Charlotte's Web Holdings, Inc. 10-Q

Item 1. Financial Statements 1 CHARLOTTE’S WEB HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) June 30, December 31, 2022 (unaudited) 2021 ASSETS Current assets: Cash and cash equivalents $ 14,817 $ 19,494 Accounts receivable, net 2,455 4,882 Notes receivable - current 495 495 Inventories, net 52,631 52,077 Prepaid expenses and other current assets 4,390 8,095 Income taxes receivable 7,579 10,764 Total current assets 82,367 95,807 Property and equipment, net 32,917 36,085 Operating lease right-of-use assets, net 19,358 20,679 Intangible assets, net 2,337 2,843 Stanley Brothers USA Holdings purchase option 13,100 13,000 Notes receivable - noncurrent 1,037 1,037 Other long-term assets 1,898 2,062 Total assets $ 153,014 $ 171,513 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 5,122 $ 5,049 Accrued and other current liabilities 7,304 9,570 Cultivation liabilities – current 2,957 3,448 Lease obligations – current 2,408 2,103 Total current liabilities 17,791 20,170 Cultivation liabilities – noncurrent — 385 Lease obligations – noncurrent 19,299 20,500 Other long-term liabilities 12 12 Total liabilities 37,102 41,067 Commitments and contingencies (note 6) Shareholders’ equity: Common shares, nil par value; unlimited shares authorized as of June 30, 2022 and December 31, 2021, respectively; 145,278,165 and 144,659,964 shares issued and outstanding as of June 30, 2022 and December 31, 2021 1 1 Proportionate voting shares, nil par value; nil shares authorized as of June 30, 2022 and December 31, 2021, respectively; nil shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively — — Additional paid-in capital 321,021 319,059 Accumulated deficit ( 205,110 ) ( 188,614 ) Total shareholders’ equity 115,912 130,446 Total liabilities and shareholders’ equity $ 153,014 $ 171,513 See Notes to Unaudited Condensed Consolidated Financial Statements 2 CHARLOTTE’S WEB HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) Three Months Ended June 30, (unaudited) Six Months Ended June 30, (unaudited) 2022 2021 2022 2021 Revenue $ 18,877 $ 24,152 $ 38,234 $ 47,559 Cost of goods sold 9,556 8,325 17,199 18,095 Gross profit 9,321 15,827 21,035 29,464 Selling, general and administrative expenses 17,259 25,178 37,614 48,964 Operating loss ( 7,938 ) ( 9,351 ) ( 16,579 ) ( 19,500 ) Other (expense) income, net 68 105 ( 17 ) 210 Change in fair value of financial instruments and other — 3,319 100 623 Loss before provision for income taxes ( 7,870 ) ( 5,927 ) ( 16,496 ) ( 18,667 ) Income tax (expense) benefit — 4 — ( 30 ) Net loss $ ( 7,870 ) $ ( 5,923 ) $ ( 16,496 ) $ ( 18,697 ) Net loss per common share, basic and diluted $ ( 0.05 ) $ ( 0.04 ) $ ( 0.11 ) $ ( 0.13 ) Weighted-average shares used in computing net loss per share, basic and diluted 145,168,510 139,936,443 145,079,859 139,817,622 See Notes to Unaudited Condensed Consolidated Financial Statements 3 CHARLOTTE’S WEB HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (in thousands, except share amounts) (unaudited) Proportionate Voting Shares Common Shares Additional Paid-in Capital Accumulated Deficit Total Shareholders’ Equity Shares Shares Amount Balance—December 31, 2021 — 144,659,964 $ 1 $ 319,059 $ ( 188,614 ) $ 130,446 Common shares issued upon vesting of restricted share units, net of withholding — 77,193 — ( 45 ) — ( 45 ) Harmony Hemp contingent equity compensation — 169,045 — 165 — 165 ATM program issuance costs — 239,500 — ( 2 ) — ( 2 ) Share-based compensation — — — 1,214 — 1,214 Net loss — — — — ( 8,626 ) ( 8,626 ) Balance— March 31, 2022 — 145,145,702 $ 1 $ 320,391 $ ( 197,240 ) $ 123,152 Common shares issued upon vesting of restricted share units, net of withholding — 132,463 — ( 13 ) — ( 13 ) Share-based compensation — — — 643 — 643 Net loss — — — — ( 7,870 ) ( 7,870 ) Balance—June 30, 2022 — 145,278,165 $ 1 $ 321,021 $ ( 205,110 ) $ 115,912 See Notes to Unaudited Condensed Consolidated Financial Statements 4 CHARLOTTE’S WEB HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (in thousands, except share amounts) (unaudited) Proportionate Voting Shares Common Shares Additional Paid-in Capital Accumulated Deficit Total Shareholders’ Equity Shares Shares Amount Balance—December 31, 2020 81,177 107,060,237 $ 1 $ 305,133 $ ( 50,892 ) $ 254,242 Exercise of stock options — 8,261 — 30 — 30 Conversion to common shares ( 3,961 ) 1,584,410 — — — — Common shares issued upon vesting of restricted share units, net of withholding — 61,548 — ( 112 ) — ( 112 ) Exercise of common stock warrants — 98,788 — 441 — 441 Share-based compensation — — — 832 — 832 Harmony Hemp contingent equity compensation — 169,046 — 360 — 360 Net loss — — — — ( 12,774 ) ( 12,774 ) Balance—March 31, 2021 77,216 108,982,290 $ 1 $ 306,684 $ ( 63,666 ) $ 243,019 Conversion to common shares ( 1,327 ) 530,900 — — — — Withholding of common stock upon vesting of restricted share awards — 16,559 — ( 26 ) — ( 26 ) Harmony Hemp contingent equity compensation — — — 363 — 363 ATM Offering, net of share issuance costs — 278,200 — 839 — 839 Share-based compensation — — — 994 — 994 Net loss — — — — ( 5,923 ) ( 5,923 ) Balance—June 30, 2021 75,889 109,807,949 $ 1 $ 308,854 $ ( 69,589 ) $ 239,266 See Notes to Unaudited Condensed Consolidated Financial Statements 5 CHARLOTTE’S WEB HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Six Months Ended June 30, (unaudited) 2022 2021 Cash flows from operating activities: Net loss $ ( 16,496 ) $ ( 18,697 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 3,940 5,466 Change in fair value of financial instruments ( 100 ) ( 613 ) Allowance for credit losses ( 2 ) 515 Inventory provision 1,857 178 Share-based compensation 2,022 2,549 Loss on disposal of assets 150 93 Cultivation settlement reduction ( 582 ) — Changes in right-of-use assets 1,236 1,309 Changes in operating assets and liabilities: Accounts receivable, net 2,430 601 Inventories, net ( 2,411 ) ( 315 ) Prepaid expenses and other current assets 3,706 589 Operating lease obligations ( 896 ) ( 1,288 ) Accounts payable, accrued and other liabilities ( 2,194 ) ( 1,825 ) Income taxes receivable 3,185 540 Cultivation liabilities ( 323 ) ( 5,243 ) Other operating assets and liabilities, net 194 ( 26 ) Net cash used in operating activities ( 4,284 ) ( 16,167 ) Cash flows from investing activities: Purchases of property and equipment and intangible assets ( 333 ) ( 3,268 ) Proceeds from sale of assets — 9 Issuance of notes receivable, net of collections — 363 Investment in Stanley Brothers USA Holdings purchase option — ( 8,000 ) Other investing activities — 507 Net cash used in investing activities ( 333 ) ( 10,389 ) Cash flows from financing activities: Proceeds from sale of public offering, net of issuance costs — 978 Proceeds from stock option exercises — 30 Other financing activities ( 60 ) ( 159 ) Net cash (used) provided in financing activities ( 60 ) 849 Net decrease in cash and cash equivalents ( 4,677 ) ( 25,707 ) Cash and cash equivalents —beginning of period 19,494 52,803 Cash and cash equivalents —end of period $ 14,817 $ 27,096 Non-cash activities: Non-cash purchases of property and equipment $ — $ ( 2,364 ) See Notes to Unaudited Condensed Consolidated Financial Statements 6 CHARLOTTE’S WEB HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( In thousands, except share, per share, per unit, and number of years) (unaudited) 1. DESCRIPTION OF BUSINESS AND PRESENTATION OF FINANCIAL STATEMENTS Description of the Business Charlotte’s Web Holdings, Inc. together with its subsidiaries (collectively "Charlotte's Web" or the “Company”) is a public company incorporated pursuant to the laws of the Province of British Columbia. The Company’s common shares are publicly listed on the Toronto Stock Exchange (“TSX”) under the symbol “CWEB” and quoted on the OTCQX under the symbol "CWBHF." The Company’s head office is located in Denver, Colorado in the United States of America. The Company’s primary products are made from proprietary strains of whole-plant hemp extracts containing a full spectrum of phytocannabinoids, terpenes, flavonoids and other hemp compounds. Hemp extracts are produced from the plant Cannabis sativa L. (“Cannabis”), and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol ("THC") concentration of not more than 0.3% on a dry weight basis ("Hemp"). The Company is engaged in research involving the effectiveness of a broad variety of compounds derived from Hemp. The Company’s current product categories include human ingestible products: tinctures (liquid product), capsules, gummies, and sprays, topicals, and pet products. The Company’s products are distributed through its e-commerce website, third-party e-commerce websites, select distributors, health practitioners, and a variety of brick-and-mortar specialty retailers. The Company does not currently produce or sell medicinal or recreational marijuana or products derived from high-delta-9 ("THC") cannabis plants. On March 2, 2021, Charlotte’s Web executed an Option Purchase Agreement (the "SBH Purchase Option") pursuant to which the Company has the option to acquire Stanley Brothers USA Holdings, Inc. (“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. Internationally, the companies are able to explore opportunities where Cannabis is federally permissible. The Company does not currently have any plans to expand into high-THC products in the near future. 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, Oregon and Canada. 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 current good manufacturing practice ("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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND USE OF ESTIMATES Basis of Presentation The accompanying unaudited interim condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Any reference in these notes to applicable guidance is 7 CHARLOTTE’S WEB HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( In thousands, except share, per share, per unit, and number of years) (unaudited) meant to refer to GAAP as found in the Accounting Standards Codification ("ASC") and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”). In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the financial statements) considered necessary to present fairly the Company’s financial position as of June 30, 2022 and its results of operations for the three and six months ended June 30, 2022 and 2021, cash flows for the six months ended June 30, 2022 and 2021, and stockholders’ equity for the three and six months ended June 30, 2022 and 2021. Operating results for the three and six months ended June 30, 2022, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2022. The unaudited interim condensed consolidated financial statements presented herein do not contain the required disclosures under GAAP for annual consolidated financial statements. Certain amounts presented in prior periods have been reclassified to conform with the current period presentation. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and related notes as of and for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2022. Inventories Inventories are stated at the lower of cost or net realizable value. The Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on its assessment of market conditions. The Company's inventory production process for cannabinoid products includes the cultivation of botanical raw material. Because of the duration of the cultivation process, a portion of the 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. Revenue Recognition The majority of the Company’s revenue is derived from sales of branded products to consumers via the Company's direct-to-consumer e-commerce website, and distributors, retail and wholesale business-to-business customers. The following table sets forth the disaggregation of the Company’s revenue: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Direct-to-consumer $ 13,277 $ 15,683 $ 26,415 $ 31,813 Business-to-business 5,600 8,469 11,819 15,746 Total $ 18,877 $ 24,152 $ 38,234 $ 47,559 Substantially all of the Company’s revenue is earned in the United States. Recently Adopted Accounting Pronouncements Other than described below, no new accounting pronouncements adopted or issued by the FASB had or may have a material impact on the Company’s condensed consolidated financial statements. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which aims to reduce complexity in accounting standards by improving certain areas of U.S. GAAP without compromising information provided to users of financial statements. ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For all other entities, the standard is effective for fiscal years beginning after December 15, 2021, and 8 CHARLOTTE’S WEB HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( In thousands, except share, per share, per unit, and number of years) (unaudited) interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. There was an immaterial impact upon adoption on the condensed consolidated financial statements. Recently Issued Accounting Pronouncements In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This standard provides optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this standard apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The Company is currently evaluating the impact, if any, that the updated standard will have on the condensed consolidated financial statements. 3. FAIR VALUE MEASUREMENT The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis at June 30, 2022 and December 31, 2021, by level within the fair value hierarchy: June 30, 2022 Level 1 Level 2 Level 3 Total Financial assets: Stanley Brothers USA Holdings Purchase Option $ — $ — $ 13,100 $ 13,100 December 31, 2021 Level 1 Level 2 Level 3 Total Financial assets: Stanley Brothers USA Holdings Purchase Option $ — $ — $ 13,000 $ 13,000 There were no transfers between levels of the hierarchy during the three and six month periods ended June 30, 2022 and the year ended December 31, 2021. Stanley Brothers USA Holdings Purchase Option The Monte Carlo valuation model considers multiple revenue and Earnings Before Interest Taxes Depreciation and Amortization ("EBITDA") outcomes for Stanley Brothers USA and other probabilities in assigning a fair value. Primary assumptions utilized include financial projections of Stanley Brothers USA and the probability and timing of exercise. The following additional assumptions are used in the model of the SBH Purchase Option: 9 CHARLOTTE’S WEB HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( In thousands, except share, per share, per unit, and number of years) (unaudited) June 30, December 31, 2022 2021 Expected volatility 90.0 % 92.5 % Expected term (years) 3.2 3.7 Risk-free interest rate 3.0 % 1.1 % Weighted average cost of capital 40.0 % 40 % Warrant Liabilities The warrants offered during 2020 (the "2020 Share Offering Warrants") do not meet all of the criteria for equity classification as the warrants are denominated in Canadian dollars, which differs from the Company's functional currency. As a result, the 2020 Share Offering Warrants are initially measured at fair value and are revalued at each reporting period using the Black-Scholes option pricing model based on Level 2 observable inputs. The assumptions used by the Company are the quoted price of the Company’s common shares in an active market, risk-free interest rate, volatility and expected life, and assumes no dividends. Volatility is based on the actual historical market activity of the Company’s shares. The expected life is based on the remaining contractual term of the warrants and the risk-free interest rate is based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the expected life of the warrants. On June 18, 2022, the 2020 Share Offering Warrants expired, totaling 5,750,000 common shares, with a weighted average exercise price per warrant of $ 6.27 . For the three and six months ended June 30, 2022 and 2021, a $ 0 and $ 4,099 and $ 0 and $ 1,443 , respectively, gain related to the warrant liabilities was recognized as change in fair value of financial instruments and other in the condensed consolidated statements of operations and net loss, respectively. 4. INVENTORIES Inventories consist of the following: June 30, December 31, 2022 2021 Harvested hemp and seeds $ 38,042 $ 38,249 Raw materials 12,760 15,189 Finished goods 16,654 13,974 67,456 67,412 Less: inventory provision ( 14,825 ) ( 15,335 ) Total inventory $ 52,631 $ 52,077 5. DEBT Line of Credit The Company has an asset backed line of credit ("ABL") with J.P. Morgan for $ 10,000 with an option under certain circumstances to increase the line of credit. Borrowings under the ABL bear interest at a variable rate based on (A) CB Floating Rate defined as Prime Rate plus 1.0 % or (B) monthly LIBOR rate plus 2.50 %. The current maturity date is March 23, 2023. Borrowings under the ABL are secured by all of the assets of the Company and guaranteed by other subsidiaries of the Company. The line of credit agreement requires compliance by the Company with certain debt covenants. As of June 30, 2022 and December 31, 2021, the Company was not in compliance with the 10 CHARLOTTE’S WEB HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( In thousands, except share, per share, per unit, and number of years) (unaudited) debt covenants and had not drawn on the line of credit. The ABL was voluntarily terminated by the Company on July 27, 2022 . 6. COMMITMENTS AND CONTINGENCIES Legal Contingencies From time to time, the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. Although the ultimate aggregate amount of monetary liability or financial impact with respect to these matters is subject to many uncertainties and is therefore not predictable with assurance, management believes that as of June 30, 2022 there are no litigation pending that could have, individually and in the aggregate, a material adverse effect on the Company’s financial position, results of operations or cash flows. 7. LEASES The Company has lease arrangements related to office space, warehouse and production space, and land to facilitate agricultural operations. The leases have remaining lease terms of less than 8 years to 12.67 years, some of which include options to extend the leases for up to 5 years. Generally, the lease agreements do not include options to terminate the lease. Maturities of operating lease liabilities as of June 30, 2022 are as follows: Operating Leases Year Ending December 31: 2022 (6 months remaining) $ 1,433 2023 3,411 2024 3,255 2025 2,946 2026 2,222 Thereafter 15,595 Total lease obligation 28,862 Less: Imputed interest ( 7,155 ) Total lease liabilities 21,707 Less: Current lease liabilities ( 2,408 ) Total non-current lease liabilities $ 19,299 11 CHARLOTTE’S WEB HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( In thousands, except share, per share, per unit, and number of years) (unaudited) 8. CULTIVATION LIABILITIES Future payments due under cultivation contract obligations are as follows: Short-term Long-term Total December 31, 2021 $ 3,448 $ 385 $ 3,833 Costs incurred related to 2021 crop 97 — 97 Payments ( 420 ) — ( 420 ) Settlement reductions ( 582 ) — ( 582 ) Interest 29 — 29 Conversion to short-term borrowings 385 ( 385 ) — June 30, 2022 $ 2,957 $ — $ 2,957 9. SHAREHOLDERS’ EQUITY As of June 30, 2022 and December 31, 2021, the Company’s share capital consists of one class of issued and outstanding shares: common shares. The Company is also authorized to issue preferred shares issuable in series. To date, no shares of preferred shares have been issued or are outstanding. On November 3, 2021, all outstanding proportionate voting shares ("PVS") of the Company were converted by way of mandatory conversion in accordance with the Company’s articles and at the discretion of the Company, into common shares. Following this conversion, and as of the close of business on November 3, 2021, 142,335,464 common shares were issued and outstanding, nil PVS were issued and outstanding and nil preferred shares were issued and outstanding. Pursuant to the Company’s Articles, the Company is no longer authorized to issue additional PVS. As of June 30, 2022 and December 31, 2021, the Company had no PVS issued and outstanding. Common Shares As of June 30, 2022 and December 31, 2021, the Company was authorized to issue an unlimited number of common shares, which have no par value. Share Offering Warrants – Liability Classified The following summarizes the number of warrants outstanding as of June 30, 2022: Number of Warrants Weighted-Average Exercise Price per Warrant Outstanding as of December 31, 2021 6,983,140 $ 7.86 Exercised — — Expired ( 6,983,140 ) $ 7.86 Outstanding as of June 30, 2022 — — As of June 30, 2022, there are no outstanding warrants. On May 8, 2022, warrants issued pursuant to the Abacus acquisition expired, totaling 1,233,140 , with a weighted average exercise price per warrant of $ 15.29 . In addition, on 12 CHARLOTTE’S WEB HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( In thousands, except share, per share, per unit, and number of years) (unaudited) June 18, 2022, the 2020 Share Offering Warrants expired, totaling 5,750,000 common shares, with a weighted average exercise price per warrant of $ 6.27 . 10. LOSS PER SHARE The Company computes loss per share of common shares and PVS under the two-class method required for multiple classes of common shares and participating securities. The rights, including the liquidation and dividend rights, of the two classes of shares are similar except for the 400 :1 conversion ratio between the common shares and PVS shares. Accordingly, the loss per share attributable to common shareholders will be the same for common shares and PVS, on either an individual or combined basis. Basic net loss per common share and PVS is computed by dividing the allocated net loss by the weighted-average number of common shares outstanding and weighted average number of PVS outstanding during the period. Diluted loss per common share is computed by dividing the allocated net loss by the weighted-average number of common shares together with the number of additional common shares that would have been outstanding if all potentially dilutive common shares had been issued, unless anti-dilutive. Diluted loss per PVS is computed by dividing the allocated net loss by the weighted-average number of PVS outstanding during the period. The following table sets forth the computation of basic and dilutive net loss per share attributable to common shareholders: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net loss $ ( 7,870 ) $ ( 5,923 ) $ ( 16,496 ) $ ( 18,697 ) Weighted-average number of common shares - basic 145,168,510 109,435,643 145,079,859 108,833,622 Dilutive effect of stock options and awards — — — — Weighted-average number of proportionate voting shares - basic — 76,252 — 77,460 Weighted-average number of common shares - diluted 145,168,510 109,435,643 145,079,859 108,833,622 Weighted-average number of proportionate voting shares - diluted — 76,252 — 77,460 Loss per common share – basic and diluted $ ( 0.05 ) $ ( 0.04 ) $ ( 0.11 ) $ ( 0.13 ) Loss per proportionate voting share – basic and diluted $ — $ ( 16.93 ) $ — $ ( 53.49 ) As of June 30, 2022 and 2021, potentially dilutive securities include stock options, restricted share units, broker warrants, and common share warrants. When the Company recognizes a net loss, all potentially dilutive shares are anti-dilutive and are consequently excluded from the calculation of diluted net loss per share. The potentially dilutive awards outstanding for each year are presented in the table below: 13 CHARLOTTE’S WEB HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( In thousands, except share, per share, per unit, and number of years) (unaudited) June 30, 2022 2021 Outstanding options 5,207,959 3,895,512 Outstanding restricted share units 2,508,596 974,813 Outstanding common share warrants — 9,483,140 Total 7,716,555 14,353,465 11. SHARE-BASED COMPENSATION Stock options Stock options vest over a prescribed service period and are approved by the Company's board of directors on an award-by-award basis. Options have a prescribed service period generally lasting up to four years , with certain options having a shorter vesting period or vesting immediately upon issuance. Upon the exercise of any stock options, the Company issues shares to the award holder from the pool of authorized but unissued common shares. The fair values of options granted during the period were determined using a Black-Scholes model. The following principal inputs were used in the valuation of awards issued for the six months ended June 30, 2022 and 2021: Six Months Ended June 30, 2022 2021 Expected volatility 83.4 % 84.7 % Expected term (years) 6.0 6.0 Risk-free interest rate 3.3 % 1.5 % Expected dividend yield 0 % 0 % Value of underlying share $ 0.31 $ 3.10 Detail of the number of stock options outstanding for the three months ended June 30, 2022 under the Company's 2015 legacy option plan and the Company's amended 2018 long term incentive plan (collectively, the "Plans") is as follows: Number of Options Weighted- Average Exercise Price per Option Weighted- Average Remaining Contract Term (in years) Aggregate Intrinsic Value Outstanding as of December 31, 2021 3,343,883 $ 3.16 7.54 $ 1,039,229 Granted 3,555,188 1.14 Exercised — — Forfeited (and expired) ( 1,691,112 ) 4.30 Outstanding as of June 30, 2022 5,207,959 $ 1.42 8.85 $ 928,368 Exercisable/vested as of June 30, 2022 1,829,404 $ 1.49 5.83 $ 409,939 14 CHARLOTTE’S WEB HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( In thousands, except share, per share, per unit, and number of years) (unaudited) The weighted average grant-date fair value of options granted during the six months ended June 30, 2022 was $ 1.14 . The weighted average grant-date fair value of options granted during the six months ended June 30, 2021 was $ 4.66 . The weighted average share price at the date of exercise of options exercised during the six months ended June 30, 2022 and 2021 was $ 0 and $ 4.85 , respectively. Restricted share units The Company has issued time-based restricted share units to certain employees as permitted under the 2018 Plan. The restricted share units granted vest in accordance with the board-approved agreement, typically over equal installments over up to four years . Upon vesting, one of the Company’s common shares is issued for each restricted share unit awarded. The fair value of each restricted share unit granted is equal to the market price of the Company’s shares at the date of the grant. The fair value of shares vested during the six months ended June 30, 2022 and June 30, 2021 was $ 625 and $ 628 , respectively. Details of the number of restricted share units outstanding under the 2018 Plan is as follows: Number of Shares Weighted- Average Grant Date Fair Value Outstanding as of December 31, 2021 1,816,851 $ 2.28 Granted 2,197,676 $ 0.98 Forfeited ( 1,230,658 ) $ 2.10 Vested ( 209,656 ) $ 2.98 Shares withheld upon vesting ( 65,617 ) $ 2.29 Outstanding as of June 30, 2022 2,508,596 $ 1.22 Share-based Compensation Expense Share-based compensation expense for all equity arrangements for the three and six months ended June 30, 2022 and June 30, 2021 was $ 643 and $ 1,357 and $ 2,022 and $ 2,549 , respectively, included in selling, general and administrative expense in the condensed consolidated statements of operations and comprehensive loss. As of June 30, 2022, $ 5,219 of total unrecognized share-based compensation expense related to unvested options and restricted stock units granted to employees is expected to be recognized over a weighted-average period of 2.19 years. 12. INCOME TAXES The Company’s effective tax rate in the six months ended June 30, 2022 and 2021 was 0 % and 0.16 %, respectively. The Company’s effective tax rates differ from the U.S. federal statutory rate of 21% for the six months end June 30, 2022 and 2021, respectively, primarily due to the valuation allowance. The effective tax rate for the six months of 2022 was lower than the same periods in 2021 primarily due to state income taxes. 13. RELATED PARTY TRANSACTIONS Aidance Scientific, Inc. (“Aidance”) is the manufacturer of nearly all Abacus Health products. The former Chief Executive Officer of Abacus Products, Inc. ("Abacus"), and a former officer of the Company, also serves on Aidance’s Board of Directors. For the three and six months ended June 30, 2022 and 2021, the Company made 15 CHARLOTTE’S WEB HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( In thousands, except share, per share, per unit, and number of years) (unaudited) 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 June 30, 2022, the Company had a liability of $ 182 due to Aidance presented in accounts payable in the condensed consolidated balance sheets. As of December 31, 2021, the Company had a liability of $ 119 due to Aidance presented in accounts payable in the condensed consolidated balance sheets. Effective November 2020, the Company entered into a note receivable with certain founders of the Company ("founders") to negotiate a future binding transaction in good faith. This agreement included a secured promissory note, where $ 1,000 was loaned to one of the founders. The note receivable is secured by equity instruments with certain founders of the Company, is carried at amortized cost, bears interest at 3.25 % per year, and required the unpaid principal and unpaid interest balances to be paid on or before the maturity date of November 13, 2021. The founders requested an extension of the maturity date, as allowed under the terms of the promissory note, resulting in an extension of the maturity date to November 13, 2023. According to the terms of the agreement, no additional interest will accrue through the payment date. The founders' equity instruments securing the promissory note remained in place. Interest income is recognized based upon the contractual interest rate and unpaid principal balance of the promissory note. As of June 30, 2022 and December 31, 2021, the founders owed the Company $ 1,037 consisting of principal and interest. 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, the Company does not believe there is an estimated credit loss on the note receivable as of June 30, 2022 and December 31, 2021. The Company will continue to evaluate the note receivable for changes to credit loss estimates through the extended maturity date. On March 2, 2021, the Company entered into the SBH Purchase Option with Stanley Brothers USA as discussed above (Note 3). The SBH Purchase Option was purchased for total consideration of $ 8,000 . Certain founders of the Company, who are or were employees at the time, are the majority shareholders of Stanley Brothers USA. On April 16, 2021, pursuant to an amendment to the Name and Likeness and License Agreement between the Company and Leeland & Sig LLC d/b/a Stanley Brothers Brand Company, agreement was extended for a period of one year , originally expiring July 31, 2022 and was subsequently extended to 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 and six months ended June 30, 2022, the Company recognized $ 454 and $ 875 , respectively in sales and marketing expenses in the condensed consolidated statements of operations and net loss related to this agreement. For the three and six months ended June 30, 2021, the Company recognized $ 167 selling, general and administrative expenses in the condensed consolidated statements of operations and net loss related to this agreement. The remaining $ 150 is presented in prepaid expenses in the condensed consolidated balance sheets. 14. SUBSEQUENT EVENTS During July 2022, the Company received approximately $ 7,600 from the Internal Revenue Service ("IRS") which was the remaining amount of the income taxes receivable. On July 27, 2022, the Company entered into a payoff letter with J.P. Morgan to voluntarily terminate all commitments and obligations under the ABL. In connection with the execution of the payoff letter, the Company paid J.P. Morgan approximately $ 20 in fees and expenses. There were no outstanding borrowings under the ABL at the time of termination. On July 28, 2022, pursuant to an amendment to the agreement, the name and likeness and license agreement between the Company and Leeland & Sig LLC d/b/a Stanley Brothers Brand Company was extended for a period of one month, expiring August 31, 2022. 16 CHARLOTTE’S WEB HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( In thousands, except share, per share, per unit, and number of years) (unaudited) On August 2, 2022, the Company entered into an amendment to the offer of employment, dated December 16, 2021, with Jacques Tortoroli, President and Chief Executive Officer of the Company. 17