What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-14 compared with 2022-08-09 · 183 added, 168 removed, 191 unchanged (65% of the section changed)

14 unchanged sentences

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.

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

and its subsidiaries:

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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 Holdings, Inc., a Certified B Corp headquartered in Louisville, Colorado, and does the majority of its business in the United States.

The Company 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

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.

The Company moved into its new cGMP facility 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

research and development ("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.

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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.

As of September 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").

Hemp extracts are produced from 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 THC concentration of not more than 0.3% on a dry weight basis.

The Company is engaged in research involving a broad variety of compounds derived from Hemp.

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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 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.

The Company holds the number one share position in food/drug/mass retail, natural/ vitamin specialty 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.

Additionally, high quality Hemp is sourced through contract farming operations in Kentucky, Oregon and Canada.

The Hemp grown in Canada is utilized exclusively in the Canadian market and not in products sold in the United States.

On October 12, 2022, the Company announced a partnership with Major League Baseball (MLB) along with the launch of Charlotte's Web TM SPORT – Daily Edge, the first broad-spectrum hemp-derived tincture to be Certified for Sport® by NSF, the highly respected global third-party organization that establishes standards for safety, quality, sustainability, and performance and certifies manufacturers and products against them.

Leveraging our scientific research, Current Good Manufacturing Practices (cGMP), and Certified B Corp principles, Daily Edge underwent strict independent testing to uniquely meet MLB's scientific benchmarks and no-banned substances policy.

Our products, which receive the NSF Certified for Sport® designation, have met the highest safety standards and can be promoted across MLB events and media platforms.

Effective as of November 14, 2022, we entered into a subscription agreement (the “Subscription Agreement”) with BT DE Investments, Inc.

a wholly-owned subsidiary of BAT Group (LSE:

BATS and NYSE:

BTI), providing for the issuance of an approximately $56.8 million (C$75.3 million) convertible debenture (the “Debenture”) is convertible into 19.9% ownership of the Company’s common shares at a conversion price of C$2.00 per common share of the Company on the Toronto Stock Exchange (TSX).

The Debenture will accrue interest at an annualized

rate of 5% until such time that there is a federal regulation permitting the use of CBD.

Federal regulation is defined as the date that federal laws in the United States permit, authorize or do not prohibit the use of CBD as an ingredient in food products and dietary supplements.

Following federal regulation of CBD, the annualized rate of interest shall reduce to 1.5%.

The maturity date for the Debenture shall be November 2029.

The Subscription Agreement contains customary representations and warranties and covenants.

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

The Company plans to capitalize on the rapidly emerging botanical wellness products industry by driving customer acquisition and retention, accelerating national retail expansion primarily through distributors, and growing its international market penetration.

In furtherance of the Company’s 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 safe Hemp-based health solutions.

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

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

6 unchanged sentences

11,032 24,299 48,646 73,263

Asset Impairment

1,822 — 1,822 —

Operating loss (3,909) (9,384) (20,488) (28,884)

Other income (expense), net

Other income, net

321 110 304 320

Change in fair value of financial instruments and other (4,000) 8,459 (3,900) 9,082

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

Income tax benefit — 38 — 8

$ (7,588) $ (777) $ (24,084) $ (19,474)

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Total liabilities $ 31,656 $ 44,800

For The Three Months Ended June 2022 and 2021

For The Three Months Ended September 30, 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

June 30, % (Decrease)

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

September 30, % (Decrease)

Direct-to-consumer ("DTC") revenue $ 11,759 $ 15,175 (22.5) %

Business-to-business ("B2B") revenue 5,278 8,529 (38.1) %

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.

Total revenue $ 17,037 $ 23,704 (28.1) %

Total revenue for the three months ended September 30, 2022 was $17,037, a decrease of 28.1% compared to the three months ended September 30, 2021.

DTC e-commerce revenue decreased 22.5% compared to the three months ended September 30, 2021.

The decrease was primarily attributable to lower traffic at our online store due to lower organic searches, less paid media and less effective earned and affiliate traffic generation.

Additional drivers include increased depth and frequency of competitor price promotions.

The decrease was partially offset by higher customer subscription orders through its loyalty program.

B2B revenue decreased 38.1% compared to the three months ended September 30, 2021, due to an unfavorable product mix as lower priced gummies, increased 11.6 points in share representing 38%, compared to higher priced tinctures which declined 3.3 points in share representing 11.1% in the similar prior year period.

Additionally, B2B revenue decreased as the Food Drug Mass retail and Natural channels reduced CBD products shelf space.

Higher depth and frequency of price promotions has also unfavorably impacted year over year revenues.

To a lesser extent, product returns reserve during the current period of $270 contributed to the decrease during the three months ended September 30, 2022.

This was partially offset by new retail distribution following the passing of Assembly Bill 45 in California.

This law allows for the inclusion of hemp and CBD, extracts, or derivatives of hemp in food and beverages, dietary supplements, cosmetics, and processed pet food.

Cost of Goods Sold

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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 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 co-manufacturer 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)

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

Three Months Ended September 30, % (Decrease)

Inventory expensed to cost of goods sold $ 5,407 $ 6,684 (19.1) %

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Depreciation and amortization 843 897 (6.0) %

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.

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)

Cost of goods sold $ 8,092 $ 8,789 (7.9) %

Cost of goods sold decreased by 7.9% for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, as a result of lower unit volume sold.

Lower cost gummies unit volume was down 2% compared to higher cost tinctures unit volume down 42% period over period.

The decrease is partially offset by under leveraged fixed costs.

Depreciation and amortization expense for the three months ended September 30, 2022 and September 30, 2021 was $1,822 and $2,763, respectively, of which $843 and $897, respectively, was expensed to cost of goods sold.

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

Three Months Ended September 30, % (Decrease)

Gross profit $ 8,945 $ 14,915 (40.0) %

Percentage of revenue 52.5 % 62.9 % (10.4) %

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.

Gross profit decreased 40.0% for the three months ended September 30, 2022, compared to the three months ended September 30, 2021.

The decrease is primarily related to lower revenue in both the DTC and B2B channels, as discussed above, due to a decrease in online traffic, competitor price pressure, and rising inflation in the macro economy.

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

Selling, General, and Administrative Expenses

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

Three Months Ended

June 30, % (Decrease)

Three Months Ended September 30, % (Decrease)

Selling, general, and administrative expenses $ 11,032 $ 24,299 (54.6) %

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 Selling, general, and administrative expenses for the three months ended September 30, 2022 and September 30, 2021 were $11,032 and $24,299, respectively.

The 54.6% decrease was primarily attributable to restructuring activities earlier this year lowering personnel costs;

an Employee Retention Credit ("ERC") tax benefit of $4,106, a decrease in media marketing spend, along with lower depreciation and amortization.

Depreciation and amortization expensed to Selling, general, and administrative expenses for the three months ended September 30, 2022 and September 30, 2021 were $979 and $1,866, respectively.

The overall decrease in depreciation and amortization resulted from the write off of intangible assets in December 2021.

Asset Impairment

During the quarter, the Company made the decision to cease utilizing the Denver office space and plans to sublease the office space at current market rents.

Based on an analysis of the estimated undiscounted cash flows relative to a potential sublease arrangement, the Company evaluated the recoverability of the assets associated with the subleased space, including, the right-of-use asset and concluded the asset was impaired.

The Company recorded an impairment charge of $1,822 in the consolidated statements of operations for the three and nine months ended September 30, 2022.

There were no such impairments for the three and nine months ended September 30, 2021.

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)

Three Months Ended September 30, % (Decrease)

Change in fair value of financial instruments and other $ (4,000) $ 8,459 (147.3) %

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.

Total change in fair value of financial instruments and other for the three months ended September 30, 2022 and September 30, 2021 was a loss of $4,000 and a gain of $8,459, respectively.

For the three months ended September 30, 2022, there was a loss in the fair value of the Company's SBH Purchase Option of $4,000 compared to a gain of $5,730 as of September 30, 2021.

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

Additionally, for the three months ended September 30, 2021, the change in fair value of financial instruments and other was also driven by the revaluation of the fair value of the Company's warrant liabilities resulting in a gain of $2,638.

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

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

For The Nine Months Ended September 30, 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) %

Nine Months Ended

September 30, % (Decrease)

Direct-to-consumer ("DTC") revenue $ 38,174 $ 46,988 (18.8) %

Business-to-business ("B2B") revenue 17,097 24,275 (29.6) %

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.

Total revenue 55,271 71,263 (22.4) %

Total revenue for the nine months ended September 30, 2022 was $55,271, a decrease of 22.4% compared to the nine months ended September 30, 2021.

DTC e-commerce revenue decreased 18.8% compared to the nine months ended September 30, 2021.

The decrease was primarily due to lower traffic at our online store due to lower organic search, less paid media and less effective earned and affiliate traffic generation.

Additional drivers include increased depth and frequency of competitor price promotions.

The decrease was partially offset by higher customer subscription orders through its loyalty program.

B2B revenue decreased 29.6% compared to the nine months ended September 30, 2021, due to an unfavorable product mix as lower priced gummies, increased 7.9 points in share representing 46.4%, compared to higher priced tinctures which declined 4.5 points in share representing 11.7% in the similar prior year period.

Additionally, B2B revenue decreased as the Food Drug Mass retail and Natural channels reduced CBD products shelf space.

Higher depth and frequency of price promotions has also unfavorably impacted year over year revenues.

To a lesser extent, product returns reserve during the current period of $1,145 contributed to the decrease for nine months ended September 30, 2022.

This was partially offset by new retail distribution following the passing of Assembly Bill 45 in California.

Cost of Goods Sold

3 unchanged sentences

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) %

Nine Months Ended September 30, % (Decrease)

Inventory expensed to cost of goods sold $ 17,373 $ 20,801 (16.5) %

2 unchanged sentences

Depreciation and amortization 2,543 2,587 (1.7) %

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.

Cost of goods sold $ 25,291 $ 26,884 (5.9) %

Cost of goods sold decreased 5.9% for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily due to lower unit volume sold.

Lower cost gummies unit volume decreased 2.6% compared to higher cost tinctures which decreased 41.6% year over year The decrease is partially offset by an increase in the inventory provision as well as under leveraged fixed costs.

Depreciation and amortization expense for the nine months ended September 30, 2022 and September 30, 2021 was $5,762 and $8,228, respectively, of which $2,543 and $2,587, respectively, was expensed to cost of goods sold.

The remaining depreciation and amortization expenses of $3,219 and $5,641, 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 for the nine months ended September 30, 2022 and September 30, 2021 is as follows:

Nine Months Ended September 30, % (Decrease)

Gross profit $ 29,980 $ 44,379 (32.4) %

Percentage of revenue 54.2 % 62.3 % (8.1) %

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

Gross profit decreased 32.4% for the nine months ended September 30, 2022 compared to the nine months ended September 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.

The decrease is partially offset by lower inventory expenses.

Selling, General, and Administrative Expenses

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

Six Months Ended

June 30, % (Decrease)

Nine Months Ended September 30, % (Decrease)

Selling, general, and administrative expenses $ 48,646 $ 73,263 (33.6) %

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 selling, general, and administrative expenses for the nine months ended September 30, 2022 and September 30, 2021 were $48,646 and $73,263, respectively.

The 33.6% decrease was primarily attributable to restructuring activities in the first nine months of the year lowering personnel costs, an Employee Retention Credit ("ERC") tax benefit of $4,106, a decrease in media marketing spend, along with lower depreciation and amortization.

Depreciation and amortization expensed to Selling, general, and administrative expenses for the nine months ended September 30, 2022 and September 30, 2021 were $3,219 and $5,641, respectively.

Total research and development costs expensed to Selling, general, and administrative expense for the nine months ended September 30, 2022 and September 30, 2021 were $2,835 and $4,434, respectively.

1 unchanged sentence

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

Six Months Ended

June 30, % (Decrease)

Nine Months Ended September 30, % (Decrease)

Change in fair value of financial instruments and other $ (3,900) $ 9,082 (142.9) %

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.

Total change in fair value of financial instruments and other for the nine months ended September 30, 2022 and September 30, 2021 was a loss of $3,900 and a gain of $9,082, respectively.

For the nine months ended September 30, 2022, the change in fair value of financial instruments and other was primarily driven by a loss of $3,900 in the fair value of the Company's SBH Purchase Option .

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

Similarly, for the nine months ended September 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 SBH Purchase Option resulting in a gain of $4,900, as well as, the revaluation of the Company's warrant liabilities resulting in a gain of $4,081.

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

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

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.

As of September 30, 2022 and December 31, 2021, the Company had total current liabilities of $13,147 and $20,170, respectively, and cash and cash equivalents of $16,513 and $19,494, respectively, to meet its current obligations.

For the first nine months of 2022, the Company used approximately $3,000 in net cash, in which $4,997 was used in the first quarter, as such the Company was cash flow positive in the remaining quarters in which net cash provided was $1,997.

Despite lower revenues than 2021, the Company has taken actions to reduce operating costs by approximately $30,000 annualized including eliminating positions and lowering employee costs substantially in January and July 2022, simplifying the business by rationalizing the number of products produced and sold, reducing the number of third-party co-manufacturers, and lowering spend on paid media.

The Company collected the outstanding IRS receivable of approximately $10,841, partially offset by cultivation payments of $2,600 which benefited cash flow year to date.

Effective as of November 14, 2022, we entered into a subscription agreement with BT DE Investments, Inc.

a wholly-owned subsidiary of BAT Group (LSE:

BATS and NYSE:

BTI), providing for the issuance of an approximately $56.8 million convertible debenture (the “Debenture”) is convertible into 19.9% ownership of the Company’s common shares at a conversion price of C$2.00 per common share of the Company on the Toronto Stock Exchange (TSX).

The Debenture will accrue interest at an annualized rate of 5% until such time that there is federal regulation permitting the use of CBD as an ingredient in food products and dietary supplements in the United States.

Following federal regulation of CBD, the annualized rate of interest shall reduce to 1.5%.

The maturity date for the Debenture shall be November 2029.

The Subscription Agreement contains customary representations and warranties and covenants.

The funds from this Debenture can be used for operating purposes to fund the Company, as approved by the board of directors or in accordance with the Company’s board-approved budget.

The Company expects its selling, general and administrative expenses in 2023 to be generally in line with 2022 as MLB related rights fees is expected to be materially funded for through other expense savings.

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.

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 factor s 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.

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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 regularly considers 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.

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 Hemp industry and market perceptions about us.

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,

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

Nine Months Ended September 30,

Net cash used in operating activities $ (2,599) $ (23,324)

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.

For the nine months ended September 30, 2022, the decrease in cash used in op erations is primarily due lower revenues, collection of $10,841 from income tax refunds and its related interest, partially offset by cultivation payments.

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,

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

Nine Months Ended September 30,

Net cash used in investing activities $ (57) $ (11,090)

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.

For the nine months ended September 30, 2022, the decrease in cash used in investing activities was driven by lower purchases of capital expenditures, partially offset by proceeds of sale of assets.

For the nine months ended September 30, 2021 the outflow related to the SBH Purchase Option executed for total consideration of $8,000 and the purchase of $4,088 in capital expenditures, partially offset by other investing activities.

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,

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.

Net cash used or provided by financing activities for the nine months ended September 30, 2022 and September 30, 2021 were as follows:

Nine Months Ended September 30,

Net cash (used) provided in financing activities $ (325) $ 2,680

For the nine months ended September 30, 2022, the net change was primarily due to cash payment of taxes on the vesting of shares, as well as fees paid related to the termination of the asset backed line of credit with J.P.

For the nine months ended September 30, 2021, the net cash provided by financing activities during the period ended September 30, 2021 resulted primarily from ATM Program proceeds of $3,234, offset by payments on lease obligations and notes payable.

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.

As of September 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

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.

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 nine months ended September 30, 2022 and 2021, the Company made purchases of $1,254 and $947 and $2,943 and $3,133, respectively from Aidance.

Payment terms on purchases are due 30 days after receipt.

As of September 30, 2022, the Company had a liability of $258 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 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 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 note receivable is secured by equity instruments with certain founders of the Company, is carried at amortized cost, bore 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 and interest will continue to accrue on the note.

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 September 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 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.

As a result of this amendment, the Company does not believe there is an estimated credit loss on the note receivable as of September 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.

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.

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 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.

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

On September 30, 2022, 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 to December 31, 2022.

The Name and Likeness Agreement was amended to provide the payment of a nominal per diem fee for each Stanley brother that participates in certain events.

In addition, on April 16, 2021, the Company executed a separate consulting agreement which extended the services agreements of the seven Stanley brothers for a period of one year, expiring July 31, 2022.

Upon execution of the consulting agreement in 2021, 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 nine months ended September 30, 2022, the Company recognized $150 and $1,025, respectively in sales and marketing expenses in the condensed consolidated statements of operations and net loss related to this agreement.

For the three and nine months ended September 30, 2021, the Company recognized $167 of selling, general and administrative expenses in the condensed consolidated statements of operations and net loss related to this agreement.

As September 30, 2022 there is no remaining balance.

Recently Adopted Accounting Principles

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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 and six months ended June 30, 2022 and 2021.

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

Income and Other Taxes

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

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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 June 30, 2022 and December 31, 2021.

The Company has recorded an uncertain tax position as of September 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.

The Company qualified for federal government assistance through employee retention credit (“ERC”) provisions of the Consolidated Appropriations Act of 2021.

As there is no authoritative guidance under U.S.

GAAP on accounting for government assistance to for-profit business entities, we account for grants provided by the government, including accounting for certain refundable tax credits, by analogy to International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance.

In accordance with IAS 20, management determined it has reasonable assurance for receipt of the ERC and recorded the ERC benefit of $4,106 for the period ended September 30, 2022 as an offset to payroll tax expense.

Due to the expected timing of receipt of the ERC, a corresponding receivable was recognized within other long-term assets as of September 30, 2022.

Revenue Recognition

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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.

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.

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.

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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.

Generally, 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.

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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