $1,752,000 to $4,675,000 as compared to approximately $6,427,000 for the same period in 2020. Notably, this decrease is comprised of reductions of approximately $1,812,000 of non-cash, stock-based compensation and $165,000 of bad debt expense. The reduction in non-cash, stock-based compensation is primarily due to the forfeiture of stock awards by Brandon Stump and Ryan Stump pursuant to the adoption of the Amended Employment Agreements entered February 12, 2020, as well as the conclusion of the vesting period for shares of Common Stock awarded to several employees in conjunction with the Share Exchange in April 2019. The decrease was primarily offset by increases in professional fees and other general administrative expenses of $134,000 and $91,000, respectively. The increase in professional fees was largely the result of an internal project focused on the creation of a solution "network" necessary to effectively meet the requirements of both the Consolidated Appropriations Act of 2021 and the PACT Act.




Sales and Marketing Expense



For the six months ended June 30, 2021, total sales and marketing expense decreased approximately $154,000, or 16.7%, to approximately $770,000 as compared to approximately $924,000 for the same period in 2020, which was primarily due to reduced trade show activity compared to the beginning of Q1 2020, as business travel activity had yet to be affected by the global COVID-19-related shutdowns during that period. During the six months ended June 30, 2021, we also continued to refine our sales and marketing strategy across both businesses, reducing our emphasis on the use of costlier point-of-sale materials in favor of increased digital marketing campaigns. Sales commissions increased marginally due to revenue growth across our businesses, however the increase was mitigated by a restructuring of our sales team and compensation program at the beginning of 2021.

Research and Development Expense

For the six months ended June 30, 2021, total research and development expense decreased approximately $2,622,000, to approximately $9,000 as compared to $2,631,000 for the same period in 2020, which was primarily due to reduced costs associated with our PMTA registrations.



Loss from Operations


We had operating losses of approximately $397,000 for the six months ended June 30, 2021, due primarily to a $134,000 increase in professional fees as well as a $138,000 increase in the provision for inventory obsolescence. We also incurred certain general and administrative expenses that contributed to the loss from operations including a $524,000 expense related to non-cash, stock-based compensation. Net loss is determined by adjusting loss from operations by the following items:



    ?   Change in Fair Value of Derivative Liabilities. For the six months ended
        June 30, 2021, and 2020, the loss and gain in fair value of derivative
        liabilities was $828,000 and $610,000 respectively. The derivative
        liability is associated with the issuance of the Investor Warrants and the
        Placement Agent Warrants (as defined in Note 3 of this Report) in
        connection with the Share Exchange. The loss for the six months ended June
        30, 2021, reflects the effect of the increase in stock price as of June
        30, 2021, compared to December 31, 2020. During the six months ended June
        30, 2021, we experienced a substantial variation in trading volume for our
        stock, which may persist in the future. Due to the limited supply of
        shares currently freely trading, our stock price may experience volatility
        and therefore, considerable fluctuations in the value of our warrant
        derivative liability in the future. We had 40,337,693 warrants outstanding
        as of June 30, 2021.




    ?   Interest Expense. For the six months ended June 30, 2021, and 2020, we
        recorded interest expense related to notes payable of $31,000 and $76,000,
        respectively.

    ?   Gain on debt extinguishment. For the six months ended June 30, 2021, and
        2020, we recorded a debt extinguishment gain of $875,000 and $0,
        respectively, including principal and accrued interest, related to the
        forgiveness of the Don Polly PPP Loan and the Charlie's PPP Loan.




    ?   Other Income. For the six months ended June 30, 2021, and 2020, we
        recorded other income of $8,000 and $15,000, respectively.





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Net Loss



For the six months ended June 30, 2021, we had a net loss of $373,000 as compared to a net loss of $4,560,000 for the same period in 2020.



Effects of Inflation


Inflation has not had a material impact on our business.

Liquidity and Capital Resources

As of June 30, 2021, we had negative working capital of approximately $2,715,000, which consisted of current assets of approximately $6,097,000 and current liabilities of approximately $8,812,000. This compares to negative working capital of approximately $6,020,000 at December 31, 2020. The current liabilities, as presented in the condensed consolidated balance sheet at June 30, 2021 included elsewhere in this Report primarily include approximately $2,499,000 of accounts payable and accrued expenses, approximately $588,000 of deferred revenue associated with product shipped but not yet received by customers, approximately $453,000 of lease liabilities, and $5,272,000 of derivative liability associated with the Investor Warrants and Placement Agent Warrants (the derivative liability of $5,272,000 is included in determining the negative working capital of $2,715,000 but is not expected to use any cash to ultimately satisfy the liability). In addition, the effect of the COVID-19 pandemic may have a negative impact on our liquidity and capital reserves.

Our cash and cash equivalents balance at June 30, 2021 was approximately $1,961,000.

For the six months ended June 30, 2021, net cash used in operating activities was approximately $325,000, as compared to $2,638,000 for the same period in 2020. This resulted from a net loss of $373,000, partially offset by $524,000 of share-based compensation, $828,000 of change in fair value of derivative liabilities and $773,000 changes in our operating assets and liabilities.

For the six months ended June 30, 2021, we used cash for investment activities of approximately $40,000 as compared to $112,000 for the same period in 2020. The cash used for investment activities is primarily for the on-going development and configuration of enterprise resource planning software during the six months ended June 30, 2021.

For the six months ended June 30, 2021 we generated approximately $904,000 cash from financing activities as compared to $1,766,000 for the same period in 2020. In the 2021 period, we generated cash from financing activities from the Polly PPP Loan 2 (as defined in Note 8 of Item 1, Part 1 of this Report) and the Private Placement (as defined in Note 10 of Item 1, Part 1 of this Report). We paid cash dividends of $880,000 during the six months ended June 30, 2021.

Going Concern Uncertainty Regarding the Legal and Regulatory Environment, Liquidity and Management's plan of operation.

Our financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company operates in a rapidly changing legal and regulatory environment; new laws and regulations or changes to existing laws and regulations could significantly limit the Company's ability to sell its products, and/or result in additional costs. Additionally, the Company was required to apply for FDA approval to continue selling and marketing its products used for the vaporization of nicotine in the United States. There is significant cost associated with the application process and there can be no assurance the FDA will approve the application(s). In addition, the recent outbreak of COVID-19 in March 2020 has had a negative impact on the global economy and markets which has negatively impacted the Company's supply chain and sales. For the six months ended June 30, 2021, the Company has incurred losses from operations of $397,000 and a consolidated net loss of approximately $373,000 and the Company has a stockholders' deficit of $2,075,000 as of June 30, 2021. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to the carrying amount and classification of recorded assets and liabilities should the Company be unable to continue operations.




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Our plans and growth depend on our ability to increase revenues and continue our business development efforts, including the expenditure of approximately $4,400,000 to date, to complete our PMTA registration process. On March 23, 2021, we closed a $3 million capital raise through the private sale of 3,517,000 shares of our common stock to the Company's founders Brandon Stump and Ryan Stump (see Recent Developments). We intend to use the proceeds to fund future growth, increase working capital, retire outstanding debt, and for other general corporate purposes. If in the future our plans or assumptions change or prove to be inaccurate, or there is a significant change in the regulatory environment or the recent outbreak of COVID-19 continues to impact the global economy, we will need to raise additional funds through public or private debt or equity offerings, financings, corporate collaborations, or other means. There can be no assurance that such financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and in our best interests.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements other than operating lease commitments.




Critical Accounting Policies



The condensed consolidated financial statements are prepared in conformity with U.S. GAAP, which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of expense in the periods presented. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, due to inherent uncertainties in making estimates, actual results could differ from the original estimates, requiring adjustments to these balances in future periods. The critical accounting estimates that affect the consolidated financial statements and the judgments and assumptions used are consistent with those described under Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020.

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Financials (USD)
Sales 2020 16,7 M - -
Net income 2020 -7,19 M - -
Net Debt 2020 2,21 M - -
P/E ratio 2020 -7,40x
Yield 2020 -
Capitalization 32,4 M 32,4 M -
EV / Sales 2019 1,47x
EV / Sales 2020 3,32x
Nbr of Employees 45
Free-Float 36,9%
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Managers and Directors
Ryan Stump Chairman, Chief Executive & Operating Officer
Henry Sicignano President
Matthew P. Montesano Chief Financial Officer
Adam Mirkovich Chief Information Officer
Scot J. Cohen Independent Director