S-1 1 truus1_july2019.htm S-1 Blueprint
 

 
As filed with the Securities and Exchange Commission on July 10, 2019
 
Registration No. 333-_____
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM S-1
 
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
 
 
CHARLIE’S HOLDINGS, INC.
(Exact name of registrant as specified in its charter.)
 
Nevada
(State or other jurisdiction
of incorporation or organization)
2111
(Primary Standard Industrial Classification Number)
 
84-1575085
(IRS Employer
Identification No.)
 
1007 Brioso Drive
Costa Mesa, California 92627
(949) 531-6855
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
Brandon Stump
Chief Executive Officer
1007 Brioso Drive
Costa Mesa, California 92627
(949) 531-6855
 (Name, address, including zip code and telephone number, including area code, of agent for service)
 
Copy of correspondence to:
 
Daniel W. Rumsey, Esq.
Jessica R. Sudweeks, Esq.
Disclosure Law Group,
a Professional Corporation
655 West Broadway, Suite 870
San Diego, CA 92101
(619) 272-7050
 
From time to time after the effective date of this Registration Statement.
(Approximate date of commencement of proposed sale to the public)
 
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box.  [X]
 
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  [  ]
 
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  [  ]
 
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  [  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
[  ]
  
Accelerated filer
 
[  ] 
 
 
 
 
 
 
Non-accelerated filer
 
[  ]  
  
Smaller reporting company
 
[X] 
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
[ ] 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. [  ]
 

 
 
 
 
CALCULATION OF REGISTRATION FEE
 
Title of Each Class of
Securities To be Registered
 
Amount
to be
Registered(1)(2)
 
 
Proposed
Maximum
Offering Price
Per Share(3)
 
 
Proposed
Maximum
Aggregate
Offering Price
 
 
Amount of
Registration Fee
 
Common Stock, par value $0.001 per share
  26,317,060,072 
 $0.01 
 $263,170,600.72 
 $31,896.28 
 
 
 
 
(1)
Represents shares offered by the selling stockholders. Includes an indeterminable number of additional shares of common stock, pursuant to Rule 416 under the Securities Act of 1933, as amended, that may be issued to prevent dilution from stock splits, stock dividends or similar transactions that could affect the shares to be offered by the selling stockholders.
 
 
(2)
The amount to be registered consists of (i) 17,628,941,493 shares of common stock, par value $0.001 per share, (ii) up to 4,654,349,239 shares of common stock issuable upon conversion of outstanding shares of the registrant’s Series A Convertible Preferred Stock, par value $0.001 per share, and (iii) up to 4,033,769,340 shares of common stock issuable upon exercise of certain outstanding common stock purchase warrants.
 
 
(3)
Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended, based on the last reported sales price on the OTC Pink Marketplace for the registrant’s common stock as of July 3, 2019.
 
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said section 8(a), may determine.

 
 
 
The information in this preliminary prospectus is not complete and may be changed. The selling stockholders named in this preliminary prospectus may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and the selling stockholders named in this preliminary prospectus are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
 
Subject to Completion, Dated July 10, 2019
 
PRELIMINARY PROSPECTUS
 
 
 
CHARLIE’S HOLDINGS, INC.
 
 
26,317,060,072 Shares
 
Common Stock  
 
 
This prospectus relates to the offering and resale by the selling stockholders identified in this prospectus of up to 26,317,060,072 shares of our common stock, par value $0.001 per share, which consists of: (i) 17,628,941,493 shares of common stock, (ii) up to 4,654,349,239 shares of common stock issuable upon conversion of outstanding shares of our Series A Convertible Preferred Stock, par value $0.001 per share (“Series A Preferred”), and (iii) up to 4,033,769,340 shares of common stock issuable upon exercise of certain outstanding common stock purchase warrants (the “Warrants”). The selling stockholders acquired these securities in a private transaction exempt from registration under the Securities Act of 1933 as amended (the “Securities Act”). We are registering the offer and sale of the common stock to satisfy registration rights we have granted to certain of the selling stockholders.
 
We will not receive any proceeds from the sale of these shares by the selling stockholders. The selling stockholders may sell the shares as set forth under “Plan of Distribution.” For a list of the selling stockholders, see the section entitled “Selling Stockholders” on page 71. We will bear the costs relating to the registration of these shares.
 
Our common stock is traded on the OTC Pink Marketplace under the symbol “CHUC.” On July 9, 2019, the last reported sale price of shares of our common stock on the OTC Pink Marketplace was $0.133.
 
We may amend or supplement this prospectus from time to time by filing amendments or supplements as required. You should read the entire prospectus and any amendments or supplements carefully before you make your investment decision.
             
 
Investment in our common stock involves risks. See “Risk Factors” beginning on page 8 of this prospectus.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
 
 The date of this prospectus is                     , 2019
 
 
 
 
 
 
TABLE OF CONTENTS
 
 
Page
 
 
1
 
 
2
 
 
6

 
7
 
 
8
 
 
19
 
 
20
 
 
28
 
 
42
 
 
57
 
 
62
 
 
66
 
 
66
 
 
67
 
 
68
 
 
71
 
 
80
 
 
82
 
 
85
 
 
85
 
 
85
 
 
 
 
-i-
 
 
 
ABOUT THIS PROSPECTUS
 
This prospectus is part of a registration statement on Form S-1 that we filed with the Securities and Exchange Commission (the “SEC”). Under this registration statement, the selling stockholders may, from time to time, sell up to an aggregate of 26,317,060,072 shares of our common stock, par value $0.001 per share. The registration statement we filed with the SEC, of which this prospectus forms a part, includes exhibits that provide more detail of the matters discussed in this prospectus. You should read this prospectus and the related exhibits filed with the SEC before making your investment decision. The registration statement and the exhibits can be obtained from the SEC, as indicated under the section entitled “Where You Can Find More Information.”
 
You should rely only on the information contained in this prospectus. Neither we nor the selling stockholders have authorized anyone to provide you with different or additional information. If anyone provides you with different or inconsistent information, you should not rely on it. Neither we nor the selling stockholders are making an offer to sell our common stock in any jurisdiction where the offer or sale thereof is not permitted. You should not assume that the information appearing in this prospectus or the documents incorporated by reference in this prospectus is accurate as of any date other than their respective dates. Our business, financial condition, results of operations and prospects may have changed since those dates. You should read carefully the entirety of this prospectus before making an investment decision.
 
As used in this prospectus, unless the context requires otherwise, the terms “Company,” “we,” “our” and “us” refer to Charlie’s Holdings, Inc. (formerly known as True Drinks Holdings, Inc.), “Charlie’s” and “CCD” refer to Charlie’s Chalk Dust, LLC, a California limited liability company and wholly-owned subsidiary of the Company, and “Don Polly” refers to Don Polly, LLC, a Nevada limited liability company that is owned by entities controlled by Brandon and Ryan Stump, the Company’s Chief Executive Officer and Chief Operating Officer, respectively, and a consolidated variable interest for which the Company is the primary beneficiary.
 
 
 
 
 
 
 
 
-1-
 
 
PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus or incorporated by reference herein. This summary does not contain all of the information you should consider before investing in our securities. Before deciding to invest in our securities, you should read this entire prospectus carefully, including the section of this prospectus entitled “Risk Factors” beginning on page 10.
 
Our objective is to become a leader in the rapidly growing, global e-cigarette segment of the broader nicotine related products industry. Through Charlie’s, we formulate, market and distribute branded e-cigarette liquid for use in both open and closed consumer e-cigarette and vaping systems. Charlie’s products are produced domestically through contract manufacturers for sale through select distributors, specialty retailers and third-party online resellers throughout the United States, as well as over 80 countries worldwide. Charlie’s primary international markets include the United Kingdom, Italy, Spain, Belgium, Australia, Sweden and Canada. In June 2019, we launched distribution, through Don Polly, of certain premium vapor, tincture and topical products containing hemp-derived cannabidiol (“CBD”) and we currently intend to develop and launch additional products containing hemp-derived CBD in the future. Prior to the Share Exchange, our primary business was the development, marketing, sale and distribution of all-natural, vitamin-enhanced drinks, including AquaBall® Naturally Flavored Water and Bazi® All Natural Energy.
 
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.
 
 
Black Label and White Label. CCD’s original black and white product line launched in 2015. Black Label is currently available in five flavors and White Label is currently available in four flavors.
 
 
CCD3. Launched in 2016, is a sea salt caramel ice cream flavor.
 
 
Pachamama™. A line launched in 2016 consisting of eight eclectic mixes of natural fruit flavors such as passion fruit raspberry yuzu, blood orange banana gooseberry and huckleberry pear acai.
 
 
Meringue. The third brand launched in 2016, based on creative character stories, currently includes three flavors.
 
 
Campfire™. Outdoors and Smores flavor inspired by camp vibes.
 
 
Stumps™. Line of four flavors inspired by the founders and their families broadly released in 2017 across various formats. Currently active in select markets.
 
 
The Creator of Flavor™. Two flavors broadly released in 2018 across various formats. Currently active in select markets.
 
 
-2-
 
 
Nicotine Salt Products
 
Nicotine salt e-liquids (“NIC salts”) are formulated for use in lower wattage open, semi-open and closed system vaporizers and are available in higher nicotine concentrations (25mg and 50mg per milliliter) than traditional e-liquids. Nicotine salts consist of nicotine dissolved in an acid that results in a lower PH level than other e-liquids. This form of nicotine has a higher bioavailability resulting in faster blood stream absorption and more closely mimics the effects of combustible tobacco products. We broadly released Pachamama™ Salts, an extension of the Pachamama™ line, in late December 2018 to a select group of key accounts, which now includes seven flavors packaged in 10ml and 30ml bottles. During 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
 
The Company, through Don Polly, a related Company under common ownership, has been engaged in the development of proprietary and innovative hemp-derived, non-THC, CBD wellness products, which we refer to as 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.
 
In June 2019, Don Polly launched a suite of full-spectrum and isolate CBD products across three categories including vapor, tinctures, and topicals.
 
Don Polly was formed in the second quarter of 2019 and there are no operating results from its operations in any of the historical financial statements included in this filing.
 
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 widely believed to be a beneficial cannabinoid, full spectrum products have the potential to provide the body access to all the plant’s cannabinoids, allowing the end user to achieve a wide range of therapeutic benefits. The full spectrum products are formulated with single-source and single strain hemp extracts. Don Polly believes this sourcing practice yields various compounds that work synergistically to heighten the effects of the products, making them superior to single-compound CBD isolates. In June 2019, we introduced the Pachamama™ tincture and topical full spectrum products. The tincture offering includes four flavors (the Natural, Green Tea Echinacea, Goji Cacao and Kava Kava Valerian) available in 30ml bottle sizes and both 750mg and 1750mg strengths. Our topical products include the Cooling Ointment, available in a one ounce jar and 750mg strength, and the Athletic Rub, available in a two ounce jar and 500mg strength. We plan on continuing to research, develop, and launch products in these categories.
 
 
 
-3-
 
 
Broad Spectrum CBD Products
 
In addition to isolate and fill spectrum CBD products, we believe there is an opportunity to develop broad spectrum hemp-derived CBD extracts that provide the same benefits of full spectrum CBD products but, through additional processing of hemp-derived extracts, eliminate the presence of THC. This category of THC-free, broad spectrum products will provide consumers with concerns about THC access to the same level of quality and nutrients we value in our full spectrum products. We are currently developing certain broad spectrum products, which, ultimately, will allow us to launch products which match the consumer accessibility of our CBD isolate products with the experience and benefits of our full spectrum products.
 
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 “Share Exchange”). As a result of the Share Exchange, Charlie’s became a wholly owned subsidiary of the Company.
 
In connection with the Share Exchange, the Company also entered into registration rights agreements (the “Registration Rights Agreements”) with each of the Members and Direct Investors, pursuant to which the Company agreed to use its best efforts to file a registration statement with the SEC no later than 30 days after the Closing Date in order to register, on behalf of the Members and Direct Investors, the shares of common stock, shares of common stock issuable upon conversion of the Series A Preferred and Series B Preferred, and shares of common stock issuable upon exercise of the Investor Warrants.
 
Immediately prior to, and in connection with, the Share Exchange, Charlie’s consummated a private offering of membership interests that resulted in gross proceeds to Charlie’s of approximately $27.5 million (the “Charlie’s Financing”). Katalyst Securities LLC (“Katalyst”) acted as the sole placement agent in connection with the CCD Financing pursuant to an Engagement Letter entered into by and between Katalyst, CCD 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, Ryan Stump and Brandon Stump, the founders of CCD and the Company’s newly appointed Chief Executive Officer and Chief Operating Officer, respectively, own in excess of 50% of the Company’s issued and outstanding voting securities as a result of the Share Exchange. Upon issuance of the common stock, conversion of the Series A Preferred and Series B Preferred, and exercise of the Investor Warrants and Placement Agent Warrants issued in connection with the Share Exchange, and assuming that the Company’s Articles of Incorporation are further amended to effect the increase in authorized shares of common stock described in the section of this prospectus entitled “Description of Capital Stock.”, it is anticipated that the Company will have an aggregate of approximately 27.7 billion shares of common stock issued and outstanding, of which approximately 24.3 billion shares issued or issuable in connection with the Share Exchange are and will be restricted until such time as such shares are registered under the Securities Act or an exemption therefrom is available to permit the resale of such shares.
 
 
-4-
 
 
 
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.  
 
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 strengths. Our initial launch consisted of six vapor, eight tincture and two topical product variations. The newly released products were launched under the Pachamama™ namesake 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 and Switzerland, and we expect to continue expanding our 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.
 
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.
 
 
 
 
-5-
 
 
THE OFFERING
 
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 sell their shares at prevailing market prices or privately negotiated prices.
 
Common stock outstanding
18,935,746,396 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.”
 
The number of shares of common stock outstanding is based on an aggregate of 18,935,746,396 shares outstanding as of July 9, 2019, and excludes:
 
● 
206,249 shares of Series A Preferred convertible into 4,654,349,239 shares of common stock;
 
● 
outstanding warrants, including the Warrants, to purchase 4,033,769,340 shares of common stock;
 
● 
91,759,826 shares of common stock reserved for issuance upon exercise of outstanding stock options issued under our 2013 Stock Incentive Plan (the “2013 Plan”); and
 
● 
1,107,254,205 shares of common stock reserved for issuance upon exercise of stock options available under our 2019 Omnibus Incentive Plan (the “2019 Plan”). These options have not been granted.
 
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.
 
 
 
 
 
-6-
 
 
SUMMARY HISTORICAL FINANCIAL DATA OF CHARLIE’S CHALK DUST, LLC
 
The following tables set forth a summary of Charlie’s historical financial data as of, and for the periods ended on, the dates indicated, as, following the Share Exchange, we are now primarily dependent on the business of Charlie’s. We have derived the statements of operations data for the years ended December 31, 2018 and 2017 from the audited financial statements of Charlie’s included elsewhere in this prospectus. The statements of operations data for the three-months ended March 31, 2019 and 2018 and the balance sheet data as of March 31, 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 entitledRisk 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 three-months ended March 31, 2019 may not be indicative of our results for the year ending December 31, 2019.
 
 
 
Year Ended
December 31,
 
 
Three Months Ended
March 31,
 
 
 
2018
 
 
2017
 
 
2019
 
 
2018
 
Statements of Operations Data:
 
 
 
 
 
 
 
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net revenue
 $20,840,794 
 $12,233,925 
 $6,647,545 
 $5,432,370 
Cost of goods sold
  8,514,790 
  5,475,051 
  2,750,274 
  2,165,289 
Gross profit
  12,326,004 
  6,758,874 
  3,897,271 
  3,267,081 
Operating expenses:
    
    
    
    
Selling and marketing
  2,904,456 
  1,862,441 
  767,042 
  718,036 
Product development
  95,180 
  116,040 
  39,542 
  31,976 
General and administrative
  2,126,945 
  1,523,334 
  615,572 
  460,105 
Total operating expenses
  5,126,581 
  3,501,815 
  1,422,156 
  1,210,117 
 
    
    
    
    
Income from operations
  7,199,423 
  3,257,059 
  2,475,115 
  2,056,964 
Other income
  453 
  9,410 
  90 
  95 
Net income
 $7,199,876 
 $3,266,469 
 $2,475,205 
 $2,057,059 
 
    
    
    
    
Earnings per Unit(1)
    
    
    
    
Basic and diluted earnings per unit
 $7,200 
 $3,266 
 $2,475 
 $2,057 
Basic and diluted weighted average number of units outstanding
  1,000 
  1,000 
  1,000 
  1,000 
 
(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:
 
March 31, 2019
 
 
 
(unaudited)
 
Cash
 $1,243,081 
Working capital
  2,193,280 
Total assets
  3,578,863 
Membership Equity
 $2,287,432 
 
 
 
-7-
 
 
RISK FACTORS
 
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 $6.6 million during the three months ended March 31, 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:
 
 
the expected increase in revenue due to the addition of those products developed and marketed by Charlie’s prior to the Share Exchange, as well as any products that we may release in the future, to our revenue stream;
 
 
our decision in early 2018 to discontinue the production and sale of AquaBall®, that in the years ended December 31, 2018 and 2017, contributed approximately $1,767,802 and $3,581,142 in revenue, respectively;
 
 
our previous sole reliance on sales of Bazi®, that in the years ended December 31, 2018 and 2017, contributed approximately $179,250 and $242,192 in revenue to the Company, respectively; and
 
 
the restructuring of substantially all of our previously outstanding debt and shares of preferred stock on April 26, 2019, in connection with the Share Exchange.
 
Although we believe that, as a result of the Share Exchange and the restructuring of our prior debt, our cash resources are currently sufficient, our long-term liquidity and capital requirements may be difficult to predict, which may adversely affect our long-term cash position.
 
Prior to the Share Exchange, our core business product sales were significantly below levels necessary to achieve positive cash flow. In addition, we had significant liabilities, amounting to approximately $4.1 million as of March 31, 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.
 
 
 
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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 in excess of 50% of our issued and outstanding voting securities as a result of the Share Exchange. As a result, Ryan Stump and Brandon Stump have the ability to exert influence over both the actions of our Board of Directors, the outcome of issues requiring approval by our stockholders, as well as the execution of management’s plans. This concentration of ownership may have effects such as delaying or preventing a change in control of the Company that may be favored by other stockholders or preventing transactions in which stockholders might otherwise recover a premium for their shares over current market prices.
 
We will need to hire additional qualified accounting and administrative personnel in order to remediate material weaknesses in our internal control over financial accounting, and we will need to expend additional resources and efforts to establish and maintain the effectiveness of our internal control over financial reporting and our disclosure controls and procedures.
 
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Sarbanes-Oxley Act of 2002. Our management is required to evaluate and disclose its assessment of the effectiveness of our internal control over financial reporting as of each year-end, including disclosing any “material weakness” in our internal control over financial reporting. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As a result of its assessment, management has determined that there were material weaknesses due to the lack of segregation of duties and sufficient internal controls (including technology-based general controls) that encompass our Company as a whole with respect to entity and transactions level controls in order to ensure complete documentation of complex and non-routine transactions and adequate financial reporting. If we continue to experience material weaknesses in our internal controls or fail to maintain or implement required new or improved controls, such circumstances could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements, or adversely affect the results of periodic management evaluations and, if required, annual auditor attestation reports. Due to these material weaknesses, management concluded that, as of December 31, 2018 and 2017, our internal control over financial reporting was ineffective. Management also concluded that our disclosure controls and procedures were ineffective as of December 31, 2018 and 2017, as well as for the quarter ended March 31, 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.
 
 
 
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The loss of one or more of our key personnel or our failure to attract and retain other highly qualified personnel in the future, could harm our business.
 
We currently depend on the continued services and performance of key members of our management team, in particular, Ryan Stump and Brandon Stump, Charlie’s founders and our Chief Executive Officer and Chief Operating Officer, respectively, and David Allen, our Chief Financial Officer.  If we cannot call upon them or other key management personnel for any reason, our operations and development could be harmed. We have not yet developed a succession plan. Furthermore, as we grow, we will be required to hire and attract additional qualified professionals such as accounting, legal, finance, production, market and sales experts. We may not be able to locate or attract qualified individuals for such positions, which will affect our ability to grow and expand our business.
 
We rely on contractual arrangements with Don Polly, our consolidated variable interest entity for our CBD-related business operations, which may not be as effective as direct ownership in providing operational control.
 
We have relied and expect to continue to rely on contractual arrangements with Don Polly and its shareholders, consisting of entities controlled by Brandon Stump and Ryan Stump, for the operation of our CBD-related operations. These contractual arrangements may not be as effective as direct ownership in providing us with control over our consolidated variable interest entity. For example, Don Polly and its shareholders could breach their contractual arrangements with us by, among other things, failing to conduct their operations, including maintaining our website and using the domain names and trademarks, in an acceptable manner or taking other actions that are detrimental to our interests.
 
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.
 
 
 
 
 
 
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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 affected by extensive laws, governmental regulations, administrative determinations, court decisions and similar other constraints, which can make compliance costly and subject us to enforcement actions by governmental agencies.
 
The formulation, manufacturing, packaging, labeling, holding, storage, distribution, advertising and sale of our products are affected by extensive laws, governmental regulations and policies, administrative determinations, court decisions and similar constraints at the federal, state and local levels, both within the United States and in any country where we conduct business. There can be no assurance that we, or our independent distributors, will be in compliance with all of these regulations. A failure by us or our distributors to comply with these laws and regulations could lead to governmental investigations, civil and criminal prosecutions, administrative hearings and court proceedings, civil and criminal penalties, injunctions against product sales or advertising, civil and criminal liability for us and/or our principals, bad publicity, and tort claims arising out of governmental or judicial findings of fact or conclusions of law adverse to us or our principals. In addition, the adoption of new regulations and policies or changes in the interpretations of existing regulations and policies may result in significant new compliance costs or discontinuation of product sales, and may adversely affect the marketing of our products, resulting in decreases in revenue.
 
The business that we conduct outside the U.S. may be adversely affected by international risk and uncertainties.
 
Although our operations are based in the United States, we conduct business outside of the United States and expect to continue to do so in the future. Any business that we conduct outside of the United States is subject to additional risks that may have a material adverse effect on our ability to continue conducting business in certain international markets, including, without limitation:
 
            
Potentially reduced protection for intellectual property rights;
 
            
Unexpected changes in tariffs, trade barriers and regulatory requirements;
 
 
Economic weakness, including inflation or political instability, in particular foreign economies and markets;
 
 
Business interruptions resulting from geo-political actions, including war and terrorism or natural disasters, including earthquakes, hurricanes, typhoons, floods and fires; and
 
 
Failure to comply with Office of Foreign Asset Control rules and regulations and the Foreign Corrupt Practices Act (“FCPA”).
 
 
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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.
 
Vapor products have become subject to regulation by the FDA.
 
In 2016, the FDA finalized a rule extending the regulatory authority to cover all tobacco products, including vaporizers, vape pens, hookah pens, e-cigarettes, e-pipes, and all other Electronic Nicotine Delivery Systems (“ENDS”). The FDA now regulates the manufacture, import, packaging, labeling, advertising, promotion, sale, and distribution of ENDS. This includes components and parts of ENDS, but excludes accessories. Under the new guidance, any company that makes, modifies, mixes, manufactures, fabricates, assembles, processes, labels, repacks, relabels, or imports any tobacco product is considered a tobacco product manufacturer. 
 
However, recent statements by the FDA have begun to clear up the agency’s position on nicotine-free e-liquids and synthetic nicotine. According to court statements made by the FDA, some devices that truly contain no nicotine (or only synthetic nicotine) may not be subject to the deeming regulations, depending on the circumstances in which they are likely to be used.  Some disposable, closed-system devices with zero-nicotine or synthetic nicotine e-liquids may also escape regulation as tobacco products if they meet certain further criteria. We believe that certain of our products, which do not contain nicotine, fall under this guidance and are not regulated by the FDA. However, even if products currently fall outside the scope of the deeming rule, the FDA could choose to regulate them later.
 
 
 
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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 premium vapor products containing hemp-derived CBD, and we currently intend to develop and launch additional products containing hemp-derived CBD in the future. Until 2014, when 7 U.S. Code §5940 became federal law as part of the Agricultural Act of 2014 (the “2014 Farm Act”), products containing oils derived from hemp, notwithstanding a minimal or non-existing THC content, were classified as Schedule I illegal drugs. The 2014 Farm Act expired on September 30, 2018, and was thereafter replaced by the Agricultural Improvement Act of 2018 on December 20, 2018 (the “2018 Farm Act”), which amended various sections of the U.S. Code, thereby removing hemp, defined as cannabis with less than 0.3% THC, from Schedule 1 status under the Controlled Substances Act, and legalizing the cultivation and sale of industrial-hemp at the federal level, subject to compliance with certain federal requirements and state law, amongst other things. THC is the psychoactive component of plants in the cannabis family generally identified as marihuana or marijuana. There is no assurance that the 2018 Farm Act will not be repealed or amended such that our products containing hemp-derived CBD would once again be deemed illegal under federal law.
 
The 2018 Farm Act delegates the authority to the states to regulate and limit the production of hemp and hemp derived products within their territories. Although many states have adopted laws and regulations that allow for the production and sale of hemp and hemp derived products under certain circumstances, no assurance can be given that such state laws may not be repealed or amended such that our intended products containing hemp-derived CBD would once again be deemed illegal under the laws of one or more states now permitting such products, which in turn would render such intended products illegal in those states under federal law even if the federal law is unchanged. In the event of either repeal of federal or of state laws and regulations, or of amendments thereto that are adverse to our intended products, we may be restricted or limited with respect to those products that we may sell or distribute, which could adversely impact our intended business plan with respect to such intended products. 
 
Additionally, the FDA has indicated its view that certain types of products containing CBD may not be permissible under the FDCA. The FDA’s position is related to its approval of Epidiolex, a marijuana-derived prescription medicine to be available in the United States. The active ingredient in Epidiolex is CBD. On December 20, 2018, after the passage of the 2018 Farm 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.
 
 
 
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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.
 
 
 
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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.
 
 
 
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The success of our business will depend upon our ability to create and expand our brand awareness.
 
The market we compete in is highly competitive, with many well-known brands leading the industry. Our ability to compete effectively and generate revenue will be based upon our ability to create and expand awareness of our products distinct from those of our competitors. It is imperative that we are able to convey to consumers the benefits of our products. However, advertising and packaging and labeling of such products will be limited by various regulations. Our success will be dependent upon our ability to convey to consumers that our products are superior to those of our competitors.
 
We must develop and introduce new products to succeed.
 
Our industry is subject to rapid change. New products are constantly introduced to the market. Our ability to remain competitive depends in part on our ability to enhance existing products, to develop and manufacture new products in a timely and cost-effective manner, to accurately predict market transitions, and to effectively market our products. Our future financial results will depend to a great extent on the successful introduction of several new products. We cannot be certain that we will be successful in selecting, developing, manufacturing and marketing new products or in enhancing existing products.
 
The success of new product introductions depends on various factors, including, without limitation, the following:
 
            
proper new product selection;
 
            
successful sales and marketing efforts;
 
            
timely delivery of new products;
 
            
availability of raw materials;
 
            
pricing of raw materials;
 
            
regulatory allowance of the products; and
 
            
customer acceptance of new products.
   
If we are not able to adequately protect our intellectual property, then we may not be able to compete effectively, and we may not be profitable.
 
Our existing proprietary rights may not afford remedies and protections necessary to prevent infringement, reformulation, theft, misappropriation and other improper use of our products by competitors. We own the formulations for our products and we consider these product formulations our critical proprietary property, which must be protected from competitors. We do not currently have any patents for our product formulations. Although trade secret, trademark, copyright and patent laws generally provide a certain level of protection, and we attempt to protect ourselves through contracts with manufacturers of our products, we may not be successful in enforcing our rights. In addition, enforcement of our proprietary rights may require lengthy and expensive litigation. We have attempted to protect some of the trade names and trademarks used for our products by registering them with the U.S. Patent and Trademark Office, but we must rely on common law trademark rights to protect our unregistered trademarks. Common law trademark rights do not provide the same remedies as are granted to federally registered trademarks, and the rights of a common law trademark are limited to the geographic area in which the trademark is actually used. Our inability to protect our intellectual property could have a material adverse impact on our ability to compete and could make it difficult for us to achieve a profit.
 
Compliance with changing corporate governance regulations and public disclosures may result in additional risks and exposures.
 
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and new regulations from the SEC, have created uncertainty for public companies such as ours. These laws, regulations, and standards are subject to varying interpretations in many cases, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result, our efforts to comply with evolving laws, regulations, and standards have resulted in, and are likely to continue to result in, increased expense and significant management time and attention.
 
 
 
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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.
 
If we issue additional shares of common stock in the future, it will result in the dilution of our existing stockholders.
 
Our Charter currently authorizes the issuance of up to 50.0 billion shares of common stock, of which approximately 18.9 billion shares are currently issued and outstanding. In addition, we have reserved approximately 9.8 billion shares for issuance upon conversion and/or exercise of our outstanding shares of Series A Preferred, warrants and stock options, as well as for issuance as awards under our 2019 Omnibus Incentive Plan. The issuance of any additional shares of our common stock, including those shares issuable upon conversion and/or exercise of our outstanding derivative securities, will result in significant dilution to our stockholders and a reduction in value of our outstanding common stock. Further, any such issuance may result in a change of control of our corporation.
 
Holders of Series A Convertible Preferred Stock have substantial rights and ranks senior to our common stock
 
Our common stock ranks junior as to dividend rights, redemption rights, conversion rights and rights in any liquidation, dissolution or winding-up of the Company to the Series A Preferred. Upon liquidation, dissolution or winding-up of the Company, the holders of the Series A Preferred are entitled to a liquidation preference equal to the original purchase price of Series A Preferred prior to and in preference to any distribution to the holders of our common stock. In addition, the holders of the Series A Preferred are also entitled to an annual 8% dividend payable in cash or shares of our common stock. Such rights could cause dilution of our common stock or limit our cash.
 
Our outstanding Series A Preferred contains anti-dilution provisions that, if triggered, could cause substantial dilution to our then-existing common stock holders which could adversely affect our stock price.
 
Our outstanding Series A Preferred contains certain anti-dilution provisions that benefit the holders thereof. As a result, if we, in the future, issue common stock or grant any rights to purchase our common stock or other securities convertible into our common stock for a per share price less than the then existing conversion price of the Series A Preferred, an adjustment to the then current conversion price would occur. This reduction in the conversion price could result in substantial dilution to our then-existing common stockholders as well as give rise to a beneficial conversion feature reported on our statement of operations. Either or both of which could adversely affect the price of our common stock.
 
The price of our securities could be subject to wide fluctuations and your investment could decline in value.
 
The market price of the securities of a company such as ours with little name recognition in the financial community can be subject to wide price swings. The market price of our common stock may be subject to wide changes in response to quarterly variations in operating results, announcements of new products by us or our competitors, reports by securities analysts, volume trading, or other events or factors. In addition, the financial markets have experienced significant price and volume fluctuations for a number of reasons, including the failure of certain companies to meet market expectations. These broad market price swings, or any industry-specific market fluctuations, may adversely affect the market price of our securities.
 
 
 
-17-
 
 
 
Companies that have experienced volatility in the market price of their stock have been the subject of securities class action litigation. If we were to become the subject of securities class action litigation, it could result in substantial costs and a significant diversion of our management’s attention and resources.
 
Because our common stock may be classified as “penny stock,” trading may be limited, and the share price could decline. Moreover, trading of our common stock, if any, may be limited because broker-dealers would be required to provide their customers with disclosure documents prior to allowing them to participate in transactions involving our common stock. These disclosure requirements are burdensome to broker-dealers and may discourage them from allowing their customers to participate in transactions involving our common stock.
 
We have issued preferred stock with rights senior to our common stock, and may issue additional preferred stock in the future.
 
Our Charter authorizes the issuance of up to 5.0 million shares of preferred stock, par value $0.001 per share, without stockholder approval and on terms established by our directors, of which 300,000 shares have been designated as Series A Preferred and 1.5 million shares have been designated as Series B Preferred. We may issue additional shares of preferred stock in the future in order to consummate a financing or other transaction, in lieu of the issuance of shares of our common stock. The rights and preferences of any such class or series of preferred stock would be established by our Board of Directors in its sole discretion and may have dividend, voting, liquidation and other rights and preferences that are senior to the rights of the common stock.
 
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.
 
 
 
 
-18-
 
 
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:
 
● 
anticipated trends and challenges in our business and the markets in which we operate;
 
● 
the impact of regulation of our nicotine-based and CBD-based products;
 
● 
the accuracy of our estimates regarding expenses, future revenue and capital requirements;
 
● 
our ability to anticipate market needs or develop new or enhanced products to meet those needs;
 
● 
our expectations regarding market acceptance of our products;
 
● 
the success of competing products by others that are or become available in the market in which we sell our products;
 
● 
our ability to protect our proprietary information and trademarks;
 
● 
our ability to manage additional expansion into international markets;
 
● 
our ability to maintain or broaden our business relationships and develop new relationships with strategic alliances, suppliers, customers, distributors or otherwise; and
 
● 
other risks and uncertainties, including those described under “Risk Factors” and elsewhere in this prospectus.
 
These forward-looking statements are only predictions and we may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, so you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results. We have included important factors in the cautionary statements included in this prospectus, that could cause actual future results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
 
You should read this prospectus with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law.
 
 
 
 
-19-
 
 
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
 
The following unaudited pro forma condensed combined financial information was prepared under United States generally accepted accounting principles (“U.S. GAAP”), and gives effect to the transaction between Charlie's Chalk Dust, LLC, a Delaware limited liability company (“Charlie’s”) and Charlie’s Holdings, Inc., formerly known as True Drinks Holdings, Inc. (the “Company”), to be accounted for as a reverse recapitalization under U.S. GAAP (the “Merger”). In addition, the pro forma condensed combined financial information gives effect to the issuance of 1,551,445,702 shares of common stock, 4,654,349,239 shares of common stock issuable upon conversion of 206,249 shares of Series A Convertible Preferred Stock (“Series A Preferred”) and warrants to purchase 3,102,899,493 shares of common stock for aggregate gross proceeds of $27.5 million (the “Financing”). The warrants have a five-year term and the exercise price of $0.0044313 per share, subject to certain adjustments. The closing of the Financing occurred immediately prior to the closing of the Merger and was contingent upon the satisfaction or waiver of all conditions precedent to the closing of the Merger. Katalyst Securities, LLC (“Katalyst”) acted as the sole placement agent in connection with the Financing. As consideration for its services in connection with the Financing and corresponding 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 Merger 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 Merger. Charlie’s was determined to be the accounting acquirer based upon the terms of the Merger and other factors including: (i) Charlie’s stockholders and other persons holding securities convertible, exercisable or exchangeable directly or indirectly for Charlie’s membership units now own approximately 49%, on a fully diluted basis, of the Company’s outstanding securities immediately following the effective time of the Merger, (ii) individuals associated with Charlie’s now hold a majority of the seats on the Company’s Board of Directors and (iii) Charlie’s management holds all key positions in the management of the combined Company.
 
The following unaudited pro forma condensed combined financial statements are based on Charlie’s historical financial statements and the Company’s historical financial statements, as adjusted, to give effect to Charlie’s reverse recapitalization of the Company and the Financing. The unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2019 and the year ended December 31, 2018 give effect to these transactions as if they had occurred on January 1, 2018. The unaudited pro forma condensed combined balance sheet as of March 31, 2019 gives effect to these transactions as if they had occurred on March 31, 2019.
 
Because Charlie’s will be treated as the acquirer under the reverse recapitalization, Charlie’s and the Company’s assets and liabilities will be 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: (i) directly attributable to the Merger; (ii) factually supportable; and (iii) 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 the Company following the Merger.
 
The unaudited pro forma condensed combined financial information is based on the assumptions and adjustments that are described in the accompanying notes. Accordingly, the pro forma adjustments are preliminary, subject to further revision as additional information becomes available and additional analyses are performed and have been made solely for the purpose of providing unaudited pro forma condensed combined financial information. Differences between these preliminary estimates and the final reverse recapitalization accounting, expected to be completed after the closing of the transaction, will occur and these differences could have a material impact on the accompanying unaudited pro forma condensed combined financial information and the combined organization’s future results of operations and financial position.
 
The unaudited pro forma condensed combined financial information does 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 unaudited pro forma condensed combined financial information is preliminary and has been prepared for illustrative purposes only and is not necessarily indicative of the financial position or results of operations in future periods or the results that actually would have been realized had the Company and Charlie’s been a combined organization during the specified periods. The actual results reported in periods following the transaction may differ significantly from those reflected in the pro forma condensed combined financial information presented herein for a number of reasons, including, but not limited to, differences between the assumptions used to prepare this pro forma condensed combined financial information.
 
The assumptions and estimates underlying the unaudited adjustments to the pro forma condensed combined financial statements are described in the accompanying notes, which should be read together with the pro forma condensed combined financial statements.
 
The unaudited pro forma condensed combined financial statements should be read together with the Company’s historical financial statements, which are included in the Company’s latest Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on April 1, 2019 and the March 31, 2019 results included in the Company’s report on Form 10-Q filed with the SEC on May 15, 2019, and Charlie’s historical information included herein.
 
 
-20-
 
 
Unaudited Pro Forma Combined Balance Sheet as of March 31, 2019
 
 
 
 
 
 
 
 
 
Pro Forma
 
 
 
Pro Forma
 
 
 
Charlie's Chalk Dust
 
 
True Drinks
 
 
Adjustments
 
 
   Note 3
 
 
Combined
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 $1,243,081 
 $401 
 $23,161,334 
(d)
 $6,904,816 
 
    
    
  (17,500,000)
(d)
    
Accounts receivable
  1,103,118 
  1,173 
  - 
 
  1,104,291 
Inventory, net
  677,768 
  25,657 
  - 
 
  703,425 
Prepaid expense and other current assets
  420,397 
  - 
  - 
 
  420,397 
Total current assets
  3,444,364 
  27,231 
  5,661,334 
 
  9,132,929 
 
    
    
    
 
    
Property and equipment, net
  54,652 
  - 
  - 
 
  54,652 
Goodwill
  - 
  1,576,502 
  (1,576,502)
(b)
  - 
Other assets
  79,847 
  - 
  - 
 
  79,847 
Total assets
 $3,578,863 
 $1,603,733 
 $4,084,832 
 
 $9,267,428 
 
    
    
    
 
    
 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
    
 
    
Current liabilities
    
    
    
 
    
Accounts payable and accrued expenses and other liabilities
 $1,067,081 
  710,615 
  (710,615)
(c)
  1,067,081 
Debt - short term
  - 
  3,394,497 
  (3,394,497)
(c)
  - 
Warrant liability
    
    
  7,762,704 
(f)
  7,762,704 
Deferred revenue
  184,003 
  - 
  - 
 
  184,003 
Total current liabilities
  1,251,084 
  4,105,112 
  3,657,592 
 
  9,013,788 
Long term liabilities
    
    
    
 
    
Other long term liabilities
  40,347 
  - 
  - 
 
  40,347 
Total long term liabilities
  40,347 
  - 
  - 
 
  40,347 
Total liabilities
  1,291,431 
  4,105,112 
  3,657,592 
 
  9,054,135 
 
    
    
    
 
    
Commitments and contingencies
    
    
    
 
    
 
    
    
    
 
    
Stockholders' equity (deficit)
    
    
    
 
    
Series A Convertible Preferred stock, $.001 par value
  - 
  - 
  206 
(d)
  206 
Series B Convertible Preferred stock, $.001 par value
  - 
  - 
  1,396 
(d)
  1,396 
Preferred stock, $.001 par value
  - 
  1,425 
  (1,425)
(b)
  - 
Common stock, $.001 par value
  - 
  511,230 
  5,077,471 
(a)
  5,077,471 
 
    
    
  (511,230)
(b)
    
Members' equity
  2,287,432 
  - 
  (2,287,432)
(d)
  - 
Additional paid-in-capital
  - 
  50,145,370 
  (5,077,471)
(a)
  15,522,737 
 
    
    
  (4,077,881)
(b)
    
 
    
    
  (50,145,370)
(b)
    
 
    
    
  4,105,112 
(c)
    
 
    
    
  2,287,432 
(d)
    
 
    
    
  23,159,732 
(d)
    
 
    
    
  (7,762,704)
(f)
    
 
    
    
  2,888,517 
(e)
    
Accumulated deficit
  - 
  (53,159,404)
  53,159,404 
(b)
  (20,388,517)
 
    
    
  (17,500,000)
(d)
    
 
    
    
  (2,888,517)
(e)
    
Total stockholders' equity (deficit)
  2,287,432 
  (2,501,379)
  427,240 
 
  213,293 
Total liabilities and stockholders' equity
 $3,578,863 
 $1,603,733 
 $4,084,832 
 
 $9,267,428 
 
 
-21-
 
 
   Unaudited Pro Forma Combined Statement of Income – Year Ended December 31, 2018
 
 
 
 
 
 
 
 
 
Pro Forma
 
 
 
Pro Forma
 
 
 
Charlie's Chalk Dust
 
 
True Drinks
 
 
Adjustments
 
 
 Note 3
 
 
Combined
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 $20,840,794 
 $1,947,052 
 $(1,436,113)
 (l)
 $21,351,733 
Cost of revenue
  8,514,790 
  1,228,448 
  (728,025)
 (l)
  9,015,213 
Gross profit
  12,326,004 
  718,604 
  (708,088)
 
  12,336,520 
 
    
    
    
 
    
Operating expenses:
    
    
    
 
    
Selling and marketing
  2,904,456 
  411,371 
  - 
 
  3,315,827 
General and administrative
  2,126,945 
  10,997,813 
  1,128,327 
 (h)
  14,253,085 
Product development
  95,180 
  - 
  - 
 
  95,180 
 
  5,126,581 
  11,409,184 
  1,128,327 
 
  17,664,092 
Operating income (loss)
  7,199,423 
  (10,690,580)
  (1,836,415)
 
  (5,327,572)
 
    
    
    
 
    
Other income (expense):
    
    
    
 
    
Change in fair value of derivative liabilities
  - 
  8,883,383 
  (8,883,383)
 (g)
  - 
Impairment of goodwill
  - 
  (1,898,000)
  - 
 
  (1,898,000)
Interest expense
  - 
  (813,545)
  813,545 
 (g)
  - 
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)
 (i)
  (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 
 (g)
  (1,650,000)
 
  - 
  - 
  (1,650,000)
 (k)
    
Net income (loss) attributable to common shareholders
 $7,199,876 
 $(4,139,987)
 $(13,455,528)
 
 $(10,395,639)
 
    
    
    
 
    
Net loss per common share:
    
    
    
 
    
Basic and diluted
    
 $(0.02)
    
 
  (0.00)
 
    
    
    
 
    
Weighted average common shares outstanding:
    
    
    
 
    
Basic and diluted
    
  230,204,655 
  4,591,184,190 
 (j)
  4,821,388,845 
 
 
 
-22-
 
 
Unaudited Pro Forma Combined Statement of Income – Three Months Ended March 31, 2019
 


 
 
 
 
Pro Forma
 
 
 
Pro Forma
 
 
 
Charlie's Chalk Dust
 
 
True Drinks
 
 
Adjustments
 
 
  Note 3
 
 
Combined
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 $6,647,545 
 $28,014 
 $- 
 
 $6,675,559 
Cost of revenue
  2,750,274 
  14,145 
  - 
 
  2,764,419 
Gross profit
  3,897,271 
  13,869 
  - 
 
  3,911,140 
 
    
    
    
 
    
Operating expenses:
    
    
    
 
    
Selling and marketing
  767,042 
  20,692 
  - 
 
  787,734 
General and administrative
  615,572 
  217,543 
  282,082 
 (h)
  1,115,197 
Product development
  39,542 
  - 
  - 
 
  39,542 
 
  1,422,156 
  238,235 
  282,082 
 
  1,942,473 
Operating income (loss)
  2,475,115 
  (224,366)
  (282,082)
 
  1,968,667 
 
    
    
    
 
    
Other income (expense):
    
    
    
 
    
Change in fair value of derivative liabilities
  - 
  (975,430)
  975,430 
 (g)
  - 
Interest expense
  - 
  (192,932)
  192,932 
 (g)
  - 
Other income
  90 
  353,972 
  - 
 
  354,062 
Total other income (expense)
  90 
  (814,390)
  1,168,362 
 
  354,062 
Income (loss) before provision for income taxes
  2,475,205 
  (1,038,756)
  886,280 
 
  2,322,729 
Provision for income taxes
  - 
  - 
  (742,562)
 (i)
  (742,562)
Net income (loss)
  2,475,205 
  (1,038,756)
  143,719 
 
  1,580,168 
Dividends on preferred stock
  - 
  (64,279)
  64,279 
 (g)
  (412,500)
 
    
    
  (412,500)
 (k)
    
Net income (loss) attributable to common shareholders
 $2,475,205 
 $(1,103,035)
 $(204,503)
 
 $1,167,668 
 
    
    
    
 
    
Net loss per common share:
    
    
    
 
    
Basic and diluted
    
 $(0.00)
    
 
  0.00 
 
    
    
    
 
    
Weighted average common shares outstanding:
    
    
    
 
    
Basic and diluted
    
  486,287,708 
  4,591,184,190 
 (j)
  5,077,471,898 
 
 
-23-
 
 
Notes to the Unaudited Pro Forma Condensed Combined Financial Information
Note 1 — Description of Transactions and 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 financial position and results of operations of the combined companies based upon the historical data of Charlie’s Holding, Inc., formerly known as True Drinks Holdings, Inc. (the “Company”) and Charlies Chalk Dust, LLC, a Delaware limited liability company (“Charlie’s”).
 
Description of Transactions
 
See “Prospectus Summary- Share Exchange” on page 2 of this prospectus for a description of the Share Exchange.
 
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 balance sheet as of March 31, 2019 is presented as if the Merger had been completed on March 31, 2019. The unaudited pro forma condensed consolidated statement of operations for the three months ended March 31, 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 the Company.
 
For accounting purposes, Charlie’s is considered to be the acquiring company and the Merger will be accounted for as a reverse recapitalization of the Company by Charlie’s because the primary assets of the Company, 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 the Company 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 the Company following determination of the actual purchase consideration for the Company 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 the Company and Charlie’s, which are provided elsewhere in this registration statement, have been adjusted to give pro forma effect to events that are (i) directly attributable to the Merger, (ii) factually supportable, and (iii) with respect to the statements of operations, expected to have a continuing impact on the combined results.
 
To the extent there are significant changes to the business following completion of the Merger, the assumptions and estimates set forth in the unaudited pro forma condensed consolidated financial statements could change significantly. Accordingly, the pro forma adjustments are subject to further adjustments as additional information becomes available and as additional analyses are conducted following the completion of the Merger. There can be no assurances that these additional analyses will not result in material changes to the estimates of fair value.
 
Note 2 — Preliminary purchase price allocation
 
The following is the preliminary estimate of the value of assets acquired and liabilities assumed by Charlie’s in the Merger:
 
Cash and cash equivalents
 $401 
Accounts receivable
  1,173 
Inventory, net
  25,657 
Accounts payable and accrued expenses and other liabilities
  (710,615)
Debt - short term
  (3,394,497)
Net liabilities acquired
 $(4,077,881)

 
 
-24-
 
 
 
Note 3 — Pro forma adjustments
 
The pro forma adjustments are based on preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma condensed combined financial information:
 
(a)           Represents the issuance of 3,718,958,705 common shares of the Company’s common stock and its effect on the common stock and additional paid in capital accounts:
 
 
 
Common
 
 
Additional
 
 
 
Stock
 
 
Paid in Capital
 
 
 
 
 
 
 
 
Issuance of 3,718,958,705 shares
 $3,718,959 
 $(3,718,959)
Adjustment due to reverse merger
  1,358,512 
  (1,358,512)
 
 $5,077,471 
 $(5,077,471)
 
(b)           Represents the elimination of the historical equity of the Company and the write-off of existing goodwill, as follows:
 
Preferred stock, $.001 par value
 $(1,425)
Common stock, $.001 par value
  (511,230)
Additional paid-in-capital
  (50,145,370)
Accumulated deficit
  53,159,404 
Write-down/(write-up) of assets:
Goodwill
  1,576,502 
Net liabilities acquired
 $4,077,881 

 
 
-25-
 
 
 
(c)           Represents the debt conversion (including accounts payable and accrued expenses) and certain share issuances for settlements, as follows:
 
 
 
 
 
 
Shares
 
 
Shares Issuable for Niagara Settlement
 
  348,367,950 
Settlement Shares (RS)
 
 
 
  104,548,760 
Sub-total
 
 
 
  452,916,710 
Convertible Debt
 
 
 
    
    Convertible Debt (Trade Debt)
 $710,615 
  229,762,800 
    Convertible Debt (Investment Debt)
  2,737,627 
  403,443,450 
    Convertible Debt (Investment Debt)
  656,870 
  437,535,224 
Sub-total
  4,105,112 
  1,070,741,474 
 
 $4,105,112 
  1,523,658,184 
 
(d)           Represents the Financing, Exchange, and issuances of warrants, as follows:
 
 
 
 Common
 
 
 Preferred A
 
 
 Preferred B
 
 
 Warrants
 
 
 Total
 
CCD Founders
  133,988,842 
  - 
  13,264,895,330 
  - 
  13,398,884,172 
CCD Employees
  7,052,044 
  -
  698,152,386 
  -
  705,204,430 
New investors
  1,325,784,329 
  3,977,352,986 
  - 
  2,651,568,657 
  7,954,705,972 
Direct investors
  225,665,418 
  676,996,253 
    
  451,330,835 
  1,353,992,506 
Placement agent
  - 
  - 
  - 
  930,869,848 
  930,869,848 
True Drinks
  2,482,319,594 
  - 
  - 
  - 
  2,482,319,594 
Red Tech (Newco)
  902,661,671 
  - 
  - 
  - 
  902,661,671 
 
  5,077,471,898 
  4,654,349,239 
  13,963,047,716 
  4,033,769,340 
  27,728,638,193 
 
New and direct investors represent the issuance of 1,551,449,746 shares of common stock, 206,249 shares of Preferred A shares convertible into 4,654,349,239 shares of common stock and 3,102,899,492 warrants for an aggregate purchase price of $27.5 million ($23.1 million net of fees).
 
The Company also distributed $16,625,000 to Charlie’s Members and $875,000 to Charlie’s employees. The Company recorded cash distributions to Charlie’s members as a dividend and Charlie’s employees as compensation. The compensation of $875,000 was excluded from the pro form adjustments on the Unaudited Pro Forma Combined Statements of Income because it is a non-recurring expense related to completion of the Merger and is not expected to have a continuing impact on the combined results of Charlie’s and the Company following the Merger.
 
 
 
-26-
 
 
(e)           The Company issued of 902,661,671 fully vested shares of common stock, including to a member of the Company’s Board of Directors, pursuant to a Subscription Agreement (the “Red Tech (Newco)”). The Company recorded stock-based compensation of $2,888,517 (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).
 
(f)           Represents the issuance of 4,033,769,340 warrants to new investors, direct investors, and placement agents. The warrants have a five year term and the exercise price is equal to $0.0044313, subject to adjustment for anti-dilution events. Charlie’s has preliminarily determined that the exercise features of certain of these warrants are not indexed to Charlie’s own stock and is therefore not afforded equity treatment. In accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”), Charlie’s has presented the pro-forma effect of the issuance of the liability classified warrants based upon the preliminary determination of the fair value of $7.8 million as a warrant liability. ASC 815 requires Charlie’s to assess the fair value of warrant liabilities at each reporting period and recognize any change in the fair value as items of other income or expense. Therefore, Charlie’s recorded the following journal entry:
 
Dr – Additional paid in capital
$7,762,704
Cr – Warrant liability
7,762,704
 
(g)          Represents the elimination of the Company’s change in fair value of derivative liabilities, interest expense and dividends on preferred stock in connection with the transaction.
 
(h)           The Company granted 705,204,430 unvested common shares to certain employees of Charlie’s. These shares vest over a two-year period. The fair value of a share of common stock was $0.0032 which is based upon a valuation prepared by the Company on the date of the Merger. The Company will record $0.3 million and $1.1 million during the three months ended March 31, 2019 and year ended December 31, 2018, respectively.
 
(i)           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.
 
(j)           Represents the increase in the weighted average shares of 4,591,184,190 shares due to the Transactions.
 
(k)           Represents the recording of a $0.41 million and $1.65 million 8% dividend of the Series A Preferred for the three months ended March 31, 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
 
$20,624,818
 
X 8%
 
$1,650,000 on an annual basis
or $412,500 on a quarterly basis
 
(l) To remove revenue and cost of revenue related to one-time transactions between True and a related party during the twelve months ended December 31, 2018 that are not expected to have a continuing impact on the combined entities in the future.
 
 
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DESCRIPTION OF OUR BUSINESS
 
As used in this prospectus, unless otherwise stated or the context otherwise requires, references to the “Company,” “we,” “us,” “our,” or similar references mean Charlie’s Holdings, Inc. (formerly True Drinks Holdings, Inc.), its subsidiaries and consolidated variable interest entity on a consolidated basis. References to “Charlie’s” and “CCD” refer to Charlie’s Chalk Dust, LLC, a California limited liability company and wholly-owned subsidiary of the Company, and “Don Polly” refers to Don Polly, LLC, a Nevada limited liability company that is owned by entities controlled by Brandon 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 premium vapor, tincture and topical products containing hemp-derived cannabidiol (“CBD”) and we currently intend to develop and launch additional products containing hemp-derived CBD in the future. Prior to the Share Exchange, our primary business was the development, marketing, sale and distribution of all-natural, vitamin-enhanced drinks, including AquaBall® Naturally Flavored Water and Bazi® All Natural Energy.
 
Recent Developments
 
Share Exchange
 
On April 26, 2019, the Company (then known as True Drinks Holdings, Inc.), entered into a Securities Exchange Agreement with each of the members of Charlie’s on that date (the “Charlie’s Members”), pursuant to which the Company acquired all outstanding membership interests beneficially owned by the Charlie’s Members in exchange for certain units consisting of the Company’s securities (the “Share Exchange”). As a result, Charlie’s became a wholly owned subsidiary of the Company. Following the consummation of the Share Exchange, the primary business operations of the Company consisted of those of Charlie’s and, more recently, Don Polly. See “Prospectus Summary - The Share Exchange.
 
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 and Switzerland, and we expect to continue expanding both our domestic and international distribution efforts.
 
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.
 
 
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E-Liquids
 
E-liquids used to produce vapor in vaping devices are sold separately for use in refillable tanks of open system vaporizers.  Liquids are available in differing nicotine concentrations (0 mg, 3 mg and 6 mg per milliliter) to suit user preferences. Liquids are available in a variety of flavors, including our proprietary blends.  Liquid solution consists of flavoring and/or nicotine dissolved in one or several hygroscopic components, which turns the water in the solution into the smoke-like vapor when heated. The most commonly used hygroscopic components are propylene glycol (“PG”), vegetable glycerin (“VG”) or polyethylene glycol 400. VG imparts sweetness and produces vapor clouds, while PG produces more “throat hit”, which simulates the feeling of smoking. Our proprietary brands of e-liquids are manufactured by ISO Class 7 certified manufacturers in the United States, which helps ensure their purity and quality.
 
Charlie’s e-liquid products are produced under seven brand names distinguished by their flavor profiles, packaging art and ingredient transparency. All products are packaged in plastic drip containers that are typically available in seven sizes ranging from 10 mil to 100ml, as well as bulk concentrate formats.
 
 
Black Label and White Label. CCD’s original black and white product line launched in 2015. Black Label is currently available in five flavors and White Label is currently available in four flavors.
 
 
CCD3. Launched in 2016, is a sea salt caramel ice cream flavor.
 
 
Pachamama™. A line launched in 2016 consisting of eight eclectic mixes of natural fruit flavors such as passion fruit raspberry yuzu, blood orange banana gooseberry and huckleberry pear acai.
 
 
Meringue. The third brand launched in 2016, based on creative character stories, currently includes three flavors.
 
 
Campfire™. Outdoors and Smores flavor inspired by camp vibes.
 
 
Stumps™. Line of four flavors inspired by the founders and their families broadly released in 2017 across various formats. Currently active in select markets.
 
 
The Creator of Flavor™. Two flavors broadly released in 2018 across various formats. Currently active in select markets.
 
Nicotine Salt Products
 
Nicotine salt e-liquids (“NIC salts”) are formulated for use in lower wattage open, semi-open and closed system vaporizers and are available in higher nicotine concentrations (25mg and 50mg per milliliter) than traditional e-liquids. Nicotine salts consist of nicotine dissolved in an acid that results in a lower PH level than other e-liquids. This form of nicotine has a higher bioavailability resulting in faster blood stream absorption and more closely mimics the effects of combustible tobacco products. We broadly released Pachamama™ Salts, an extension of the Pachamama™ line, in late December 2018 to a select group of key accounts, which now includes seven flavors packaged in 10ml and 30ml bottles. During 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
 
The Company, through Don Polly, a related company under common ownership, has been engaged in the development of proprietary and innovative hemp-derived, non-THC, CBD wellness products, which we refer to as 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.
 
 
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In June 2019, Don Polly launched a suite of full-spectrum and isolate CBD products across three categories including vapor, tinctures, and topicals.
 
Isolate CBD Products
 
Our CBD isolate products contain a minimum purity of 99% isolate crystals, tested by independent, third-party facilities to ensure it is free of pesticides and heavy metals. Vape, as a CBD delivery method, has grown in popularity due to the high level of bioavailability and reported therapeutic responses. In response to demand for CBD infused e-liquids from our existing distribution channels, we launched a new line of CBD infused vapor products in June 2019. We refer to these products as the “Don Polly Vape Product Line” or the “Don Polly Isolate Products.” The Don Polly Vape Product Line is currently available in 30ml chubby bottles across three flavors (Minty Mango, Grape Berry and Strawberry Watermelon) and two strengths (250mg and 500mg). We are continuing to research and develop isolate products as both vape line extensions and in other product categories.
 
Full Spectrum CBD Products
 
Our full spectrum hemp extract comes from whole plant extraction which retains the plant’s natural compounds. This extraction method ensures each product preserves the holistic benefits of the plant including minimal amounts of THC (0.3% or less), which allows for optimal absorption of the plant’s nutrients. While CBD alone is a beneficial cannabinoid, full spectrum products provide the body access to all the plant’s cannabinoids, allowing the end user to achieve a wide range of therapeutic benefits. The full spectrum products are formulated with single-source and single strain hemp extracts. Don Polly believes this sourcing practice yields various compounds that work synergistically to heighten the effects of the products, making them superior to single-compound CBD isolates. In June 2019, we introduced the Pachamama™ tincture and topical full spectrum products. The tincture offering 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 beverages. A discussed below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we ceased producing AquaBall® in early 2018. We continue to market and sell Bazi®, but on a very limited basis and only as we sell off existing inventory, as we focus our resources on the marketing, distribution and selling of the Charlie’s Products and the Don Polly Products. Bazi® is a liquid nutritional drink packed with eight different super fruits, including the Chinese jujube and seven other super fruits, plus 12 vitamins. Management is currently exploring the value of continuing the marketing and sale of Bazi®.
 
 
 
 
 
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Manufacturing and Distribution
 
Manufacturing
 
Charlie’s Product Line. We work closely with contract manufacturing partners in the United States, Ireland and Scotland to manufacture our products. Our e-liquid and NIC salts products are manufactured to meet our proprietary formula specifications in facilities that are ISO Class 7 certified, which helps ensure their purity and quality. In 2018, we sourced 97% of our products from three suppliers in the United States. While we have developed long-standing relationships with our manufacturing sources and take great care to ensure that they share our commitment to quality, we do not have any long-term term contracts with these parties for the production of our product lines. We maintain redundancies in our supply chain and are aware of several alternative sources for our products.
 
Don Polly Product Line. Our hemp-derived, CBD-based Don Polly Products are manufactured with contract manufacturers to meet our formula specifications. While we do not have any long-term contracts with these parties, we are strengthening our supplier partnerships as well as identifying additional supplier and contract manufacturing opportunities.
 
Bazi®. Bazi® had been manufactured by Arizona Packaging and Production since 2007. Presently, we are not manufacturing Bazi Product, although we continue to sell existing inventory.
 
Distribution
 
Charlie’s Product Line. Once manufactured, Charlie’s Products are directly distributed throughout the United States and in more than 80 countries, primarily the United Kingdom, Italy, Spain, Belgium, Australia, Sweden and Canada.  We distribute our products to more than 2,100 specialty retailers through direct sales and to distributors and wholesalers both in the United States and internationally.  Retailers of our products include specialty retailers throughout the United States and in 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 and Switzerland. Like the Charlie’s Product Line, we will distribute Don Polly Products directly to retailers, as well as through the use of distributors and third-party wholesalers. We also expect to utilize direct-to-consumer sales through a newly developed e-commerce platform.
 
Online Sales
 
Charlie’s Product Line and Don Polly Product Line. We do not currently sell our products directly. However, we market our products and sell branded merchandise through our websites www.charlieschalkdust.com and www.enjoypachamama.com. In the future we intend to sell our Don Polly Product Line directly to consumers through an in-house, e-commerce platform.
 
Bazi®. Our e-commerce platform allows current and future consumers to purchase Bazi® Energy Shot through http://www.drinkbazi.com. All sales of Bazi® Energy Shot are made through our online platform, and, to a lesser extent, online marketplaces such as Amazon.
 
Sales and Marketing
   
Charlie’s Product Line. We have a 15-person sales team, based in the United States, that promotes our Charlie’s Products globally. Salespeople seek to form long-term “360” collaborative relationships with their clients, partnering with them on sell-through efforts, providing access to Charlie’s marketing and creative teams and advising and educating them on the Charlie’s Product Line and other industry-related issues. Currently, we advertise our products primarily through direct customer engagement through social media channels, print media, directed Internet marketing, industry tradeshows and collaborative events with retail partners. Historically, participation at industry-specific tradeshows played a large role in our marketing and distribution strategy. However, in 2018 we began shifting resources to collaborative events, and, instead, our marketing team is now focusing its efforts on fostering relationships with key distributors and retailers by launching customer-specific marketing campaigns, in-person visits to new customer accounts and other forms of direct customer engagement. In 2018, approximately 30% of our sales were to customers outside of the United States. 
 
 
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We intend to strategically expand our advertising activities in 2019 and increase our public relations efforts to gain industry awareness as well as editorial coverage for our brands. Some of our competitors promote their brands through print media and through celebrity endorsements and have substantial resources to devote to such efforts. We believe that our and our competitors’ efforts have helped increase our sales, our product acceptance and general industry awareness.
 
Don Polly Product Line. Since the launch of the Don Polly products in June 2019, we have employed similar sales and marketing efforts used for the Charlie’s Product Line, and intend to utilize those sales and marketing efforts in the near term.
 
Bazi® While Bazi is sold online at http://www.drinkbazi.com, a large portion of its sales are made to recurring customers on a subscription basis.
 
Source and Availability of Raw Materials
 
Charlie’s Product Line. Our manufacturing partners source the ingredients for our proprietary e-cigarette liquids from a variety of sources, in accordance with our formulations and quality specifications. We source our proprietary e-liquids from multiple ISO Class 7 certified manufacturers in the United States, which helps ensure their purity and quality. In an effort to maintain consistency across our supply chain, we directly purchase certain product packaging and are responsible for managing various third-party supplier relationships.
 
Don Polly Product Line. For our full spectrum CBD products we currently source the individual components and CBD from several suppliers. Each are delivered to our primary manufacturer for storage prior to manufacturing. Our primary manufacturer for isolate CBD products handles all raw material sourcing internally.
 
Bazi®. During 2018, we relied significantly on one supplier for 100% of our purchases of certain raw materials for Bazi®. Bazi, Inc. has sourced these raw materials from this supplier since 2007, and does not anticipate any issues with the supply of these raw materials. Presently, we are not producing Bazi product.
 
Although we own the formulas for the Charlie’s Products, the Don Polly Products and Bazi®, we obtain certain components, such as packaging, flavors and certain raw materials, from third party suppliers. None of the third party suppliers are considered to be material to the business on a standalone basis and all are components that are readily available from other suppliers on the market. However, given the rapid growth of the vaping, e-cigarette and CBD industries, there may be fluctuations in the availability of certain of the materials we obtain from third-parties due to high demand from our competitors. If any given supplier or distributor is lost or unavailable in a specific region, and we are unable to contract with alternative suppliers or distributors to provide the requisite service(s) and product(s), we may be unable to fulfill customer orders and our business could be materially harmed.
 
Competition
 
The industries in which we operate are highly competitive.
 
Charlie’s Product Line. Our CCD Product Line competes in a highly-fragment industry. Some identifiable competitors of CCD include Naked100, Milkman, Humble, and Beard. Other brands such as Juul, Vuse, Group Mark Ten, Green Smoke, Blu, Vaporfi, Njoy, Logic, V2, and Apollo all participate in a different segment of the electronic cigarette market which appeals to current smokers and recently-converted electronic cigarette users.
 
In the e-liquid flavor space, new flavor brands emerge daily due to low barriers to entry. Companies that produce electronic cigarettes and vaporizers, including Vaporfi, Atmos and Njoy, carry their own flavor lines for the refillable market. Other brands like Mount Baker Vapor focus on wide variety of choice and value, while other brands like Charlie’s Chalk Dust carve out their identity with branding, and more nuanced flavor combinations. The nature of our competitors is varied as the market is highly fragmented and the barriers to entry into the business are low.
 
 
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Part of our business strategy focuses on the establishment of relationships with distributors and prominent branding focused on performance and quality. We are aware that e-cigarette competitors in the industry are also seeking to enter into such relationships and try to create brand loyalty. In many cases, competitors for such relationships may have greater management, human, and financial resources than we do for attracting distributor relationships. Furthermore, certain of our electronic cigarette competitors may have better control of their supply and distribution, be, better established, larger and better financed than our Company.
 
We plan to compete primarily on the basis of product quality, brand recognition, brand loyalty, service, marketing, and advertising. We are subject to highly competitive conditions in all aspects of our business. The competitive environment and our competitive position can be significantly influenced by weak economic conditions, erosion of consumer confidence, competitors’ introduction of low-priced products or innovative products, cigarette excise taxes, higher absolute prices and larger gaps between price categories, and product regulation that diminishes the ability to differentiate tobacco products.
 
We also compete against “big tobacco”, U.S. cigarette manufacturers of both conventional tobacco cigarettes and electronic cigarettes like Altria Group, Inc., Lorillard, Inc. and Reynolds American, Inc. We compete against big tobacco who offers not only conventional tobacco cigarettes and electronic cigarettes but also smokeless tobacco products such as “snus” (a form of moist ground smokeless tobacco that is usually sold in sachet form that resembles small tea bags), chewing tobacco and snuff. Big tobacco has nearly limitless resources, global distribution networks in place and a customer base that is fiercely loyal to their brands. Furthermore, we believe that big tobacco will devote more attention and resources to developing and offering electronic cigarettes as the market for electronic cigarettes grows. Because of their well-established sales and distribution channels, marketing expertise and significant resources, big tobacco may be better positioned than small competitors like us to capture a larger share of the electronic cigarette market.
 
Don Polly Product Line. The market for CBD-based hemp products is rapidly growing and is highly competitive. The competition consists of publicly and privately-owned companies, which tend to be highly fragmented in terms of both geographic market coverage and products offered. With the Company’s leading brand status, innovation capabilities, existing sales and marketing platform, established distribution channels and high-quality manufacturing, Management believes the Company is well-positioned to capitalize on favorable long-term trends in the hemp-based, CBD wellness products segment.
 
Bazi®. Bazi® competitors include Steaz®, Guayaki Yerba Mate, POM Wonderful®, as well as sports and energy drinks including Gatorade®, Red Bull®, 5-Hour Energy®, RockStar®, Monster®, Powerade®, Accelerade® and All Sport®. These competitors can use their resources and scale to rapidly respond to competitive pressures and changes in consumer preferences by introducing new products, reducing prices or increasing promotional activities. Many of our competitors have longer operating histories and have substantially greater financial and other resources than we do. They, therefore, have the advantage of established reputations, brand names, track records, back office and managerial support systems and other advantages that we cannot duplicate in the near future, if ever. Moreover, many competitors, by virtue of their longevity and capital resources, have established lines of distribution to which we do not have access, and are not likely to duplicate in the near term, if ever.
 
Intellectual Property
 
Patents and Trademarks
 
Charlie’s Product Line and Don Polly Product Line. We are the registered owner of the federal trademarks for CHARLIE’S CHALK DUST, PACHAMAMA, STUMPS, AUNT MERINGUE & Design, CAMPFIRE & Design, Mr. MERINGUE & Design, and THE CREATOR OF FLAVOR & Design. We also maintain registrations in several international markets and will work with our international distributors to manage intellectual property and trademark registrations when necessary. 
 
We plan to continue to expand our brand names and our proprietary trademarks and designs worldwide as our business grows.
 
True Drinks -- Legacy Products. We were granted the patent for 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.
 
 
 
-33-
 
 
 
We maintain trademark protection for 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
 
Charlie’s Product Line. CCD is currently active in exploring several long-term licensing arrangements with several well-known industry participants. The goal of such relationships is to acquire additional revenue streams as well as to introduce the Charlie’s Chalk Dust and Pachamama™ brands to a wider consumer base.
 
Don Polly Product Line. On April 25, 2019, the Company and Charlie’s entered into a License Agreement (the “License Agreement”) with Don Polly. As previously noted, Don Polly is classified as a variable interest entity for which the Company is the primary beneficiary, and is owned by entities controlled by Brandon Stump and Ryan Stump, the Company’s Chief Executive Officer and Chief Operating Officer, respectively. Pursuant to the License Agreement, Charlie’s provides Don Polly with a limited right and license to use certain of Charlie’s intellectual property rights, including certain trademarks, copyrights and original artwork, in connection with certain of Don Polly’s branded CBD products. In exchange for such license, Don Polly (i) pays Charlie’s monthly royalties amounting to 75% of its net profits, (ii) uses its best efforts to market, promote and advertise its products, (iii) provides Charlie’s with most favored nations pricing in the event that Charlie’s wishes to sell products sold by Don Polly, (iv) provide Charlie’s with the exclusive right of first refusal to purchase Don Polly, including all of its assets and liabilities, for a purchase price of $111,618 on or before December 31, 2025, and (v) will not license any intellectual property from any other source other than Charlie’s in connection with its design, manufacture, advertisement, promotion distribution and sale of CBD infused products within the agreed upon territory. The License Agreement will continue in perpetuity unless terminated in accordance with its terms.
 
Concurrently with the execution of the License Agreement, Charlie’s and Don Polly also entered into a Services Agreement (the “Services Agreement”), pursuant to which Charlie’s provides certain services to Don Polly, including, without limitation, (i) the development and creation of Don Polly’s sales, marketing, brand development and customer service strategies and (ii) performing sales, branding, marketing and other business functions at the request of Don Polly. Charlie’s will perform such services in the capacity of a contractor, and all materials and work product created by Charlie’s in its capacity as such will be the property of Don Polly. As consideration for the Services provided by Charlie’s, Don Polly (i) pays Charlie’s 25% of its net profits on a quarterly basis, and (ii) reimburse Charlie’s for all out-of-pocket business expenses that are preapproved in writing by Don Polly. The Services Agreement will continue in perpetuity unless terminated in accordance with its terms.
 
 True Drinks -- Legacy Products. We previously had a licensing agreement with Disney (the “Disney License”), which allowed us to feature popular Disney characters on AquaBall® Naturally Flavored Water, allowing AquaBall® to stand out among other beverages marketed towards children. As discussed in the section entitled “Recent Developments” above, in connection with the discontinued production of AquaBall®, we notified Disney of our desire to terminate the Disney License in early 2018. As a result of our decision to discontinue the production of AquaBall® and terminate the Disney License, and considering amounts due, Disney drew from a letter of credit funded by Red Beard in the amount of $378,000 on or about June 1, 2018. Subsequently, Disney agreed to a settlement and release of all claims related to the Disney License in consideration for the payment to Disney of $42,000.
  
Government Regulations
 
Charlies’s Product Line
 
Pursuant to a December 2010, decision, by the U.S. Court of Appeals for the District of Columbia Circuit, in Sottera, Inc. v. Food & Drug Administration, 627 F.3d 891 (D.C. Cir. 2010), the FDA is permitted to regulate electronic cigarettes as “tobacco products” under the Family Smoking Prevention and Tobacco Control Act of 2009 (the “Tobacco Control Act”).
 
Under this Court decision, the FDA is not permitted to regulate electronic cigarettes as “drugs” or “devices” or a “combination product” under the Federal Food, Drug and Cosmetic Act unless they are marketed for therapeutic purposes.
 
 
 
-34-
 
  
The Tobacco Control Act also requires establishment, within the FDA’s new Center for Tobacco Products, of a Tobacco Products Scientific Advisory Committee to provide advice, information and recommendations with respect to the safety, dependence or health issues related to tobacco products.
 
The FDA had previously indicated that it intended to regulate E-cigarettes under the Tobacco Control Act through the issuance of “Deeming Regulations” that would include E-liquid, E-cigarettes, and other vaping products (collectively, “Deemed Tobacco Products”) under the Tobacco Control Act and subject to the FDA’s jurisdiction.
 
On May 10, 2016, the FDA issued the “Deeming Regulations” which came into effect August 8, 2016. The Deeming Regulations amended the definition of “tobacco products” to include E-liquid, E-cigarettes and other vaping products. Deemed Tobacco Products include, but are not limited to, E-liquids, atomizers, batteries, cartomizers, clearomisers, tank systems, flavors, bottles that contain E-liquids and programmable software. Beginning August 8, 2016, Deemed Tobacco Products became subject to all FDA regulations applicable to cigarettes, cigarette tobacco, and other tobacco products which require:
 
 
a prohibition on sales to those younger than 18 years of age and requirements for verification by means of photographic identification;
 
 
health and addictiveness warnings on product packages and in advertisements;
 
 
a ban on vending machine sales unless the vending machines are located in a facility where the retailer ensures that individuals under 18 years of age are prohibited from entering at any time;
 
 
registration with, and reporting of product and ingredient listings to, the FDA;
 
 
no marketing of new tobacco products prior to FDA review;
 
 
no direct and implied claims of reduced risk such as "light", "low" and "mild" descriptions unless FDA confirms (a) that scientific evidence supports the claim and (b) that marketing the product will benefit public health;
 
 
payment of user fees;
 
 
ban on free samples; and
 
 
childproof packaging.
 
In addition, the Deeming Regulations requires any Deemed Tobacco Product that was not commercially marketed as of the “grandfathering” date of February 15, 2007, to obtain premarket approval before it can be marketed in the United States. Premarket approval could take any of the following three pathways: (1) submission of a premarket tobacco product application (“PMTA”) and receipt of a marketing authorization order; (2) submission of a substantial equivalence report and receipt of a substantial equivalence order; or (3) submission of a request for an exemption from substantial equivalence requirements and receipt of an substantial equivalence exemption determination. The Company cannot predict if any of the products in the CCD 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.
 
 
 
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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 six (6) year grace period where such products can continue to be marketed until the August 8, 2022 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.
 
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 six (6) year grace period to determine whether or not to continue marketing E-liquid or other vaping products in the United States after the six (6) year grace period lapses on August 8, 2022.
 
State and local governments currently legislate and regulate tobacco products, including what is considered a tobacco product, how tobacco taxes are calculated and collected, to whom tobacco products can be sold and by whom, in addition to where tobacco products, specifically cigarettes may be smoked and where they may not. Certain municipalities have enacted local ordinances which preclude the use of E-liquid, E-cigarettes and other vaping products where traditional tobacco burning cigarettes cannot be used and certain states have proposed legislation that would categorize vaping products as tobacco products, equivalent to their tobacco burning counterparts. If these bills become laws, vaping products may lose their appeal as an alternative to traditional cigarettes, which may have the effect of reducing the demand for the Products.
 
The Company may be required to discontinue, prohibit or suspend sales of its E-liquid Products in states that require us to obtain a retail tobacco license. If the Company is unable to obtain certain licenses, approvals or permits and if the Company is not able to obtain the necessary licenses, approvals or permits for financial reasons or otherwise and/or any such license, approval or permit is determined to be overly burdensome to the Company, then the Company may be required to cease sales and distribution of its E-liquid Products to those states, which would have a material adverse effect on the Company’s business, results of operations and financial condition.
 
As a result of FDA import alert 66-41 (which allows the detention of unapproved drugs promoted in the U.S.), U.S. Customs has from time to time temporarily and in some instances indefinitely detained certain products. If the FDA modifies the import alert from its current form which allows U.S. Customs discretion to release the products, to a mandatory and definitive hold the Company may no longer be able to ensure a supply of raw materials or saleable product, which will have material adverse effect on the Company’s business, results of operations and financial condition.
 
At present, neither the Prevent All Cigarette Trafficking Act (which prohibits the use of the U.S. Postal Service to mail most tobacco products and which amends the Jenkins Act, which would require individuals and businesses that make interstate sales of cigarettes or smokeless tobacco to comply with state tax laws) nor the Federal Cigarette Labeling and Advertising Act (which governs how cigarettes can be advertised and marketed) apply to electronic cigarettes. The application of either or both of these federal laws to electronic cigarettes would have a material adverse effect on our business, results of operations and financial condition.
 
 
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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.
 
 
 
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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.
 
 
 
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Currently in Canada, electronic smoking products (i.e., electronic products for the vaporization and administration of inhaled doses of nicotine including electronic cigarettes, cigars, cigarillos and pipes, as well as cartridges of nicotine solutions and related products) fall within the scope of the Food and Drugs Act. All of these products require market authorization prior to being imported, advertised or sold in Canada. Market authorization is granted by Health Canada following successful review of scientific evidence demonstrating safety, quality and efficacy with respect to the intended purpose of the health product. To date, no electronic smoking product has been authorized for sale by Health Canada.
 
In the absence of evidence establishing otherwise, an electronic smoking product delivering nicotine is regulated as a “new drug” under Division 8, Part C of the Food and Drug Regulations. In addition, the delivery system within an electronic smoking kit that contains nicotine must meet the requirements of the Medical Devices Regulations. Appropriate establishment licenses issued by Health Canada are also needed prior to importing, and manufacturing electronic cigarettes. Products that are found to pose a risk to health and/or are in violation of the Food and Drugs Act and related regulations may be subject to compliance and enforcement actions in accordance with the Health Products and Food Branch Inspectorate’s Compliance and Enforcement Policy (POL-0001). According to Health Canada regulations, it is not permissible to import, advertise or sell electronic smoking products without the appropriate authorizations, and persons that violate these regulations are subject to repercussions from Health Canada, including but not limited to, seizure of the products.
 
Since no scientific evidence demonstrating safety, quality and efficacy with respect to the intended purpose of E-cigarettes, E-liquid or other vaping products has been submitted to Health Canada to date, there is the possibility that in the future Health Canada may modify or retract the current prohibitions currently in place. However, there can be no assurance that the Company will be in total compliance, remain competitive, or financially able to meet future requirements and regulations imposed by Health Canada.
 
To date, Health Canada has not imposed any restrictions on E-cigarettes, E-liquid and other vaping products that do not contain nicotine. E-cigarettes, E-liquid and other vaping products that do not make any health claim and do not contain nicotine may legally be sold in Canada. Thus, vendors can openly sell nicotine-free E-cigarettes, E-liquid and other vaping products. However, there are vape shops operating throughout Canada selling E-cigarettes, E-liquid and other vaping products containing nicotine without any implications from Health Canada. E-cigarettes, E-liquid and other vaping products are subject to standard product regulations in Canada, including the Canada Consumer Product Safety Act and the Consumer Packaging and Labelling Act.
 
At present, neither the Tobacco Act (which regulates the manufacture, sale, labelling and promotion of tobacco products) nor the Tobacco Products Labelling Regulations (Cigarettes and Little Cigars) (which governs how cigarettes can be advertised and marketed) apply to E-cigarettes, E-liquid and other vaping products. The application of these federal laws to E-cigarettes, E-liquid and other vaping products would have a material adverse effect on the Company’s business, results of operations and financial condition.
 
Company’s efforts to mitigate risks associated with new and evolving regulation.
 
The Company is constantly seeking to stay in compliance with all existing and reasonably expected future regulations. The Company, through its internal compliance team, market consultants and technicians and testing labs hopes to stay in accordance with all standards whether set forth in the New Tobacco Products Directive or the Deeming Regulations. Making sure that all E-liquid Products meet and exceed the standards set forth by each market’s regulatory body is of the highest concern for the Company. Staying in compliance with all marketing and packaging directives is imperative to maintaining access to the markets. Although these processes are costly and time consuming, it is imperative for the Company’s success that these steps are taken and constantly kept up to date. Failure to comply in a timely fashion to any particular directive or regulation could have material adverse effects on the results of business operations.
 
 
 
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Don Polly Product Line
 
Don Polly’s CBD products are subject to various state and federal laws regarding the production and sales of hemp-based products. Section 12619 of the Agriculture Improvement Act of 2018 (“2018 Farm Bill”) removed “hemp,” as defined in the Agricultural Marketing Act of 1946 (the “1946 Agricultural Act”), from the classification of “marijuana,” which is generally prohibited as a Schedule I drug under the Controlled Substances Act of 1970 (“CSA”). Under the 1946 Agricultural Act (as amended by the 2018 Farm Bill), the term “hemp” means “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.” As a result of the passage of the 2018 Farm Bill, and since the Company believes the Don Polly Products contain parts of the cannabis plant with a THC concentration of not more than 0.3 percent on a dry weight basis, the Company believes that the Don Polly Products are not governed by the CSA and, ergo, would not be subject to prosecution thereunder because the Company believes the Don Polly Products contain “hemp” within the meaning of the 1946 Agricultural Act (as amended by the 2018 Farm Bill) and do not contain any “marijuana” as prohibited under the CSA (as amended by the 2018 Farm Bill); provided, however, there is a lack of legal protection for hemp-based products that contain more than 0.3 percent THC and there is a risk that the Company would be subject to prosecution under the CSA in the event that its CBD products are found to contain more than 0.3 percent THC.
 
Furthermore, the 1946 Agricultural Act (as amended by the 2018 Farm Bill) provides additional regulations regarding the production of hemp-based products and there is the risk that the Don Polly Products may be found to be in violation of these regulations. Specifically, the 1946 Agricultural Act (as amended by the 2018 Farm Bill) contains provisions relating to the shared state-federal jurisdiction over hemp cultivation and production, whereby states and Indian tribes have been delegated the broad authority to regulate and limit the production and sale of hemp and hemp products within their borders. Under the 1946 Agricultural Act (as amended by the 2018 Farm Bill), a plan under which a State or Indian tribe monitors and regulates the production of hemp shall only be required to include “(i) a practice to maintain relevant information regarding land on which hemp is produced in the State or territory of the Indian tribe, including a legal description of the land, for a period of not less than three calendar years; (ii) a procedure for testing, using post-decarboxylation or other similarly reliable methods, delta-9 tetrahydrocannabinol concentration levels of hemp produced in the State or territory of the Indian tribe; (iii) a procedure for the effective disposal of—(I) plants, whether growing or not, that are produced in violation of this subtitle; and (II) products derived from those plants; (iv) a procedure to comply with enforcement procedures; (v) a procedure for conducting annual inspections of, at a minimum, a random sample of hemp producers to verify that hemp is not produced in violation of [applicable law]; (vi) a procedure for submitting the information, as applicable, to the Secretary of Agriculture (the “Secretary”) not more than 30 days after the date on which the information is received; and (vii) a certification that the State or Indian tribe has the resources and personnel to carry out the practices and procedures described in clauses (i) through (vi).” Further, a hemp producer in a State or the territory of an Indian tribe for which a State or Tribal plan is approved shall be determined to have negligently violated the State or Tribal plan, including by negligently— “(i) failing to provide a legal description of land on which the producer produces hemp; (ii) failing to obtain a license or other required authorization from the State department of agriculture or Tribal government, as applicable; or (iii) producing Cannabis sativa L. with a delta-9 THC concentration of more than 0.3 percent on a dry weight basis.” A hemp producer that negligently violates a State or Tribal plan 3 times in a 5-year period shall be ineligible to produce hemp for a period of 5 years beginning on the date of the third violation. If the State department of agriculture or Tribal government in a State or the territory of an Indian tribe for which a State or Tribal plan, as applicable, determines that a hemp producer in the State or territory has violated the State or Tribal plan with a culpable mental state greater than negligence— “(i) the State department of agriculture or Tribal government, as applicable, shall immediately report the hemp producer to —(I) the Attorney General; and (II) the chief law enforcement officer of the State or Indian tribe, as applicable.” In the case of a State or Indian tribe for which a State or Tribal plan is not approved, the production of hemp in that State or the territory of that Indian tribe shall be subject to a plan established by the Secretary to monitor and regulate that production. A plan established by the Secretary under shall include— “(A) a practice to maintain relevant information regarding land on which hemp is produced in the State or territory of the Indian tribe, including a legal description of the land, for a period of not less than 3 calendar years; (B) a procedure for testing, using post-decarboxylation or other similarly reliable methods, delta-9 tetrahydrocannabinol concentration levels of hemp produced in the State or territory of the Indian tribe; (C) a procedure for the effective disposal of—(i) plants, whether growing or not, that are produced in violation of [applicable law]; and (ii) products derived from those plants; (D) a procedure to comply with the enforcement procedures; (E) a procedure for conducting annual inspections of, at a minimum, a random sample of hemp producers to verify that hemp is not produced in violation of this subtitle; and (F) such other practices or procedures as the Secretary considers to be appropriate. The Secretary shall also establish a procedure to issue licenses to hemp producers. In the case of a State or Indian tribe for which a State or Tribal plan is not approved under applicable law, it shall be unlawful to produce hemp in that State or the territory of that Indian tribe without a license issued by the Secretary. A violation of a plan established by the Secretary shall be subject to enforcement and the Secretary shall report the production of hemp without a license issued by the Secretary to the Attorney General. In the event that the Company’s CBD products are found to be in violation of these regulations, the Company may become subject to enforcement action as provided for in the 1946 Agricultural Act (as amended by the 2018 Farm Bill) and may become subject to prosecution thereunder.
 
 
 
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True Drinks -- Legacy Products
 
Certain states and localities prohibit the sale of certain beverages unless a deposit or tax is charged for containers. These requirements vary by each jurisdiction. Similar legislation has been proposed in certain other states and localities, as well as by Congress. We are unable to predict whether such legislation will be enacted or what impact its enactment would have on our business, financial condition or results of operations.
 
All of our facilities in the United States are subject to federal, state and local environmental laws and regulations. Although compliance with these provisions has not had any material adverse effect on our financial or competitive position, compliance with or violation of any current or future regulations and legislation could require material expenditures or have a material adverse effect on our financial results.
  
Research and Development
 
 Our research and development activities consist of development and testing of new flavors, formulations, formats and delivery methods for our existing products, as well as development of new products for the Charlie’s Product Line and the Don Polly Product Line.
 
For the years ended December 31, 2017 and 2018, Charlie’s recorded product development expenses of $116,040 and $95,180, respectively.
 
Employees
 
We had 51 full-time employees across Charlie’s Holdings Inc., Charlie’s Chalk Dust LLC and Don Polly LLC as of 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.
 
Facilities
 
We occupy approximately 7,200 square feet of 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 have not yet renewed the lease for our corporate headquarters, and instead are 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.

 
 
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CHARLIE’S CHALK DUST, LLC MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
The following discussion of the financial condition and results of operations of Charlie’s Chalk Dust, LLC should be read in conjunction with the financial statements and the notes to those statements appearing elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, 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 of this prospectus 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.
 
Overview
 
Charlie’s Chalk Dust, LLC (“Charlie’s”) was incorporated in Delaware in 2014 as a limited liability corporation. Charlie’s is a formulator, marketer and distributor of branded e-cigarette nicotine based liquid for use in both open and closed consumer e-cigarette and vaping systems. Charlie’s products are produced domestically through contract manufactures for sale to distributors and specialty retailers throughout the United States, and over 80 countries worldwide. Charlie’s primary international markets include the United Kingdom, Italy, Spain, Belgium, Australia, Sweden and Canada. Charlie’s is headquartered in Costa Mesa, California.

In addition, in June 2019 we began to manufacture and distributed CBD based e-cigarette liquid and other CBD based products. We manufacture and sell this product through Don-Polly, LLC, a Denver based company with common ownership and control with Charlie’s Chalk Dust and with who Charlies Chalk Dust has both marketing and service agreements. We will account for this activity as a Variable Interest Entity (“VIE”).
 
For the quarters ended March 31, 2019 and 2018, Charlie’s revenues from continuing operations were $6,648,000 and $5,432,000 respectively. Net Income for the quarters ended March 31, 2019 and 2018 was $2,475,000 and $2,057,000 respectively.
 
For the years ended December 31, 2018 and 2017, Charlie’s revenues from continuing operations were $20,841,000 and $12,234,000, respectively. Net Income for the years ended December 31, 2018 and 2017 was $7,200,000 and $3,266,000 respectively.
 
On April 26, 2019, the Company consummated the Share Exchange with the stockholders of Charlie’s, pursuant to which it acquired all of the issued and outstanding membership interests of Charlie’s in exchange for the issuance of shares of the Company’s common stock, representing approximately 90% of the Company’s issued and outstanding common stock. After the Share Exchange, the business operations of the Company consist of those of Charlie’s. See “Prospectus Summary- The Share Exchange.” On June 28, 2019, the Company changed its corporate name from True Drinks Holdings, Inc. to Charlie’s Holdings, Inc.
 
Company Strategy
 
The Company intends to expand its operations and seek revenue and profit growth by increasing the sales of its nicotine based e-cigarette liquid by offering additional product and expanding sales territories, as well as from the recently launched manufacturing and distribution of CBD based products.
 
Current Operating Trends and Financial Highlights
 
Management currently considers the following events, trends and uncertainties to be important in understanding Charlie’s results of operations and financial condition for the most recent calendar quarter and full year:
 
With regard to results from continuing operations for the three months ended March 31, 2019, Charlie’s generated revenue of approximately $6,648,000 as compared to revenue of $5,432,000 for the three months ended March 31, 2018. This $1,216,000 increase in revenue was due primarily to the introduction of new products and the addition of new customers and sales territories.
 
 
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Charlie’s generated a net income for the three months ended March 31, 2019 of approximately $2,475,000, or $2,475 per share of membership units of which there are 1,000. As Charlie’s is limited liability company, this profit is before any tax liability or distribution to the members of Charlie’s.
 
The net income for the three months ended March 31, 2019 compares net income of approximately $2,057,000, or $2,057 per membership unit, for the three months ended March 31, 2018.
 
With regard to results from continuing operations for the year ended December 31, 2018, Charlie’s generated revenue of approximately $20,841,000 as compared to revenue of $12,234,000 for the prior year. This $8,607,000 increase in revenue was due primarily to introduction of new products and the addition of new customers and territories.
 
Charlie’s generated a net income for the year ended December 31, 2018 of approximately $7,200,000, or $7,200 per share membership units of which there are 1,000. As Charlie’s is a limited liability company, this profit is before any tax liability or distribution to the members of Charlie’s.
 
The net Income for the year ended December 31, 2018 compares net income of approximately $3,266,000, or $3,266 per membership unit, for the year ended December 31, 2017.
 
A review of both the three month period ended March 31, 2019 and the twelve month period ended December 31, 2018 are as follows:
 
Results of Operations for the Three Months Ended March 31, 2019 Compared to the Three Months Ended March 31, 2018.
 
 
 
For the three months ended March  31,
 
 
 2019 
 2018 
Revenue
 $6,647,545 
  100.0%
 $5,432,370 
  100.0%
Costs and expenses:
   
   
   
   
Cost of revenue
  2,750,274 
  41.4%
  2,165,289 
  39.9%
Sales and Marketing
  767,042 
  11.5%
  718,036 
  13.2%
Product Development
  39,542 
  0.6%
  31,976 
  0.6%
General and Administrative
  615,572 
  9.3%
  460,105 
  8.4%
​Total Expenses
  4,172,430 
  62.8%
  3,375,406 
  62.1%
Operating income
  2,475,115 
  37.2%
  2,056,964 
  37.9%
Interest income
  90 
  0.0%
  95 
  0.0%
Net income
 $2,475,205 
  37.2%
 $2,057,059 
  37.9%
 
Operating Income
 
Charlie’s had operating income of approximately $2,475,000 for the three months ended March 31, 2019. The quarter’s operating income was derived from its branded nicotine based e-cigarette liquid business. For the three months ended March 31, 2018, Charlie’s had operating income of approximately $2,057,000 from its branded nicotine based e-cigarette liquid business. The details of the operating income are as follows:
 
 
 
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Revenue
 
Revenue for the three months ended March 31, 2019 increased approximately $1,216,000, or 22.4%, to approximately $6,648,000, as compared to approximately $5,432,000 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 $585,000, or 27.0%, to approximately $2,750,000, or 41.4% of revenue, for the three months ended March 31, 2019, as compared to approximately $2,165,000, or 399% of revenue, for the same period in 2018. This 15% percent increase in the cost of revenue is due to rising costs in the production process and lower selling price on certain products as compared to last year.
 
Sales and Marketing Expenses
 
For the three months ended March 31, 2019, total sales and marketing expenses increased approximately $49,000, or 6.8%, to approximately $767,000 as compared to approximately $718,000 for the same period in 2018, which was primarily due to increased salary expense for the addition of personnel.
 
Product Development
 
For the three months ended March 31, 2019, product development was approximately $40,000 as compared to approximately $32,000 for the same quarter in 2018. The increase of $8,000 is due primarily to certain product registrations.
 
General and Administrative Expenses
 
For the three months ended March 31, 2019, total general and administrative expenses increased approximately $156,000, or 33.7%, to approximately $616,000 as compared to approximately $460,000 for the same period in 2018, which was primarily due to increased salary expense for the addition of personnel and professional fees in connection with our stock exchange transaction.
 
Income from Operations
 
Charlie’s had net income from operations of approximately $2,475,000 for the three months ended March 31, 2019 as compared to net income from operations of approximately $2,057,000 for the same period in 2018. Net Income is determined by adjusting income from operations by the following item:
 
Other Income
 
For the three months ended March 31, 2019 and 2018, other income was $90 and $95, respectively.
 
Net Income
 
For the three months ended March 31, 2019, Charlie’s had net income of $2,475,000 as compared to $2,057,000 for the same period in 2018. 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 Charlie’s business.
 
 
 
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Liquidity and Capital Resources
 
As of March 31, 2019, Charlie’s had working capital of approximately $2,193,000, which consisted of current assets of approximately $3,444,000 and current liabilities of approximately $1,251,000. This compares to working capital of approximately $704,000 at December 31, 2018. The current liabilities as presented in the balance sheet at March 31, 2019 primarily include approximately $1,027,000 of accounts payable and accrued expenses and approximately $184,000 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 March 31, 2019 was approximately $1,243,000.
 
For the three months ended March 31, 2019 we generated cash from operations of $1,930,000 as compared to $1,949,000 for the same period in 2018.
 
For the three months ended March 31,2019 we used cash for financing activities (primarily LLC member distributions) of $979,000 as compared to $1,192,000 for the same period in 2018.
 
Charlie’s plans and growth depend on its ability to increase revenues and continue its business development efforts. Charlie’s currently anticipates that its current cash position will be enough to meet its working capital requirements to continue our sales and marketing efforts for at least 12 months. If in the future Charlie’s plans or assumptions change or prove to be inaccurate, we may need to raise additional funds through public or private debt or equity offerings, financings, corporate collaborations, or other means.
 
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, 
 
 2018 
 2017 
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