Charlotte's Web Holdings, Inc. 10-Q

Item 1. Financial Statements 1 CHARLOTTE’S WEB HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) March 31, December 31, 2024 (unaudited) 2023 ASSETS Current assets: Cash and cash equivalents $ 38,510 $ 47,820 Accounts receivable, net 1,725 1,950 Inventories, net 22,487 21,538 Prepaid expenses and other current assets 5,535 6,864 Total current assets 68,257 78,172 Property and equipment, net 28,255 27,513 License and media rights 17,614 17,070 Operating lease right-of-use assets, net 14,206 14,601 Investment in unconsolidated entity 10,200 11,000 SBH purchase option and other derivative assets 1,579 2,602 Intangible assets, net 1,051 887 Other long-term assets 616 703 Total assets $ 141,778 $ 152,548 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 3,991 $ 2,860 Accrued and other current liabilities 8,230 8,682 Lease obligations – current 2,339 2,252 License and media rights payable - current 5,072 9,852 Total current liabilities 19,632 23,646 Convertible debenture 42,736 42,528 Lease obligations 15,063 15,655 License and media rights payable 13,899 11,338 Derivative and other long-term liabilities 3,780 3,823 Total liabilities 95,110 96,990 Commitments and contingencies (Note 7) Shareholders’ equity: Common shares, nil par value; unlimited shares authorized; 157,227,855 and 154,332,366 shares issued and outstanding as of March 31, 2024 and December 31, 2023 1 1 Additional paid-in capital 328,024 327,280 Accumulated deficit ( 281,357 ) ( 271,723 ) Total shareholders’ equity 46,668 55,558 Total liabilities and shareholders’ equity $ 141,778 $ 152,548 See Notes to Unaudited Condensed Consolidated Financial Statements 2 CHARLOTTE’S WEB HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) Three Months Ended March 31, (unaudited) 2024 2023 Revenue $ 12,124 $ 17,010 Cost of goods sold 5,213 7,093 Gross profit 6,911 9,917 Selling, general, and administrative expenses 15,280 17,513 Operating loss ( 8,369 ) ( 7,596 ) Change in fair value of financial instruments ( 1,860 ) 5,382 Other income (expense), net 611 ( 698 ) Loss before provision for income taxes $ ( 9,618 ) $ ( 2,912 ) Income tax expense ( 16 ) — Net loss $ ( 9,634 ) $ ( 2,912 ) Per common share amounts (Note 10) Net loss per common share, basic and diluted $ ( 0.06 ) $ ( 0.02 ) See Notes to Unaudited Condensed Consolidated Financial Statements 3 CHARLOTTE’S WEB HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (in thousands, except share amounts) (unaudited) Common Shares Additional Paid-in Capital Accumulated Deficit Total Shareholders’ Equity Shares Amount Balance—December 31, 2023 154,332,366 $ 1 $ 327,280 $ ( 271,723 ) $ 55,558 Common shares issued upon vesting of restricted share units, net of withholding 2,895,489 — ( 98 ) — ( 98 ) Share-based compensation — — 842 — 842 Net loss — ( 9,634 ) ( 9,634 ) Balance—March 31, 2024 157,227,855 $ 1 $ 328,024 $ ( 281,357 ) $ 46,668 Balance—December 31, 2022 152,135,026 $ 1 $ 325,431 $ ( 247,927 ) $ 77,505 Common shares issued upon vesting of restricted share units, net of withholding 297,888 — ( 69 ) — ( 69 ) Share-based compensation — — 375 — 375 Net loss — — — ( 2,912 ) ( 2,912 ) Balance—March 31, 2023 152,432,914 $ 1 $ 325,737 $ ( 250,839 ) $ 74,899 See Notes to Unaudited Condensed Consolidated Financial Statements 4 CHARLOTTE’S WEB HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Three Months Ended March 31, (unaudited) 2024 2023 Cash flows from operating activities: Net loss $ ( 9,634 ) $ ( 2,912 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,493 3,792 Change in fair value of financial instruments 1,860 ( 5,351 ) Convertible debenture and other accrued interest 1,015 697 Share-based compensation 842 375 Changes in right-of-use assets 443 493 Other ( 956 ) 768 Changes in operating assets and liabilities: Accounts receivable, net 98 ( 1,212 ) Inventories, net ( 1,026 ) 1,187 Prepaid expenses and other current assets 150 480 License and media rights ( 2,500 ) ( 2,000 ) Operating lease obligations ( 551 ) ( 925 ) Accounts payable, accrued and other liabilities 663 ( 1,098 ) Other operating assets and liabilities, net ( 76 ) ( 367 ) Net cash used in operating activities ( 7,179 ) ( 6,073 ) Cash flows from investing activities: Purchases of property and equipment and intangible assets ( 2,060 ) ( 70 ) Proceeds from sale of assets 27 30 Net cash used in investing activities ( 2,033 ) ( 40 ) Cash flows from financing activities: Other financing activities ( 98 ) ( 69 ) Net cash used in financing activities ( 98 ) ( 69 ) Net decrease in cash and cash equivalents ( 9,310 ) ( 6,182 ) Cash and cash equivalents —beginning of period 47,820 66,963 Cash and cash equivalents —end of period $ 38,510 $ 60,781 Non-cash activities: Non-cash purchase of property and equipment and intangible assets $ ( 374 ) $ — See Notes to Unaudited Condensed Consolidated Financial Statements 5 CHARLOTTE’S WEB HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share, per share, per unit, and number of years) (unaudited) 1. DESCRIPTION OF BUSINESS AND PRESENTATION OF FINANCIAL STATEMENTS Description of the Business Charlotte's Web Holdings, Inc. together with its subsidiaries (collectively "Charlotte's Web" or the "Company") is a public company incorporated pursuant to the laws of the Province of British Columbia and is also a Certified B Corp. The Company's common shares are publicly listed on the Toronto Stock Exchange ("TSX") under the symbol "CWEB" and quoted on the OTCQX under the symbol "CWBHF." The Company's corporate headquarters is located in Louisville, Colorado in the United States of America. The majority of the Company's business is conducted in the United States of America. The Company's primary products are made from proprietary strains of whole-plant hemp extracts containing a full spectrum of phytocannabinoids, terpenes, flavonoids, and other hemp compounds. Hemp extracts are produced from the plant Cannabis sativa L. ("Cannabis"), and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol ("THC") concentration of not more than 0.3% on a dry weight basis ("Hemp"). The Company is engaged in research involving the effectiveness of a broad variety of compounds derived from Hemp. The Company does not currently produce or sell medical or recreational marijuana or products derived from high THC Cannabis plants. The Company does not currently have any plans to expand into such high THC products in the near future. The Company's product categories include full spectrum hemp extract oil tinctures (liquid product), gummies, capsules, CBD topical creams and lotions, and pet products. The Company's products are distributed through its e-commerce website, third-party e-commerce websites, select distributors, health practitioners, and a variety of brick-and-mortar specialty retailers. 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 products sold within the United States. In furtherance of the Company's research and development ("R&D") efforts, the Company established CW Labs, an internal division for R&D, to expand the Company's efforts around the science of hemp derived compounds. CW Labs is currently engaged in clinical trials addressing Hemp-based health solutions. CW Labs is located in Louisville, Colorado at the Company's current good manufacturing practice ("cGMP") production and distribution facility. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND USE OF ESTIMATES Basis of Presentation The accompanying unaudited interim condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Any reference in these notes to applicable guidance is meant to refer to GAAP as found in the Accounting Standards Codification ("ASC") and Accounting Standards Updates ("ASU") of the Financial Accounting Standards Board ("FASB"). In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the financial statements) considered necessary to present fairly the Company's financial position as of March 31, 2024 and its results of operations for the three months ended March 31, 2024 and 2023, cash flows for the three months ended March 31, 2024 and 2023, and stockholders’ equity for the three months ended March 31, 2024 and 2023. Operating results for the three months ended March 31, 2024, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2024. The unaudited interim condensed consolidated financial statements presented herein do not contain the required disclosures under GAAP for annual consolidated financial statements. Certain amounts presented in prior periods have been reclassified to conform with the current period presentation. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and related notes as of and for the year ended December 31, 2023, included in the Company's Annual Report on Form 10-K filed with the SEC on March 21, 2024. 6 CHARLOTTE’S WEB HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share, per share, per unit, and number of years) (unaudited) Inventories Inventories are stated at the lower of cost or net realizable value. The Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on its assessment of market conditions. The Company's inventory production process for cannabinoid products includes the cultivation of botanical raw material. Due to the duration of the cultivation process, a portion of the inventory will not be sold within one year. Consistent with the practice in other industries that cultivate botanical raw materials, all inventory is classified as a current asset. Revenue Recognition The majority of the Company's revenue is derived from sales of branded products to consumers via the Company's direct-to-consumer e-commerce website, as well as distributors, retail and wholesale business-to-business customers. Additionally, on February 12, 2024, the Company and DeFloria LLC ("DeFloria") entered into a Master Services Agreement ("Services Agreement") pursuant to which the Company is compensated for the provision of certain services to DeFloria. Refer to Note 3 for additional disclosure on the DeFloria Service Agreement. The following table sets forth the disaggregation of the Company's revenue: Three Months Ended March 31, 2024 2023 Direct-to-consumer $ 7,772 $ 11,268 Business-to-business 4,041 5,742 Service revenue 311 — Total revenue $ 12,124 $ 17,010 Substantially all of the Company's revenue is earned in the United States. Recently Adopted Accounting Pronouncements There are no new accounting pronouncements adopted by the FASB that had or may have a material impact on the accompanying unaudited interim condensed consolidated financial statements. Recently Issued Accounting Pronouncements Other than described below, no new accounting pronouncements issued by the Financial Accounting Standards Board ("FASB") may have a material impact on the Company's consolidated financial statements and related disclosures. On December 14, 2023, the FASB issued a final standard on improvements to income tax disclosures, ASU 2023-09, Improvements to Income Tax Disclosures . The standard requires disaggregated information about a reporting entity's effective tax rate reconciliation as well as information on income taxes paid. The standard is intended to benefit investors by providing more detailed income tax disclosures that would be useful in making capital allocation decisions. For public business entities, the new requirements will be effective for annual periods beginning after December 15, 2024. The Company is currently evaluating the impact, if any, that the updated standard will have on the Company's consolidated financial statements and related disclosures. On November 27, 2023, the FASB issued ASU 2023-07—Segment Reporting . The new guidance was issued primarily to provide financial statement users with more disaggregated expense information about a public entity's reportable segments. The guidance is effective for calendar year public entities in 2024 year-end financial statements and should be adopted retrospectively unless impracticable. The Company is currently evaluating the impact, if any, that the updated standard will have on the Company's consolidated financial statements and related disclosures 7 CHARLOTTE’S WEB HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share, per share, per unit, and number of years) (unaudited) 3. FAIR VALUE MEASUREMENT The following table sets forth the Company's financial instruments that were measured at fair value on a recurring basis at March 31, 2024 and December 31, 2023, by level within the fair value hierarchy: March 31, 2024 Level 1 Level 2 Level 3 Total Financial assets: Stanley Brothers USA Holdings purchase option $ — $ — $ 779 $ 779 Debt interest rate conversion feature — — 800 800 Total financial assets $ — $ — $ 1,579 $ 1,579 Investment in unconsolidated entity: $ — $ — $ 10,200 $ 10,200 Financial liabilities: Debt conversion option $ — $ 3,200 $ — $ 3,200 December 31, 2023 Level 1 Level 2 Level 3 Total Financial assets: Stanley Brothers USA Holdings purchase option $ — $ — $ 1,730 $ 1,730 Debt interest rate conversion feature — — 872 872 Total financial assets $ — $ — $ 2,602 $ 2,602 Investment in unconsolidated entity: $ — $ — $ 11,000 $ 11,000 Financial liabilities: Debt conversion option $ — $ 3,213 $ — $ 3,213 There were no transfers between levels of the hierarchy during the three months ended March 31, 2024, and the year ended December 31, 2023. Investment in Unconsolidated Entity On April 6, 2023, the Company jointly formed an entity, DeFloria, with AJNA BioSciences PBC ("AJNA"), and a subsidiary of British American Tobacco PLC (LSE: BATS and NYSE: BTI) ("BAT"). AJNA is a botanical drug development company. AJNA is partially owned and was co-founded by a co-founder of Charlotte's Web. The entity was established to pursue FDA-approval for a botanical drug to target a neurological condition. BAT holds an equity interest in DeFloria in the form of 200,000 or 100 % preferred units following its $ 10 million investment and has the right to participate in future equity issuances to maintain its pro rata equity position. Effective February 12, 2024, BAT invested an additional $ 3 million into DeFloria in exchange for a convertible debenture. The Company and AJNA each hold 400,000 or 50 %, respectively, of DeFloria'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. 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. DeFloria is expected to use the investments for the clinical development of a hemp botanical Investigational New Drug application and has commenced Phase I clinical development. 8 CHARLOTTE’S WEB HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share, per share, per unit, and number of years) (unaudited) Concurrently with the formation of DeFloria, the Company was issued a warrant to purchase 865,052 shares of Class A Common Stock of AJNA for an exercise price of $ 2.89 per share. Management determined the warrant should be accounted for in accordance with ASC 321, which requires the warrant to be measured at fair value at issuance and subsequently remeasured at fair value each reporting period. All changes from the remeasurement of the warrant will be recorded as a change in fair value of financial instruments in the condensed consolidated statements of operations. The Company determined the fair value of the AJNA warrants to be de minimis and as such no value was recorded as of March 31, 2024. The Company determined that it 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. The maximum exposure to loss in the investment in DeFloria is limited to the Company's investment, which is represented by the financial statement carrying amount of its retained interest. 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 is 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. Upon formation of the entity, the Company elected the fair value option because it allowed the investment to be valued based on current market conditions. As such, the investment has been remeasured at fair value at each reporting date, with changes recognized in condensed consolidated statements of operations as changes in fair value of financial instruments for the period. For the three months ended March 31, 2024, a loss of $ 800 , respectively, related to the investment in DeFloria was recognized as a change in fair value of financial instruments in the condensed consolidated statements of operations. As of March 31, 2024 and December 31, 2023, the DeFloria investment represents an investment of $ 10,200 and $ 11,000 within the condensed consolidated balance sheets. 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. 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. The following additional assumptions are used in the model: March 31, December 31, 2024 2023 Expected term (years) 6.0 6.3 Volatility 75.0 % 70.0 % Risk-free interest rate 4.2 % 3.9 % Expected dividend yield — % — % Discount for lack of marketability 20.0 % 20.0 % Convertible Debt Derivatives On November 14, 2022, the Company entered into a subscription agreement (the "Subscription Agreement") with BT DE Investments, Inc. a wholly-owned subsidiary of BAT Group (LSE: BATS and NYSE: BTI) (the "Lender"), providing for the issuance of $ 56.8 million (C$ 75.3 million) convertible debenture (the "debenture"). The debenture is convertible into 19.9 % ownership of the Company's common shares at a conversion price of C$ 2.00 per common share of the Company on the TSX. The debenture will accrue interest at a stated annualized rate of 5 % until such time that there is federal regulation permitting the use of cannabidiol, a phytocannabinoid derived from the plant Cannabis sativa L. ("CBD") as an ingredient in food products and dietary supplements in the United States. (The term "federal regulation" is defined as the date that federal laws in the United States permit, authorize or do not prohibit the use of CBD as an ingredient 9 CHARLOTTE’S WEB HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share, per share, per unit, and number of years) (unaudited) in food products and dietary supplements). Following federal regulation of CBD, the annualized rate of interest shall reduce to 1.5 %. The maturity date for the debenture is November 14, 2029 (the "Maturity Date"). Debt Interest Rate Conversion Feature The debt interest rate conversion feature is classified as a financial asset and is remeasured at fair value at each reporting date, with changes recognized in condensed consolidated statements of operations as changes in fair value of financial instruments for the period. The use of assumptions for the fair value determination includes a high degree of subjectivity and judgment using unobservable inputs (level 3 on the fair value hierarchy), which results in estimation uncertainty. The debt interest rate conversion feature, if triggered, reduces the stated interest rate of the debenture to 1.5% upon federal regulation of CBD in the United States. For the three months ended March 31, 2024 and March 31, 2023, a loss of $ 54 and $ 605 , respectively, related to the debt interest rate conversion feature was recognized as a change in fair value of financial instruments in the condensed consolidated statements of operations. As of March 31, 2024 and December 31, 2023, the debt interest rate conversion feature represents a financial asset of $ 800 and $ 872 , respectively, within SBH purchase option and other derivative assets in the condensed consolidated balance sheets. To determine the value of the debt interest rate conversion feature, the Company utilizes a probability weighted income approach. This method calculates the present value of the reduced interest accrued on the debenture assuming the feature is triggered at a certain time, after accounting for the probability of federal regulation of CBD. This approach is useful when ultimate valuation is based on an unverifiable outcome, such as an event outside of the Company's influence. The following additional assumptions are used in the model: March 31, December 31, 2024 2023 Stated interest rate 5.0 % 5.0 % Adjusted interest rate 1.5 % 1.5 % Implied debt yield 12.8 % 11.0 % Federal regulation probability Various Various Year of event Various Various Debt Conversion Option Per the debenture, the Lender has the option, at any time before the Maturity Date at no additional consideration, for all or any part of the principal amount to be converted into fully paid and non-assessable common shares. The Company assessed this conversion feature and determined that the debt conversion option is an embedded derivative that requires bifurcation and is classified as a financial liability. The debt conversion option is initially measured at fair value and is revalued at each reporting period using the Black-Scholes option pricing model based on Level 2 observable inputs. The assumptions used by the Company are the quoted price of the Company's common shares in an active market, risk-free interest rate, volatility and expected life, and assumes no dividends. Volatility is based on the actual historical market activity of the Company's shares. The expected life is based on the remaining contractual term of the debenture and the risk-free interest rate is based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the expected maturity of the debenture. For the three months ended March 31, 2024 and March 31, 2023, a loss of $ 56 and a gain of $ 6,257 , respectively, related to the debt conversion option was recognized as a change in fair value of financial instruments in the condensed consolidated statements of operations. As of March 31, 2024 and December 31, 2023, the debt conversion option represents a financial liability of $ 3,200 and $ 3,213 , respectively, within derivative and other long-term liabilities in the condensed consolidated balance sheets. 10 CHARLOTTE’S WEB HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share, per share, per unit, and number of years) (unaudited) The following table provides the assumption regarding Level 2 fair value measurements inputs at their measurement dates: March 31, December 31, 2024 2023 Expected volatility 87.9 % 87.4 % Expected term (years) 5.6 5.9 Risk-free interest rate 4.2 % 3.9 % Expected dividend yield — % — % Value of underlying share C$ 0.28 C$ 0.27 Exercise price C$ 2.00 C$ 2.00 Stanley Brothers USA Holdings Purchase Option In 2021, the Company entered into an option purchase agreement (the "SBH Purchase Option") with Stanley Brothers USA Holdings, Inc ("Stanley Brothers USA") . The SBH Purchase Option was purchased for total consideration of $ 8,000 and has a term of five years (extendable for an additional two years upon payment of additional consideration). The SBH Purchase Option provides the Company the option to acquire all or substantially all the shares of Stanley Brothers USA on the earlier of February 26, 2024 and federal legalization of cannabis in the United States, or such earlier time as Stanley Brothers USA and the Company agree, at a purchase price to be determined at the time of exercise of the SBH Purchase Option. Upon exercise of the SBH Purchase Option, the purchase price will be determined based on application of predetermined multiples of Stanley Brothers USA revenue and earnings before interest, taxes, depreciation, and amortization ("EBITDA") measures. The Company is not obligated to exercise the SBH Purchase Option. As part of the SBH Purchase Option agreement, Stanley Brothers USA issued the Company a warrant exercisable to purchase 10 % of the outstanding Stanley Brothers USA shares and convertible securities that are considered in-the-money, subject to certain conditions and exclusions. The warrant is exercisable at the Company's election for a nominal exercise price in the event the Company elects not to acquire all or substantially all shares of Stanley Brothers USA and expires 60 days after the expiration of the option. The Company elected the fair value option in accordance with ASC 825-10 guidance to record its SBH Purchase Option. The SBH Purchase Option is classified as a financial asset and is remeasured at fair value at each reporting date, with changes to fair value recognized in the condensed consolidated statements of operations for the period. The use of assumptions for the fair value determination includes a high degree of subjectivity and judgment using unobservable inputs (level 3 on the fair value hierarchy), which results in estimation uncertainty. Changes in assumptions that reasonably could have been different at the reporting date may result in a higher or lower determination of fair value. Changes in fair value measurements, if significant, may affect performance of cash flows. For the three months ended March 31, 2024 and 2023, a loss of $ 951 and $ 300 , respectively, related to the SBH Purchase Option was recognized as change in fair value of financial instruments in the condensed consolidated statements of operations. As of March 31, 2024 and December 31, 2023, the SBH Purchase Option represents a financial asset of $ 779 and $ 1,730 , respectively, within SBH purchase option and other derivative assets in the condensed consolidated balance sheets. The Monte Carlo valuation model considers multiple revenue and EBITDA outcomes for Stanley Brothers USA and other probabilities in assigning a fair value. Primary assumptions utilized include financial projections of Stanley Brothers USA and the probability and timing of exercise. The following additional assumptions are used in the model of the SBH Purchase Option: March 31, December 31, 2024 2023 Expected volatility 125.0 % 125.0 % Expected term (years) 1.9 2.2 Risk-free interest rate 4.6 % 4.2 % Weighted average cost of capital 50.9 % 50.6 % 11 CHARLOTTE’S WEB HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share, per share, per unit, and number of years) (unaudited) 4. INVENTORIES Inventories consist of the following: March 31, December 31, 2024 2023 Harvested Hemp and seeds $ 8,736 $ 9,300 Raw materials 10,637 9,726 Finished goods 6,668 6,320 26,041 25,346 Less: inventory provision ( 3,554 ) ( 3,808 ) Total $ 22,487 $ 21,538 5. LICENSE AND MEDIA RIGHTS MLB Promotion Rights Agreement On October 11, 2022, the Company entered into a Promotional Rights Agreement (the "MLB Promotional Rights Agreement") with MLB Advanced Media L.P., on its own behalf and on behalf of Major League Baseball Properties, Inc., the Office of the Commissioner of Baseball, The MLB Network, LLC and the Major League Baseball Clubs (collectively, the "MLB"), pursuant to which the Company entered into a strategic partnership with MLB to promote the Company's new NSF-Certified for Sport® product line. On January 29, 2024, the Company and MLB entered into the First Amendment to the Promotional Rights Agreement ("First Amendment"). The First Amendment extended the agreement through December 31, 2027, with an aggregate rights fee of $ 23 million for the remainder of the term. As consideration under the MLB promotional rights agreement, the Company has paid and is committed to pay a combination of cash over the license period, along with upfront non-cash consideration in the form of equity, as well as contingent consideration in the form of contingent payments based on revenue. As of March 31, 2024 and December 31, 2023, the carrying value of the licensed properties was $ 14,614 and $ 14,589 , respectively, recorded as a license and media rights asset within the condensed consolidated balance sheets. As of March 31, 2024 and December 31, 2023, the carrying value of the media rights was $ 4,000 and $ 4,982 recorded as a prepaid asset and a license and media rights asset within the condensed consolidated balance sheets. For the three months ended March 31, 2024 and March 31, 2023, the Company paid the MLB $ 2,500 and $ 2,000 , respectively, as part of the committed cash payments, and recognized $ 974 and $ 1,824 , respectively, in amortization expense related to the license and media right assets. Licensed properties are amortized straight line and media rights are amortized as incurred. 12 CHARLOTTE’S WEB HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share, per share, per unit, and number of years) (unaudited) The MLB First Amendment agreement extended the maturities of the future payment by an additional 2 years. Maturities of the MLB license and media rights payable as of March 31, 2024 are as follows: 2024 (9 months remaining) $ 2,500 2025 5,500 2026 6,000 2027 6,500 Total payments $ 20,500 Less: Imputed interest ( 1,529 ) Total license and media rights payable $ 18,971 Less: Current license liabilities ( 5,072 ) Total non-current license and media rights payable $ 13,899 As of March 31, 2024, expected amortization of licensed properties are as follows: 2024 (9 months remaining) $ 2,923 2025 3,897 2026 3,897 2027 3,897 Total future amortization $ 14,614 6. DEBT Convertible Debenture On November 14, 2022, the Company entered into the Subscription Agreement with BT DE Investments, Inc., providing for the issuance of a $ 56.8 million (C$ 75.3 million) convertible debenture. The debenture was denominated in Canadian Dollars ("CAD" or "C$"). The debenture is convertible into 19.9 % ownership of the Company's common shares at a conversion price of C$ 2.00 per common share of the Company. The debenture will accrue interest at a stated annualized rate of 5 % until such time that there is federal regulation permitting the use of CBD as an ingredient in food products and dietary supplements in the United States. Following federal regulation of CBD, the stated annualized rate of interest shall reduce to 1.5 %. Interest is accrued annually and payable on the maturity date or date of earlier conversion. The maturity date for the debenture is November 14, 2029. The following is a summary of the Company's convertible debenture as of March 31, 2024 : As of March 31, 2024 Principal Amount Unamortized Debt Discount and Costs Net Carrying Amount Convertible Debenture Convertible debenture due November 2029 $ 59,544 $ ( 16,808 ) $ 42,736 13 CHARLOTTE’S WEB HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share, per share, per unit, and number of years) (unaudited) The following is a summary of the Company's convertible debenture as of December 31, 2023 : As of December 31, 2023 Principal Amount Unamortized Debt Discount and Costs Net Carrying Amount Convertible Debenture Convertible debenture due November 2029 $ 60,116 $ ( 17,588 ) $ 42,528 The debenture was C$ 75.3 million per the subscription agreement and translated to USD on the transaction date. For the three months ended March 31, 2024 and March 31, 2023 , the Company recognized a foreign currency gain of $ 925 and $ 12 , respectively, related to the net carrying value of the debenture within the condensed consolidated statements of operations . Interest is accrued annually and payable on the maturity date or date of earlier conversion. On conversion, accrued interest will either be converted into common shares equal to the amount of accrued interest or will be paid in cash if agreed with the Lender. As of March 31, 2024 and December 31, 2023 , the principal amount of the debenture includes $ 3,915 and $ 3,182 , respectively, of accrued interest expense. The following is a summary of the interest expense and amortization expense, recorded within the condensed consolidated statements of operation, of the Company's convertible debenture for the three months ended March 31, 2024: Three Months Ended March 31, 2024 2023 Interest expense $ 733 $ 697 Amortization of debt discounts and costs 401 319 Total interest and amortization expense $ 1,134 $ 1,016 7. COMMITMENTS AND CONTINGENCIES Legal Contingencies From time to time, the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. Although the ultimate aggregate amount of monetary liability or financial impact with respect to these matters is subject to many uncertainties and is therefore not predictable with assurance, management believes that as of March 31, 2024 there is no litigation pending that could have, individually and in the aggregate, a material adverse effect on the Company’s financial position, results of operations or cash flows. 8. LEASES The Company has lease arrangements related to office space, warehouse and production space, and land to facilitate agricultural operations. The leases have remaining lease terms of less than one to eleven years , some of which include options to extend the leases for up to five years . Generally, the lease agreements do not include options to terminate the lease. 14 CHARLOTTE’S WEB HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share, per share, per unit, and number of years) (unaudited) Maturities of operating lease liabilities as of March 31, 2024 are as follows: Operating Leases 2024 (9 months remaining) $ 2,449 2025 2,892 2026 2,169 2027 1,844 2028 1,762 Thereafter 11,884 Total lease obligation 23,000 Less: Imputed interest ( 5,598 ) Total lease liabilities 17,402 Less: Current lease liabilities 2,339 Total non-current lease liabilities $ 15,063 9. SHAREHOLDERS’ EQUITY As of March 31, 2024 and December 31, 2023, the Company's share capital consists of one class of issued and outstanding shares: common shares. The Company is also authorized to issue preferred shares issuable in series. To date, no shares of preferred shares have been issued or are outstanding. Common Shares As of March 31, 2024 and December 31, 2023, the Company was authorized to issue an unlimited number of common shares, which have no par value. 10. LOSS PER SHARE The Company computes loss per share of common shares. Basic net loss per common share is computed by dividing the net loss by the weighted-average number of common shares outstanding. Diluted loss per common share is computed by dividing the net loss by the weighted-average number of common shares together with the number of additional common shares that would have been outstanding if all potentially dilutive common shares had been issued, unless anti-dilutive. The following table sets forth the computation of basic and dilutive net loss per share attributable to common shareholders: Three Months Ended March 31, 2024 2023 Net loss $ ( 9,634 ) $ ( 2,912 ) Weighted-average number of common shares - basic 156,036,670 152,314,150 Dilutive effect of stock options and awards — — Weighted-average number of common shares - diluted 156,036,670 152,314,150 Loss per common share – basic and diluted $ ( 0.06 ) $ ( 0.02 ) As of March 31, 2024 and March 31, 2023, potentially dilutive securities include stock options, restricted share units, common share warrants, and convertible debenture conversion. When the Company recognizes a net loss from continuing operations, all potentially 15 CHARLOTTE’S WEB HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share, per share, per unit, and number of years) (unaudited) dilutive shares are anti-dilutive and are consequently excluded from the calculation of diluted net loss per share. The potentially dilutive awards outstanding for each period are presented in the table below: March 31, 2024 2023 Outstanding options 5,522,942 4,386,215 Outstanding restricted share units 3,750,000 2,216,022 Total 9,272,942 6,602,237 The Company's debenture is convertible into 19.9 % ownership of the Company's common shares at a conversion price of C$ 2.00 per common share of the Company. The Company can settle the convertible debenture in shares. If the convertible debenture in diluted EPS is anti-dilutive, or if the conversion value of the debenture does not exceed their conversion price for a reporting period, then the shares underlying the notes will not be reflected in the Company's calculation of diluted EPS. For the three months ended March 31, 2024, the price of the Company's shares did not exceed the conversion price and therefore there was no impact to potential common share diluted EPS during those periods. 11. SHARE-BASED COMPENSATION Stock options Stock options vest over a prescribed service period and are approved by the Company's board of directors on an award-by-award basis. Options have a prescribed service period generally lasting up to four years , with certain options vesting immediately upon issuance. Upon the exercise of any stock options, the Company issues shares to the award holder from the pool of authorized but unissued common shares. There were no options granted for the three months ended March 31, 2024. The fair values of options granted for the three months ended March 31, 2023 were determined using a Black-Scholes model. The following principal inputs were used in the valuation of awards issued for the three months ended March 31, 2023: Three Months Ended March 31, 2023 Expected volatility 89.5 % Expected term (years) 5.5 - 6.5 Risk-free interest rate 3.4 % Expected dividend yield 0 % Value of underlying share $ 0.56 16 CHARLOTTE’S WEB HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share, per share, per unit, and number of years) (unaudited) Detail of the number of stock options outstanding for the three months ended March 31, 2024 under the Company's 2015 legacy option plan and the Company's amended 2018 long term incentive plan (collectively, the "Plans") is as follows: Number of Options Weighted- Average Exercise Price per Option Weighted- Average Remaining Contract Term (in years) Aggregate Intrinsic Value Outstanding as of December 31, 2023 5,780,134 $ 0.75 8.56 $ — Granted — — Exercised — — Forfeited (and expired) ( 257,192 ) 0.53 Outstanding as of March 31, 2024 5,522,942 $ 0.77 8.31 $ — Exercisable/vested as of March 31, 2024 2,761,000 $ 1.06 7.39 $ — There were no options granted during the three months ended March 31, 2024. The weighted average grant-date fair value of options granted during the three months ended March 31, 2023 was $ 0.56 . There were no options exercised during the three months ended March 31, 2024 and 2023. Restricted share units The Company has issued time-based restricted share units to certain employees as permitted under the amended 2018 long term incentive plan ("the 2018 Plan"). The restricted share units granted vest in accordance with the board-approved agreement, typically over equal installments up to four years . Upon vesting, one common share of the Company is issued for each restricted share unit awarded. The fair value of each restricted share unit granted is equal to the market price of the Company's shares at the date of the grant. The fair value of shares vested during the three months ended March 31, 2024 and 2023 was $ 869 and $ 740 , respectively. Details of the number of restricted share units outstanding under the 2018 Plan is as follows: Number of Shares Weighted- Average Grant Date Fair Value Outstanding as of December 31, 2023 7,250,766 $ 0.31 Granted — $ — Forfeited ( 85,731 ) $ 0.53 Vested ( 2,895,489 ) $ 0.30 Shares withheld upon vesting ( 519,546 ) $ 0.53 Outstanding as of March 31, 2024 3,750,000 $ 0.29 Share-based Compensation Expense Share-based compensation expense for all equity arrangements for the three months ended March 31, 2024 and 2023 was $ 842 and $ 375 , respectively, included in selling, general and administrative expense in the condensed consolidated statements of operations. As of March 31, 2024, $ 1,783 of total unrecognized share-based compensation expense related to unvested options granted to employees is expected to be recognized over a weighted-average period of 2.25 years. 17 CHARLOTTE’S WEB HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share, per share, per unit, and number of years) (unaudited) 12. INCOME TAXES The Company reported income tax expense of $ 16 and $ 0 for the three months ended March 31, 2024 and 2023, respectively. The Company's effective tax rate in the three months ended March 31, 2024 and 2023 was ( 0.2 )% and 0 %, respectively. The Company's effective tax rates differ from the U.S. federal statutory rate of 21.0 % for the three months end March 31, 2024 and 2023 , respectively, primarily due to the valuation allowance. The effective tax rate for the three months ended March 31, 2024 is consistent with the three months ended March 31, 2023, as the Company has been in a full valuation allowance for both periods. 13. RELATED PARTY TRANSACTIONS 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 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 until November 13, 2024. According to the terms of the agreement, no additional interest will accrue through the payment date. The note has been fully reserved for as of December 31, 2023 . 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. On April 6, 2023, the Company jointly formed an entity, DeFloria, with AJNA and BAT. AJNA is a botanical drug development company. AJNA is partially owned and was co-founded by a co-founder of Charlotte's Web. BAT holds an equity interest in the entity in the form of 200,000 preferred units following its $ 10 million investment and has the right to participate in future equity issuances to maintain its pro rata equity position. The Company and AJNA each hold 400,000 of the entity's voting common units (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 March 31, 2024 , the remaining note receivable of $ 113 is presented in other assets in the condensed consolidated balance sheets. On February 12, 2024, BAT invested an additional $ 3 million in DeFloria in the form of convertible debt (refer to Note 3). Additionally on February 12, 2024, the Company and DeFloria entered into a separate master services agreement pursuant to which the Company will be compensated for the provision of certain services to DeFloria. For the three months ended March 31, 2024, the Company recognized $ 311 in revenue and cost of goods sold, respectively, related to the service agreement with DeFloria. Additionally, the Company has an accounts receivable balance due from DeFloria of $ 74 for the three months ended March 31, 2024. 18