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



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



Overview



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



Operational Plan

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





First, we plan to increase the sales of our hemp-derived products, including
topicals, ingestibles and disposable vapor devices. We feel there is a
significant upside in the hemp-derived products space, and we have begun to
shift our focus in this business to the burgeoning market for products
containing compounds synthetically derived from hemp, including
Delta-8-Tetrahydrocannabinol ("Delta-8-THC") and other synthetic
tetrahydrocannabinol ("Synthetic THC") compounds. These product categories have
grown rapidly, as they offer consumers a range of therapeutic benefits across
varying potencies and product formats. We have also recently enhanced our focus
on our direct-to-consumer business and have allocated additional financial
resources to increase e-commerce sales of hemp-derived products.



Secondly, we continue to see a significant opportunity for sales growth in
international markets for our e-liquid and other vapor products. Presently,
approximately 15% of our vapor product sales come from the international market
and we are well positioned to increase those sales in the countries that we
presently sell, and in additional overseas markets, as we have already built an
international distribution platform. Specifically, the Company intends to launch
proprietary new disposables, containing synthetically derived nicotine, that
have been specially formulated for the European and Middle East markets. In
partnership with our international distributors, Charlie's will sell award
wining products in markets where more than 20% of the population consumes
nicotine in some format.



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



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Recent Developments



Resignation of Brandon Stump.



On October 29, 2021, Brandon Stump resigned from his position as: (i) Chief
Executive Officer and Chairman of the Board of Directors; and (ii) all positions
held for each direct and indirect subsidiary of the Company (each, a
"Subsidiary"), including as a member of the Board of Directors of the Company
and each Subsidiary.



In connection with Mr. Stump's resignation, the Company and Mr. Stump entered
into an agreement regarding Mr. Stump's resignation (the "Termination
Agreement"), which Termination Agreement is dated October 29, 2021. Pursuant to
the Termination Agreement, in consideration for Mr. Stump agreeing to terminate
his employment agreement with the Company, as amended and restated on February
12, 2020 (the "Employment Agreement"), and agreeing to certain restrictions and
covenants, the Company will: (i) continue to pay Mr. Stump his base salary (as
defined in the Employment Agreement), through April 22, 2022; (ii) pay Mr. Stump
certain bonus compensation owed to Mr. Stump in an amount equal to $300,000,
payable in installments of $75,000 on each of November 1, 2021, December 1,
2021, January 1, 2022, and February 1, 2022; and (iii) continue to make
available to Mr. Stump certain employee benefits offered by the Company until
April 22, 2022.



Reverse Stock Split



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



March 2021 Private Placement



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

Red Beard Holdings, LLC Note Payable





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



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

Small Business Administration Loan Programs





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



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



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



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



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



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



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



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



PMTA



During the quarter ended September 30, 2020, the FDA's Center for Tobacco
Products informed us that our PMTA has received a valid submission tracking
number, passed the FDA's filing review phase, and recently entered the
substantive review phase. To date, Charlie's has invested over $4.4 million for
our initial PMTA submission. We engaged a team of more than 200 professionals,
including doctors, scientists, biostatisticians, data analysts, and numerous
contract research organizations to create our comprehensive PMTA submission.
During the quarter ended September 30, 2021, the FDA began issuing Marketing
Denial Orders ("MDO") for electronic nicotine delivery system ("ENDS") products
that lack evidence to demonstrate that permitting the marketing of such products
would be appropriate for the protection of the public health. As of September
30, 2021, the Company had not received an MDO for any of its submissions. This
news highlights our progress toward achieving full regulatory compliance and our
goal of providing customers with a trusted product portfolio.



Impact of COVID-19



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



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Risks and Uncertainties



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



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



Basis of Presentation



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



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

Current Operating Trends and Financial Highlights





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



Regarding results from operations for the quarter ended September 30, 2021, we
generated revenue of approximately $5,219,000, as compared to revenue of
$3,894,000 for the three months ended September 30, 2020. This $1,325,000
increase in revenue was due primarily to a $1,168,000 increase in sales of our
nicotine-based vapor products, as well as a $157,000 increase in sales of our
hemp-derived wellness products.



We generated net income for the three months ended September 30, 2021 of
approximately $3,107,000, as compared to net loss of approximately $6,824,000
for the three months ended September 30, 2020. The net income for the three
months ended September 30, 2021 includes non-cash stock-based compensation
expense of approximately $39,000 and a non-cash gain in fair value of derivative
liabilities of $2,729,000.



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Regarding results from operations for the nine months ended September 30, 2021,
we generated revenue of approximately $15,013,000, as compared to revenue of
$12,462,000 for the nine months ended September 30, 2020. This increase in
revenue was due primarily to a $2,551,000 increase in sales of our
nicotine-based vapor products, while sales of our hemp-derived products remained
relatively unchanged.



We generated net income for the nine months ended September 30, 2021 of
approximately $2,734,000, as compared to net loss of approximately $11,384,000
for the nine months ended September 30, 2020. The net income for the nine months
ended September 30, 2021 includes non-cash stock-based compensation expense of
approximately $563,000 and a non-cash gain in fair value of derivative
liabilities of $1,901,000.

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





                                              For the three months ended
                                                     September 30,                         Change
                                               2021                2020           Amount        Percentage

($ in thousands)
Revenues:
Product revenue, net                       $      5,219       $        3,894     $   1,325             34.0 %
Total revenues                                    5,219                3,894         1,325             34.0 %
Operating costs and expenses:
Cost of goods sold - product revenue              2,310                1,666           644             38.7 %
General and administrative                        2,084                2,073            11              0.5 %
Sales and marketing                                 442                  335           107             31.9 %
Research and development                              5                  741          (736 )          -99.3 %
Total operating costs and expenses                4,841                4,815            26              0.5 %
Income (loss) from operations                       378                 (921 )       1,299           -141.0 %
Other income (expense):
Interest expense                                     (2 )                (29 )          27            -93.1 %
Change in fair value of derivative
liabilities                                       2,729               (5,874 )       8,603           -146.5 %
Other income                                          2                    -             2              100 %
Total other income (loss)                         2,729               (5,903 )       8,632           -146.2 %
Net income (loss)                          $      3,107       $       (6,824 )   $   9,931           -145.5 %

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





Revenue



Revenue for the three months ended September 30, 2021 increased approximately
$1,325,000 or 34%, to approximately $5,219,000, as compared to approximately
$3,894,000 for same period in 2020 due to a $1,168,000 increase in sales of our
nicotine-based vapor products and a $157,000 increase in sales of our
hemp-derived wellness products. The increase in our nicotine-based vapor product
sales is directly related to the launch of our Pachamama Disposable product
line, which is not currently subject to FDA review and currently represents
Charlie's most important, fastest-growing product category. Pachamama
Disposables became Charlie's first-ever entrant into the rapidly expanding,
disposable e-cigarette market and offer users a variety of premium flavors
containing synthetic nicotine (not derived from tobacco) in a compact, discrete
format. However, ongoing uncertainty surrounding the FDA's recent issuance of
MDO's and Refuse-to-File designations, as well as the addition of vapor products
to the Prevent All Cigarette Trafficking Act ("PACT Act") (See Regulatory and
Market Risks) continue to affect buying patterns in the domestic vapor products
market as customers reduce inventories of non-PMTA submitted products and adjust
their business models to suit recent changes in regulation. Lingering effects of
COVID-19 as well as shifting consumer preferences in our channels have both
continued to affect sales of our CBD wellness products. As a result, during the
quarter ended March 31, 2021, we began to streamline our existing hemp-derived
wellness product offering and pursue the developing market for products
containing synthetically derived cannabinoids, including Delta-8-THC and other
Synthetic THC compounds. We view this market segment as having higher growth
potential, as well as better alignment with our existing sales channels.



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Cost of Revenue



Cost of revenue, which consists of direct costs of materials, direct labor,
third party subcontractor services, and other overhead costs increased
approximately $644,000, or 38.7%, to approximately $2,310,000, or 44.3% of
revenue, for the three months ended September 30, 2021, as compared to
approximately $1,666,000, or 42.8% of revenue, for the same period in 2020. This
cost, as a percent of revenue, increased due to a higher sales mix consisting of
our Pachamama Disposable product line, which carries a lower margin per unit
relative to our other vapor products. Cost of revenue was partially offset by a
lower than expected provision for inventory obsolescence across both business
lines.

General and Administrative Expenses





For the three months ended September 30, 2021, total general and administrative
expense increased approximately $11,000 to $2,084,000 as compared to
approximately $2,073,000 for the same period in 2020. Notably, this change is
primarily comprised of increases of approximately $175,000 in the provision for
bad debt, $124,000 in professional fees as well as $109,000 in other general and
administrative expenses. The increase in provision for bad debt was primarily
related to the increase in sales and accounts receivable balance during the
period. The increase in professional fees was the result of several internal
projects, most of which focused on the creation of a solution "network"
necessary to effectively meet the requirements of both the Consolidated
Appropriations Act of 2021 and the PACT Act. These increases were offset by
reductions in non-cash stock-based compensation and salaries and benefits costs
of approximately $342,000 and $55,000, respectively. The reduction in non-cash,
stock-based compensation is primarily due to the conclusion of the vesting
period for shares of Common Stock awarded to several employees in conjunction
with Share Exchange in April 2019 (as defined in Note 3 of Item 1, Part 1 of
this Report).



Sales and Marketing Expense



For the three months ended September 30, 2021, total sales and marketing expense
increased approximately $107,000, or 31.9%, to approximately $442,000 as
compared to approximately $335,000 for the same period in 2020, which was
primarily due to a return to normalized trade-show activity during the quarter.
Sales commissions increased marginally due to revenue growth across our
businesses, however the increase was mitigated by a restructuring of our sales
team and compensation program at the beginning of 2021.

Research and Development Expense





For the three months ended September 30, 2021, total research and development
costs decreased approximately $736,000, or 99.3%, to approximately $5,000 as
compared to approximately $741,000 for the same period in 2020, which was
primarily due to reduced costs associated with our PMTA registrations.



Income from Operations



We had operating income of approximately $378,000 for the three months ended
September 30, 2021, due primarily to an increase in sales across both Charlie's
and Don Polly. We also incurred certain non-cash, general and administrative
expenses during the period including a $39,000 expense related to stock-based
compensation. Net income is determined by adjusting income from operations by
the following items:

? Change in Fair Value of Derivative Liabilities. For the three months ended

September 30, 2021, the gain in fair value of derivative liabilities was

$2,729,000, compared to a loss of $5,874,000 for the three months ended

September 30, 2020. The derivative liability is associated with the issuance

of the Investor Warrants and the Placement Agent Warrants (as defined in Note

3 of this Report) in connection with the Share Exchange. The gain for the

quarter ended September 30, 2021, reflects the effect of the decrease in stock

price as of September 30, 2021, compared to June 30, 2021. Due to the limited

supply of shares currently freely trading, our stock price may experience


    volatility and therefore, considerable fluctuations in the value of our
    warrant derivative liability in the future. We had 40,337,693 warrants
    outstanding as of September 30, 2021.

? Interest Expense. For the three months ended September 30, 2021, and 2020, we

recorded interest expense related to notes payable of $2,000 and $29,000,


    respectively.

? Other Income. For the three months ended September 30, 2021 and 2020, we


    recorded other income of $2,000 and $0, respectively.




Net Income (Loss)

For the three months ended September 30, 2021, we had net income of $3,107,000 as compared to a net loss of $6,824,000 for the same period in 2020.







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A review of the nine-month period ended September 30, 2021 follows:





                                               For the nine months ended
                                                     September 30,                         Change
                                               2021                2020           Amount        Percentage

($ in thousands)
Revenues:
Product revenue, net                       $     15,013       $       12,462     $   2,551             20.5 %
Total revenues                                   15,013               12,462         2,551             20.5 %
Operating costs and expenses:
Cost of goods sold - product revenue              7,047                5,361         1,686             31.4 %
General and administrative                        6,759                8,500        (1,741 )          -20.5 %
Sales and marketing                               1,212                1,259           (47 )           -3.7 %
Research and development                             14                3,372        (3,358 )          -99.6 %
Total operating costs and expenses               15,032               18,492        (3,460 )          -18.7 %
Loss from operations                                (19 )             (6,030 )       6,011            -99.7 %
Other income (expense):
Interest expense                                    (33 )               (105 )          72            -68.6 %
Change in fair value of derivative
liabilities                                       1,901               (5,264 )       7,165           -136.1 %
Gain on debt extinguishment                         875                    -           875              100 %
Other income                                         10                   15            (5 )          -33.3 %
Total other income (loss)                         2,753               (5,354 )       8,107           -151.4 %
Net income (loss)                          $      2,734       $      (11,384 )   $  14,118           -124.0 %

Results of Operations for the Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020





Revenue



Revenue for the nine months ended September 30, 2021 increased approximately
$2,551,000 or 20.5%, to approximately $15,013,000, as compared to approximately
$12,462,000 for same period in 2020 due to a $2,551,000 increase in sales of our
nicotine-based vapor products, while sales of our hemp-derived products remained
relatively unchanged. The increase in our nicotine-based vapor product sales is
directly related to the launch of our Pachamama Disposable product line, which
is not currently subject to FDA review and currently represents Charlie's most
important, fastest-growing product category. Pachamama Disposables became
Charlie's first-ever entrant into the rapidly expanding, disposable e-cigarette
market and offer users a variety of premium flavors containing synthetic
nicotine (not derived from tobacco) in a compact, discrete format. However,
ongoing uncertainty surrounding the FDA's recent issuance of MDO's and
Refuse-to-File designations, as well as the addition of vapor products to the
Prevent All Cigarette Trafficking Act ("PACT Act") (See Regulatory and Market
Risks) continue to affect buying patterns in the domestic vapor products market
as customers reduce inventories of non-PMTA submitted products and adjust their
business models to suit recent changes in regulation. Lingering effects of
COVID-19 as well as shifting consumer preferences in our channels have both
continued to affect sales of our CBD wellness products. As a result, during the
quarter ended March 31, 2021, we began to streamline our existing hemp-derived
wellness product offering and pursue the developing market for products
containing synthetically-derived cannabinoids, including Delta-8-THC and other
Synthetic THC compounds. We view this market segment as having higher growth
potential, as well as better alignment with our existing sales channels.



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Cost of Revenue



Cost of revenue, which consists of direct costs of materials, direct labor,
third party subcontractor services, and other overhead costs increased
approximately $1,686,000, or 31.4%, to approximately $7,047,000, or 46.9% of
revenue, for the nine months ended September 30, 2021, as compared to
approximately $5,361,000, or 43% of revenue, for the same period in 2020. This
cost, as a percent of revenue, increased due to a higher sales mix consisting of
our Pachamama Disposable product line, which carries a lower margin per unit
relative to our other vapor products. Cost of revenue was also negatively
affected by a larger than normal provision for inventory obsolescence during the
period related to certain of our hemp-derived wellness products.

General and Administrative Expenses





For the nine months ended September 30, 2021, total general and administrative
expense decreased approximately $1,741,000 to $6,759,000 as compared to
approximately $8,500,000 for the same period in 2020. Notably, this decrease is
comprised of reductions of approximately $2,153,000 of non-cash, stock-based
compensation and $61,000 of salaries and benefits costs. The reduction in
non-cash, stock-based compensation is primarily due to the forfeiture of stock
awards by Brandon Stump and Ryan Stump pursuant to the adoption of the Amended
Employment Agreements entered February 12, 2020, as well as the conclusion of
the vesting period for shares of Common Stock awarded to several employees in
conjunction with the Share Exchange in April 2019. The decrease was primarily
offset by increases of approximately $325,000 in professional fees, $97,000 of
merchant processing costs and $51,000 of other general administrative expenses.
The increase in professional fees was largely the result of several internal
projects largely focused on the creation of a solution "network" necessary to
effectively meet the requirements of both the Consolidated Appropriations Act of
2021 and the PACT Act as well as costs associated with certain corporate actions
including our Reverse Split, completed June 16, 2021, and the private sale of
3,517,000 shares of our common stock to the Company's founders Brandon Stump and
Ryan Stump completed March 23, 2021.



Sales and Marketing Expense



For the nine months ended September 30, 2021, total sales and marketing expense
decreased approximately $47,000, or 3.7%, to approximately $1,212,000 as
compared to approximately $1,259,000 for the same period in 2020, which was
primarily due to a shift away from broad-based advertising efforts and focusing
on targeted sales and marketing programs with certain of our large key
distribution partners. Our sales mix to large distributors has increased as a
result of logistical changes in our business following the addition of ENDS
products to the PACT Act earlier this year. During the nine months ended
September 30, 2021, we also continued to refine our use of certain point-of-sale
materials in favor of increased digital marketing campaigns, however we will
continue to remain agile in how we focus our resources in the future. Sales
commissions increased marginally due to revenue growth across our businesses,
however the increase was mitigated by a restructuring of our sales team and
compensation program at the beginning of 2021.

Research and Development Expense





For the nine months ended September 30, 2021, total research and development
expense decreased approximately $3,358,000, to approximately $14,000 as compared
to $3,372,000 for the same period in 2020, which was primarily due to reduced
costs associated with our PMTA registrations.



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Loss from Operations



We had operating losses of approximately $19,000 for the nine months ended
September 30, 2021, due primarily to a $325,000 increase in professional fees as
well as a $148,000 increase in other general and administrative costs. We also
incurred certain non-cash general and administrative expenses that contributed
to the loss from operations including a $563,000 expense related to stock-based
compensation. Net loss is determined by adjusting loss from operations by the
following items:

? Change in Fair Value of Derivative Liabilities. For the nine months ended

September 30, 2021, the gain in fair value of derivative liabilities was

$1,901,000, compared to loss of $5,264,000 for the same period in 2020. The

derivative liability is associated with the issuance of the Investor Warrants

and the Placement Agent Warrants (as defined in Note 3 of this Report) in

connection with the Share Exchange. The gain for the nine months ended

September 30, 2021, reflects the effect of the decrease in stock price as of

September 30, 2021, compared to December 31, 2020. During the nine months

ended September 30, 2021, we experienced a substantial variation in trading

volume for our stock, which may persist in the future. Due to the limited

supply of shares currently freely trading, our stock price may experience


    volatility and therefore, considerable fluctuations in the value of our
    warrant derivative liability in the future. We had 40,337,693 warrants
    outstanding as of September 30, 2021.

? Interest Expense. For the nine months ended September 30, 2021, and 2020, we

recorded interest expense related to notes payable of $33,000 and $105,000,


    respectively.

? Gain on debt extinguishment. For the nine months ended September 30, 2021, and

2020, we recorded a debt extinguishment gain of $875,000 and $0, respectively,

including principal and accrued interest, related to the forgiveness of the


    Don Polly PPP Loan and the Charlie's PPP Loan.

? Other Income. For the nine months ended September 30, 2021, and 2020, we


    recorded other income of $10,000 and $15,000, respectively.




Net Income (Loss)

For the nine months ended September 30, 2021, we had a net income of $2,734,000 as compared to a net loss of $11,384,000 for the same period in 2020.





Effects of Inflation

Inflation has not had a material impact on our business.

Liquidity and Capital Resources





As of September 30, 2021, we had working capital of approximately $505,000,
which consisted of current assets of approximately $5,667,000 and current
liabilities of approximately $5,162,000. This compares to negative working
capital of approximately $6,020,000 at December 31, 2020. The current
liabilities, as presented in the condensed consolidated balance sheet at
September 30, 2021 included elsewhere in this Report primarily include
approximately $2,006,000 of accounts payable and accrued expenses, approximately
$221,000 of deferred revenue associated with product shipped but not yet
received by customers, approximately $392,000 of lease liabilities, and
$2,543,000 of derivative liability associated with the Investor Warrants and
Placement Agent Warrants (the derivative liability of $2,543,000 is included in
determining the working capital of $505,000 but is not expected to use any cash
to ultimately satisfy the liability). In addition, the effect of the COVID-19
pandemic may have a negative impact on our liquidity and capital reserves.

Our cash and cash equivalents balance at September 30, 2021 was approximately $1,270,000.





For the nine months ended September 30, 2021, net cash used in operating
activities was approximately $980,000, as compared to $3,502,000 for the same
period in 2020. This resulted from a net income of $2,734,000, partially offset
by $563,000 of share-based compensation, $1,901,000 of change in fair value of
derivative liabilities and $2,080,000 changes in our operating assets and
liabilities.



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For the nine months ended September 30, 2021, we used cash for investment
activities of approximately $73,000 as compared to $153,000 for the same period
in 2020. The cash used for investment activities is primarily for the on-going
development and configuration of enterprise resource planning software during
the nine months ended September 30, 2021.



For the nine months ended September 30, 2021 we generated approximately $901,000
cash from financing activities as compared to $2,416,000 for the same period in
2020. In the 2021 period, we generated cash from financing activities from the
Polly PPP Loan 2 (as defined in Note 8 of Item 1, Part 1 of this Report) and the
Private Placement (as defined in Note 10 of Item 1, Part 1 of this Report). We
paid cash dividends of $883,000 and notes payable of $1,400,000 during the nine
months ended September 30, 2021.

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





Our financial statements have been prepared assuming that the Company will
continue as a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company
operates in a rapidly changing legal and regulatory environment; new laws and
regulations or changes to existing laws and regulations could significantly
limit the Company's ability to sell its products, and/or result in additional
costs. Additionally, the Company was required to apply for FDA approval to
continue selling and marketing its products used for the vaporization of tobacco
derived nicotine in the United States. There is significant cost associated with
the application process and there can be no assurance the FDA will approve the
application(s). In addition, the recent outbreak of COVID-19 in March 2020 has
had a negative impact on the global economy and markets which has negatively
impacted the Company's supply chain and sales. For the nine months ended
September 30, 2021, the Company has incurred a loss from operations of $19,000
and a consolidated net income of approximately $2,734,000 and the Company has a
stockholders' equity of $1,068,000 as of September 30, 2021. However, net cash
used in operating activities was approximately $980,000, and net income for the
period was largely the result of $2,754,000 in other income, including a
$1,901,000 gain in fair value of derivative liabilities. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments to the carrying amount
and classification of recorded assets and liabilities should the Company be
unable to continue operations.



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

Off-Balance Sheet Arrangements

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





Critical Accounting Policies



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



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