What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-23 compared with 2022-03-24 · 416 added, 397 removed, 740 unchanged (52% of the section changed)

5 unchanged sentences

Consolidated Balance Sheets

Consolidated Statements of Operations and Comprehensive Loss

Consolidated Statements of Operations

Consolidated Statements of Shareholders’ Equity

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We have audited the accompanying consolidated balance sheets of Charlotte’s Web Holdings, Inc.

(the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”).

(the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with U.S.

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Accounts receivable, net

Notes receivable - current

Inventories, net

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Income taxes receivable

10,764 11,440

Total current assets

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Property and equipment, net 29,330 36,085

License and media rights 26,871 —

Operating lease right-of-use assets, net 16,519 20,679

Intangible assets, net 1,771 2,843

Goodwill — 76,039

Stanley Brothers USA Holdings purchase option 13,000 —

SBH purchase option and other derivative assets 3,620 13,000

Notes receivable - noncurrent — 1,037

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Lease obligations – current

License and media rights payable - current 7,759 —

Total current liabilities

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17,905 20,500

Warrant and other long-term liabilities

Derivative and other long-term liabilities

License and media rights payable - noncurrent 20,383 —

Convertible debenture 37,421 —

Total liabilities

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152,135,026 and 144,659,964 shares issued and outstanding as of December 31, 2022 and 2021

Proportionate voting shares, nil par value;

nil shares authorized as of December 31, 2021 and unlimited shares authorized as of December 31, 2020, respectively;

nil and 81,177 outstanding as of December 31, 2021 and December 31, 2020, respectively

Additional paid-in capital

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CHARLOTTE’S WEB HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

9 unchanged sentences

Change in fair value of financial instruments and other

( 7,480 ) 9,429

Loss before provision for income taxes

$ ( 59,222 ) $ ( 137,579 )

Income tax (expense) benefit

Income tax expense

( 91 ) ( 143 )

Net loss and comprehensive loss

$ ( 59,313 ) $ ( 137,722 )

15 unchanged sentences

Conversion to common shares ( 81,177 ) 32,471,060 — — — —

Exercise of warrants — 98,788 — 441 — 441

Withholding of common shares upon vesting of restricted share units — 182,727 — ( 146 ) — ( 146 )

Share-based compensation — — — 3,149 — 3,149

Harmony Hemp contingent equity compensation — 338,091 — 1,460 — 1,460

2020 Share offering, net of warrants and issuance costs — 11,500,000 — 44,591 — 44,591

Abacus acquisition 1,975 17,551,705 — 109,562 — 109,562

Net loss and comprehensive loss — — — — ( 30,681 ) ( 30,681 )

ATM Program, net of share issuance costs — 4,500,800 — 8,118 — 8,118

Share-based compensation — — — 4,023 — 4,023

Net loss — — — — ( 137,722 ) ( 137,722 )

Balance—December 31, 2021

— 144,659,964 $ 1 $ 319,059 $ ( 188,614 ) $ 130,446

Exercise of stock options — 8,261 $ — $ 30 $ — $ 30

Conversion to common shares ( 81,177 ) 32,471,060 — — — —

Exercise of warrants — 98,788 — 441 — 441

Withholding of common shares upon vesting of restricted share units — 182,727 — ( 146 ) — ( 146 )

Common shares issued upon vesting of restricted share units, net of withholdings — 947,396 — ( 190 ) — ( 190 )

Harmony Hemp contingent equity compensation — 169,045 — 164 — 164

Common share issuance license and media agreement 6,119,121 — 3,060 — 3,060

ATM Program, net of share issuance costs — 239,500 — ( 65 ) — ( 65 )

Share-based compensation — — — 3,403 — 3,403

Net loss and comprehensive loss — — — — ( 137,722 ) ( 137,722 )

Net loss — — — — ( 59,313 ) ( 59,313 )

Balance—December 31, 2022

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Cash flows from operating activities:

Net loss and comprehensive loss

$ ( 59,313 ) $ ( 137,722 )

Adjustments to reconcile net loss and comprehensive loss to net cash used in operating activities:

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

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Share-based compensation

Changes in right-of-use assets 2,146 2,368

Loss (gain) on disposal of assets

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2,946 ( 948 )

1,023 ( 1,782 )

Inventories, net

Prepaid expenses and other current assets

Operating lease obligations

( 2,012 ) ( 2,230 )

Operating lease right-of-use assets and lease obligations

Accounts payable, accrued and other liabilities

( 3,577 ) ( 2,911 )

676 ( 8,133 )

License and media rights ( 500 ) —

Income tax receivable

Cultivation liabilities

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Cash flows from investing activities:

Acquisition of business, net of cash acquired — 11,181

Purchases of property and equipment and intangible assets ( 265 ) ( 4,918 )

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Other investing activities — 606

Net cash used in investing activities

Net cash provided by (used in) investing activities

395 ( 11,789 )

2 unchanged sentences

Proceeds from stock option exercises — 30

Proceeds from convertible debenture 52,761 —

Other financing activities ( 308 ) ( 248 )

Net cash provided by financing activities

Net decrease in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

47,469 ( 33,309 )

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Non-cash activities:

Equity instruments issued in business combinations

$ — $ 109,562

Non-cash purchase of license and media rights assets ( 31,399 ) —

Non-cash share issuance for license and media rights agreement ( 3,060 ) —

Non-cash purchases of property and equipment

( 2,500 ) ( 1,291 )

Reduction to cultivation liabilities for inventory provision

( 543 ) ( 2,073 )

See Notes to Consolidated Financial Statements

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Charlotte’s Web Holdings, Inc.

together with its subsidiaries, (collectively "Charlotte's Web" or the “Company”) is a public company incorporated pursuant to the laws of the Province of British Columbia.

The Company’s common shares are publicly listed on the Toronto Stock Exchange (“TSX”) under the symbol “CWEB” and quoted on the OTCQX under the symbol "CWBHF." The Company’s head office is located in Denver, Colorado in the United States of America.

together with its subsidiaries, (collectively "Charlotte's Web" or the “Company”) is a public company incorporated pursuant to the laws of the Province of British Columbia and a Certified B Corp.

The Company’s common shares are publicly listed on the Toronto Stock Exchange (“TSX”) under the symbol “CWEB” and quoted on the OTCQX under the symbol "CWBHF." The Company’s corporate headquarters is located in Louisville, Colorado in the United States of America.

The majority of the Company's business is conducted in the United States of America.

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

Hemp extracts are produced from Hemp, which is defined as the plant Cannabis sativa L .

Hemp extracts are produced from the plant Cannabis sativa L.

(“Cannabis”), and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol ("THC") concentration of not more than 0.3% on a dry weight basis ("Hemp").

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

The Company’s current product categories include human ingestible products:

tinctures (liquid product), capsules, gummies, and sprays, topicals, and pet products.

tinctures (liquid product), capsules, gummies, sprays, topicals, and pet products.

The Company’s products are distributed through its e-commerce website, third-party e-commerce websites, select distributors, health practitioners, and a variety of brick-and-mortar specialty retailers.

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Internationally, the companies are able to explore opportunities where Cannabis is federally permissible.

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

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

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

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

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

In November 2019, the Company announced 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 does not currently have any plans to expand into high-THC products in the near future.

The Company grows its proprietary hemp domestically in the United States on farms leased in northeastern Colorado and sources Hemp 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.

In furtherance of the Company’s R&D efforts, in 2020, the Company established CW Labs, an internal division for R&D, to substantially expand the Company’s efforts around the science of hemp derived compounds.

CW Labs is currently engaged in clinical trials addressing Hemp-based health solutions.

CW Labs is located in Louisville, Colorado at the Company’s current good manufacturing practice ("cGMP") production and distribution facility.

Emerging Growth Company Status

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Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.

The Company has elected to use the extended transition period for complying with new or

The Company has elected to use the extended transition period for complying with new or revised accounting standards, and as a result of this election, the consolidated financial statements may not be comparable to companies that comply with public company FASB standards’ effective dates.

The Company can elect to early adopt, if permitted by the accounting standard.

The Company may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of an offering or such earlier time that it is no longer an EGC.

CHARLOTTE’S WEB HOLDINGS, INC.

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(in thousands, except share, per share, per unit, and number of years)

revised accounting standards, and as a result of this election, the consolidated financial statements may not be comparable to companies that comply with public company FASB standards’ effective dates.

The Company can elect to early adopt, if permitted by the accounting standard.

The Company may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of an offering or such earlier time that it is no longer an EGC.

Smaller Reporting Company Status

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The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Companies acquired during each reporting period are reflected in the results of the Company effective as of their respective dates of acquisition through the end of the reporting period.

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.

All intercompany balances and transactions have been eliminated in consolidation.

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On an ongoing basis, management evaluates such estimates and assumptions for continued reasonableness.

In particular, management makes estimates with respect to any (i) inventory provision, (ii) underlying assumptions that affect the potential impairment of goodwill and long-lived assets, (iii) ability to realize income tax benefits associated with deferred tax assets , (iv) fair value of acquired intangible assets and goodwill, and (v) underlying assumptions that affect the fair value of the SBH Purchase Option.

In particular, management makes estimates with respect to any (i) inventory provision, (ii) underlying assumptions that affect the potential impairment of goodwill and long-lived assets, (iii) ability to realize income tax benefits associated with deferred tax assets , and, (iv) underlying assumptions that affect the fair value of the SBH purchase option and other derivative instruments.

Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation.

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Certain amounts presented in prior periods have been reclassified to conform with the current period presentation.

Basic and Diluted Net Loss per Share

Basic net loss per common share is computed by dividing the allocated net loss and by the weighted-average number of common shares outstanding during the period.

Diluted loss per common share is computed by dividing the allocated net loss by the weighted-average number of common shares together with the number of additional common shares that would have been outstanding if all potentially dilutive common shares had been issued.

Since the Company was in a loss position for the periods presented, basic net loss per share is the same as diluted net loss per share since the effects of potentially dilutive securities are antidilutive.

CHARLOTTE’S WEB HOLDINGS, INC.

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(in thousands, except share, per share, per unit, and number of years)

Basic and Diluted Net Loss per Share

Basic loss per share is calculated using the two-class method, in which net loss and comprehensive loss is allocated to both common shares and proportionate voting shares based on the number of fully converted shares in each class.

Basic net loss per common share and proportionate voting share is computed by dividing the allocated net loss and comprehensive loss by the weighted-average number of common shares outstanding and weighted average number of proportionate voting shares outstanding during the period.

Diluted loss per common share is computed by dividing the allocated net loss and comprehensive loss by the weighted-average number of common shares together with the number of additional common shares that would have been outstanding if all potentially dilutive common shares had been issued.

Diluted loss per proportionate voting share is computed by dividing the allocated net loss and comprehensive loss by the weighted-average number of proportionate voting shares outstanding during the period.

Operating segments are defined as components of an entity for which discrete financial information is available that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources and in assessing performance.

As such, the Company has one operating segment, which is the business of hemp-based CBD wellness products.

Substantially all long-lived assets are located in the United States and substantially all revenue is attributed to customers and consumers based in the United States.

Business Combinations

Business combinations are accounted for under the acquisition method of accounting.

Under the acquisition method of accounting, the total consideration transferred in connection with the acquisition is allocated to the tangible and intangible assets acquired, liabilities assumed, and any non-controlling interest in the acquired entity based on fair values.

Goodwill acquired in connection with business combinations represents the excess of consideration transferred over the net tangible and identifiable intangible assets acquired.

Certain assumptions and estimates are employed in evaluating the fair value of assets acquired and liabilities assumed.

These estimates may be affected by factors, such as changing market conditions or changes in government regulations.

The most significant assumptions requiring judgment involve identifying and estimating the fair value of intangible assets and the associated useful lives to establish amortization periods.

To finalize purchase accounting for significant acquisitions, the Company utilizes the services of independent valuation specialists to assist in the determination of the fair value of acquired tangible and intangible assets.

Costs related to the acquisition, other than those associated with the issuance of debt or equity securities, incurred by the Company in connection with a business combination, are expensed as incurred.

Any contingent or deferred consideration payable is recognized at fair value at the acquisition date.

Any amounts tied to an individual’s employment are recognized as compensation expense over the required service period.

Substantially all long-lived assets are located in the United States and substantially all revenue is attributed to customers based in the United States.

Cash and Cash Equivalents

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The Company has not experienced any losses in such accounts.

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.

The Company's financial instruments that are potentially exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.

The cash amounts in deposit accounts held in excess of federally-insured limits were $ 66,713 and $ 19,244 as of December 31, 2022 and 2021, respectively.

Management believes that the Company is not exposed to significant credit risk due to the financial strength of the depository institution in which the cash is held.

The Company provides credit to its customers in the normal course of business and has established credit evaluation and monitoring processes to mitigate credit risk, but has limited risk, as the majority of its sales are transacted with cash.

As of December 31, 2022 and 2021, no single customer accounted for more than 10% of the Company’s consolidated revenue.

As of December 31, 2021 the Company had one customer whose accounts receivable balance individually represented 34 % of the Company's accounts receivable.

At December 31, 2020, no single customer accounted for more than 10% of the Company's accounts receivable.

The Company had one customer whose accounts receivable balance individually represented 21 % and 34 % of accounts receivable as of December 31, 2022 and 2021, respectively.

Accounts Receivable and Allowance for Credit Losses

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Cost is determined by use of the weighted average method.

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 raw materials inventories of harvested hemp are recorded at cost to harvest.

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

The Company's inventory production process for cannabinoid products includes the cultivation of botanical raw material.

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

Consistent with

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

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

Refer to note "Inventories" for further discussion.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets were comprised of the following amounts (in thousands):

December 31, 2021 December 31, 2020

Prepaid expenses $ 2,612 $ 6,224

License and media rights 2,500 —

Deposits 2,313 925

2 unchanged sentences

$ 7,998 $ 8,590

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

Property and Equipment, Net

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Finite Lived Intangible Assets

Finite lived intangible assets consist of customer relationships, software, patents, and trade names.

Finite lived intangible assets consist of software, patents, and licenses.

These intangible assets were determined to have finite lives and are amortized over their useful lives.

Acquired intangible assets from business combinations include trade names and customer relationships.

Software is stated at cost less accumulated amortization.

The costs of obtaining a patent are capitalized and amortized over its useful life.

Acquired trade names and customer relationships are stated at fair value and are amortized over their useful lives.

Amortization is calculated on the straight-line basis over the following estimated useful lives of the assets:

Customer Relationships

15 - 20 years

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

Capitalized Software Development Costs

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The Company performs its annual impairment test to determine if any events or circumstances exist, such as an adverse change in business climate or a decline in overall industry demand, that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill.

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

If events or circumstances do not indicate that the fair value of a reporting unit is below its carrying amount, then goodwill is not considered to be impaired and no further testing is required.

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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.

Long-lived assets, such as property and equipment and intangible assets subject to depreciation and amortization, as well as indefinite lived intangibles 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.

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Cultivation Liabilities

Cultivation liabilities consist of amounts owed to third-party farming operators for the hemp harvests cultivated in 2019 and 2018.

Cultivation liabilities consist of amounts owed to third-party farming operators for the hemp harvests cultivated between 2022 and 2019.

There were no cultivation liabilities incurred for the hemp harvest cultivated in 2021 or 2020 as there was minimal hemp grown with third-party farming operators due to sufficient quantities on hand of harvested hemp inventories and the resulting minimal crops did not trigger additional liabilities per the terms of the agreements.

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The Company can reduce the settlement amount of cultivation liabilities for harvested hemp outside of quality specifications, as stated in the agreements.

The cultivation liabilities are initially measured at the present value of future payments, discounted using the Company’s incremental borrowing rate.

Refer to note 11 for detail of the cultivation liabilities for the years ended December 31, 2021 and 2020.

The Company did not enter into any arrangements of this nature with third-party farming operators for the 2022 harvest.

The cultivation liabilities are initially measured at the present value of

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

future payments, discounted using a risk free interest rate.

Refer to note "Cultivation Liabilities" for detail of the cultivation liabilities for the years ended December 31, 2022 and 2021.

The Company elected to early adopt ASU 2016-02, Leases (Topic 842) as of January 1, 2019, as permitted by the standard.

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Present value of lease payments are discounted based on the more readily determinable of (i) the rate implicit in the lease or (ii) the Company’s incremental borrowing rate.

Because the Company’s operating leases generally do not

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

provide an implicit rate, the Company estimates its incremental borrowing rate based on the information available at lease commencement date for collateralized borrowings with a similar term, an amount equal to the lease payments and in a similar economic environment where the leased asset is located.

Because the Company’s operating leases generally do not provide an implicit rate, the Company estimates its incremental borrowing rate based on the information available at lease commencement date for collateralized borrowings with a similar term, an amount equal to the lease payments and in a similar economic environment where the leased asset is located.

The collateralized borrowings were based on the Company’s credit rating corroborated with market credit metrics like debt level and interest coverage.

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ROU assets are also assessed for impairments consistent with the Company’s long-lived asset policy.

See note "Leases" for further discussion.

Operating lease expense for fixed lease payments is recognized on a straight-line basis over the lease term.

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Leases with an initial term of 12 months or less, that do not include an option to purchase the underlying asset that we are reasonably certain to exercise, are not recorded on the balance sheet.

Convertible Debenture

The Company determined that the debenture is a freestanding financial instrument, which includes embedded derivatives.

The embedded derivatives have been bifurcated from the debenture and accounted for separately in accordance with the provisions of ASC 815, Derivatives and Hedging .

The Company reviewed the terms of the debenture and identified two material embedded features which required bifurcation and separate accounting pursuant to the provisions of ASC 815:

1) the interest rate conversion feature based on changes in federal regulations, and 2) the debt conversion option to common shares.

The debt interest rate conversion feature is classified as a derivative asset and measured at fair value using a probability weighted income approach.

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

conversion option is classified as a derivative liability and measured at fair value using a Black-Scholes option pricing model.

The Company allocated proceeds first to the derivatives measured at fair value and the residual amount is allocated to the debenture.

Debt issuance costs are allocated to the debenture.

The debt issuance costs are presented as a direct reduction from the face value of the debenture and amortized over the stated term of the debenture.

Refer to note "Fair Value Measurement' and note "Debt" for additional discussion regarding the convertible debenture and derivative instruments.

Revenue Recognition

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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.

Freight revenue is included in revenue on the consolidated statements of operations, 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.

Contracts are written to include standard discounts and allowances.

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The Company also offers ecommerce discounts and promotions through its online rewards program.

The Charlotte’s Web Loyalty Program offers customers rewards points for every dollar

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

spent through the Company website to earn store credit for future purchases.

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:

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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 data.

The Company destroys all returned products for safety and quality purposes.

The majority of the Company’s revenue is derived from sales of branded products to consumers via our direct-to-consumer ecommerce website, and distributors, retail and wholesale business-to-business customers.

Estimates are based on actual historical and current specific data.

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

The majority of the Company’s revenue is derived from sales of branded products to consumers via the Company's direct-to-consumer ecommerce website, and distributors, retail, wholesale business-to-business customers, and health practitioners.

The following table sets forth the disaggregation of the Company’s revenue:

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Cost of goods sold primarily consists of the inventory and production costs for the Company’s products sold during the period, and also includes amortization and depreciation, as well as allocated expenses.

For the year ended December 31, 2022 and 2021, cost of goods sold includes $ 23,394 and $ 9,729 in inventory provision, respectively.

Refer to note "Inventories" for further discussion.

Selling, General and Administrative

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Defined contribution expense of $ 540 and $ 441 was recorded during the years ended December 31, 2022 and December 31, 2021, respectively.

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

Share-based Compensation

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Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award.

Expected dividend yield is zero based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.

Expected dividend yield is zero based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

Share-based compensation is recognized net of actual forfeitures when they occur.

All share-based compensation costs are recorded in the consolidated statements of operations and comprehensive loss in selling, general and administrative expense.

All share-based compensation costs are recorded in the consolidated statements of operations in selling, general and administrative expense.

The Company measures nonemployee awards at their fair value consistent with the accounting for employee share-based compensation as described above.

For the years ended December 31, 2021 and 2020, the Company did not have any material expense for nonemployee awards.

For the years ended December 31, 2022 and December 31, 2021, the Company did not have any material expense for nonemployee awards.

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

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

Recently Issued Accounting Pronouncements

Other than described below, no new accounting pronouncements adopted or issued by the Financial Accounting Standards Board (“FASB”) had or may have a material impact on the Company’s consolidated financial statements.

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No.

2020-04, Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting .

This standard provides optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting.

The amendments in this standard apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform.

The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022.

The standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on rollforward information, which is effective for fiscal years beginning after

CHARLOTTE’S WEB HOLDINGS, INC.

1 unchanged sentence

(in thousands, except share, per share, per unit, and number of years)

Recently Issued Accounting Pronouncements

In August 2018, the FASB issued ASU No.

2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force) .

The guidance on the accounting for implementation, setup and other upfront costs (collectively referred to as implementation costs) applies to entities that are a customer in a hosting arrangement that is a service contract.

The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).

The new standard is effective for public companies with fiscal years beginning after December 15, 2019, including interim periods within that fiscal year.

For all other entities, the amendments are effective for all fiscal years beginning after December 15, 2020 and all interim periods beginning after December 15, 2021.

As an EGC, the Company has elected to use the extended transition period for complying with new or revised standards and can and has elected to follow the private company adoption timeline.

The Company adopted this standard prospectively as of January 1, 2021, and is currently evaluating the impact on the Company’s consolidated financial statements.

December 15, 2023.

Early adoption is permitted.

The Company is currently evaluating the impact, if any, that the updated standard will have on the condensed consolidated financial statements.

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU No.

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For all other entities, the standard is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.

Early adoption is permitted.

The Company is currently evaluating the impact, if any, that the updated standard will have on the consolidated financial statements.

Recently Adopted Accounting Pronouncements

In August 2018, the FASB issued ASU No.

2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force) .

The new standard is effective for public companies with fiscal years beginning after December 15, 2019, including interim periods within that fiscal year.

For all other entities, the amendments are effective for all fiscal years beginning after December 15, 2020 and all interim periods beginning after December 15, 2021.

As an EGC, the Company has elected to use the extended transition period for complying with new or revised standards and can and has elected to follow the private company adoption timeline.

The Company adopted this standard prospectively as of January 1, 2021, and the adoption of the standard did not have a material impact on the Company's consolidated financial statements.

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

ACQUISITION OF ABACUS HEALTH

On June 11, 2020, the Company acquired all the issued and outstanding subordinate voting shares of Abacus Products, Inc.

Abacus develops, markets and sells over-the-counter (“OTC”) topical products combining active pharmaceutical ingredients with hemp extract.

This acquisition provided the Company with growth opportunities in both topical and ingestible products in the CBD wellness category.

Abacus primarily sells its products under three brand names:

CBDMedic™, CBD Clinic™, and Harmony Hemp.

CBD Clinic™ is marketed to the professional practitioner market and sold exclusively to registered health practitioners such as chiropractors, acupuncturists, massage therapists, physical therapists, naturopaths, and osteopaths.

CBDMedic™ is targeted to the consumer market.

CBDMedic™ products are sold directly to consumers through retail outlets, health, and fitness locations, as well as through an e-commerce platform.

Harmony Hemp is targeted to the consumer market.

These products are sold through retail outlets as well as through an e-commerce platform.

The acquisition of these brands substantially expanded the Company's topical offerings and presence in the key food and mass markets.

The acquisition closed on June 11, 2020 and, accordingly, the consolidated statements of operations and comprehensive loss include Abacus Health results of operations for the period from June 11, 2020 through December 31, 2020 and for the year ended December 31, 2021.

Due to integration of Abacus Health into the Company’s systems as of July 1, 2020, at December 31, 2021 and 2020 it is not feasible for the Company to disaggregate the acquiree revenue, on an after discount and promotions basis, or the results of operations related thereto consolidated in the financial statements.

If the acquisition had taken place as of January 1, 2020, revenue from continuing operations for the year ended December 31, 2020 would have been $ 99,341 .

Loss from continuing operations for the year ended December 31, 2020 would have been $( 47,810 ).

The aforementioned pro-forma amounts are unaudited.

As a result of the business combination, one-time acquisition costs of $ 3,897 were expensed as incurred during the year ended December 31, 2020.

Fair Value of Consideration

Pursuant to the terms of the arrangement agreement, for each Abacus subordinate voting share and other equity instruments, including outstanding stock options, warrants, SARs, and contingent consideration, each holder received a 0.85 equivalent replacement award of the Company’s respective security at the time of closing.

To determine the portion of fair value of the replacement award that is part of purchase consideration, the Company measured both the fair value of the replacement award as the acquiree, Abacus, and the acquirer, the Company, as of the acquisition date.

The Company attributed the portion of the fair value related to pre-combination service as purchase consideration and attributed the remaining fair value to remuneration for post-combination services based on any remaining service period.

The Company’s fair values of the replacement awards were valued using the Black-Scholes option pricing model, with the following assumptions used in the model:

expected volatility;

expected term;

risk-free interest rate and value of the underlying share.

The resulting purchase consideration for replacement stock options, warrants, SARs, and contingent consideration is $ 7,251 .

A portion of the other equity instruments, SARs of $ 293 and certain warrants of $ 2,857 , were determined to be liabilities based on the nature of the instruments.

These liabilities are presented at their respective fair value as of December 31, 2021 and 2020 in the consolidated balance sheets.

The Company transferred 18,456,302 Common shares and 3,884,986 other equity instruments.

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

The following table outlines the total consideration transferred:

Common shares $ 105,461

Other equity instruments 7,251

Total consideration transferred $ 112,712

The following table summarizes the assets acquired and liabilities assumed as of the acquisition date:

Cash $ 11,181

Accounts receivable and other receivables 2,264

Inventories 4,845

Intangible assets 23,400

Other current and long-term assets 3,653

Goodwill 76,039

Accounts payable 4,687

Accrued liabilities 2,041

Current note payable 1,258

Other current and long-term liabilities 684

Total liabilities $ 8,670

Net assets acquired $ 112,712

The fair value of acquired inventories and intangible assets were determined using a forecasted cash flow approach with the assistance of a third-party valuation firm.

Acquired inventories consist of substantially all finished goods.

Acquired intangible assets consist of a trade name and customer relationships.

Fair value of the acquired customer relationships and trade name are $ 22,700 and $ 700 , respectively.

The Company assigned a ten-year useful life to both classes of acquired intangible assets.

The Company determined that Abacus Health’s carrying costs approximated fair value for all other acquired assets and assumed liabilities.

On February 10, 2020, one of the wholly-owned subsidiaries of Abacus US, Abacus Wellness, Inc., acquired the principal assets of two companies owning the Harmony Hemp brand.

Pursuant to the terms of the asset purchase agreement, Abacus US, and therefore the Company, is obligated to pay the remaining purchase price payable for Harmony Hemp and deliver contingent equity compensation.

The remaining purchase price payable as of December 31, 2021 and 2020 for Harmony Hemp acquired with the Abacus acquisition was $ 144 and $ 770 , respectively, which is included in accrued and other current liabilities on the consolidated balance sheets.

The goodwill acquired from the Abacus acquisition was primarily attributable to expected synergies from future growth and potential monetization opportunities.

See note 7, Goodwill and intangible assets, for further discussion.

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

Early adoption is permitted, and the Company elected to adopt for the fiscal year beginning January 1, 2022.

There was an immaterial impact upon adoption on the condensed consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for convertible instruments by removing the separation models for convertible debt instruments and convertible preferred stock with (1) cash conversion features, and (2) beneficial conversion features.

In addition, ASU 2020-06 enhances information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share guidance and amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions.

ASU 2020-06 is effective for emerging growth companies for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

Early adoption is permitted, and the Company elected to adopt for the fiscal year beginning January 1, 2022.

The Company evaluated the impact of the pronouncement and accounted for the convertible debenture in accordance with ASU 2020-06.

See further discussion within the note "Debt".

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832):

Disclosures by Business Entities about Government Assistance , which addresses that Current GAAP has no specific authoritative guidance on the accounting for, or the disclosure of, government assistance received by business entities.

The pronouncement and subsequent amendments require the following annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy:

1) Information about the nature of the transactions and the related accounting policy used to account for the transactions;

2) The line items on the balance sheet and income statement that are affected by the transactions, and the amounts applicable to each financial statement line item, 3) Significant terms and conditions of the transactions, including commitments and contingencies.

ASU 2021-10 is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.

The Company adopted for the fiscal year beginning January 1, 2022.

The Company evaluated the impact of the pronouncement, see further discussion within the note "Income and Other Taxes".

FAIR VALUE MEASUREMENT

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Level 1 —Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

Level 2 —Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities;

3 unchanged sentences

The categorization of a financial instrument within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The Company’s financial instruments include cash and cash equivalents, accounts receivable and other receivables, notes receivable and payable, accounts payable and accrued liabilities, cultivation liabilities, warrant liabilities and other current assets and liabilities.

At December 31, 2021 and 2020, the carrying amounts of accounts receivable and other receivables, accounts payable and other current assets and liabilities approximated at their fair values because of their short-term nature.

The Company’s financial instruments include cash and cash equivalents, accounts receivable and other receivables, notes receivable and payable, SBH purchase option and asset derivatives, accounts payable and accrued liabilities, cultivation liabilities, convertible debenture, liability derivatives, and other current assets and liabilities.

At December 31, 2022 and 2021, the carrying amounts of cash and cash equivalents, accounts receivable and other receivables, accounts payable and other current assets and liabilities approximated at their fair values because of their short-term nature.

The carrying value of the notes receivable and cultivation liability approximates the fair value as the stated interest rate approximates market rates currently available to the Company.

The Company’s warrant liabilities are accounted for at fair value and are considered Level 2 instruments.

The Company's Stanley Brothers USA Holdings Purchase Option is accounted for at fair value and is considered a Level 3 instrument.

The carrying value of the convertible debenture approximates the fair value after adjustments for the bifurcated embedded derivatives and other discounts, refer to the "Debt" note for fair value discussion.

The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis at December 31, 2022 and 2021, by level within the fair value hierarchy:

3 unchanged sentences

Stanley Brothers USA Holdings purchase option $ — $ — $ 2,300 $ 2,300

Debt interest rate conversion feature — — 1,320 1,320

Total Financial Assets $ — $ — $ 3,620 $ 3,620

Financial Liabilities:

Warrant liabilities $ — $ — $ — $ —

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

Debt conversion option $ — $ 12,995 $ — $ 12,995

December 31, 2021

1 unchanged sentence

Financial assets:

$ — $ — $ — $ —

Stanley Brothers USA Holdings Purchase Option $ — $ — $ 13,000 $ 13,000

Financial Liabilities:

Warrant liabilities $ — $ 4,304 $ — $ 4,304

There were no transfers between levels of the hierarchy during the year ended December 31, 2021 and December 31, 2020.

Warrants $ — $ — $ — $ —

There were no transfers between levels of the hierarchy during the years ended December 31, 2022 and December 31, 2021.

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

Convertible Debt Derivatives

On November 14, 2022, the Company 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, the "Lender"), providing for the issuance of $ 56.8 million (C$ 75.3 million) convertible debenture (the “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 a stated annualized rate of 5 % until such time that there is federal regulation permitting the use of cannabidiol, a phytocannabinoid derived from the plant Cannabis sativa L.

(“CBD”) as an ingredient in food products and dietary supplements in the United States.

(The term “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 Company determined that the debenture did not meet the definition of a freestanding derivative under ASC 815 "Fair Value Measurement for financial statement", and required the bifurcation of two embedded derivatives, the debt interest rate conversion feature and the debt conversion option.

Debt Interest Rate Conversion Feature

The debt interest rate conversion feature is classified as a financial asset and is remeasured at fair value at each reporting date, with changes recognized in consolidated statements of operations as changes in fair value of financial instruments and other 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.

The debt interest rate conversion feature, if triggered, reduces the stated interest rate of the debenture to 1.5% upon federal regulation of CBD in the United States.

For the year ended December 31, 2022, a $ 138 gain related to the debt interest rate conversion feature was recognized as change in fair value of financial instruments and other in the statements of operations.

As of December 31, 2022, the debt interest rate conversion feature represents a financial asset of $ 1,320 within SBH purchase option and other derivative assets in the consolidated balance sheets.

To determine the value of the option, the Company utilizes a probability weighted income approach.

This method calculates the present value of the reduced interest accrued on the debenture assuming the feature is triggered at a certain time, after accounting for the probability of federal regulation of CBD.

This approach is useful when ultimate valuation is based on an unverifiable outcome, such as an event outside of the Company’s influence.

The following additional assumptions are used in the model:

Year Ended December 31,

Stated interest rate 5.0 %

Adjusted interest rate 1.5 %

Implied debt yield 8.6 %

Federal regulation probability 15.0 %

Year of event 2025

Debt Conversion Option

Per the debenture, the Lender has the option, at any time before the Maturity Date at no additional consideration, for all or any part of the principal amount to be converted into fully paid and non-assessable common shares.

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

Company assessed this conversion feature and determined that the debt conversion option is an embedded derivative that requires bifurcation and is classified as a financial liability.

The debt conversion option is initially measured at fair value and is revalued at each reporting period using the Black-Scholes option pricing model based on Level 2 observable inputs.

The assumptions used by the Company are the quoted price of the Company’s common shares in an active market, risk-free interest rate, volatility and expected life, and assumes no dividends.

Volatility is based on the actual historical market activity of the Company’s shares.

The expected life is based on the remaining contractual term of the debenture and the risk-free interest rate is based on the implied yield available on U.S.

Treasury Securities with a maturity equivalent to the expected maturity of the debenture.

For the year ended December 31, 2022, a $ 3,082 gain related to the debt conversion option was recognized as change in fair value of financial instruments and other in the statements of operations.

As of December 31, 2022, the debt conversion option represents a financial liability of $ 12,995 within derivative and other long-term liabilities in the consolidated balance sheets.

The following table provides the assumption regarding Level 2 fair value measurements inputs at their measurement dates:

Year Ended December 31,

Expected volatility

Expected term (years)

Risk-free interest rate

Expected dividend yield

Value of underlying share

Exercise price $ 2.00

Stanley Brothers USA Holdings Purchase Option

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

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

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

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

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 (Stanley Brothers USA financial results or projections of future financial results).

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

For the year ended December 31, 2021, a $ 5,000 gain related to the SBH Purchase Option was recognized as change in fair value of financial instruments and other in the statements of operations and comprehensive loss.

As of December 31, 2021, the SBH Purchase Option represents a financial asset of $ 13,000 in the consolidated balance sheets.

For the year ended December 31, 2022 and December 31, 2021 , a $ 10,700 loss and a $ 5,000 gain, respectively, related to the SBH Purchase Option was recognized as change in fair value of financial instruments and other in the statements of operations.

As of December 31, 2022 and December 31, 2021 , the SBH Purchase Option represents a financial asset of $ 2,300 and $ 13,000 within SBH purchase option and other derivative assets in the consolidated balance sheets.

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

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The following additional assumptions are used in the model:

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

Year Ended December 31,

Expected volatility

115.0 % 92.5 %

Expected term (years)

1 unchanged sentence

Weighted average cost of capital

40.0 % 40.0 %

Warrant Liabilities

The 2019 Share Offering Warrants and the 2020 Share Offering Warrants do not meet all of the criteria for equity classification as the warrants are denominated in Canadian dollars, which differs from the Company's functional currency.

As a result, the 2019 Share Offering Warrants and the 2020 Share Offering Warrants are initially measured at fair value and are revalued at each reporting period using the Black-Scholes option pricing model based on Level 2 observable inputs.

In 2020, the Company closed its underwritten public share offering (“2020 Share Offering”) of 10,000,000 units ("Offered Units").

Each Offered Unit consisted of one common share of the Company and one-half of one common share purchase warrant of the Company (each whole common share purchase warrant, a "2020 Share Offering Warrant").

The 2020 Share Offering Warrants do not meet all of the criteria for equity classification as the warrants are denominated in Canadian dollars ("CAD"), which differs from the Company's functional currency.

As a result, the 2020 Share Offering Warrants are initially measured at fair value and are revalued at each reporting period using the Black-Scholes option pricing model based on Level 2 observable inputs.

The assumptions used by the Company are the quoted price of the Company’s common shares in an active market, risk-free interest rate, volatility and expected life, and assumes no dividends.

2 unchanged sentences

Treasury Securities with a maturity equivalent to the expected life of the warrants.

For the years ended December 31, 2021 and 2020, a $ 4,304 and $ 11,167 gain related the warrant liabilities was recognized as change in fair value of financial instruments and other in the consolidated statements of operations and comprehensive loss.

For the years ended December 31, 2022 and December 31, 2021, no gain and $ 4,304 gain, respectively, was recognized related the warrant liabilities as change in fair value of financial instruments and other in the consolidated statements of operations.

As of December 31, 2021, the Company's warrant liabilities' fair value is zero due to some warrants expiring in December 2021, a shorter expected term for the remaining outstanding warrants, and a significant decline in the Company's stock price.

As of December 31, 2022, there are no outstanding warrants.

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

The following table provides quantitative information regarding Level 2 fair value measurements inputs at their measurement dates:

1 unchanged sentence

Expected volatility

83.8 % 86.1 %

Expected term (years)

2 unchanged sentences

Value of underlying share

$ 1.34 $ 3.29

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

Inventories consist of the following:

10 unchanged sentences

Inventory Provision

For the year ended December 31, 2021, inventory provisions of $ 10,272 were recognized, of which $ 9,729 were expensed through the cost of goods sold and $ 543 were recognized as settlement reductions of cultivation liabilities due to third-party farming operators related to harvested hemp outside of quality specifications.

For the year ended December 31, 2022, inventory provisions of $ 23,394 were expensed through cost of goods sold.

The increase was primarily due to an additional reserve for Hemp inventory of $ 20,349 based on the Company's determination during the fourth quarter that this inventory would no longer be used in product formulations as a result of Colorado's anticipated regulatory changes based on Senate Bill 22-205.

For the year ended December 31, 2022, write-offs of inventory previously reserved for of $ 6,722 were recognized.

For the year ended December 31, 2020, inventory provisions of $ 8,025 were expensed through the cost of good and $ 2,073 were recognized as settlement reductions of cultivation liabilities due to third-party farming operators related to harvested hemp outside of quality specifications.

For the year ended December 31, 2021, inventory provisions of $ 9,729 were expensed through cost of goods sold in the consolidated statements of operations, and $ 543 were recognized as settlement reductions of cultivation liabilities due to third-party farming operators related to harvested hemp outside of quality specifications.

For the year ended December 31, 2021, write-offs of inventory previously reserved for of $ 12,129 were recognized.

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

PROPERTY AND EQUIPMENT, NET

12 unchanged sentences

$ 29,330 $ 36,085

Depreciation expense for the years ended December 31, 2021 and December 31, 2020, was $ 7,481 and $ 4,839 , respectively, of which $ 4,503 and $ 3,661 , respectively, was recorded in Selling, general, and administrative expense in the consolidated statements of operations and comprehensive loss.

For the years ended December 31, 2021 and December 31, 2020, depreciation expense of $ 2,978 and $ 1,178 , respectively, was recorded in Cost of goods sold in the consolidated statements of operations and comprehensive loss.

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

Depreciation expense for the years ended December 31, 2022 and December 31, 2021, was $ 6,213 and $ 7,481 , respectively, of which $ 3,181 and $ 4,503 , respectively, was recorded in Selling, general, and administrative expense in the consolidated statements of operations.

For the years ended December 31, 2022 and December 31, 2021, depreciation expense of $ 3,032 and $ 2,978 , respectively, was recorded in Cost of goods sold in the consolidated statements of operations.

During the year ended December 31, 2021, an impairment loss of $ 1,921 was recorded related to property and equipment.

1 unchanged sentence

GOODWILL AND I NTANGIBLE ASSETS

The following table summarizes the changes in the carrying amount of goodwill:

Beginning balance

Goodwill arising from business combination

Goodwill impairment $ ( 76,039 ) —

Ending balance

The Company determined the sustained decrease in our share price in the fourth quarter of 2021, along with a significant decline to the equity value of the Company's peers, represented a goodwill impairment triggering event.

The Company performed a quantitative analysis as of December 31, 2021 to determine if impairment to our goodwill existed for the one reporting unit.

We used a blended approach in calculating fair value of our one reporting unit including the income approach and market approach.

This analysis resulted in full impairment of our goodwill balance totaling $ 76,039 included in goodwill and asset impairments charges on the consolidated statements of operations and comprehensive loss for the year ended December 31, 2021.

As of December 31, 2022 and December 31, 2021, the Company has no goodwill.

The Company determined the sustained decrease in share price in the fourth quarter of 2021, along with a significant decline to the equity value of the Company's peers, represented a goodwill impairment triggering event.

The Company performed a quantitative analysis as of December 31, 2021 to determine if impairment to the Company's goodwill existed for the one reporting unit.

A blended approach in calculating fair value of the one reporting unit included the income approach and market approach.

This analysis resulted in full impairment of the Company's goodwill balance totaling $ 76,039 included in goodwill and asset impairments charges on the consolidated statements of operations for the year ended

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

December 31, 2021.

The goodwill impairment was measured as the amount by which the carrying value of the reporting unit, including goodwill, exceeded its fair value.

4 unchanged sentences

Accumulated Amortization Net

Definite-lived intangibles assets ( 1) :

1.67 $ 3,993 $ ( 2,342 ) $ 1,651

Definite-lived intangible assets:

18.93 $ 3,514 $ ( 1,893 ) $ 1,621

Internal use software in process

Indefinite-lived intangible assets:

Internet domain name

Total $ 3,664 $ ( 1,893 ) $ 1,771

(1) The factors listed above representing a goodwill triggering event also indicated a triggering event for the Company's customer relationships and trade name intangible assets acquired with the acquisition of Abacus.

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

The Company performed a quantitative analysis as of December 31, 2021 to determine if impairment existed by comparing the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate over their remaining lives.

This analysis resulted in full impairment of the customer relationships and trade name intangible assets acquired and total an impairment loss of $ 19,750 was recorded in goodwill and asset impairments charges on the consolidated statements of operations and comprehensive loss for the year ended December 31, 2021.

As of December 31, 2021

3 unchanged sentences

20.04 $ 5,059 $ ( 2,366 ) $ 2,693

Customer relationships

9.44 22,700 ( 1,269 ) 21,431

9.44 700 ( 39 ) 661

18.66 201 ( 8 ) 193

Internal use software in process

Indefinite lived intangible assets:

Internet domain name

Total $ 5,209 $ ( 2,366 ) $ 2,843

For the years ended December 31, 2021 and December 31, 2020, amortization expense of $ 3,544 and $ 2,008 , respectively, was recorded in Selling, general, and administrative expense in the consolidated statements of operations and comprehensive loss.

For the years ended December 31, 2022 and December 31, 2021, amortization expense of intangible assets of $ 1,228 and $ 3,544 , respectively, was recorded in Selling, general, and administrative expense in the consolidated statements of operations.

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

As of December 31, 2022 , expected amortization of intangible assets is as follows:

1 unchanged sentence

Total future amortization

LICENSE AND MEDIA RIGHTS

MLB Promotion Rights Agreement

On October 11, 2022, the Company entered into a Promotional Rights Agreement (the “MLB Promotional Rights Agreement”) with MLB Advanced Media L.P., on its own behalf and on behalf of Major League Baseball Properties, Inc., the Office of the Commissioner of Baseball, The MLB Network, LLC and the Major League Baseball Clubs (collectively, the “MLB”), pursuant to which the Company entered into an strategic partnership with MLB to promote the Company’s new NSF-Certified for Sport® product line.

As consideration under the MLB promotional rights agreement, the Company has paid and is committed to pay a combination of cash over the license period, along with upfront non-cash consideration in the form of equity, as well as contingent consideration in the form of contingent payments based on revenue.

The consideration is as follows:

4 % of the Company’s fully diluted outstanding common shares;

$ 30.5 million in cash consideration from 2022 through 2025, paid in accordance with the payment schedule below;

10 % royalty on the Company’s gross revenue from the sale of MLB branded products, after cumulative gross sales of all such branded products exceed $ 18.0 million.

As of October 11, 2022, the Company measured the assets acquired under the MLB promotional rights agreement based on the pro-rated fair value of i) the equity grant, ii) the committed cash payments, and iii) the revenue royalty payment for the acquired assets of 1) licensed properties and 2) prepaid media rights.

The Company issued the MLB 6,119,121 common shares, the fair value of equity grant was $ 3,060 .

The fair value of the $ 30.5 million committed cash consideration was $ 28,339 , based on the discounted future payments through the term of the agreement using a risk free interest rate of 4.31 %.

The fair value of the contingent 10 % revenue royalty payment was $ 0 as the payment of the royalty fee is not considered probable.

As of December 31, 2022, the fair value of the total licensed properties was $ 23,399 recorded as a license and media rights asset, and the fair value of the media rights was $ 7,482 recorded as a $ 2,500 prepaid asset and a $ 4,982 license and media rights asset within the consolidated balance sheets.

For the year ended December 31, 2022, the Company paid the MLB $ 500 as part of the committed cash payments, and recognized $ 1,516 in amortization expense related to the licensed properties, and $ 518 in media expense related to the media rights.

CHARLOTTE’S WEB HOLDINGS, INC.

1 unchanged sentence

(in thousands, except share, per share, per unit, and number of years)

Maturities of the MLB license and media rights payable as of December 31, 2022 are as follows:

Year Ending December 31:

Total payments

Imputed interest

Total license and media rights payable

Current license liabilities

Total non-current license and media rights payable

As of December 31, 2022 , expected amortization of licensed properties is as follows:

Year Ending December 31:

Total future amortization

Convertible Debenture

Effective as of November 14, 2022, the Company entered into the Subscription Agreement with BT DE Investments, Inc., providing for the issuance of $ 56.8 million (C$ 75.3 million) convertible debenture.

The debenture was denominated in Canadian Dollars ("CAD" or "C$").

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.

The debenture will accrue interest at a stated 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 stated annualized rate of interest shall reduce to 1.5 %.

The maturity date for the debenture is November 2029.

The following is a summary of the Company's convertible debenture as of December 31, 2022:

As of December 31, 2022

Principal Amount Unamortized Debt Discount and Costs Net Carrying Amount

Convertible Debenture

Convertible debenture due November 2029 $ 56,080 $ ( 18,659 ) $ 37,421

The debenture was C$ 75.3 million per the subscription agreement and translated to USD on the transaction date.

The Company remeasures the debenture at each balance sheet date using the CAD to USD exchange rate as of that balance sheet date.

The Company recognizes the resulting foreign currency gain or loss within the statement of

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

operations during the period.

For the year ended December 31, 2022, the Company recognized a foreign currency gain of $ 727 related to the net carrying value of the debenture.

Interest is accrued annually and payable on the maturity date or date of earlier conversion.

On conversion, accrued interest will either be converted into common shares equal to the amount of accrued interest or will be paid in cash if agreed with the Lender.

As of December 31, 2022, the principal amount of the debenture includes $ 163 of accrued interest expense.

The following is a summary of the interest expense and amortization expense, recorded within the statement of operation, of the Company's convertible debenture as of December 31, 2022:

For the Year Ended December 31,

Interest and Amortization Expense 2022

Interest expense $ 379

Amortization of debt discounts and costs $ 163

Line of Credit

The Company entered has an asset backed line of credit ("ABL") with J.P.

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

Borrowings under the ABL bear interest at a variable rate based on (A) CB Floating Rate defined as Prime Rate plus 1.0 % or (B) monthly LIBOR rate plus 2.50 %.

The current maturity date is March 23, 2023.

Borrowings under the ABL are secured by all of the assets of the Borrowers and guaranteed by other subsidiaries of the Borrowers.

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

Financial Covenants

The Company is subject to a number of customary covenants under the credit facility, including limitation on additional borrowings, acquisitions, dividend payments and requirements to maintain certain financial ratios including a consolidated fixed charge coverage ratio, minimum earnings before interest, depreciation, and amortization ("EBITDA") and minimum liquidity, as defined by the line of credit agreement as measured on the last day of each quarter.

As of December 31, 2021 , the Company was not in compliance with certain debt covenants and as of March 9, 2022 the line of credit was on hold.

As of December 31, 2021 , there are no amounts drawn on the line of credit.

The Company terminated the asset backed line of credit ("ABL") of $ 10,000 with J.P.

Morgan on July 27, 2022.

Borrowings under the ABL bore interest at a variable rate based on (A) CB Floating Rate defined as Prime Rate plus 1.0 % or (B) monthly LIBOR rate plus 2.50 %.

Borrowings under the ABL were secured by all of the assets of the Company and guaranteed by other subsidiaries of the Company.

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

As of the termination date and December 31, 2021, the Company was not in compliance with the debt covenants and had not drawn on the line of credit.

COMMITMENTS AND CONTINGENCIES

1 unchanged sentence

From time to time, the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business.

Although the ultimate aggregate amount of monetary liability or financial impact with respect to these matters is subject to many uncertainties and is therefore not predictable with assurance, management believes that as of December 31, 2021 there are no other litigations pending that could have, individually and in the aggregate, a material adverse effect on the Company’s financial position, results of operations or cash flows.

The ultimate aggregate amount of monetary liability or financial impact with respect to these matters is subject to many uncertainties and is therefore not predictable with assurance.

As of December 31, 2022 there are no pending litigation that could have, individually and in the aggregate, a material adverse effect on the Company’s financial position, results of operations or cash flows.

The Company has lease arrangements related to office space, warehouse and production space, and land to facilitate agricultural operations.

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Right-of-use assets obtained in exchange for new operating lease liabilities

$ 2,350 $ 515

Maturities of operating lease liabilities as of December 31, 2022 are as follows:

9 unchanged sentences

(in thousands, except share, per share, per unit, and number of years)

During the year ended December 31, 2022, 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 $ 1,837 within goodwill and asset impairments in the consolidated statements of operations as of December 31, 2022.

There were no such impairments for the year ended December 31, 2021.

CULTIVATION LIABILITIES

9 unchanged sentences

December 31, 2021 $ 3,448 $ 385 $ 3,833

Short-term Long-term Total

December 31, 2020 $ 9,304 $ 2,513 $ 11,817

Payments ( 3,049 ) ( 3,049 )

Settlement reductions ( 582 ) ( 582 )

2022 Crop 206 6 212

Interest 37 37

3 unchanged sentences

Year Ending December 31:

Total payments

Total future payments

Imputed interest

6 unchanged sentences

SHAREHOLDERS’ EQUITY

As of December 31, 2021, the Company’s share capital consists of one class of issued and outstanding shares:

As of December 31, 2022 and December 31, 2021, the Company’s share capital consists of one class of issued and outstanding shares:

Common Shares.

1 unchanged sentence

To date, no shares of preferred shares have been issued or are outstanding.

On November 3, 2021, all outstanding proportionate voting shares ("PVS") of the Company were converted by way of mandatory conversion in accordance with the Company’s Articles and at the discretion of the Company, into common shares.

Following this conversion, and as of the close of business on November 3, 2021, 142,335,464 common shares were issued and outstanding, nil proportionate voting shares were issued and outstanding and nil preferred shares were issued and outstanding.

Pursuant to the Company’s Articles, the Company is no longer authorized to issue additional proportionate voting shares.

Common Shares

As of December 31, 2021, the Company was authorized to issue an unlimited number of common shares, which have no par value.

Dividend Rights – Holders of common shares are entitled to receive dividends out of the assets available for the payment of dividends at such times and in such amount and form as the Board of Directors may determine from time to time, subject to any preferential rights of the holders of any outstanding preferred shares, on the following basis, and otherwise without preference or distinction between the common shares and the PVSs;

each PVS was entitled to 400 times the amount distributed per common share.

As of December 31, 2022 and December 31, 2021, the Company was authorized to issue an unlimited number of common shares, which have no par value.

The Company is permitted to pay dividends unless there are reasonable grounds for believing that the Company is insolvent or the payment of the dividend would render the Company insolvent.

Voting Rights – Holders of common shares shall be entitled to receive notice of and to attend and vote at all meetings of shareholders of the Company except a meeting at which only the holders of another class or series of shares is entitled to vote.

Voting Rights – Holders of common shares are entitled to receive notice of and to attend and vote at all meetings of shareholders of the Company except a meeting at which only the holders of another class or series of shares is entitled to vote.

Each common share shall entitle the holder thereof to one vote at each such meeting.

1 unchanged sentence

Proportionate Voting Shares

Pursuant to the above, the Company is no longer authorized to issue additional proportionate voting shares.

As a result as of December 31, 2021, the Company had no PVS issued and outstanding.

As of December 31, 2020, the Company had issued and outstanding 81,177 PVS shares.

Dividend Rights – Holders of PVSs were entitled to receive dividends out of the assets available for the payment of dividends at such times and in such amount and form as the Board of Directors may determine from time to time, subject to any preferential rights of the holders of any outstanding preferred shares, on the following basis, and otherwise without preference or distinction among or between the common shares and the PVSs;

each PVS was entitled to 400 times the amount distributed per common share.

The Company was permitted to pay dividends unless there were reasonable grounds for believing that the Company was insolvent or the payment of the dividend would render the Company insolvent.

Voting Rights – Holders of PVSs were entitled to receive notice of and to attend and vote at all meetings of shareholders of the Company except a meeting at which only the holders of another class or series of shares is entitled to vote.

Each PVS entitled the holder thereof to 400 votes at each such meeting.

Pursuant to the Company’s Articles, the Company is no longer authorized to issue additional proportionate voting shares.

As of December 31, 2022 and December 31, 2021, the Company has no PVS issued and outstanding.

Share Offering Warrants – Liability Classified

The Company accounted for warrants as liability-classified instruments as they did not meet all the criteria for equity classification.

The warrants were required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter.

Any change in fair value of the warrants is recognized in change in fair value of financial instruments and other within the statements of operations.

CHARLOTTE’S WEB HOLDINGS, INC.

1 unchanged sentence

(in thousands, except share, per share, per unit, and number of years)

Conversion Rights – PVSs could at any time, subject to certain conditions as outlined in the Articles, at the option of the holder or the discretion of the Company, be converted into common shares at a ratio of 400 common shares per PVS.

Liquidation Rights – Holders of Shares were entitled to receive all of the Company's assets remaining after payment of all debts and other liabilities, subject to any preferential rights of the holders of any outstanding preferred shares, on the basis that each PVS were entitled to 400 times the amount distributed per common share, and otherwise without preference or distinction between the common shares and PVSs.

Share Offering Warrants – Liability Classified

The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480 and ASC 815, Derivatives and Hedging (“ASC 815”).

The assessment considers whether the warrants are freestanding financial instruments and meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s common shares, among other conditions for equity classification.

This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.

For issued warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter.

Any change in fair value of the warrants is recognized in the Company’s statements of operations and comprehensive loss.

As of December 31, 2022, there are no outstanding warrants.

On May 8, 2022, warrants related to prior acquisition, totaling 1,233,140 , with a weighted average exercise price per warrant of $ 15.29 expired.

In addition, on June 18, 2022, the 2020 Share Offering Warrants, totaling 5,750,000 common shares, with a weighted average exercise price per warrant of $ 6.27 expired.

The following summarizes the number of warrants outstanding as of December 31, 2022 and December 31, 2021:

Number of Warrants Weighted-Average Exercise Price per Warrant

Outstanding as of December 31, 2021 6,983,140 $ 7.86

( 6,983,140 ) 7.86

Outstanding as of December 31, 2022 — $ —

On June 4, 2021, the Company filed a prospectus supplement to establish an at-the-market equity program (the “ATM Program”).

6 unchanged sentences

For the year ended December 31, 2021, share issuance costs were $ 596 for net proceeds to the Company of $ 8,118 .

For the year ended December 31, 2022, share issuance costs were $ 64 recognized in the consolidated statements of shareholders’ equity.

The Company became an SEC reporting entity beginning on January 4, 2022.

1 unchanged sentence

Thereafter, the manner in which the Company raises capital will likely require that the Company file registration statements with the SEC related to such activities, which will likely increase the time and expense associated with such activities.

On June 18, 2020, the Company closed its underwritten public share offering (“2020 Share Offering”) of 10,000,000 units ("Offered Units") with an over-allotment option exercised in full for an additional 1,500,000 units of the Company at a price of C$ 6.75 (US$ 4.97 ) per Offered Unit, for total aggregate gross proceeds of C$ 77,625 (US$ 57,165 ).

Each 2020 Share Offering Warrant entitles the holder to purchase one common share of the Company at a price of C$ 8.50 through expiration two years after the closing of the 2020 Share Offering.

At initial measurement, the 5,750,000 2020 Share Offering Warrants issued resulted in a $ 9,206 financial liability reported in the consolidated statements of financial position.

For the year ended December 31, 2020, share issuance costs of $ 3,368 were recognized in the consolidated statements of changes in shareholders’ equity.

The 2020 Share Offering Warrants do not meet all of the criteria for equity classification as the warrants are denominated in Canadian dollars, which differs from the Company’s functional currency.

As a result, the 2020 Share Offering Warrants are initially measured at fair value and are revalued at each reporting period using the

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

Black-Scholes option pricing model (note 4).

Total common share warrants issued in the 2020 Share Offering were 5,750 at an initial fair market value of $ 1.601 per share, totaling $ 9,206 , as reported as a warrant liability.

Pursuant to the terms of the Abacus acquisition, each holder of an Abacus common share warrant received a 0.85 equivalent replacement warrant.

Refer to note 3 for determination of fair value of warrants acquired and the related classification as of acquisition June 11, 2020.

The following summarizes the number of warrants outstanding as of December 31, 2021 and December 31, 2020:

Number of Warrants Weighted-Average Exercise Price per Warrant

Outstanding as of December 31, 2020 10,142,872 $ 8.80

3,060,944 10.94

Outstanding as of December 31, 2021 6,983,140 $ 7.86

For the balance of outstanding warrants at December 31, 2021, the weighted average remaining contractual life is 0.54 years.

LOSS PER SHARE

The Company computes loss per share of common shares.

Basic net loss per common share is computed by dividing the net loss by the weighted-average number of common shares outstanding.

Diluted loss per common share is computed by dividing the net loss by the weighted-average number of common shares together with the number of additional common shares that would have been outstanding if all potentially dilutive common shares had been issued, unless anti-dilutive.

CHARLOTTE’S WEB HOLDINGS, INC.

1 unchanged sentence

(in thousands, except share, per share, per unit, and number of years)

LOSS PER SHARE

The Company computes loss per share of common shares and PVS under the two-class method required for multiple classes of common shares and participating securities.

The rights, including the liquidation and dividend rights, of the two classes of shares are similar except for the 400 :1 conversion ratio between the common shares and PVS shares.

Accordingly, the loss per share attributable to common shareholders will be the same for common shares and PVS, on either an individual or combined basis.

The following table sets forth the computation of basic and dilutive net loss per share attributable to common shareholders:

Year Ended December 31,

Net loss and comprehensive loss $ ( 137,722 ) $ ( 30,681 )

Net loss $ ( 59,313 ) $ ( 137,722 )

Weighted-average number of common shares - basic 146,631,767 140,769,247

Dilutive effect of stock options and awards — —

Weighted-average number of proportionate voting shares - basic — 90,040

Weighted-average number of common shares - diluted

146,631,767 140,769,247

Weighted-average number of proportionate voting shares - diluted — 90,040

Loss per common share – basic and diluted $ ( 0.40 ) $ ( 0.98 )

Loss per proportionate voting share – basic and diluted $ — $ ( 98.17 )

As of December 31, 2021 and 2020, potentially dilutive securities include stock options, restricted share units, broker warrants, and common share warrants.

When the Company recognizes a net loss and comprehensive loss from continuing operations, all potentially dilutive shares are anti-dilutive and are consequently excluded from the calculation of diluted net loss per share.

As of December 31, 2022 and December 31, 2021, potentially dilutive securities include stock options, restricted share units, broker warrants, common share warrants, and conversion of the convertible debenture.

When the Company recognizes a net loss from continuing operations, all potentially dilutive shares are anti-dilutive and are consequently excluded from the calculation of diluted net loss per share.

The potentially dilutive awards outstanding for each year are presented in the table below:

3 unchanged sentences

Outstanding common share warrants — 6,983,140

Convertible debenture conversion 28,587,830 —

35,114,431 12,143,874

Convertible debenture conversion

For the year ended December 31, 2022, t he debenture has no impact on the weighted-average number of common shares outstanding for the Basic EPS calculation prior to conversion as there are no shares issued and outstanding on issuance of the debenture.

Conversely, income available to common stockholders will be impacted by interest expense of $ 379 and amortization of debt issuance costs of $ 163 related to the debenture.

Additionally, the Company evaluated the calculation for diluted EPS for the non-contingent conversion feature.

Non-contingent features are considered at the option of the Lender at any time before maturity.

The Company noted that only the non-contingent conversion feature requires further analysis for diluted EPS as there are no contingencies under the Subscription Agreement and common shares will be issued on conversion.

The Company evaluated that the potential adjustments to the income available to common stockholders will include the after-tax amount of interest and other consequential changes in income or expense that would result from the assumed conversion, if any.

The potential adjustment to the weighted-average number of common shares outstanding is based on the additional common shares resulting from the assumed conversion.

The Company will consider the conversion feature only if it will have dilutive impact, not anti-dilutive.

See reconciliation of basic and diluted EPS computations within note "Loss Per Share".

CHARLOTTE’S WEB HOLDINGS, INC.

43 unchanged sentences

3,813,579 1.11

( 8,261 ) 3.64

Forfeited (and expired)

16 unchanged sentences

The fair value of each restricted share unit granted is equal to the market price of the Company’s shares at the date of the grant.

The fair value of shares vested during the year ended December 31, 2021 was $ 751 .

The fair value of shares vested during the year ended December 31, 2022 and 2021was $ 1,462 and $ 751 , respectively.

CHARLOTTE’S WEB HOLDINGS, INC.

10 unchanged sentences

Share-based Compensation Expense

Share-based compensation expense for all equity arrangements for the years ended December 31, 2021 and 2020 was $ 5,483 and $ 4,326 , respectively, included in selling, general and administrative expense in the consolidated statements of operations and comprehensive loss.

Share-based compensation expense for all equity arrangements for the years ended December 31, 2022 and 2021 was $ 3,567 and $ 5,483 , respectively, included in selling, general and administrative expense in the consolidated statements of operations.

As of December 31, 2022, and 2021, there was approximately $ 3,239 and $ 4,638 of total unrecognized share-based compensation expense, related to unvested options granted to employees under the Company’s share option plan that is expected to be recognized over a weighted average period of 2.27 years as of each year ended.

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

INCOME AND OTHER TAXES

Loss before provision for income taxes for the years ended December 31, 2022 and December 31, 2021 consists of the following:

1 unchanged sentence

$ ( 59,153 ) $ ( 137,589 )

Foreign income 10 98

Foreign income (loss) ( 69 ) 10

Total current $ ( 59,222 ) $ ( 137,579 )

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

The major components of income tax (expense) benefit attributable to loss from operations consists of:

4 unchanged sentences

Total deferred — —

Total income tax (expense) benefit

Total income tax expense

$ ( 91 ) $ ( 143 )

3 unchanged sentences

federal statutory tax rate 21.0 % 21.0 %

21.0 % 21.0 %

State income taxes, net of federal tax benefit

State taxes, net of federal benefit 3.3 % 1.8 %

Share based compensation ( 2.0 )% ( 0.3 )%

Change in fair value of financial instruments and other ( 2.7 )% 1.4 %

Non-deductible transaction costs — % ( 2.1 )%

Goodwill impairment (1)

— % ( 11.4 )%

Changed in valuation allowance (2)

( 12.5 )% ( 18.5 )%

Research and development tax credit 0.4 % 2.9 %

Change in valuation allowance (2)

( 24.8 )% ( 12.5 )%

R&D credit 0.7 % 0.4 %

Prior year true up 5.2 % — %

Other, net ( 0.8 )% ( 0.5 )%

Effective tax rate

( 0.1 )% ( 0.1 )%

(1) During the year ended December 31, 2021, the Company impaired its goodwill associated with the acquisition of Abacus.

A portion of this impairment charge is permanently disallowed for tax purposes.

(2) During the year ended December 31, 2022 and 2021, the Company maintained a full valuation allowance on its deferred tax assets.

CHARLOTTE’S WEB HOLDINGS, INC.

1 unchanged sentence

(in thousands, except share, per share, per unit, and number of years)

(1) During the year ended December 31, 2021, the Company impaired its goodwill associated with the acquisition of Abacus.

A portion of this impairment charge is permanently disallowed for tax purposes.

(2) During the year ended December 31, 2021, the Company maintained a full valuation allowance on its deferred tax assets.

In March 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security ("CARES") Act, a substantial tax-and-spending package intended to provide additional economic stimulus to address the impact of the COVID-19 pandemic.

The CARES Act, among other things, allows for the Company to carryback certain net operating losses ("NOLs") generated in 2019.

The impact of the carryback of our 2019 net operating losses resulted in an additional refund of $ 8,056 , and is reflected in income taxes receivable as of December 31, 2021 and 2020 .

The carryback also resulted in an income tax benefit of $ 8,056 , consisting of $ 6,218 due to the ability to recognize the net operating loss deferred tax asset and $ 1,838 from the rate differential between the tax effective in the carryback period and the 21% federal tax rate in 2019.

The difference in the income tax receivable and the income tax benefit relates to incremental R&D credits claimed in the years the carryback was applied.

These incremental tax credits recorded are also subject to the valuation established against net deferred tax assets.

The Company previously recognized $ 3,273 of income taxes receivable related to overpayments made in 2019.

The CARES Act, 2019 overpayments, and miscellaneous other income taxes receivable result in total income taxes receivable as of December 31, 2020 of $ 11,440 .

During the year ended December 31, 2021, the Company received $ 676 of the outstanding incomes taxes receivable related to state refunds.

The Coronavirus Aid, Relief and Economic Security ("CARES") Act and miscellaneous other income taxes receivable result in total income taxes receivable as of December 31, 2021 of $ 10,764 .

During the year ended December 31, 2022, the Company received $ 10,841 from the Internal Revenue Service ("IRS") which was the remaining amount of the income taxes receivable and interest.

The components of deferred tax assets and liabilities are as follows:

2 unchanged sentences

$ 53,997 $ 45,557

Share-based compensation

Inventory provision and UNICAP 263A

Lease liability 4,972 5,586

Property and equipment 121 —

Intangible assets 514 —

Section 174 capitalized costs 1,733 —

Share-based compensation

Total deferred tax assets

5 unchanged sentences

Deferred tax liabilities:

Property and equipment

$ — $ ( 851 )

Intangibles — ( 5,127 )

Right of use assets ( 4,063 ) ( 5,110 )

2 unchanged sentences

$ ( 4,236 ) $ ( 5,319 )

Net deferred taxes (liabilities) $ — $ —

Net deferred taxes $ — $ —

The realization of deferred income tax assets may be dependent on the Company’s ability to generate sufficient income in future years in the associated jurisdiction to which the deferred tax assets relate.

The Company considers

The Company considers all available positive and negative evidence, including scheduled reversals of deferred income tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance.

Based on the review of all positive and negative evidence, including a three-year cumulative pre-tax loss, the Company continues to believe its deferred tax assets are not more-likely-than-not to be realized and, as such, a full valuation allowance is recorded against net deferred taxes.

For the years ended December 31, 2022 and 2021, the Company’s valuation allowance increased by $ 14,694 and $ 17,203 , respectively, primarily related to the incremental net operating losses and an increase to the inventory provision.

As of December 31, 2022, the Company has US federal, US state, and Canadian net operating losses of approximately $ 195,381 , $ 159,964 , and $ 8,654 respectively.

The entire US federal NOLs are post-2017 NOL and therefore can be carried forward indefinitely and the US state NOLs will begin to expire in, 2029.

The Canada NOLs will begin to expire in 2038.

For the year ended December 31, 2022 and 2021, the Company also has a research and development credit carryforward of $ 2,205 and $ 1,788 , respectively , which begin to expire in 2039 .

CHARLOTTE’S WEB HOLDINGS, INC.

1 unchanged sentence

(in thousands, except share, per share, per unit, and number of years)

all available positive and negative evidence, including scheduled reversals of deferred income tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance.

For the years ended December 31, 2021 and 2020, the Company’s valuation allowance increased by $ 17,203 and $ 11,251 , respectively, primarily related to the incremental net operating losses.

As of December 31, 2021, the Company has federal and state net operating losses of approximately $ 170,443 and $ 144,225 , respectively.

The entire federal NOLs are post-2017 NOL and therefore can be carried forward indefinitely and the state NOLs will begin to expire on December 31, 2029.

The Company also has a research and development credit carryforward of $ 1,788 as of December 31, 2021.

Tax laws impose restrictions on the utilization of net operating loss carryforwards and research and development credit carryforwards in the event of a change in ownership of the Company as defined by Internal Revenue Code Section 382 and 383.

18 unchanged sentences

The Company’s estimated liabilities related to these matters are adjusted in the period in which the uncertain tax position is effectively settled, the statute of limitations for examination expires or when additional information becomes available.

The Company’s liability for unrecognized tax benefits requires the use of assumptions and significant judgement to estimate the exposures associated with our various filing positions.

Although the Company believes that the judgments and estimates made are reasonable, actual results could differ and resulting adjustments could

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

materially affect the Company's effective income tax rate and income tax provision.

The Company’s liability for unrecognized tax benefits requires the use of assumptions and significant judgment to estimate the exposures associated with the Company's various filing positions.

Although the Company believes that the judgments and estimates made are reasonable, actual results could differ and resulting adjustments could materially affect the Company's effective income tax rate and income tax provision.

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

2 unchanged sentences

The Company files income tax returns in the U.S.

federal and various state jurisdictions and Israel.

federal, various state jurisdictions, Canada, and Israel.

In the normal course of business, it is subject to examination by taxing authorities throughout the world.

2 unchanged sentences

income tax examinations by tax authorities in years before 2019.

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

The Inflation Reduction Act (“IRA”) was enacted on August 16, 2022.

The IRA introduced new provisions including a 15% corporate alternative minimum tax for certain large corporations that have at least an average of $1 billion adjusted financial statement income over a consecutive three-tax-year period and a 1% excise tax surcharge on stock repurchases.

The IRA is applicable for tax years beginning after December 31, 2022 and had no benefit to our consolidated financial statements for any of the periods presented, and we do not expect it to have a direct material impact on our future results of operations, financial condition, or cash flows.

Employee Retention Credit

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 year ended December 31, 2022 as an offset to Selling, general and administrative expenses expense.

Due to the expected timing of receipt of the ERC, a corresponding receivable was recognized within other long-term assets as of December 31, 2022.

RELATED PARTY TRANSACTIONS

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(“Aidance”) is the manufacturer of nearly all Abacus Health products.

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

The former Chief Executive Officer of Abacus Health ("Abacus"), and a former officer of the Company through June 2022, also serves on Aidance’s Board of Directors.

For the years ended December 31, 2022 and 2021, the Company made purchases of $ 3,293 and $ 3,570 , respectively from Aidance.

Payment terms on purchases are due 30 days after receipt.

As of December 31, 2021, the Company had a liability of $ 119 due to Aidance presented in accounts payable in the consolidated balance sheets.

As of December 31, 2022 and 2021, the Company had a liability of $ 36 and $ 119 , respectively, 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 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, 2021, 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.

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.

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 December 31, 2021.

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

On March 2, 2021, the Company entered into the SBH Purchase Option with Stanley Brothers USA as discussed above (note 4).

The note receivable was secured by equity instruments with certain founders of the Company, and bore 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.

On March 22, 2022, 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.

As of December 31, 2021, the note receivable of $ 1,037 consisted of principal and interest.

As of December 31, 2022, the Company established a reserve against the note receivable due to decline in collateral and risk associated with collectability and therefore, expensed the outstanding balance of $ 1,037 .

Effective January 5, 2023, the Company entered into a Brand License and Option Agreement with JMS Brands LLC, an entity owned by one of the Company’s founders.

Pursuant to the Brand License and Option Agreement, the Company licenses certain intellectual property from JMS Brands LLC, for an annual license fee of $ 500 .

Pursuant to the terms of the agreement, the Company has the option to purchase the intellectual property rights for $ 2,000 .

On March 2, 2021, the Company entered into the SBH Purchase Option with Stanley Brothers USA as discussed above (note "Fair Value Measurement").

The SBH Purchase Option was purchased for total consideration of $ 8,000 .

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

On April 16, 2021, pursuant to an amendment to the agreement, the name and likeness and license agreement between the Company and Leeland & Sig LLC d/b/a Stanley Brothers Brand Company was extended for a period of one year , expiring July 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.

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

CHARLOTTE’S WEB HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share, per share, per unit, and number of years)

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, the agreement was extended to June 30, 2023.

The agreement includes the payment of a nominal per diem fee for specifically requested activities as brand ambassadors for the Company.

In addition, on April 16, 2021, the Company executed a separate consulting agreement which extended the services agreements of the 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 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 year ended December 31, 2021, the Company recognized $ 1,056 of sales and marketing expenses in the condensed consolidated statements of operations and comprehensive loss related to this agreement.

The remaining $ 1,025 is presented in prepaid expenses in the condensed consolidated balance sheets.

For the year ended December 31, 2022 and 2021, the Company recognized $ 1,025 and $ 1,056 , respectively, of sales and marketing expenses in the condensed consolidated statements of operations related to this agreement.

As of December 31, 2022 , there is no remaining balance.

SUBSEQUENT EVENTS

Effective January 5, 2023, the Company entered into a Brand License and Option Agreement with JMS Brands LLC, an entity owned by one of the Company’s founders.

Pursuant to the Brand License and Option Agreement, the Company licenses certain intellectual property from JMS Brands LLC, for an annual license fee of $ 500 .

Pursuant to the terms of the agreement, the Company has the option to purchase the intellectual property rights for $ 2,000 .

Effective as of February 22, 2023, the Company entered into an Extension and Fifth Amending Agreement to Name and Likeness and License Agreement (the “Extension Agreement”) with Leeland & Sig LLC d/b/a Stanley Brothers Brand Company.

Pursuant to the Extension Agreement, the term of the Name and Likeness and License Agreement dated August 1, 2018 between the Company and Licensor, as amended by the Amending Agreement to Name and Likeness Agreement effective April 16, 2021 was extended to June 30, 2023.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

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-K

Item 8. Financial Statements and Supplementary Data