COSTA MESA, CA / ACCESSWIRE / May 18, 2020 / Charlie's Holdings, Inc. (OTC PINK:CHUC) ("Charlie's" or the "Company), an industry leader in both the premium, nicotine-only, e-cigarette space and the hemp-derived, CBD wellness space, announced today the Company's financial results for the first quarter ended March 31, 2020.
Key Highlights for Q1 2020
- Partnered with Blackbriar Regulatory Services to direct submission of Premarket Tobacco Product Application ("PMTA")
- CBD wellness products contributed revenue of $877,000
- Ramping direct-to-consumer e-commerce efforts
Management Commentary
"This month marks our one-year anniversary of being a publicly-traded company, and over that time we have been on a rollercoaster witnessing some highs and lows. Unforeseen industry headwinds from the nationwide vaping concerns and the uncertainty brought on from the global COVID-19 pandemic have produced challenges that have prompted us to transition and streamline operations to become more efficient," commented Brandon Stump, Chief Executive Officer of Charlie's.
Stump, continued, "we have witnessed a stabilization in our nicotine-based e-liquid products and have focused more of our attention on differentiating ourselves by being an early mover with our preparation for submission of our PMTA. While the deadline to the Food and Drug Administration ("FDA") has been pushed back to September 2020, we continue to compile more data and remain on track thanks to our partnership with Blackbriar Regulatory Services. We strongly believe our commitment to the highest standards of regulatory compliance, coupled with our hemp-derived CBD wellness products and our international vaping distribution network are huge differentiating factors for our Company. Our team has transitioned well over the past several months and we remain confident and enthusiastic on our future growth prospects."
Growth Initiatives
Charlie's products 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, New Zealand and Canada. In June 2019, the Company launched distribution, through Don Polly, of certain premium vapor, tincture and topical wellness products containing hemp-derived cannabidiol ("CBD") and currently intends to develop and launch additional products containing hemp-derived CBD in the future.
First, we plan to focus on increasing the sales of our CBD related products, including topicals, tinctures and vaping liquids. We feel there is a significant upside in the CBD space, and we have begun to focus on numerous vertical markets for the sale of our isolate, full and broad-spectrum products. These vertical markets include, but aren't limited to the medical and wellness markets. In addition, we have begun conversations with various companies and organizations that, if successful, will allow us to significantly expand our marketing and distribution reach.
Secondly, we see a significant opportunity for sales growth in international markets for nicotine e-liquids. Presently, approximately 25% of our e-liquid product sales come from the international market and we are well positioned to increase those sales in the countries that we presently sell, and in additional overseas markets, as we have already built an international distribution platform.
Lastly, we feel that the nicotine based flavored vaping products will continue to be a significant growth opportunity, once all the rightful regulatory changes have been made. We will continue with our plan to obtain marketing authorization for certain of our products through the submission of a PMTA, which is due in September 2020. We expect the cost associated with the preparation and submission of these PMTAs will be approximately $4.4 million in total. In addition, we are evaluating the potential returns associated with obtaining marketing authorization for our other nicotine based vaping products after the September 2020 deadline. We feel that a significant amount of our competitors will not have the resources and/or expertise to complete the extensive and costly PMTA process and that once complete, we will be able to benefit from being one of only a select group of companies operating in the flavored nicotine product space.
Financial Results for the Three Months Ended March 31, 2020
Revenue for the three months ended March 31, 2020 was $4,405,000, a decrease of $2,243,000, or 34%, as compared to $6,648,000 for the three months ended March 31, 2019. The decrease was primarily due to a $3,120,000 decrease in sales of our nicotine-based products, offset by $877,000 of sales from our CBD based products, which were introduced in June of 2019.
The decrease in sales in our nicotine-based e-liquid flavor sales is directly related to the current regulatory and health related news stories surrounding the vaping industry. The nicotine-based e-liquid sales decline began late in the quarter ended September 30, 2019 and we expect sales in future quarters to be affected until the regulatory environment becomes clear. In addition, in late February 2020, sales of our CBD wellness products began to experience a decrease as the effects of the global COVID-19 pandemic caused disruptions in the global economy, however, we did not see a material decrease in our nicotine-based e-liquid products.
Gross profit for the three months ended March 31, 2020 was $2,442,000, a decrease of $1,456,000, or 37%, compared to $3,898,000 for the three months ended March 31, 2019. The resulting gross margin was 55.4% for the three months ended March 31, 2020, compared to 58.6% for the three months ended March 31, 2019.
The 3.2% decrease in gross profit is primarily due to an increase in the sales mix to distributors and retailers participating in volume incentive programs, a higher provision for returns and lower fixed cost absorption, but was slightly offset by relatively stable manufacturing costs.
General and administrative expense for the three months ended March 31, 2020 was $4,151,000, an increase of $3,148,000, or 314%, as compared to $1,003,000 for the three months ended March 31, 2019. Costs relating to the completion of our share exchange on April 26, 2019 accounted for part of the increase, including $1,853,000 of non-cash stock-based compensation expense. The remaining increase is primarily due to professional fees and increased salaries associated with conducting business as a public company and certain step-up costs related to new business activities, including the launch of our CBD business.
Sales and marketing expenses for the three months ended March 31, 2020 was $419,000, an increase of $5,000, or 1%, as compared to $414,000 for the three months ended March 31, 2019. Sales and marketing shifted to higher commissions paid for new customer acquisition and enhanced marketing efforts for our CBD business.
Research and development expense for the three months ended March 31, 2020 was $2,223,000, an increase of $2,218,000, as compared to $5,000 for the three months ended March 31, 2019. The increase was primarily due to costs incurred with the PMTA registration process.
Operating loss for the three months ended March 31, 2020 was $4,351,000, as compared to operating income of $2,476,000 for the three months ended March 31, 2019. Operating results have primarily been affected by a $3,148,000 million increase in general and administrative expense as we grow the business, a $2,218,000 increase in research and development expense related to the PMTA registration of some of our products and a decline in our nicotine-based product sales of $3,120,000 as compared to the same period in 2019, offset by an increase in sales from our CBD products business of $877,000.
For the three months ended March 31, 2020, the gain in fair value of derivative liabilities was $430,000, as compared to $0 for the three months ended March 31, 2019. The derivative liability is associated with the issuance of the Investor Warrants and the Placement Agent Warrants in connection with the Share Exchange and the gain for the quarter ended March 31, 2020 reflects the effect of the change in stock price on the liability associated with the issuance of these warrants. There were no warrants outstanding on March 31, 2019.
Net loss for the three months ended March 31, 2020 was $3,916,000, as compared to net income of $2,476,000 for the three months ended March 31, 2019. The net loss for the three months ended March 31, 2020 includes non-cash stock-based compensation expense of $1,853,000 offset by a non-cash gain in fair value of derivative liabilities of $430,000. In addition, the Company expensed $2,223,000 of consulting fees for the three months ended March 31, 2020 as a result of the PMTA registration process.
About Charlie's Holdings, Inc.
Charlie's Holdings, Inc. (OTC Pink: CHUC) is an industry leader in both the premium, nicotine-only, e-cigarette space and the hemp-derived, CBD wellness space through its subsidiary companies Charlie's Chalk Dust, LLC and Don Polly, LLC. Charlie's Chalk Dust produces high quality vapor products currently distributed in more than over 90 countries around the world. Charlie's Chalk Dust has developed an extensive portfolio of brand styles, flavor profiles and innovative product formats. Launched in June of 2019, Don Polly, LLC formulates innovative hemp-derived CBD wellness products. Don Polly's high quality CBD products derive from single-strain-sourced hemp extract and high purity CBD isolate crystals.
For additional information, please visit our corporate website at: CharliesHoldings.com and our branded online websites: CharliesChalkDust.com and EnjoyPachamama.com.
Safe Harbor Statement
This press release contains "forward-looking statements" within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to statements regarding the Company's overall business, existing and anticipated markets and expectations regarding future sales and expenses. Words such as "expect," "anticipate," "should," "believe," "target," "project," "goals," "estimate," "potential," "predict," "may," "will," "could," "intend," variations of these terms or the negative of these terms and similar expressions are intended to identify these forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties, many of which involve factors or circumstances that are beyond the Company's control. The Company's actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including but not limited to: the Company's ability to successful increase sales and enter new markets; the Company's ability to manufacture and produce product for its customers; the Company's ability to formulate new products; the acceptance of existing and future products; the complexity, expense and time associated with compliance with government rules and regulations affecting nicotine and products containing cannabidiol; litigation risks from the use of the Company's products; risks of government regulations; the impact of competitive products; and the Company's ability to maintain and enhance its brand, as well as other risk factors included in the Company's most recent quarterly report on Form 10-K, Form 10-Q and other SEC filings. These forward-looking statements are made as of the date of this press release and were based on current expectations, estimates, forecasts and projections as well as the beliefs and assumptions of management. Except as required by law, the Company undertakes no duty or obligation to update any forward-looking statements contained in this release as a result of new information, future events or changes in its expectations.
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SOURCE: Charlie's Holdings, Inc.