What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-05-16 · 183 added, 85 removed, 176 unchanged (60% of the section changed)

13 unchanged sentences

Except for historical information, the discussion in this section contains forward-looking statements that involve risks and uncertainties, as discussed in the “Cautionary Note Regarding Forward Looking Statements.” Future results could differ materially from those discussed below for many reasons, including the risks described in Item 1A—“Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 and in Part II, Item 1A—Risk Factors” of this Form 10-Q.

MD&A of Charlotte's Web Holdings, Inc.

Management's Discussion & Analysis of Charlotte's Web Holdings, Inc.

For purposes of this discussion, “Charlotte’s Web,” “CW,” “we,” or the “Company” refers to Charlotte’s Web Holdings, Inc.

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Charlotte’s Web branded premium quality products start with proprietary hemp genetics that are 100% North American farm grown and manufactured into hemp extracts containing naturally occurring phytocannabinoids including CBD, cannabichromene ("CBC"), cannabigerol ("CBG"), terpenes, flavonoids and other beneficial hemp compounds.

The Company moved into its new cGMP facility in Louisville, Colorado, the LOFT, during the second quarter of 2020 at which the Company conducts its

production, distribution, and quality control activities, and has expanded its R&D.

Charlotte’s Web product categories include full spectrum hemp extract oil tinctures (liquid products), gummies (sleep, stress, immunity, exercise recovery), capsules, CBD topical creams and lotions, as well as products for pets.

Charlotte’s Web products are distributed to more than 15,000 retail doors and 8,000 health care practitioners, and online through the Company’s website at www.CharlottesWeb.com.

The Company moved into its new cGMPfacility in Louisville, Colorado during the second quarter of 2020 at which the Company conducts its production, distribution, and quality control activities, and has expanded its R&D.

Charlotte’s Web product

categories include full spectrum hemp extract oil tinctures (liquid products), gummies (sleep, stress, immunity, exercise recovery), capsules, CBD topical creams and lotions, as well as products for pets.

Charlotte’s Web products are distributed to retailers and health care practitioners, and online through the Company’s website at www.CharlottesWeb.com.

The information provided on the Charlotte’s Web website is not part of this MD&A.

The business of the Company consists of the farming, manufacturing, sales, and marketing of products of hemp-derived CBD wellness products.

As of March 31, 2022, the Company operated in a single operating and reportable segment, hemp-derived CBD wellness products, as its executive officers reviewed overall operating results in order to assess financial performance and to make resource allocation decisions, rather than to assess a lower-level unit of operations in isolation.

As of June 30, 2022, the Company operated in a single operating and reportable segment, hemp-derived CBD wellness products, as its executive officers reviewed overall operating results in order to assess financial performance and to make resource allocation decisions, rather than to assess a lower-level unit of operations in isolation.

The Company’s primary products are made from high quality and proprietary strains of whole-plant hemp extracts containing a full spectrum of phytocannabinoids, terpenes, flavonoids and other hemp compounds.

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The Company does not currently produce or sell medicinal or recreational marijuana or products derived from high-THC Cannabis plants.

On March 2, 2021, Charlotte’s Web executed the Stanley Brothers USA Holdings Purchase Option ("SBH Purchase Option") pursuant to which the Company has the option to acquire Stanley Brothers USA, a Cannabis wellness incubator.

On March 2, 2021, Charlotte’s Web executed the SBH Purchase Option pursuant to which the Company has the option to acquire Stanley Brothers USA, a Cannabis wellness incubator.

Until the SBH Purchase Option is exercised, both Charlotte’s Web and Stanley Brothers USA will continue to operate as standalone entities in the US.

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At this time, however, the Company does not have any plans to expand into high-THC products in the near future.

The Company holds the number one market share position across major retail channels including total US food/drug/mass retail, total US natural specialty retail, and e-commerce, based on market share data from leading third-party analysts such as Nielsen Holdings, SPINS LLC, and Brightfield Group, respectively.

The Company grows its proprietary Hemp domestically in the United States on farms leased in northeastern Colorado and sources high quality Hemp through contract farming operations in Kentucky and Oregon.

The Company holds the number one share position across major retail channels including food/drug/mass retail, natural grocery & vitamin retailers, and e-commerce, based on market share data from leading third-party analysts such as The Nielsen Company (total xAOC), SPINS (SPINS Total US), and Brightfield Group, respectively.

The Company continues to invest in R&D efforts to identify new product opportunities.

Management plans to expand CW’s production capacity, sales and marketing infrastructure, and to find opportunities for continuous improvement in the supply chain and proactively define the competitive landscape.

Management plans to find opportunities for continuous improvement in the supply chain and proactively define the competitive landscape.

The Company plans to capitalize on the rapidly emerging botanical wellness products industry by driving customer acquisition and retention, as well as accelerating national and international retail expansion.

In addition, the Company may consider expanding its product line beyond Hemp-based products should the science and the Company’s founding principles support such expansion.

In furtherance of the Company’s R&D efforts, the Company established CW Labs, an internal division for R&D, to substantially expand the Company’s efforts around the science of Hemp derived compounds.

CW Labs aims to support the Company’s product portfolio with studies and science-based innovation.

CW Labs is currently engaged in double-blind, placebo-controlled human clinical trials addressing Hemp-based solutions for several need states.

CW Labs is located in Louisville, Colorado at the Company’s production and distribution facility and the Hauptmann Woodward Research Institute on the campus of the University at Buffalo’s Jacobs School of Medicine and The Center for Integrated Global Biomedical Sciences through which it fosters collaborations throughout the State University of New York network of 64 national and international research and medical institutions.

In November 2019, the Company announced collaboration between CW Labs and the University at Buffalo’s Center for Integrated Global Biomedical Sciences to advance Hemp cannabinoid science through a research program that provides a better understanding of the therapeutic uses of cannabinoids.

In furtherance of the Company’s research and development ("R&D") efforts, the Company established CW Labs, an internal division for R&D, to expand the Company’s efforts around the science of Hemp derived compounds.

CW Labs is currently engaged in clinical trials addressing Hemp-based solutions for several need states.

CW Labs is located in Louisville, Colorado at the Company’s cGMP production and distribution facility.

In November 2019, the Company announced a collaboration between CW Labs and the University at Buffalo’s Center for Integrated Global Biomedical Sciences to advance hemp cannabinoid science through a research program that provides a better understanding of the therapeutic uses and safety of cannabinoids.

The Company has decided to move out of the downtown Denver office space by the end of August 2022.

The Company has engaged a real estate firm to assist with finding a sublessee.

Additionally, terminating the lease and

other options are being explored as a cost saving measure.

These options could potentially result in a loss due to lower rent from a sublease or loss due to early termination.

Selected Financial Information

As of and for the Three Months Ended

For the Six Months Ended

2022 2021 2022 2021

Total revenues

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9,556 8,325 17,199 18,095

9,321 15,827 21,035 29,464

Selling, general, and administrative expenses

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Other income (expense), net

68 105 (17) 210

Change in fair value of financial instruments and other — 3,319 100 623

Income tax expense — (34)

Net loss and comprehensive loss

Income tax (expense) benefit — 4 — (30)

$ (7,870) $ (5,923) $ (16,496) $ (18,697)

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Total liabilities $ 37,102 $ 46,700

For The Three Months Ended June 2022 and 2021

The majority of the Company’s revenue is derived from sales of branded products to consumers via the Company’s DTC e-commerce website, and distributors, retail and wholesale B2B customers.

Three Months Ended

March 31, % (Decrease)

June 30, % (Decrease)

Total revenue $ 18,877 $ 24,152 (21.8) %

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Business-to-business ("B2B") revenue 5,600 8,469 (33.9) %

Total revenue for the three months ended March 31, 2022 was $19,356, a decrease of 17.3% compared to the three months ended March 31, 2021.

Total revenue for the three months ended June 30, 2022 was $18,877, a decrease of 21.8% compared to the three months ended June 30, 2021.

DTC e-commerce revenue decreased 15.3% year-over-year.

The decrease was attributable to lower traffic at the Company’s online store, wildfire shipping delays, and an industry-wide consumer shift to lower-priced CBD products;

primarily gummies and topical products, where Charlotte’s Web is the market share leader.

The decreased online traffic, was due to lessened promotional frequency, partially offset by stronger subscriptions and higher conversion rates.

B2B revenue decreased 14.6% compared to the three months ended March 31, 2021, due to reduced shipments to some of the Company’s largest retail customers after the warehouse closure and some supply chain challenges on top selling clinic SKUs.

This was partially offset by new retail distribution in grocery, natural, and pet retail, following the passing of Assembly Bill 45 in California.

The decrease was attributable to lower traffic at the Company’s online store.

The decrease was partially offset by improved product mix from gummies launched in late 2021, as well as stronger subscriptions and higher conversion rates.

B2B revenue decreased 33.9% compared to the three months ended June 30, 2021, due to reduced shipments to some of the Company’s largest retail customers and an increase in the specific return reserve during the quarter of $875.

This was partially offset by improved product mix from gummies launched in late 2021, new retail distribution in grocery, natural, and pet retail, following the passing of Assembly Bill 45 in California.

Cost of Goods Sold

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Three Months Ended

March 31, % (Decrease)

June 30, % (Decrease)

Cost of goods sold $ 9,556 $ 8,325 14.8 %

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Depreciation and amortization 846 903 (6.3) %

Cost of goods sold decreased 21.8% for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily due to lower unit sales volume, lower shipping costs, product mix and a decrease in inventory provisions.

Depreciation and amortization expense for the three months ended March 31, 2022 and March 31, 2021 was $2,078 and $2,668, respectively, of which $854 and $787, respectively, was expensed to cost of goods sold.

Cost of goods sold increased 14.8% for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, primarily due to higher inventory provisions recorded during the quarter.

The increase was partially offset by a decrease in inventory expensed to cost of goods sold as a result of lower sales volume.

Depreciation and amortization expense for the three months ended June 30, 2022 and June 30, 2021 was $1,862 and $2,797, respectively, of which $846 and $903, respectively, was expensed to cost of goods sold.

The remaining depreciation and amortization expenses of $1,016 and $1,894, respectively, was expensed to Selling, general, and administrative expenses.

The decrease in depreciation and amortization is attributable to us writing off all of our intangible assets in December 2021.

The overall decrease in depreciation and amortization is attributable to the Company's write off of intangible assets in December 2021.

The primary factors that can impact gross profit margins include the volume of products sold, the mix of revenue between DTC e-commerce and B2B, the mix of products sold, the promotional and sales discount rate, third-party quality costs, transportation costs, and changes in inventory provisions.

Gross profit for the three months ended March 31, 2022 and March 31, 2021 is as follows:

Gross profit for the three months ended June 30, 2022 and June 30, 2021 is as follows:

Three Months Ended

March 31, % (Decrease)

June 30, % (Decrease)

Gross profit $ 9,321 $ 15,827 (41.1) %

Percentage of revenue 49.4 % 65.5 % (16.1) %

Gross profit decreased 14.1% for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

The decrease is primarily related to lower net revenue in both the DTC and B2B channels which we discussed above while, partially offset by lower period expenses, improved product mix and a decrease in inventory provisions.

Gross profit decreased 41.1% for the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

The decrease is primarily related to an increase in the inventory provision as well as lower revenue in both the DTC and B2B channels.

This is partially offset by lower period expenses and improved product mix.

Selling, General, and Administrative Expenses

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Three Months Ended

March 31, % (Decrease)

June 30, % (Decrease)

Selling, general, and administrative expenses $ 17,259 $ 25,178 (31.5) %

Total Selling, general, and administrative expenses for the three months ended March 31, 2022 and March 31, 2021 were $20,355 and $23,786, respectively.

The 14.4% decrease was primarily attributable to a decrease in personnel, legal and professional services costs along with lower depreciation and amortization.

Depreciation and amortization expensed to Selling, general, and administrative expenses for the three months ended March 31, 2022 and March 31, 2021 were $1,224 and $1,881, respectively.

Total research and development expenses expensed to Selling, general, and administrative expense for the three months ended March 31, 2022 and March 31, 2021 were $1,170 and $1,308, respectively.

Research and development expenses primarily include personnel costs related to our R&D science division as well as R&D related projects advancing Hemp cannabinoid science through research programs that provide a better understanding of the therapeutic uses and of cannabinoids.

Total Selling, general, and administrative expenses for the three months ended June 30, 2022 and June 30, 2021 were $17,259 and $25,178, respectively.

The 31.5% decrease was primarily attributable to a decrease in personnel costs, a decrease in media marketing, along with lower depreciation and amortization.

Depreciation and amortization expensed to Selling, general, and administrative expenses for the three months ended June 30, 2022 and June 30, 2021 were $1,016 and $1,894, respectively.

Total research and development costs expensed to Selling, general, and administrative expense for the three months ended June 30, 2022 and June 30, 2021 were $1,018 and $1,654, respectively.

Research and development expenses primarily include personnel costs related to the Company's R&D science division as well as R&D related projects advancing Hemp cannabinoid science through research programs that provide a better understanding of the therapeutic uses of cannabinoids.

Total Change in Fair Value of Financial Instruments and Other

1 unchanged sentence

Three Months Ended

March 31, % (Decrease)

June 30, % (Decrease)

Change in fair value of financial instruments and other $ — $ 3,319 (100.0) %

Total change in fair value of financial instruments and other for the three months ended March 31, 2022 and March 31, 2021 was $100 and $(2,696), respectively.

For the three months ended March 31, 2022, the change in fair value of financial instruments and other was primarily driven by the revaluation of the fair value of the Company's SBH Purchase Option for $100.

For the three months ended March 31, 2021, the change in fair value of financial instruments and other was driven by the revaluation of the fair value of the Company's warrant liabilities.

The fair value of Company's warrant liabilities is revalued at each reporting date with changes primarily based on changes to the Company's share price input to the Black-Scholes option pricing model.

Total change in fair value of financial instruments and other for the three months ended June 30, 2022 and June 30, 2021 was $0 and $3,319, respectively.

For the three months ended June 30, 2022, there was no change in fair value of financial instruments and other primarily due to the expiration of all remaining warrants and no increase in the revaluation of the fair value of the Company's SBH Purchase Option for $13,100.

For the three months ended June 30, 2021, the change in fair value of financial instruments and other was driven by the revaluation of the fair value of the Company's warrant liabilities.

The fair value of Company's warrant liabilities was revalued at each reporting date with changes primarily based on changes to the Company's share price input to the Black-Scholes option pricing model.

As of June 30, 2022, all outstanding warrants have expired.

The fair value of the Company's SBH Purchase Option is revalued at each reporting date with changes primarily based on changes in financial projections of Stanley Brothers USA and the probability and timing of exercise.

For The Six Months Ended June 2022 and 2021

The majority of the Company’s revenue is derived from sales of branded products to consumers via the Company’s DTC e-commerce website, and distributors, retail and wholesale B2B customers.

Six Months Ended

June 30, % (Decrease)

Total revenue $ 38,234 $ 47,559 (19.6) %

Direct-to-consumer ("DTC") revenue 26,415 31,813 (17.0) %

Business-to-business ("B2B") revenue 11,819 15,746 (24.9) %

Total revenue for the six months ended June 30, 2022 was $38,234, a decrease of 19.6% compared to the six months ended June 30, 2021.

DTC e-commerce revenue decreased 17.0% year-over-year.

The decrease was attributable to lower traffic at the Company’s online store.

For the 6 months ended, the Company saw a slight overall decrease in product mix due to an industry-wide consumer shift to lower-priced CBD products;

primarily gummies and topical products, where Charlotte’s Web is the market share leader.

The decrease was partially offset by stronger subscriptions and higher conversion rates.

B2B revenue decreased 24.9% compared to the six months ended June 30, 2021, due to reduced shipments to some of the Company’s largest retail customers and an increase in the specific return reserve during the quarter of $875.

This was partially offset by new retail distribution in grocery, natural, and pet retail, following the passing of Assembly Bill 45 in California.

Cost of Goods Sold

Cost of goods sold includes the cost of inventory sold, changes in inventory provisions, and other production costs expensed.

Other production costs include direct and indirect production costs including direct labor, processing, testing, packaging, quality assurance, security, shipping, depreciation of production equipment, indirect labor, including production management, and other related expenses.

The primary factors that can impact cost of goods sold on a period-to-period basis include the volume of products sold, the mix of product sold, third-party quality costs, transportation, overhead allocations and changes in inventory provisions.

The components of cost of goods sold are as follows:

Six Months Ended

June 30, % (Decrease)

Cost of goods sold $ 17,199 $ 18,095 (5.0) %

Inventory expensed to cost of goods sold 11,966 14,117 (15.2) %

Inventory provision, net 1,857 177 949.2 %

Other production costs 1,676 2,111 (20.6) %

Depreciation and amortization 1,700 1,690 0.6 %

Cost of goods sold decreased 5.0% for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily due to an increase in the inventory provision, lower unit sales volume and lower shipping costs.

Depreciation and amortization expense for the six months ended June 30, 2022 and June 30, 2021 was $3,940 and $5,466, respectively, of which $1,700 and $1,690, respectively, was expensed to cost of goods sold.

The remaining depreciation and amortization expenses of $2,240 and $3,776, respectively, was expensed to Selling, general, and administrative expenses.

Gross profit for the six months ended June 30, 2022 and June 30, 2021 is as follows:

Six Months Ended

June 30, % (Decrease)

Gross profit $ 21,035 $ 29,464 (28.6) %

Percentage of revenue 55.0 % 62.0 % (7) %

Gross profit decreased 28.6% for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

The decrease is primarily related to lower revenue in both the DTC and B2B channels which we discussed above, and an increase to inventory provisions.

The decrease is partially offset by lower period expenses.

Selling, General, and Administrative Expenses

Total Selling, general, and administrative expenses are as follows:

Six Months Ended

June 30, % (Decrease)

Selling, general, and administrative expenses $ 37,614 $ 48,964 (23.2) %

Total selling, general, and administrative expenses for the six months ended June 30, 2022 and June 30, 2021 were $37,614 and $48,964, respectively.

The 23.2% decrease was primarily attributable to a decrease in personnel costs, a decrease in media marketing, along with lower depreciation and amortization.

Depreciation and amortization expensed to Selling, general, and administrative expenses for the six months ended June 30, 2022 and June 30, 2021 were $2,240 and $3,776, respectively.

Total research and development costs expensed to Selling, general, and administrative expense for the six months ended June 30, 2022 and June 30, 2021 were $2,188 and $2,963, respectively.

Total Change in Fair Value of Financial Instruments and Other

Total change in fair value of financial instruments and other is as follows:

Six Months Ended

June 30, % (Decrease)

Change in fair value of financial instruments and other $ 100 $ 623 (83.9) %

Total change in fair value of financial instruments and other for the six months ended June 30, 2022 and June 30, 2021 was $100 and $623, respectively.

For the six months ended June 30, 2022, the change in fair value of financial instruments and other was primarily driven by the revaluation of the fair value of the Company's SBH Purchase Option for $100.

For the six months ended June 30, 2021, the change in fair value of financial instruments and other was driven by the revaluation of the fair value of the Company's warrant liabilities.

As of June 30, 2022, all outstanding warrants have expired.

Liquidity and Capital Resources

As of March 31, 2022 and December 31, 2021, the Company had total current liabilities of $17,794 and $20,170, respectively, and cash and cash equivalents of $14,497 and $19,494, respectively, to meet its current obligations.

The Company believes it will be cash neutral in 2022.

The Company’s primary sources of liquidity are its Net cash flows, and sales of its securities from time to time.

As of June 30, 2022 and December 31, 2021, the Company had total current liabilities of $17,791 and $20,170, respectively, and cash and cash equivalents of $14,817 and $19,494, respectively, to meet its current obligations.

The Company believes it will be cash neutral in the second half of 2022.

The Company’s primary sources of liquidity are its net cash on hand from operations and sales of its securities from time to time.

The Company is currently in discussions with several parties related to potential new credit facilities.

The Company’s ability to fund operating expenses and capital expenditures for the next twelve months and thereafter will depend on its future operating performance which will be affected by general economic conditions, financial, regulatory, FDA, and other factors including factors beyond the Company’s control.

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Net cash flow is affected by the following items:

(i) operating activities, including the cash impacts from the statements of operations and comprehensive loss, the level of accounts receivable, accounts payable, accrued liabilities and unearned revenue and deposits;

(i) operating activities, including the cash impacts from the statements of operations and net loss, the level of accounts receivable, accounts payable, accrued liabilities and unearned revenue and deposits;

(ii) investing activities, including the purchase of property and equipment;

and (iii) financing activities, including debt financing and the issuance of capital shares.

The Company has an asset backed line of credit with J.P.

Morgan for $10,000 with an option in certain circumstances to increase the line of credit to $20,000.

The current maturity date is March 23, 2023.

The line of credit agreement requires compliance by the Company with certain debt covenants.

As of March 31, 2022 and December 31, 2021, the Company was not in compliance with certain debt covenants since March 9, 2022 and through May 16, 2022, the line of credit has been on hold.

As of March 31, 2022 and May 16, 2022, there are no amounts drawn on the line of credit.

The Company filed the final short-form base shelf prospectus on May 5, 2021 with Canadian regulators, with a term of 25-months, which allows the Company to qualify the distribution by way of prospectus in Canada of up to C$350,000 of common shares, preferred shares, warrants, subscription receipts, units, or any combination thereof.

The Company filed the final short-form base shelf prospectus on May 5, 2021 with Canadian regulators, with a term of 25-months, which allowed the Company to qualify the distribution by way of prospectus in Canada of up to C$350,000 of common shares, preferred shares, warrants, subscription receipts, units, or any combination thereof.

The final short form base prospectus expires on June 6, 2023.

The Company filed a prospectus supplement to distribute up to C$60,000 of common shares of the Company (the "Offered Shares") under the at-the-market equity program ("ATM Program").

The Offered Shares may be issued by the Company to the public from time to time, through the agents, at the Company's discretion.

The Offered Shares sold under the ATM Program, if any, will be sold at the prevailing market price at the time of sale under the ATM Program.

As of January 4, 2022, the ATM Program ceased to be available to the Company.

The Company could reestablish this ATM once it becomes eligible for short-form registration on Form S-3, which could be as early as January 2023.

The Company expects to meet our long-term liquidity requirements through various sources of capital, including cash provided by operations.

The Company regularly consider fundraising opportunities and may decide, from time to time, to raise capital through borrowings or issuances of additional equity and/or debt securities.

The Company's ability to incur additional debt is dependent upon a number of factors, including the state of the credit markets, our degree of leverage, the value of our unencumbered assets and borrowing restrictions imposed by lenders, including restrictions on the industry.

The Company's ability to raise funds through the issuance of additional equity and/or debt securities is also dependent on a number of factors including the current state of the capital markets, investor sentiment and intended use of proceeds.

The Company's ability to raise funds through the issuance of equity securities depends on, among other things, general market conditions for companies in the cannabis industry and market perceptions about us.

Cash from Operating Activities

Net cash used in operating activities for the three months ended March 31, 2022 and March 31, 2021 were as follows:

(in thousands) Three Months Ended March 31,

Net cash used in operating activities for the six months ended June 30, 2022 and June 30, 2021 were as follows:

(in thousands) Six Months Ended June 30,

Net cash used in operating activities $ (4,284) $ (16,167)

For the three months ended March 31, 2022, the decrease in cash used in op erations is primarily due to an improvement in the net operating loss compared to the same period in the prior year as well as favorable working capital, including lower accounts payable, inventory and prepaid expenses.

Additionally, there was a decrease in cash outflows related to cultivation payments for the three months ended March 31, 2022.

For the six months ended June 30, 2022, the decrease in cash used in op erations is primarily due to an improvement in the net operating loss compared to the same period in the prior year as well as favorable working capital,

including lower accounts receivables, prepaid expenses, cultivation payments, and the collection of $3,186 from income tax refunds.

Cash from Investing Activities

Net cash used in investing activities for the three months ended March 31, 2022 and March 31, 2021 were as follows:

(in thousands) Three Months Ended March 31,

Net cash used in investing activities for the six months ended June 30, 2022 and June 30, 2021 were as follows:

(in thousands) Six Months Ended June 30,

Net cash used in investing activities $ (333) $ (10,389)

For the three months ended March 31, 2022, the decrease in cash used in investing activities was driven by lower capital expenditures as the build-out of the LOFT was substantially completed in 2020.

For the three months ended March 31, 2021 the outflow mainly related to the SBH Purchase Option that was executed for total consideration of $8,000.

For the six months ended June 30, 2022, the decrease in cash used in investing activities was driven by lower capital expenditures.

For the six months ended June 30, 2021 the outflow mainly related to the SBH Purchase Option executed for total consideration of $8,000.

Cash from Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2022 and March 31, 2021 were as follows:

(in thousands) Three Months Ended March 31,

Net cash provided by financing activities for the six months ended June 30, 2022 and June 30, 2021 were as follows:

(in thousands) Six Months Ended June 30,

Net cash used in financing activities $ (60) $ 849

For the three months ended March 31, 2022, the change was primarily due to the vesting of restricted stock units.

For the three months ended March 31, 2021, the change was primarily due payment of offering costs related to the ATM Program.

For the six months ended June 30, 2022, the change was primarily due to cash payment of taxes on the vesting of shares which are paid for by netting shares when the restricted stock units vest.

For the six months ended June 30, 2021, the change was primarily due to payment of offering costs related to the ATM Program.

The Company had an asset backed line of credit with J.P.

Morgan for $10,000 with an option in certain circumstances to increase the line of credit.

On July 27, 2022, the Company voluntarily terminated the ABL.

Off-Balance Sheet Arrangements

As of March 31, 2022 and December 31, 2021, we do not have any off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on our results of operations or financial condition, including, and without limitation, such considerations as liquidity and capital resources.

As of June 30, 2022 and December 31, 2021, we do not have any off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on our results of operations or financial condition, including, and without limitation, such considerations as liquidity and capital resources.

Related party transactions

1 unchanged sentence

$ 1,037 $ 1,037

Total due from related party (current portion notes

Total due from related party

$ 1,037 $ 1,037

9 unchanged sentences

On March 22, 2022, the Company and the founders amended the agreement to increase the equity instruments securing the promissory note and to extend the maturity date to November 13, 2023.

As a result of this amendment and the liquid and quantifiable value of the shares pledged, the Company does not believe there is an estimated credit loss on the note receivable as of March 31, 2022.

As a result of this amendment and the liquid and quantifiable value of the shares pledged, the Company does not believe there is an estimated credit loss on the note receivable as of June 30, 2022.

The Company will continue to evaluate the note receivable for changes to credit loss estimates through the extended maturity date.

Prepaid Expenses

On April 16, 2021, pursuant to the amendment to the Name and Likeness Agreement between the Company and Leeland & Sig LLC d/b/a Stanley Brothers Brothers Brand Company was extended for a period of one year, expiring July 31, 2022.

On April 16, 2021, pursuant to the amendment to the Name and Likeness Agreement between the Company and Leeland & Sig LLC d/b/a Stanley Brothers Brand Company was extended for a period of one year, originally expiring July 31, 2022 and subsequently extended through August 31, 2022.

In addition, the Company executed a consulting agreement which extended the service arrangements of the seven Stanley brothers for a period of one year, expiring July 31, 2022.

Upon execution of the consulting agreement, the Company paid $2,081 to Leeland & Sig LLC d/b/a Stanley Brothers Brand Company, on behalf of the seven Stanley brothers, as consideration for the consulting services to be provided to the Company over the term of the agreement and certain restrictive covenants.

For the three months ended March 31, 2022 and March 31, 2021, the Company recognized $420 and $0, respectively, of selling, general, and administrative expenses in the condensed consolidated statements of operations and comprehensive loss related to this agreement.

The remaining $604 and $1,025 is presented in prepaid expenses on the condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021, respectively.

The Company is currently in discussions with Leeland & Sig LLC for a long-term extension of the Name and Likeness Agreement.

For the three and six months ended June 30, 2022 and June 30, 2021, the Company recognized $454 and $167 and $875 and $167, respectively, of selling, general, and administrative expenses in the condensed consolidated statements of operations and net loss related to this agreement.

The remaining $150 and $1,025 is presented in prepaid expenses on the condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021, respectively.

Financial Instruments

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Certain founders of the Company, who are or were also employees, are the majority shareholders of Stanley Brothers USA.

The SBH Purchase Option is classified as a financial asset and is remeasured at fair value at each reporting date, with changes to fair value recognized in the statements of operations and comprehensive loss for the period.

The use of assumptions for the fair value determination includes a high degree of subjectivity and judgment using unobservable inputs (level 3 on the fair value hierarchy), which results in estimation uncertainty.

1 unchanged sentence

Changes in fair value measurements, if significant, may affect performance of cash flows.

For the three months ended March 31, 2022 and March 31, 2021, a $100 gain and $0, respectively, related to the SBH Purchase Option was recognized as a change in fair value of financial instruments and other in the statements of operations and comprehensive loss.

As of March 31, 2022 and December 31, 2021, the SBH Purchase Option represents a financial asset of $13,100 and $13,000, respectively, in the condensed consolidated balance sheets.

For the three and six months ended June 30, 2022 and June 30, 2021, a $0 and $830 loss and $100 gain and $830 loss, respectively, related to the SBH Purchase Option was recognized as a change in fair value of financial instruments and other in the statements of operations and net loss.

As of June 30, 2022 and December 31, 2021, the SBH Purchase Option represents a financial asset of $13,100 and $13,000, respectively, in the condensed consolidated balance sheets.

The Monte Carlo valuation model considers multiple revenue and EBITDA outcomes for Stanley Brothers USA and other probabilities in assigning a fair value.

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The former Chief Executive Officer of Abacus, and a former officer of the Company, also serves on Aidance’s Board of Directors.

For the three months ended March 31, 2022 and March 31, 2021, the Company made purchases of $673 and $1,537, respectively, from Aidance.

For the three and six months ended June 30, 2022 and June 30, 2021, the Company made purchases of $1,016 and $649 and $1,688 and $2,186, respectively, from Aidance.

Payment terms on purchases are due 30 days after receipt.

As of March 31, 2022 and December 31, 2021, the Company has an liabilities due to Aidance presented in accounts payable in the condensed consolidated balance sheets of $294 and $119 as of March 31, 2022 and December 31, 2021, respectively.

As of June 30, 2022 and December 31, 2021, the Company has liabilities due to Aidance presented in accounts payable in the condensed consolidated balance sheets of $0 and $119 as of June 30, 2022 and December 31, 2021, respectively.

Recently Adopted Accounting Principles

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Under ASC 825-10, a business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.

The SBH Purchase Option is classified as a financial asset in the condensed consolidated balance sheets and is remeasured at fair value at each reporting date, with changes to fair value recognized in the statements of operations and comprehensive loss for the period.

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Raw materials costs as well as production costs are included in the carrying value of the Company’s finished goods inventory.

Our inventory production process for our cannabinoid products includes the cultivation of botanical raw material.

Because of the duration of the cultivation process, a portion of our inventory will not be sold within one year.

Consistent with the practice in other industries that cultivate botanical raw materials, all inventory is classified as a current asset.

Impairment of Long-Lived Assets

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If the asset or asset group is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset or asset group.

If the useful life is shorter than originally estimated, the Company amortizes the remaining carrying value over the new shorter useful life.

If the useful life is shorter than originally estimated, the Company

amortizes the remaining carrying value over the new shorter useful life.

Impairment losses are recorded in selling, general, and administrative expense in the condensed consolidated statements of operations and comprehensive loss.

There were no impairment losses recognized for the three months ended March 31, 2022 and 2021.

There were no impairment losses recognized for the three and six months ended June 30, 2022 and 2021.

The Company utilizes the asset and liability method of accounting for income taxes.

Under this method, deferred income tax assets or liabilities are computed based on the temporary difference between the financial statement and

income tax basis of assets and liabilities using the enacted marginal income tax rate in effect for the year in which the differences are expected to reverse.

Under this method, deferred income tax assets or liabilities are computed based on the temporary difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal income tax rate in effect for the year in which the differences are expected to reverse.

Deferred income tax expense or benefit is based on the changes in the deferred income tax assets or liabilities from period to period.

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The earliest income tax year that may be subject to examination is 2018.

The Company has recorded an uncertain tax position as of March 31, 2022 and December 31, 2021.

The Company has recorded an uncertain tax position as of June 30, 2022 and December 31, 2021.

The Company’s policy is to recognize interest and penalties on taxes, if any, within operations as income tax expense.

Revenue Recognition

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customer (“ASC 606”).

The Company elected to early adopt ASC 606 as of January 1, 2018, as permitted by the standard.

The Company performs the following five steps:

(i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

The Company applies the five-step model to arrangements that meet the definition of a contract under the standard, including when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.

At contract inception, once the contract is determined to be within the scope of revenue accounting, the Company evaluates the goods or services promised within each contract related performance obligation and assesses whether each promised good or service is distinct.

The Company recognizes as revenue, the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

The Company recognizes revenue from customers when control of the goods or services are transferred to the customer, generally when products are shipped, at an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services.

Freight revenue is included in revenue on the consolidated statements of operations and comprehensive loss, and is generally exempt from state sales taxes.

Sales tax collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenue in the consolidated statements of operations and comprehensive loss.

Contracts are written to include standard discounts and allowances.

Contracts are not written to include advertising allowances,

tiered discounts or any other performance obligation.

Since the Company’s contracts involve the delivery of various tangible products, the arrangements are considered to contain only a single performance obligation, as such there is no allocation of the transaction price.

The Company also offers e-commerce discounts and promotions through its online rewards program.

The Charlotte’s Web Loyalty Program offers customers rewards points for every dollar spent through the Company website to earn store credit for future purchases.

The Company defers recognition of revenue for unredeemed awards until the following occurs:

(1) rewards are redeemed by the consumer, (2) points or certificates expire, or (3) an estimate of the expected unused portion of points or certificates is applied, which is based on historical redemption patterns.

Any product that doesn’t meet the customer’s expectations can be returned within the first 30 days of delivery in exchange for another product or for a full refund.

Any product sold through a distributor or retailer must be returned to the original purchase location for any return or exchange.

The Company accounts for customer returns utilizing the “expected value method.” Expected amounts are excluded from revenue and recorded as a “refund liability” that represents the Company’s obligation to return the customer’s consideration.

Estimates are based on actual historical and current specific data.

Quantitative and Qualitative Disclosures About Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis