What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-08-10 · 155 added, 147 removed, 219 unchanged (58% of the section changed)

13 unchanged sentences

Management’s Discussion and Analysis of Financial Condition and Results of Operations " in our Annual Report on Form 10-K for the year ended December 31, 2022.

Except for historical information, the discussion in this section contains forward-looking statements that involve risks and uncertainties, as discussed in the “Cautionary Note Regarding Forward Looking Statements.” Future results could differ materially from those discussed below for many reasons, including the risks described in Item 1A—“Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 and in Part II, Item 1A—Risk Factors” of this Form 10-Q.

Except for historical information, the discussion in this section contains forward-looking statements that involve risks and uncertainties, as discussed in the " Cautionary Note Regarding Forward Looking Statements.

" Future results could differ materially from those discussed below for many reasons, including the risks described in Item 1A— " Risk Factors " in our Annual Report on Form 10-K for the year ended December 31, 2022 and in Part II, Item 1A—Risk Factors " of this Form 10-Q.

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

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BUSINESS OVERVIEW

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.

Charlotte’s Web Holdings, Inc., is a Certified B Corp headquartered in Louisville, Colorado, which 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™, ReCreate TM , CBD Medic™, CBD Clinic™, and Harmony Hemp™.

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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 and recreateyou.com.

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

As of September 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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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.

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 Arizona, 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.

The Hemp grown in Canada is utilized exclusively in the Canadian markets or for research purposes and not in products sold in the United States.

Recent Developments

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BTI) ("BAT").

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.

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

BAT holds an equity interest in DeFloria 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 DeFloria’s voting common units.

The Company’s contribution to DeFloria was 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.

DeFloria is utilizing the initial $10 million cash investment for the clinical development of a novel hemp botanical Investigational New Drug application and has commenced Phase I clinical development.

In June of 2023, the Company announced its partnership as the Official CBD of the Premier Lacrosse League ("PLL").

In early 2023, Charlotte’s Web initiated a plan to move the production of topicals and gummies in house, and in the third quarter construction progressed with a modest capital expenditure.

On-site manufacturing better utilizes the Company’s existing Louisville production facility, improving gross margins and aligns with the Company’s ongoing efforts to improve overall operating efficiencies.

As of September 30, 2023, several states, including, but not limited to, Alaska, 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 assess 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.

The Company is working to capitalize on the rapidly emerging botanical wellness products industry by driving customer acquisition and retention, as well as accelerating national and international retail expansion.

The Company is working to capitalize on the rapidly emerging botanical wellness products industry by driving customer acquisition and retention, as well as accelerating retail expansion.

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

Selected Financial Information

For the Three Months Ended

For the Six Months Ended

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2023 2022 2023 2022

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19,889 11,032 57,029 48,646

Asset Impairment — 1,822 — 1,822

Operating loss (11,960) (3,909) (30,265) (20,488)

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

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

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

Change in fair value of financial instruments (4,024) (4,000) 5,588 (3,900)

Other income (expense), net

841 321 (1,234) 304

Net income (loss)

$ (15,143) $ (7,588) $ (15,211) $ (24,084)

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Total liabilities $ 100,129 $ 31,656

For The Three Months Ended June 30, 2023 and 2022

For The Three Months Ended September 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%.

DTC sales contributed 66% of the Company’s total net revenue in the three months ended September 30, 2023 with B2B sales contributing 34%.

Three Months Ended

June 30, % (Decrease)

September 30,

Direct-to-consumer ("DTC") revenue $ 9,428 $ 11,759 (19.8) %

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Total revenue $ 14,294 $ 17,037 (16.1) %

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.

Total revenue for the three months ended September 30, 2023 was $14,294, a decrease of 16.1% compared to the three months ended September 30, 2022.

DTC net revenue through the Company’s webstore was $9,428, a decrease of 19.8% year-over-year compared to $11,759 for the three months ended September 30, 2022.

The decrease for the quarter was primarily due to lower organic traffic and consumer acquisition.

E-commerce is the CBD industry’s largest sales channel representing more than one third of total annual industry sales.

The Company is investing in this important channel to increase digital marketing effectiveness and search engine optimization to drive higher traffic to its webstore.

Under new leadership, a new platform is being implemented to improve the consumer experience.

The platform is also expected to provide better integration with marketing initiatives, including promotions with MLB.

B2B net revenue of $4,866 decreased 7.8% year-over-year compared to $5,278 for the three months ended September 30, 2022 , primarily due to some of the Company’s mass retail customers exiting the CBD category, and/or closing retail locations.

Despite some retailers reducing the size of the CBD category over the past two years, Charlotte’s Web has increased the number retail doors and placements in 2023.

Modest category weakness within the Natural retail channel during the quarter was partially offset by increased sales traction in the medical channel.

Cost of Goods Sold

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The components of cost of goods sold are as follows:

Three Months Ended

June 30, % (Decrease)

Three Months Ended % (Decrease)/ Increase

September 30,

Inventory expensed to cost of goods sold 4,454 5,407 (17.6) %

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Cost of goods sold $ 6,365 $ 8,092 (21.3) %

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.

Cost of goods sold decreased 21.3% for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

The improvement for the quarter was primarily due to a decrease in inventory expensed to cost of goods sold and reduced operating costs as a result of lower sales volume.

Depreciation and amortization expense for the three months ended September 30, 2023 and September 30, 2022 was $3,741 and $1,822, respectively, of which $893 and $843, respectively, was expensed to cost of goods sold.

The remaining depreciation and amortization expenses for the quarter of $2,848 and $979, respectively, was expensed to Selling, general, and administrative expenses.

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

June 30, % (Decrease)

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

Three Months Ended % (Decrease)/ Increase

September 30,

Gross profit $ 7,929 $ 8,945 (11.4) %

Gross margin 55.5 % 52.5 % 5.7 %

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.

Gross profit decreased 11.4% for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

The decrease is directly related to the decrease in revenue of 16.1%, partially offset by improvements in cost of goods sold.

On a rate basis, gross margin increased 5.7% despite lower revenue due to improved operating cost management.

Selling, General, and Administrative Expenses

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

Three Months Ended

June 30, % (Decrease)

Three Months Ended % (Decrease)/ Increase

September 30,

Selling, general, and administrative expenses $ 19,889 $ 11,032 80.3 %

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 Selling, general, and administrative expenses for the three months ended September 30, 2023 and September 30, 2022 were $19,889 and $11,032, respectively.

The increase for the quarter is primarily due to the amortization of MLB license and media rights assets of $2,949.

Additionally, for the three months ended September 30, 2022, an Employee Retention Credit ("ERC") tax benefit of $4,106 was recognized reducing Selling, general, and administrative expenses in the prior period.

Depreciation and amortization expensed to Selling, general, and administrative expenses for the three months ended September 30, 2023 and September 30, 2022 were $2,848 and $979, respectively.

Total research and development costs expensed to Selling, general, and administrative expenses for the three months ended September 30, 2023 and September 30, 2022 were $733 and $647, 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 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:

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

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

Three Months Ended

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 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.

Asset Impairment

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

The Company made the decision to cease utilizing the Denver office space.

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.

There were no such impairments for the three months ended September 30, 2023.

Total Change in Fair Value of Financial Instruments

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

Three Months Ended % (Decrease)/ Increase

September 30,

Change in fair value of financial instruments $ (4,024) $ (4,000) 0.6 %

Total change in fair value of financial instruments for the three months ended September 30, 2023 and September 30, 2022 was loss of $4,024 and $4,000, respectively.

For the three months ended September 30, 2023, the loss in fair value of financial instruments 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 loss of $4,699, partially offset by a gain in the SBH purchase option and the investment in DeFloria.

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

For the three months ended September 30, 2022, there was a loss in the fair value of the Company's SBH Purchase Option of $4,000.

For the Nine Months Ended September 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)

Nine Months Ended

% (Decrease)/ Increase

September 30,

Direct-to-consumer ("DTC") revenue $ 31,430 $ 38,174 (17.7) %

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Total revenue $ 47,310 $ 55,271 (14.4) %

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

Total revenue for the nine months ended September 30, 2023 was $47,310, a decrease of 14.4% compared to the nine months ended September 30, 2022.

DTC revenue for the current year decreased 17.7%year-over-year for the period as a result of reduced traffic and sales through the Company’s webstore.

The Company is investing in its DTC platform to drive higher traffic.

Evolving consumer format preference was an additional contributing factor to lower revenue, as product sales mix has continued to shift away from higher priced oil tinctures.

B2B revenue decreased 7.1% compared to the nine months ended September 30, 2022.

The decrease for the current year was primarily the result of some of the Company’s mass retail customers exiting the CBD category in year-over-year period, or closing retail locations.

Despite some retailers reducing the size of the CBD category over the past two years, Charlotte’s Web has also added new mass retail doors in 2023.

Additionally, the Company completed a topicals portfolio rationalization for 2023 resulting in reduced topical product revenue at retail, partially offset by increased sales of pet chews.

Cost of Goods Sold

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The components of cost of goods sold are as follows:

Six Months Ended

June 30, % (Decrease)

Nine Months Ended

% (Decrease)/ Increase

September 30,

Inventory expensed to cost of goods sold 14,642 17,373 (15.7) %

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Cost of goods sold $ 20,546 $ 25,291 (18.8) %

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.

Cost of goods sold decreased 18.8% for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

Inventory and other production costs that were expensed to cost of goods declined for the current year proportionately with revenue, with a further reduction on the improvement of inventory provisions.

Depreciation and amortization expense for the nine months ended September 30, 2023 and September 30, 2022 was $11,509 and $5,762, respectively, of which $2,689 and $2,543, respectively, was expensed to cost of goods sold.

The remaining depreciation and amortization expenses for the nine months ended September 30, 2023 and September 30, 2022 of $8,820 and $3,219, 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 for the nine months ended September 30, 2023 and September 30, 2022 is as follows:

Nine Months Ended

% (Decrease)/ Increase

September 30,

Gross profit $ 26,764 $ 29,980 (10.7) %

Gross margin 56.6 % 54.2 % 4.4 %

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.

Gross profit decreased 10.7% for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, due to the lower net revenue for the first nine months of 2023.

However, on a rate basis, gross margin improved 4.4% year-over-year as a result of cost management and improved inventory provisions.

Selling, General, and Administrative Expenses

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

Six Months Ended

June 30, % (Decrease)

Nine Months Ended

% (Decrease)/ Increase

September 30,

Selling, general, and administrative expenses $ 57,029 $ 48,646 17.2 %

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.

Total Selling, general, and administrative expenses for the nine months ended September 30, 2023 and September 30, 2022 were $57,029 and $48,646, respectively.

The increase for the current year is primarily due to the amortization related to the MLB license and media rights assets of $6,846.

Additionally, for the nine months ended September 30, 2022, an Employee Retention Credit ("ERC") tax benefit of $4,106 was recognized reducing SG&A expense in the prior period.

Depreciation and amortization expensed to Selling, general, and administrative expenses for the nine months ended September 30, 2023 and September 30, 2022 were $8,820 and $3,219, respectively.

Total research and development costs expensed to Selling, general, and administrative expense for the nine months ended September 30, 2023 and September 30, 2022 were $2,194 and $2,835, 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

Gain on Initial Investment in Unconsolidated Entity

The initial gain on investment in unconsolidated entity is as follows:

Nine Months Ended

% (Decrease)/ Increase

September 30,

Gain on initial 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 gain on initial investment in unconsolidated entity for the nine months ended September 30, 2023 and September 30, 2022 was $10,700 and $0, respectively.

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

DeFloria 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.

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

Total Change in Fair Value of Financial Instruments

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

Nine Months Ended

% (Decrease)/ Increase

September 30,

Change in fair value of financial instruments $ 5,588 $ (3,900) (243) %

Total change in fair value of financial instruments for the nine months ended September 30, 2023 and September 30, 2022 was a gain of $5,588 and a loss of $3,900, respectively.

For the nine months ended September 30, 2023, the increase in the change in fair value of financial instruments 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 $5,156.

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

Liquidity and Capital Resources

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.

As of September 30, 2023 and December 31, 2022, the Company had total current liabilities of $24,781 and $21,427, respectively, and cash and cash equivalents of $51,016 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 in 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 be offset by increases in online traffic, channel sales and net revenue over the long term.

In early 2023, Charlotte’s Web initiated a plan to move the production of topicals and gummies in house, and in the third quarter construction progressed with a modest capital expenditure.

On-site manufacturing better utilizes the

Company’s existing Louisville production facility, improving gross margins and aligns with the Company’s ongoing efforts to improve overall operating efficiencies.

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 on hand and provided by operations over time.

The Company expects to meet its long-term liquidity requirements through various sources of capital, including cash on hand and cash 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.

The Company's ability to incur additional debt is dependent upon a number of factors, including the state of the credit markets, our degree of leverage, the value of our unencumbered assets and borrowing restrictions imposed by lenders, including restrictions on the industry.

The Company's ability to incur additional debt is dependent upon a number of factors, including the state of the credit markets, the Company’s degree of leverage, the value of its unencumbered assets and borrowing restrictions imposed by lenders, including restrictions on the industry.

The Company's ability to raise funds through the issuance of additional equity and/or debt securities is also dependent on a number of factors including the current state of the capital markets, investor sentiment and intended use of proceeds.

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

There can be no assurance the Company will have the ability to raise additional funds and, if raised privately or publicly, that additional funds 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 six months ended June 30, 2023 and June 30, 2022 were as follows:

Six Months Ended June 30,

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

Nine Months Ended September 30,

Net cash used in operating activities $ (12,849) $ (2,599)

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.

For the nine months ended September 30, 2023, the increase in cash used in operations is primarily due to cash outflows of $6,000 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.

For the nine months ended September 30, 2022, the Company collected $10,841 from income tax refunds due.

Cash from Investing Activities

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 for the nine months ended September 30, 2023 and September 30, 2022 were as follows:

Nine Months Ended September 30,

Net cash used in investing activities $ (2,896) $ (57)

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

For the nine months ended September 30, 2023, the increase in cash used in investing activities was driven primarily by machinery purchases as part of the Company's plan to in-source topical and gummy production.

Cash from Financing Activities

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 provided by financing activities for the nine months ended September 30, 2023 and September 30, 2022 were as follows:

Nine Months Ended September 30,

Net cash used in financing activities $ (202) $ (325)

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

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

Off-Balance Sheet Arrangements

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.

As of September 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

Effective November 2020, the Company entered into a secured promissory note, where $1,000 was loaned to one of the founders.

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.

Effective November 2020, the Company issued a secured promissory note, where $1,000 was loaned to one of the Company's founders.

The note receivable was secured by equity instruments held by 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.

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.

As of September 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 a total consideration of $8,000.

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.

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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.

As of September 30, 2023, the remaining note receivable of $142 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.

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 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.

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

Recently Adopted Accounting Principles

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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.

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.

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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.

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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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 June 30, 2023 and 2022.

There were no impairment losses recognized for the three months ended September 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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The earliest income tax year that may be subject to examination is 2019.

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

The Company has recorded an uncertain tax position as of September 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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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