What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-10 compared with 2023-05-12 · 185 added, 85 removed, 181 unchanged (60% of the section changed)

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Cautionary Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q ("Form 10-Q") contains statements that are, or may be considered to be, “forward-looking statements.” Forward-looking statements are neither historical facts nor assurances of future performance.

This Quarterly Report on Form 10-Q ("Form 10-Q") contains statements that are, or may be considered to be, “forward-looking statements” under Canadian securities laws and within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are intended to be subject to the "safe harbor" created by those sections and other applicable laws.

Forward-looking statements are neither historical facts nor assurances of future performance.

Instead, they are based on current beliefs, expectations or assumptions regarding the future of the business, future plans and strategies, operational results and other future conditions.

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

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

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

and its subsidiaries:

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Charlotte’s Web Holdings, Inc., is a Certified B Corp headquartered in Louisville, Colorado, that does the majority of its business in the United States.

The Company is a market leader in innovative hemp extract wellness products under a family of brands which includes Charlotte’s Web™, CBD Medic™, CBD Clinic™, and Harmony Hemp™.

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

The Company moved into its new cGMP facility in Louisville, Colorado during the second quarter of 2020 at which the Company conducts its production of tinctures, distribution, and quality control activities, and has

expanded its research and development ("R&D").

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

The Company is a market leader in innovative hemp extract wellness products under a family of brands which includes Charlotte’s Web™, ReCreate TM , CBD Medic™, CBD Clinic™, and Harmony Hemp™.

Charlotte’s Web branded premium quality products start with proprietary hemp genetics that are 100% North American farm grown and manufactured into hemp extracts containing naturally occurring

phytocannabinoids including CBD, cannabichromene ("CBC"), cannabigerol ("CBG"), terpenes, flavonoids and other beneficial hemp compounds.

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

As of October 2022, the Company produces NSF Certified for Sports® broad spectrum tincture products.

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

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

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

The information provided on such websites is not part of this MD&A.

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

As of March 31, 2023, the Company operated in a single operating and reportable segment, hemp-derived CBD wellness products, as its executive officers reviewed overall operating results in order to assess financial performance and to make resource allocation decisions, rather than to assess a lower-level unit of operations in isolation.

As of June 30, 2023, the Company operated in a single operating and reportable segment, hemp-derived CBD wellness products, as its executive officers reviewed overall operating results in order to assess financial performance and to make resource allocation decisions, rather than to assess a lower-level unit of operations in isolation.

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

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Where research provides evidence that a greater than 0.3% THC level may have a potential therapeutic use, the Company may consider pursuing development of that use in jurisdictions where it is legal to do so in accordance with applicable regulations and if consistent with the Company’s founding principles.

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

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

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

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

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

On October 12, 2022, the Company announced the launch of Charlotte’s Web SPORT – Daily Edge, the first broad-spectrum hemp-derived tincture to be Certified for Sport® by NSF, the highly respected global third-party organization that establishes standards for safety, quality, sustainability, and performance as well as certifies manufacturers and products against them.

NSF's Certified for Sport® program verifies that products do not contain unsafe levels of contaminants, prohibited substances or masking agents, and that what is on the label matches what is in the product.

The Certified for Sport® certification is the only independent third-party certification program recognized by Major League Baseball.

The Company does not currently have any plans to expand into high THC products in the near future.

In the US, the Company holds the number one market share position in the CBD market relative to retail dollars, this is based on market share data from leading third-party analysts such as Nielsen Company (US), LLC (“Nielsen”), SPINS, LLC (“Spins”), and Brightfield Group (“Brightfield”), respectively.

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

Effective November 1, 2022, the Company entered into a Manufacturing and Sales License Agreement with Aphria, Inc., an Ontario corporation, an affiliate of Tilray Brands, Inc ("Tilray"), pursuant to which the parties entered into a strategic alliance through which Tilray will have the rights to licensing, manufacturing, marketing and distribution of Charlotte’s WebTM CBD hemp extract products in Canada.

On April 6, 2023, the Company announced the formation of an entity with AJNA BioSciences PBC (“AJNA”), and a subsidiary of British American Tobacco PLC (LSE:

Recent Developments

On April 6, 2023, the Company jointly formed an entity, DeFloria LLC ("DeFloria"), with AJNA BioSciences PBC (“AJNA”), and a subsidiary of British American Tobacco PLC (LSE:

BATS and NYSE:

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The Company and AJNA each hold 400,000 of the entity’s voting common units.

The Company’s contribution to the entity is a license permitting the use certain proprietary hemp intellectual property, including clinical and consumer data.

The Company’s contribution to DeFloria is a license permitting the use of certain proprietary hemp intellectual property, including clinical and consumer data.

Additionally, the Company has a Supply Agreement with DeFloria, under which the Company supplies the oils at cost used to produce and develop the new drug.

AJNA's contribution to the entity is laboratory and regulatory services, clinical expertise and the provision of clinical services.

The entity is expected to use the initial $10 million cash investment for the clinical development of a novel hemp botanical Investigational New Drug application and to commence Phase I clinical development in 2024.

On July 11, 2023, the Company expanded its product footprint with the launch of NSF Certified for Sports® broad spectrum gummy products under the ReCreate™ brand, the Company's lifestyle and botanical wellness brand

focused on the combination of organic broad-spectrum CBD and functional botanicals.

At the same time, the Company announced its partnership as the Official CBD of the Premier Lacrosse League ("PLL").

As of June 30, 2023, several states, including, but not limited to, Florida, Maryland, Minnesota, New York, Utah and Virginia, have adopted new regulations that will impact the Company's ability to sell certain products as currently formulated or packaged in these states.

Many of these states have also implemented new THC/CBD limits, age verification, labeling and packaging requirements.

The Company is assessing the business and financial impacts of the new regulations, including steps that can be taken to address the new product formulation and labeling requirements, as well as costs and potential revenue impacts and anticipated timing for such impacts to the Company in these states.

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

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

In furtherance of the Company’s R&D efforts, the Company established CW Labs, an internal division for R&D, to 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 cGMP production and distribution facility.

Selected Financial Information

For the Three Months Ended

For the Six Months Ended

2023 2022 2023 2022

Total revenues

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7,088 9,556 14,181 17,199

8,918 9,321 18,835 21,035

Selling, general, and administrative expenses

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Operating loss (10,709) (7,938) (18,305) (16,579)

Other income (expense), net

Gain on investment in unconsolidated entity 10,700 — 10,700 —

Change in fair value of financial instruments and other 4,229 — 9,612 100

Other income (expense), net

(1,376) 68 (2,074) (17)

Net income (loss)

$ 2,844 $ (7,870) $ (67) $ (16,496)

Total assets $ 176,589 $ 153,014

Total liabilities $ 98,228 $ 37,102

For The Three Months Ended June 30, 2023 and 2022

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

DTC sales contributed 66% of the Company’s total net revenue in Q2 2023 with B2B sales contributing 34%.

Three Months Ended

March 31, % (Decrease)

June 30, % (Decrease)

Direct-to-consumer ("DTC") revenue $ 10,734 $ 13,277 (19.2) %

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Total revenue $ 16,006 $ 18,877 (15.2) %

Total revenue for the three months ended March 31, 2023 was $17,010, a decrease of 12.1% compared to the three months ended March 31, 2022.

DTC e-commerce revenue decreased 14.2% year-over-year.

The decrease compared to the prior period was primarily due to lower tincture sales volume and related product mix.

Price promotions for DTC remained flat year over year.

B2B revenue decreased 7.7% compared to the three months ended March 31, 2022.

The decrease compared to prior period was primarily due to unfavorable product mix shift to small count gummies.

Total revenue for the three months ended June 30, 2023 was $16,006, a decrease of 15.2% compared to the three months ended June 30, 2022.

DTC net revenue from online sales was $10.7 million, a decrease of 19.2% year-over-year from $13.3 million in Q2 2022.

The decrease was primarily due to lower traffic to the Company’s webstore as well as a shift in product mix, specifically tinctures.

Charlotte’s Web maintains the largest e-commerce business in the CBD industry according to the Brightfield Group.

E-commerce is the CBD industry’s largest sales channel representing approximately 37% of total annual industry sales.

Charlotte’s Web recently launched initiatives to increase online traffic to broaden demographic exposure, including upcoming promotions with MLB, and improving the online consumer experience.

B2B net revenue of $5.3 million decreased 5.9% year-over-year from $5.6 million in Q2 2022, primarily due to product mix.

In May 2023, B2B distribution was expanded in pet retail through a new partnership with Phillips Pet Food & Supplies, America’s largest distributor in the pet specialty retail channel, covering more than 6,000 retailers representing more than 14,000 retail locations.

Cost of Goods Sold

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Three Months Ended

March 31, % (Decrease)

June 30, % (Decrease)

Inventory expensed to cost of goods sold 4,979 6,100 (18.4) %

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Cost of goods sold $ 7,088 $ 9,556 (25.8) %

Cost of goods sold decreased 7.2% for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily due to lower unit sales volume, product mix shift away from tinctures, and a decrease in variable operating costs.

The decrease was partially offset by a slight addition to the inventory reserve for aged finished products.

Depreciation and amortization expense for the three months ended March 31, 2023 and March 31, 2022 was $3,792 and $2,078, respectively, of which $899 and $854, respectively, was expensed to cost of goods sold.

Cost of goods sold decreased 25.8% for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

The improvement was primarily due to lower comparable inventory provisions recorded during the reporting quarter as well as a decrease in inventory expensed to cost of goods sold as a result of lower sales volume.

Depreciation and amortization expense for the three months ended June 30, 2023 and June 30, 2022 was $3,977 and $1,862, respectively, of which $897 and $846, respectively, was expensed to cost of goods sold.

The remaining depreciation and amortization expenses of $3,080 and $1,016, respectively, was expensed to Selling, general, and administrative expenses.

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

Gross profit and gross profit margin are as follows:

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

Gross profit for the three months ended June 30, 2023 and June 30, 2022 is as follows:

Three Months Ended

March 31, % (Decrease)

June 30, % (Decrease)

Gross profit $ 8,918 $ 9,321 (4.3) %

Gross margin 55.7 % 49.4 % 12.8 %

Gross profit decreased 15.3% for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

The decrease is primarily related to lower net revenue in both the DTC and B2B channels, unfavorable product mix for the DTC channel, and an increase in the inventory reserve provision discussed above.

Gross profit decreased 4.3% for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

The decrease is directly related to the revenue drop of 15.2%, partially offset by improvements in cost of goods sold.

On a rate basis, gross margin increased 12.8% despite lower revenue due to the year-over-year reduction in inventory provision.

Selling, General, and Administrative Expenses

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Three Months Ended

March 31, % (Decrease)

June 30, % (Decrease)

Selling, general, and administrative expenses $ 19,627 $ 17,259 13.7 %

Total Selling, general, and administrative expenses for the three months ended March 31, 2023 and March 31, 2022 were $17,513 and $20,355, respectively.

The 14.0% decrease was primarily attributable to a decrease in personnel, insurance, rental, legal and professional services costs of approximately $3,700, partially offset by an increase in the amortization expense related to MLB assets and convertible debenture discounts of approximately $2,100.

Depreciation and amortization expensed to Selling, general, and administrative expenses for the three months ended March 31, 2023 and March 31, 2022 were $2,893 and $1,224, respectively.

Total research and development expenses expensed to Selling, general, and administrative expense for the three months ended March 31, 2023 and March 31, 2022 were $546 and $1,170, respectively.

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

Total Selling, general, and administrative expenses for the three months ended June 30, 2023 and June 30, 2022 were $19,627 and $17,259, respectively.

The increase is primarily due to the amortization of MLB license and media rights assets of $2,074.

Depreciation and amortization expensed to Selling, general, and administrative expenses for the three months ended June 30, 2023 and June 30, 2022 were $3,080 and $1,016, respectively.

Total research and development costs expensed to Selling, general, and administrative expense for the three months ended June 30, 2023 and June 30, 2022 were $916 and $1,018, respectively.

Total Change in Gain on Investment in Unconsolidated Entity

Total change in gain on investment in unconsolidated entity is as follows:

Three Months Ended

June 30, % (Decrease)

Change in gain on investment in unconsolidated entity

$ 10,700 $ — 100 %

Total change in gain on investment in unconsolidated entity for the three months ended June 30, 2023 and June 30, 2022 was $10,700 and $0, respectively.

For the three months ended June 30, 2023, the increase in the gain on investment in unconsolidated entity was due to the Company jointly forming an entity, DeFloria, with AJNA, and BAT.

The entity was established to pursue FDA-approval for a novel botanical drug to target a neurological condition.

The botanical drug will be developed from certain proprietary hemp genetics of the Company.

The Company has the ability and elected the fair value option for the investment in DeFloria.

As such the investment is measured at fair value and remeasure at each reporting date, with changes recognized in changes in fair value of financial instruments and other.

Total Change in Fair Value of Financial Instruments and Other

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Three Months Ended

March 31, % (Decrease)

June 30, % (Decrease)

Change in fair value of financial instruments and other $ 4,229 $ — 100 %

Total change in fair value of financial instruments and other for the three months ended March 31, 2023 and March 31, 2022 was $5,382 and $100, respectively.

For the three months ended March 31, 2023, the increase in the change in fair value of financial instruments and other was primarily due to the revaluation of the fair value of the Company's debt conversion option and debt interest rate conversion feature resulting in a gain of $6,257 and a loss of $605, respectively.

The fair value of the Company's embedded derivatives are revalued at each reporting date with changes impacted by variability in the Company's share price and implied debt yields.

For the three months ending March 31, 2023, there was a loss of $300 in the fair value of the SBH Purchase Option compared to a gain of $100 as of March 31, 2022.

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

Total change in fair value of financial instruments and other for the three months ended June 30, 2023 and June 30, 2022 was $4,229 and $0, respectively.

For the three months ended June 30, 2023, the increase in the change in fair value of financial instruments and other was primarily due to the revaluation of the fair value of the Company's debt conversion option and debt interest rate conversion feature resulting in a net gain of $4,173.

The fair value of the Company's embedded derivatives and options are revalued at each reporting date with changes impacted by variability in the Company's share price and implied debt yields.

For the Six Months Ended June 30, 2023 and 2022

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

Six Months Ended

June 30, % (Decrease)

Direct-to-consumer ("DTC") revenue $ 22,002 $ 26,415 (16.7) %

Business-to-business ("B2B") revenue 11,014 11,819 (6.8) %

Total revenue $ 33,016 $ 38,234 (13.6) %

Total revenue for the six months ended June 30, 2023 was $33,016, a decrease of 13.6% compared to the six months ended June 30, 2022.

DTC revenue decreased 16.7%, driven by lower tincture, gummy and capsule volume.

Promotional activity and product mix shift away from tinctures were additional contributing factors.

B2B revenue decreased 6.8% compared to the six months ended June 30, 2023.

This decrease resulted from topicals portfolio rationalization and a negative product mix shift to smaller count pack sizes.

The topicals revenue decline was partially offset by increased sales of pet chews.

The Company remains #1 in FDM and Natural retail channels according to Neilsen and Spins, respectively

Cost of Goods Sold

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

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

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

The components of cost of goods sold are as follows:

Six Months Ended

June 30, % (Decrease)

Inventory expensed to cost of goods sold 10,188 11,966 (14.9) %

Inventory provision, net 320 1,857 (82.8) %

Other production costs 1,877 1,676 12.0 %

Depreciation and amortization 1,796 1,700 5.6 %

Cost of goods sold $ 14,181 $ 17,199 (17.5) %

Cost of goods sold decreased 17.5% for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

Variable cost of goods declined proportionately with revenue, with a further reduction on the improvement of inventory provisions.

Depreciation and amortization expense for the six months ended June 30, 2023 and June 30, 2022 was $7,769 and $3,940, respectively, of which $1,796 and $1,700, respectively, was expensed to cost of goods sold.

The remaining depreciation and amortization expenses of $5,973 and $3,776, respectively, was expensed to Selling, general, and administrative expenses.

Gross profit for the six months ended June 30, 2023 and June 30, 2022 is as follows:

Six Months Ended

June 30, % (Decrease)

Gross profit $ 18,835 $ 21,035 (10.5) %

Gross margin 57.0 % 55.0 % 3.6 %

Gross profit decreased 10.5% for the six months ended June 30, 2023 compared to the six months ended June 30, 2022, due to the lower net revenue for the first six months of 2023.

However gross margin improved 3.6% year-over-year as a result of improved costs of goods sold.

Selling, General, and Administrative Expenses

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

Six Months Ended

June 30, % (Decrease)

Selling, general, and administrative expenses $ 37,140 $ 37,614 (1.3) %

Total selling, general, and administrative expenses for the six months ended June 30, 2023 and June 30, 2022 were $37,140 and $37,614, respectively.

The decrease is primarily due to a reduction in personnel and consulting costs compared to the prior period.

The decrease is partially offset by an increase in amortization related to the MLB license and media rights assets of $3,897.

Depreciation and amortization expensed to Selling, general, and administrative expenses for the six months ended June 30, 2023 and June 30, 2022 were $5,973 and $3,776, respectively.

Total research and development costs expensed to Selling, general, and administrative expense for the six months ended June 30, 2023 and June 30, 2022 were $1,462 and $2,188, respectively.

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

Total Change in Gain on Investment in Unconsolidated Entity

Total change in gain on investment in unconsolidated entity is as follows:

Six Months Ended

June 30, % (Decrease)

Change in gain on investment in unconsolidated entity

$ 10,700 $ — 100 %

Total change in gain on investment in unconsolidated entity for the three months ended June 30, 2023 and June 30, 2022 was $10,700 and $0, respectively.

For the six months ended June 30, 2023, the increase in the gain on investment in unconsolidated entity was due to the Company jointly forming an entity, DeFloria, with AJNA, and BAT.

The entity was established to pursue FDA-approval for a novel botanical drug to target a neurological condition.

The botanical drug will be developed from certain proprietary hemp genetics of the Company.

The Company has the ability and elected the fair value option for the investment in DeFloria.

As such the investment is measured at fair value and remeasure at each reporting date, with changes recognized in changes in fair value of financial instruments and other.

Total Change in Fair Value of Financial Instruments and Other

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

Six Months Ended

June 30, % (Decrease)

Change in fair value of financial instruments and other $ 9,612 $ 100 9512 %

Total change in fair value of financial instruments and other for the six months ended June 30, 2023 and June 30, 2022 was $9,612 and $100, respectively.

For the six months ended June 30, 2023, the increase in the change in fair value of financial instruments and other was primarily due to the revaluation of the fair value of the Company's debt conversion option and debt interest rate conversion feature resulting in a net gain of $9,855, respectively.

The fair value of the Company's embedded derivatives and options are revalued at each reporting date with changes impacted by variability in the Company's share price and implied debt yields.

Liquidity and Capital Resources

As of March 31, 2023 and December 31, 2022, the Company had total current liabilities of $22,623 and $21,427, respectively, and cash and cash equivalents of $60,781 and $66,963, respectively, to meet its current obligations.

As of June 30, 2023 and December 31, 2022, the Company had total current liabilities of $22,609 and $21,427, respectively, and cash and cash equivalents of $61,728 and $66,963, respectively, to meet its current obligations.

The Company expects its selling, general and administrative expenses in 2023 to be slightly higher than 2022 reflecting the incremental costs of the MLB Promotional Rights Agreement and related marketing activations.

The investments in paid license and media rights as well as the launch of the new NSF Certified for Sport® brand products are intended to withstand the decline in revenues in the current year.

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

The investments in paid license and media rights as well as the launch of the new NSF Certified for Sport® brand products are intended to be offset by increases in online traffic, channel sales and net revenue over the long term.

The Company’s ability to fund its operations for the next twelve months and thereafter will depend on its future operating performance, particularly revenue growth, which can be affected by general economic conditions, industry regulatory changes, and other factors beyond the Company’s control.

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

The Company expects to meet our long-term liquidity requirements through various sources of capital, including cash provided by operations and proceeds from the convertible debenture.

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

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

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

There can be no assurance the Company will have the ability to raise additional funds and, if raised privately or publicly, will be available to the Company when needed or on terms which are acceptable.

Cash from Operating Activities

Net cash used in operating activities for the three months ended March 31, 2023 and March 31, 2022 were as follows:

Three Months Ended March 31,

Net cash used in operating activities for the six months ended June 30, 2023 and June 30, 2022 were as follows:

Six Months Ended June 30,

Net cash used in operating activities $ (5,009) $ (4,284)

For the three months ended March 31, 2023, the increase in cash used in operations is primarily due to cash outflows of $2,000 associated with the MLB Promotional Rights Agreement which was entered into in October 2022.

For the six months ended June 30, 2023, the increase in cash used in operations is primarily due to cash outflows of $4,000 associated with the MLB Promotional Rights Agreement which was entered into in October 2022.

Additionally, the increase is due to escalating rent payments compared to the prior period.

For the six months ended June 30, 2022, the Company collected $3,185 from income tax refunds due.

Cash from Investing Activities

Net cash used in investing activities for the three months ended March 31, 2023 and March 31, 2022 were as follows:

Three Months Ended March 31,

Net cash used in investing activities for the six months ended June 30, 2023 and June 30, 2022 were as follows:

Six Months Ended June 30,

Net cash used in investing activities $ (151) $ (333)

For the three months ended March 31, 2023, the decrease in cash used in investing activities was driven by lower capital expenditures.

For the six months ended June 30, 2023, the decrease in cash used in investing activities was driven by lower capital expenditures.

Cash from Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2023 and March 31, 2022 were as follows:

Three Months Ended March 31,

Net cash provided by financing activities for the six months ended June 30, 2023 and June 30, 2022 were as follows:

Six Months Ended June 30,

Net cash used in financing activities $ (75) $ (60)

For the three months ended March 31, 2023 and March 31, 2022, the change was primarily due to the vesting of restricted stock units.

For the six months ended June 30, 2023, the change was primarily due to the vesting of restricted stock units.

Off-Balance Sheet Arrangements

As of March 31, 2023 and December 31, 2022, we do not have any off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on our results of operations or financial condition, including, and without limitation, such considerations as liquidity and capital resources.

As of June 30, 2023 and December 31, 2022, we do not have any off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on our results of operations or financial condition, including, and without limitation, such considerations as liquidity and capital resources.

Related party transactions

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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.

As of March 31, 2022, 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 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.

As of June 30, 2022 , 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.

On March 2, 2021, the Company entered into the SBH Purchase Option with Stanley Brothers USA as discussed above (Note 3).

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

The SBH Purchase Option was purchased for a 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.

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.

Effective January 5, 2023, the Company entered into a Brand License and Option Agreement with JMS Brands LLC (the “Brand License and Option Agreement”), 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 April 6, 2023, the Company jointly formed an entity, DeFloria, with AJNA and BAT.

AJNA is a botanical drug development company.

AJNA is partially owned and was co-founded by a co-founder of Charlotte's Web.

BAT holds an equity interest in the entity in the form of 200,000 preferred units following its $10 million investment and has the right to participate in future equity issuances to maintain its pro rata equity position.

The Company and AJNA each hold 400,000 of the entity’s voting common units.

Effective May 1, 2023 the Company entered into an 8% interest bearing note receivable with DeFloria for the bill of sale of machine equipment in the amount of $170.

The principal and interest of the note receivable will be paid in 36 monthly installments.

As of June 30, 2023, the remaining note receivable of $156 is presented in other assets in the condensed consolidated balance sheets.

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 December 31, 2023.

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

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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 three months ended March 31, 2022, the Company recognized $420 of sales and marketing expenses in the condensed consolidated statements of operations related to this agreement.

For the three and six months ended June 30, 2022, the Company recognized $454 and $875, respectively, of sales and marketing expenses in the condensed consolidated statements of operations related to these agreements.

Recently Adopted Accounting Principles

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Fair Value Option

The Company has elected the fair value option in accordance with ASC 825-10 guidance to record its SBH Purchase Option.

The Company has elected the fair value option in accordance with ASC 825-10 guidance to record its SBH Purchase Option and the Investment in unconsolidated entity.

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

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

These assets are remeasured at fair value at each reporting date, with changes to fair value recognized in the statements of operations for the period.

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

estimation uncertainty.

Changes in assumptions that reasonably could have been different at the reporting date may result in a higher or lower determination of fair value.

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

Primary assumptions utilized include financial projections of Stanley Brothers USA and the probability and timing of exercise asserted by the Company.

Inventories are stated at the lower of cost or net realizable value.

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

There were no impairment losses recognized for the three months ended March 31, 2023 and 2022.

There were no impairment losses recognized for the three months ended June 30, 2023 and 2022.

Convertible Debenture

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

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

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

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

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

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With respect to any tax positions that do not meet the recognition threshold, a corresponding liability, including interest and penalties, is recorded in the condensed consolidated financial statements.

Company may be subject to examination by tax authorities where the Company conducts operations.

The Company may be subject to examination by tax authorities where the Company conducts operations.

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

The Company has recorded an uncertain tax position as of March 31, 2023 and December 31, 2022.

The Company has recorded an uncertain tax position as of June 30, 2023 and December 31, 2022.

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

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

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

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

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

4 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis