Charlotte's Web Holdings, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Note Regarding Forward Looking Statements This Quarterly Report on Form 10-Q ("Form 10-Q") contains statements that are, or may be considered to be, “forward-looking statements.” Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on current beliefs, expectations or assumptions regarding the future of the business, future plans and strategies, operational results and other future conditions. All statements other than statements of historical fact included in this Form 10-Q regarding the prospects of Charlotte’s Web Holdings, Inc., (“Charlotte’s Web”, the “Company” or “we”), the industry or its prospects, plans, financial position or business strategy may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking words such as “plans,” “expects” or “does not expect,” “is expected,” “look forward to,” “budget,” “scheduled,” “estimates,” “forecasts,” “will continue,” “intends,” “the intent of,” “have the potential,” “anticipates,” “does not anticipate,” “believes,” “should,” “should not,” or variations of such words and phrases that indicate that certain actions, events or results “may,” “could,” “would,” “might,” or “will,” “be taken,” “occur,” or “be achieved,” or the negative of these terms or variations of them or similar terms. Furthermore, forward-looking statements may be included in various filings that the Company makes with the SEC or press releases or oral statements made by or with the approval of one of the Company’s authorized executive officers. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, it cannot assure you that these expectations will prove to be correct. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. (All capitalized and undefined terms used in this section shall have the same meanings hereafter defined in this Quarterly Report on Form 10-Q.) The following discussion and analysis of financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by, the unaudited condensed consolidated financial statements and the accompanying notes in this Form 10-Q and the sections entitled “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021. 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. 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. and its subsidiaries: Charlotte’s Web, Inc. and Abacus Products, Inc., and its wholly-owned subsidiaries; Abacus Health Products, Inc., Abacus Wellness, Inc. and CBD Pharmaceuticals Ltd. The results herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Amounts are presented in thousands of United States dollars, unless otherwise indicated. BUSINESS OVERVIEW Charlotte’s Web Holdings, Inc., a Certified B Corp headquartered in Denver, Colorado, is a market leader in innovative hemp extract wellness products under a family of brands which includes Charlotte’s Web™, CBD Medic™, CBD Clinic™, and Harmony Hemp™. 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 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 18 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 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. The Company believes the presence of these various compounds work synergistically to heighten the effects of the products, making them superior to single-compound isolates. 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 a broad variety of compounds derived from Hemp. Where such research evidences that a greater than 0.3% THC level may have a potential therapeutic use, the Company may consider pursuing development of that use in jurisdictions where it is legal to do so in accordance with applicable regulations and if consistent with the Company’s founding principles. 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 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. Outside the US, the companies are able to explore opportunities where Cannabis is federally permissible. 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 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 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. The Company continues to invest in R&D efforts to identify new product opportunities. 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 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 19 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 June 30, For the Six Months Ended June 30, 2022 2021 2022 2021 Total revenues $ 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 income (expense), net 68 105 (17) 210 Change in fair value of financial instruments and other — 3,319 100 623 Income tax (expense) benefit — 4 — (30) Net loss $ (7,870) $ (5,923) $ (16,496) $ (18,697) Total assets $ 153,014 $ 285,966 Total liabilities $ 37,102 $ 46,700 For The Three Months Ended June 2022 and 2021 Revenue 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 June 30, % (Decrease) 2022 2021 Total revenue $ 18,877 $ 24,152 (21.8) % Direct-to-consumer ("DTC") revenue 13,277 15,683 (15.3) % Business-to-business ("B2B") revenue 5,600 8,469 (33.9) % 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. 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 20 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: Three Months Ended June 30, % (Decrease) 2022 2021 Cost of goods sold $ 9,556 $ 8,325 14.8 % Inventory expensed to cost of goods sold 6,100 6,904 (11.6) % Inventory provision, net 1,857 (156) (1290.4) % Other production costs 753 674 11.7 % Depreciation and amortization 846 903 (6.3) % 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 overall decrease in depreciation and amortization is attributable to the Company's write off of intangible assets in December 2021. Gross Profit 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 June 30, 2022 and June 30, 2021 is as follows: Three Months Ended June 30, % (Decrease) 2022 2021 Gross profit $ 9,321 $ 15,827 (41.1) % Percentage of revenue 49.4 % 65.5 % (16.1) % 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 Total Selling, general, and administrative expenses are as follows: 21 Three Months Ended June 30, % (Decrease) 2022 2021 Selling, general, and administrative expenses $ 17,259 $ 25,178 (31.5) % 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 Total change in fair value of financial instruments and other is as follows: Three Months Ended June 30, % (Decrease) 2022 2021 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 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 Revenue 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) 2022 2021 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) % 22 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) 2022 2021 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 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 six months ended June 30, 2022 and June 30, 2021 is as follows: 23 Six Months Ended June 30, % (Decrease) 2022 2021 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) 2022 2021 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. 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 Total change in fair value of financial instruments and other is as follows: Six Months Ended June 30, % (Decrease) 2022 2021 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. 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. 24 Liquidity and Capital Resources 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. From time-to-time, management reviews acquisition opportunities and if suitable opportunities arise, may make selected acquisitions to implement the Company’s business strategy. Management continually assesses liquidity in terms of the ability to generate sufficient cash flow to fund the business. Net cash flow is affected by the following items: (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 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"). 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 Flows Cash from Operating Activities 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, 2022 2021 Net cash used in operating activities $ (4,284) $ (16,167) 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, 25 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 six months ended June 30, 2022 and June 30, 2021 were as follows: (in thousands) Six Months Ended June 30, 2022 2021 Net cash used in investing activities $ (333) $ (10,389) 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 six months ended June 30, 2022 and June 30, 2021 were as follows: (in thousands) Six Months Ended June 30, 2022 2021 Net cash used in financing activities $ (60) $ 849 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 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 June 30, December 31, 2022 2021 Secured promissory notes dated November 13, 2020 (1) $ 1,037 $ 1,037 Total due from related party $ 1,037 $ 1,037 (1) Effective November 2020, the Company entered into a note receivable with certain founders of the Company 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 annum, and required the unpaid principal and unpaid interest balances to be paid on or before the maturity date of November 13, 2021. Interest income is recognized based upon the contractual interest rate and unpaid principal balance of the promissory note. As of December 31, 202 1, the founders owed the Company $1,037 consisting of principal and interest. 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 26 will accrue through the payment date. The founders' equity instruments securing the promissory note remained in place and interest will continue to accrue on the note. 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 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 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. 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 On March 2, 2021, the Company entered into the SBH Purchase Option with Stanley Brothers USA. The SBH Purchase Option was purchased for total consideration of $8,000. 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 net 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. Changes in assumptions that reasonably could have been different at the reporting date may result in a higher or lower determination of fair value. Changes in fair value measurements, if significant, may affect performance of cash flows. 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. Primary assumptions utilized include financial projections of Stanley Brothers USA and the probability and timing of exercise. Additional assumptions used in the model include expected volatility, expected term (years), risk-free interest rate, and weighted average cost of capital. Accounts payable Aidance is the manufacturer of nearly all Abacus products. 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 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 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. 27 Recently Adopted Accounting Principles Refer to footnote 2 of the audited consolidated financial statements filed in the Company Form 10K on March 24, 2022 for more information on the recently adopted accounting principles. Critical Accounting Estimates Listed below are the accounting policies we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability, revenue or expense being reported. Please also refer to note 2 of our notes to condensed consolidated financial statements for a discussion on recently adopted and issued accounting pronouncements. Fair Value Option The Company has elected the fair value option in accordance with ASC 825-10 guidance to record its SBH Purchase Option. 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 net 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. Changes in assumptions that reasonably could have been different at the reporting date may result in a higher or lower determination of fair value. The Monte Carlo valuation model considers multiple revenue and 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 asserted by the Company. Inventories Inventories are stated at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less any applicable selling expenses. Cost includes all expenses for direct raw materials inputs, as well as costs directly attributable to the manufacturing process as well as suitable portions of related production overheads, based on normal operating capacity. Cost is determined by use of the weighted average method. To determine if a provision for inventories is required, 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, including forecasted demand compared to quantities on hand, as well as other factors such as potential excess or aged inventories based on product shelf life, and other factors that affect inventory obsolescence. The Company’s inventories of harvested Hemp are recorded at cost to grow and harvest. 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 The Company reviews intangible assets with indefinite useful lives for impairment at least annually and reviews all intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. Long-lived assets, such as property and equipment and intangible assets subject to depreciation and amortization, as well as indefinite lived intangibles and goodwill are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the useful life is shorter than the Company had originally estimated. Recoverability of these assets is measured by comparison of the carrying amount of each asset or asset group to the future undiscounted cash flows the asset or asset group is expected to generate over their remaining lives. 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 28 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 and six months ended June 30, 2022 and 2021. Income Taxes 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. Deferred income tax expense or benefit is based on the changes in the deferred income tax assets or liabilities from period to period. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. Significant judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against net deferred tax assets. The Company assesses the likelihood that deferred tax assets will be recovered as deductions from future taxable income. The evaluation of the need for a valuation allowance is performed on a jurisdiction-by-jurisdiction basis and includes a review of all available positive and negative evidence. Factors reviewed include projections of pre-tax book income for the foreseeable future, determination of cumulative pre-tax book income or loss, earnings history, and reliability of forecasting. It is the Company's policy to offset indefinite lived deferred tax assets with indefinite lived deferred tax liabilities. The Company provided a full valuation allowance on deferred tax assets because it is more likely than not that deferred tax assets will not be realized. The Company accounts for uncertainties in income taxes under ASC Topic 740, which prescribes a recognition threshold and measurement methodology to recognize and measure an income tax position taken, or expected to be taken, in a tax return. With respect to any tax positions that do not meet the recognition threshold, a corresponding liability, including interest and penalties, is recorded in the condensed consolidated financial statements. The Company may be subject to examination by tax authorities where the Company conducts operations. The earliest income tax year that may be subject to examination is 2018. 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, 29 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk The information under this item is not required to be provided by smaller reporting companies.