What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-21 compared with 2023-03-23 · 163 added, 174 removed, 176 unchanged (66% of the section changed)

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The following discussion should be read in conjunction with, and is qualified in its entirety by the audited consolidated financial statements and the accompanying notes.

Except for historical information, the discussion in this section contains forward-looking statements that involve risks and uncertainties.

Except for historical information, this section's discussion contains forward-looking statements involving risks and uncertainties.

Future results could differ materially from those discussed below for many reasons, including the risks described in Item 1A—"Risk Factors."

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and CBD Pharmaceuticals Ltd.

This management’s discussion and analysis of financial condition and results of operations (“MD&A”) is provided as of Mar ch 23, 2023 an d should be read together with the Company’s audited consolidated financial statements and the accompanying notes for the years ended December 31, 2022 and December 31, 2021.

This management’s discussion and analysis of financial condition and results of operations ("MD&A") is provided as of March 21, 2024 an d should be read together with the Company’s audited consolidated financial statements and the accompanying notes for the years ended December 31, 2023 and December 31, 2022.

The results herein have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S.

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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.

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

is a Certified B Corp headquartered in Louisville, Colorado, which conducts 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™.

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

The Company is headquartered in a cGMP compliant facility in Louisville, Colorado, where the Company conducts its production of tinctures, distribution, and quality control activities as well as research and development ("R&D").

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

The Company also offers NSF Certified for Sports® broad spectrum tincture and gummy 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.

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

As of December 31, 2022, the Company operated in a single operating and reportable segment, hemp-derived CBD wellness products, as its executive officers reviewed overall operating results in order to assess financial performance and to make resource allocation decisions, rather than to assess a lower-level unit of operations in isolation.

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

The information provided on the website is not part of this MD&A.

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

As of December 31, 2023, the Company operated in a single operating and reportable segment, hemp-derived CBD wellness products.

The 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.

The Company believes the presence of these various compounds work synergistically to heighten the effects of the products, making them superior to single-compound isolates.

Hemp extracts are produced from the plant Cannabis and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a THC concentration of not more than 0.3% on a dry weight basis.

Hemp extracts are produced from Cannabis and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a THC concentration of not more than 0.3% on a dry weight basis.

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

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 TM SPORT – Daily Edge, the first broad-spectrum hemp-derived tincture to be Certified for Sport® by NSF, the highly respected global third-party organization that establishes standards for safety, quality, sustainability, and performance 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.

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

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

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

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

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

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

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:

BTI) ("BAT").

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 production cost to develop the new drug.

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

DeFloria is utilizing the investments for the clinical development of a novel hemp botanical Investigational New Drug application and has commenced Phase I clinical development.

On July 11, 2023, the Company expanded its product footprint with the launch of NSF Certified for Sports® broad spectrum gummy products, the Company's lifestyle and botanical wellness brand focused on the combination of organic broad-spectrum CBD and functional botanicals.

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 an initial 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 December 31, 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 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.

In furtherance of the Company’s R&D efforts, in February 2020, 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

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Operating loss $ (40,612) $ (52,486)

Gain on initial investment in unconsolidated entity 10,700 —

Change in fair value of financial instruments

9,339 (7,480)

Other income (expense), net

Change in fair value of financial instruments and other (7,480) 9,429

Income tax expense (529) (91)

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DTC e-commerce revenue decreased 15.9% compared to the year ended December 31, 2022.

The decrease was primarily due to lower traffic at our online store due to lower organic search, less paid media and less effective earned and affiliate traffic generation, resulting in approximately $11,000 decrease year over year.

Additional drivers include an increase in price promotions for gummies and topicals.

The decrease was partially offset by higher customer subscription orders through its loyalty program and a more favorable product mix compared to prior year.

Lower year-over-year revenue was primarily due to lower traffic and sales through the Company’s webstore.

The Company is revamping its e-commerce platform and upgrading its overall technology platform to enhance the consumer experience and increase traffic.

B2B revenue decreased 12.4% compared to the year ended December 31, 2022.

The decrease was due to the Food Drug Mass retail and Natural channels reducing CBD products shelf space resulting in a decrease of approximately $12,000 year over year.

Additional drivers include higher depth and frequency of price promotions.

The decrease was partially offset by new retail distribution following the passing of Assembly Bill 45 in California in late 2021.

The decrease was primarily due to lower comparable shipments to some of the Company’s retail customers in 2023 who reduced total shelf space for CBD products, exited the CBD category, or closed retail locations.

Charlotte’s Web remains the market share leader in combined SPINs and LLC/IRI measurements of total retail.

Cost of Goods Sold

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

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

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

The components of cost of goods sold are as follows:

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Cost of goods sold $ 27,589 $ 54,728 (49.6) %

Cost of goods sold increased 15.2% for the year ended December 31, 2022 compared to the same period in 2021, primarily due to $13,665 or 140.5% increase in the inventory provision.

Cost of goods sold decreased 49.6% for the year ended December 31, 2023 compared to the same period in 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 of inventory provisions.

The inventory provision is estimated by management based on its assessment of market conditions, including forecasted demand compared to quantities on hand, as well as other factors such as potential excess, or aged inventories based on product shelf life.

Additionally, inventory obsolescence is impacted by changes or prospective probable changes in the regulatory environments.

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

The increase was partially offset by a decrease of 19.1% in inventory expensed to cost of goods sold for the year ended December 31, 2022 compared to December 31, 2021.

The decrease was primarily due to lower unit volume sold and mix, as lower cost gummies volume decreased 13% compared to higher cost tinctures which decreased 41% year over year.

Inventory obsolescence is impacted by changes or prospective probable changes in the regulatory environments.

For the year ended December 31, 2022, the Company's inventory provision was primarily due to the reserve for Hemp inventory of $20,349.

Management determined that this inventory would no longer be used in product formulations as a result of Colorado's anticipated regulatory changes based on Senate Bill 22-205, as well as aged finished goods.

For the year ended December 31, 2023, there was no similar inventory provision.

Depreciation and amortization expense for the year ended December 31, 2023 and 2022 was $15,160 and $8,968, respectively, of which $3,571 and $3,405, respectively, was expensed to cost of goods sold.

The remaining depreciation and amortization expenses of $11,589 and $5,563, 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.

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

Gross profit for the years ended December 31, 2023 and 2022 is as follows:

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Gross margin 56.3 % 26.2 % 114.9 %

Gross profit decreased 60.0% for the year ended December 31, 2022 compared to 2021.

The decrease is primarily related to lower revenue in both the DTC and B2B channels which was discussed above, and an increase in inventory provisions.

The decrease is partially offset by lower inventory expenses.

Gross profit before the inventory provision was $42.8 million and $58.3 million, respectively, and gross margin before inventory provision was 58% and 61% for the year ended December 31, 2022 and 2021, respectively.

Gross profit for the year ended December 31, 2023 was $35,566, compared to $19,411 for the year ended December 31, 2022, which included much larger inventory provisions of $23,394 in cost of goods sold.

Before inventory provisions, gross profit was $36,605 and $42,805, respectively.

The decrease in 2023 reflects the lower revenue in both DTC and B2B channels as discussed above.

Gross margin reported for the years ended December 31, 2023 and 2022 was 56.3%, and 26.2% respectively.

Before inventory provisions, gross margin for the years ended December 31, 2023 and 2022 was 58.0% and 57.7%, benefiting in 2023 from manufacturing efficiencies and improved costs of goods sold, despite lower year-over-year sales volume.

Selling, General, and Administrative Expenses

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Total Selling, general, and administrative expenses for the year ended December 31, 2023 and 2022 were $75,630 and $70,060, respectively.

The 28.2% decrease was primarily attributable to activities during the year which lowered personnel costs by $10,569, an Employee Retention Credit ("ERC") tax benefit of $4,106, a decrease in media marketing spend of $5,154, along with lower depreciation and amortization.

Depreciation and amortization expensed to Selling, general, and administrative expenses for the year ended December 31, 2022 and 2021 were $5,563 and $8,047.

The 8.0% increase for the current year is primarily due to the amortization related to the MLB license and media rights assets of $9,794, compared to $2,034 for the year ended December 31, 2022.

Additionally, for the year ended December 31, 2022, an Employee Retention Credit ("ERC") tax benefit of $4,106 was recognized reducing Selling, general, and administrative expense.

Depreciation and amortization expensed to Selling, general, and administrative expenses for the year ended December 31, 2023 and 2022 were $11,589 and $5,563, respectively.

Total research and development expenses for the year ended December 31, 2023 and 2022 were $2,964 and $3,435, respectively, expensed to Selling, general, and administrative expense.

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.

Goodwill and asset impairments

For the year ended December 31, 2022, the Company recorded an impairment of $1,837 related to operating leases.

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

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

This analysis resulted in a full impairment charge totaling $1,822 included in Goodwill and asset impairments charges on the consolidated statements of operations for the year ended December 31, 2022.

For the year ended December 31, 2021, the Company fully impaired the goodwill and intangible assets related to customer relationships and trade names recorded from the acquisition of Abacus during the year ended totaling $76,039.

The Company determined the sustained decrease in our share price in the fourth quarter of 2021, along with a significant decline to the equity value of the Company's peers and overall U.S.

stock market, represented a goodwill impairment triggering event.

The Company performed a quantitative analysis as of December 31, 2021 to

determine if impairment to our goodwill existed for the one reporting unit.

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

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

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

The factors listed above representing a goodwill triggering event also indicated a triggering event for the Company's acquired customer relationships and trade name intangible assets.

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

This analysis resulted in full impairment of the of customer relationships and trade name intangible assets acquired and total an impairment loss of $19,750 was recorded for the year ended December 31, 2021.

Total Change in Fair Value of Financial Instruments and Other

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

Gain on Initial Investment in Unconsolidated Entity

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

Year Ended % (Decrease)/ Increase

Gain on initial investment in unconsolidated entity

$ 10,700 $ — 100 %

The gain on initial investment in unconsolidated entity for the year ended December 31, 2023 was $10,700.

The gain 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, with the botanical drug being developed from certain proprietary hemp genetics of the Company.

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

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

The total change in fair value of financial instruments is as follows:

December 31, % Increase (Decrease)

Change in fair value of financial instruments and other $ (7,480) $ 9,429 (179.3) %

Total change in fair value of financial instruments and other for the year ended December 31, 2022 and December 31, 2021 was a loss of $7,480 and a gain of $9,429, respectively.

For the year ended December 31, 2022, there was a loss in the fair value of the Company's SBH Purchase Option of $10,700 compared to a gain of $5,000 as of December 31, 2021.

The fair value of the Company's 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.

Additionally, for the year ended December 31, 2022, the change in fair value of financial instruments and other was partially offset by the revaluation of the fair value of the Company's debt interest rate conversion feature and debt conversion option resulting in a gain of $138 and $3,082, respectively.

For the year ended December 31, 2021, the change in fair value of financial instruments and other was driven by the revaluation of the fair value of the Company's warrant liabilities resulting in a gain of $4,304.

As of December 31, 2022, all outstanding warrants have expired.

The fair value of the Company's financial derivative instruments and SBH purchase option are revalued at each reporting date.

Change in fair value of financial instruments

$ 9,339 $ (7,480) 224.9 %

Total change in fair value of financial instruments for the year ended December 31, 2023 and December 31, 2022 was a gain of $9,339 and a loss of $7,480, respectively.

For the year ended December 31, 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 $9,609.

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 year ended December 31, 2022, the change in fair value of financial instruments was primarily driven by a loss of $10,700 in the fair value of the Company's SBH Purchase Option.

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.

Additionally, for the year ended December 31, 2022, the change in fair value of financial instruments was partially offset by the revaluation of the fair value of the Company's debt interest rate conversion feature and debt conversion option resulting in a net gain of $3,220.

Asset Impairments

For the year ended December 31, 2023, an impairment loss to building assets of $548 was recorded within Asset Impairment in the consolidated statement of operations.

The impairment resulted from a decline in market conditions at the Company's hemp farm that indicated a fair value less than the carrying value.

For the year ended December 31, 2022, the Company recorded an impairment of $1,837 related to operating leases.

During the prior year, the Company ceased utilizing the Denver office space and plans to sublease the office space at current market rents.

Provision for Income Taxes

December 31, % Increase (Decrease)

Income tax (expense) benefit $ (91) $ (143) (36.4) %

Income tax expense

$ (529) $ (91) 481.3 %

Effective tax rate (2.3) % (0.2) %

The Company’s effective tax rate during the year ended December 31, 2023 and December 31, 2022 was (2.3)% and (0.2)%, respectively.

The effective tax rate for the year en ded December 31, 2022 is (0.1)% as the Company continues to believe its deferred tax assets are not more-likely-than-not to be realized and a full valuation allowance remains recorded against net deferred taxes as of December 31, 2022 and December 31, 2021.

The effective rate for the year ended December 31, 2022 is consistent with the year ended December 31, 2021, as the Company has been in a full valuation allowance for both year ends.

The effective tax rate for the year ended December 31, 2023 is (2.3)% as the Company continues to believe its deferred tax assets are not more-likely-than-not to be realized and a full valuation allowance remains recorded against net deferred taxes as of December 31, 2023 and December 31, 2022.

The decrease in the effective rate for the year ended December 31, 2023 compared to the year ended December 31, 2022, is primarily due to the remeasurement of the valuation allowance as well as changes in convertible debenture.

Liquidity and Capital Resources

As of December 31, 2022 and December 31, 2021, the Company had total current liabilities of $21,427 and $20,170, respectively, and cash and cash equivalents of $66,963 and $19,494, respectively, to meet its current obligations.

Despite lower revenues than 2021, the Company has taken actions to reduce operating costs by approximately $30,000 by eliminating positions and lowering employee costs, simplifying the business by rationalizing the number of products produced and sold, reducing the number of third-party co-manufacturers, and lowering spend on non-employee related SG&A costs.

For the year ended December 31, 2022, the Company collected the outstanding IRS receivable of approximately $10,841, partially offset by cultivation payments of $3,049.

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

The Company’s objective when managing its liquidity and capital resources is to provide sufficient short and long-term liquidity to fund net operating losses and capital expenditures while executing strategic growth plans.

In the near to mid-term, we are focused on reducing negative cash flows from operations.

On November 14, 2022, the Company entered into a subscription agreement with BT DE Investments, Inc.

a wholly-owned subsidiary of BAT Group (LSE:

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

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

Following federal regulation of CBD, the stated annualized rate of interest shall be reduced to 1.5%.

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

The maturity date for the debenture is November 2029.

The Subscription Agreement contains customary representations, warranties and covenants.

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

The Company expects its selling, general and administrative expenses in 2023 to be 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 Sports brand products are intended to combat 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 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.

Management continually assesses liquidity in terms of the ability to generate sufficient cash flow to fund the business.

Net cash flow is affected by the following items:

(i) operating activities, including the cash impacts from the statements of operations, the level of accounts receivables, accounts payable, accrued liabilities and unearned revenue and deposits;

(ii) investing activities, including the purchase of property and equipment;

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

As of December 31, 2023, the Company had total cash and cash equivalents of $47,820, compared to $66,963 at December 31, 2022.

The decrease over the twelve-month period is primarily a result of cash used in operating activities of $15,386, and capital expenditures of $3,691 primarily allocated to enabling in-house production of topical and gummy products.

As a result of delays in federal regulation of the hemp CBD industry and lower-than-expected revenue , management began taking actions in 2022 to reduce annual operating costs by lowering employee costs, simplifying the business through rationalizing the number of products produced and sold, reducing the number of third-party co-manufacturers, and lowering spend on non-employee-related SG&A costs.

Other than an increase in MLB spend, management has continued these cost saving measures throughout 2023.

The Company filed a final short form base shelf prospectus on May 5, 2021, with Canadian regulators, with a term of 25 months, which allowed the Company to qualify the distribution by way of prospectus in Canada of up to C$350,000 of common shares, preferred shares, warrants, subscription receipts, units, or any combination thereof.

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

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

We believe that our existing cash and cash equivalents, and short-term investments will provide sufficient liquidity to fund operations and planned capital expenditures for the next 12 months.

The Company’s ability to fund its operations for the longer term will depend on our 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.

In addition to cash provided by operations, the Company may fund long-term liquidity requirements through various sources of capital.

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

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

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

sentiment and intended use of proceeds.

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

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

Cash Flow from Operating Activities

Net cash used in operating activities for the year ended December 31, 2023 and December 31, 2022 were as follows:

(in thousands) Year Ended December 31,

Year Ended December 31,

Net cash used in operating activities $ (15,386) $ (5,315)

For the year ended December 31, 2022, the decrease in cash used in op erations is primarily related to lower operating expenses, collection of the $10,841 from income tax refunds and its related interest, partially offset by lower revenues and cultivation payments.

For the year ended December 31, 2023, the increase in cash used in operations is primarily due to cash outflows of $8,000 associated with the MLB Promotional Rights Agreement, compared to $500 for the year ended December 31, 2022.

Additionally, for the year ended December 31, 2022, the Company collected $10,841 from income tax refunds and related interest.

Cash Flow from Investing Activities

Net cash provided by (used in) investing activities for the year ended December 31, 2023 and December 31, 2022 were as follows:

(in thousands) Year Ended December 31,

Year Ended December 31,

Net cash provided by (used in) investing activities $ (3,506) $ 395

For the year ended December 31, 2022, the decrease in cash used in investing activities was driven by lower capital expenditures, and partially offset by proceeds from the sale of assets.

For the year ended December 31, 2021 the outflow was related to the SBH Purchase Option executed for total consideration of $8,000 and the purchase of $4,918 in capital expenditures, partially offset by other investing activities.

For the year ended December 31, 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 Flow from Financing Activities

Net cash provided by financing activities for the year ended December 31, 2022 and December 31, 2021 were as follows:

(in thousands) Year Ended December 31,

Net cash provided by financing activities $ 52,389 $ 8,039

For the year ended December 31, 2022, the increase in cash provided by financing activities was primarily due to proceeds from the issuance of $56.8 million convertible debenture, partially offset by debt issuance costs, share issuance costs, and employee equity vestings.

For the year ended December 31, 2021, the net cash provided by financing activities during the period was primarily from ATM Program proceeds of $8,257.

Net cash provided by (used in) financing activities for the year ended December 31, 2023 and December 31, 2022 were as follows:

Year Ended December 31,

Net cash provided by (used in) financing activities

$ (251) $ 52,389

For the year ended December 31, 2023, the decrease in cash provided by financing activities was primarily due to proceeds from the issuance of a $56.8 million convertible debenture received as of December 31, 2022.

Outstanding Share Data

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and (iii) an unlimited number of preferred shares, issuable in series.

On November 3,

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

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

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

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(iii) 4,125,000 restricted share units ("RSUs").

(iv) 28,937,417 convertible shares related to convertible debenture.

Each option, restricted share award, and convertible share entitles the holder to purchase one common share.

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Related party transactions

Aidance Scientific, Inc.

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

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

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

Payment terms on purchases are due 30 days after receipt.

As of December 31, 2022 and 2021, the Company had a liability of $36 and $119, respectively, due to Aidance presented in accounts payable in the consolidated balance sheets.

Effective November 2020, the Company entered into a note receivable with certain founders of the Company to negotiate a future binding transaction in good faith.

This agreement included a secured promissory note, where $1,000 was loaned to one of the founders.

The note receivable was secured by equity instruments with certain founders of the Company, and bore interest at 3.25% per annum, and required the unpaid principal and unpaid interest balances to be paid on or before the maturity date of November 13, 2021.

On March 22, 2022, the founders requested an extension of the maturity date, as allowed under the terms of the promissory note, resulting in an extension of the maturity date to November 13, 2023.

Effective November 2020, the Company issued 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, 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 December 28, 2023, the Company entered into a second amendment of the promissory note to extend the maturity date to November 13, 2024.

According to the terms of the agreement, no additional interest will accrue through the payment date.

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

As of December 31, 2022, the Company has fully reserved the collectability of the note receivable and expensed the outstanding balance of $1,037 due to the declining value in the collateral in the fourth quarter.

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.

For the year ended December 31, 2022 , the Company established a reserve against the note receivable due to a 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 "Fair Value Measurement").

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

Certain founder s 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.

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

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.

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

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.

As of January 5, 2024 , the Brand License and Option Agreement has expired.

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.

On February 12, 2024, BAT invested an additional $3 million in the form of convertible debt.

The Company and AJNA each hold 400,000 of the entity’s voting common units (Note 3).

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

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

As of December 31, 2023, the remaining note receivable of $128 is presented in other assets in the consolidated balance sheets.

On February 12, 2024, the Company and DeFloria entered into a Master Services Agreement ("Services Agreement") in which the Company will be compensated for the provision of certain services to DeFloria.

As of December 31, 2023, the Name and Likeness and License Agreement has reached its conclusion.

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

Upon execution of the consulting agreement, the Company paid $2,081 to Leeland & Sig LLC d/b/a Stanley Brothers Brand Company, on behalf of the Stanley Brothers, as consideration for the consulting services to be provided to the Company over the term of the agreement and certain restrictive covenants.

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

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

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

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which aims to reduce complexity in accounting standards by improving certain areas of U.S.

GAAP without compromising information provided to users of financial statements.

ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.

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

Early adoption is permitted.

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

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

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

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

Early adoption is permitted.

The Company evaluated the impact of the pronouncement, see further discussion within the note "Summary of Significant Accounting Policies and use of Estimates".

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

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

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

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

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

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

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

Critical Accounting Estimates

Listed below are the accounting policies we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability, revenue or expense being reported.

There are no new accounting pronouncements adopted by the FASB that had or may have a material impact on the accompanying consolidated financial statements.

Critical Accounting Policies and Estimates

Listed below are the accounting policies and estimates we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability, revenue, or expense being reported.

Please also refer to note "Summary of Significant Accounting Policies and Use of Estimates" of our notes to consolidated financial statements for a discussion on recently adopted and issued accounting pronouncements.

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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.

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

Investment in Unconsolidated Entities

The Company has a variable interest in the investment in DeFloria;

however, the Company is not the primary beneficiary of DeFloria as it lacks the power to direct DeFloria's key activities.

The Company concluded that the investment in DeFloria should not be consolidated.

In accordance with ASC 825-10, equity method investments are eligible for the fair value option as they represent recognized financial assets.

As the Company was not required to consolidate the investment and does not meet any of the other scope exceptions, the Company had the ability to adopt the fair value option for the investment at inception.

The investment was remeasured at fair value after each reporting date, with changes recognized in consolidated statements of operations, as changes in fair value of financial instruments for the period.

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

To determine the value of the investment, the Company utilizes an Option Pricing Model (OPM).

The OPM considers the various terms of the stockholder agreements, including the level of seniority among the securities, dividend policy, conversion ratios, and cash allocations upon liquidation of the entity.

The OPM is appropriate when the range of potential future outcomes is difficult to predict with any certainty.

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

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

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

The Company's inventory production process for cannabinoid products includes cultivating botanical raw material.

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

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There was $548 and $1,837 of impairment losses recognized related to long-lived assets for the year ended December 31, 2023 and December 31, 2022, respectively.

Additionally, the Company determined that there was $76,039 of impairment of its goodwill for the year ended December 31, 2021.

Convertible Debenture

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

The Company reviewed the terms of the debenture and identified two material embedded features which required bifurcation and separate accounting

pursuant to the provisions of ASC 815:

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

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

1) the interest rate conversion feature based on

changes in federal regulations, and 2) the debt conversion option to common shares.

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

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

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

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

Debt issuance costs are allocated to the debenture.

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The evaluation of the need for a valuation allowance is performed on a jurisdiction-by-jurisdiction basis and includes a review of all available positive and negative evidence.

Factors reviewed include projections of pre-tax book income for the foreseeable future, determination of cumulative pre-tax book income or loss, earnings history, and reliability of forecasting.

Factors reviewed include projections of pre-tax book income for the foreseeable future, determination of cumulative pre-tax book income or loss, earnings history, forecasting reliability.

It is the Company's policy to offset indefinite lived deferred tax assets with indefinite lived deferred tax liabilities.

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

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

As there is no authoritative guidance under U.S.

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

In accordance with IAS 20, management determined it has reasonable assurance for receipt of the ERC and recorded the ERC benefit as of December 31, 2022 within the statement of operations as a payroll tax expense.

Revenue Recognition

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(i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

The Company applies the five-step model to arrangements that meet the definition of a contract under the standard, including when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods

or services it transfers to the customer.

At contract inception, once the contract is determined to be within the scope of revenue accounting, the Company evaluates the goods or services promised within each contract-related performance obligation and assesses whether each promised good or service is distinct.

The Company recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

The Company recognizes revenue from customers when control of the goods or services are transferred to the customer, generally when products are shipped, at an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services.

The Company recognizes revenue from customers when control of the goods or services is transferred to the customer, generally when products are shipped, at an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services.

Freight revenue is included in revenue on the consolidated statements of operations and is generally exempt from state sales taxes.

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Contracts are not written to include advertising allowances, tiered discounts, or any other performance obligation.

Since the Company’s contracts involve the delivery of various tangible products, the arrangements are considered to contain only a single performance obligation, as such there is no allocation of the transaction price.

Since the Company’s contracts involve the delivery of various tangible products, the arrangements are considered to contain only a single performance obligation;

as such, there is no allocation of the transaction price.

The Company also offers e-commerce discounts and promotions through its online rewards program.

The Charlotte’s Web Loyalty Program offers customers rewards points for every dollar spent through the Company website to earn store credit for future purchases.

The Company defers recognition of revenue for unredeemed awards until the following occurs:

The Company defers recognition of revenue for unredeemed awards until the

following occurs:

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

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

Any product 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.

The Company accounts for customer returns utilizing the “expected value method.” Expected amounts are excluded from revenue and recorded as a “refund liability” that represents the Company’s obligation to return the customer’s consideration.

The Company accounts for customer returns utilizing the "expected value method".

Expected amounts are excluded from revenue and recorded as a "refund liability" that represents the Company’s obligation to return the customer’s consideration.

Estimates are based on actual historical and current specific data.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis