What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-08 compared with 2024-05-08 · 175 added, 82 removed, 201 unchanged (56% of the section changed)

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

All statements other than statements of historical fact included in this Form 10-Q regarding the prospects of Charlotte's Web Holdings, Inc.

("Charlotte's Web", the "Company" or "we"), the industry or its prospects, plans, financial position or business strategy may constitute forward-looking statements.

All statements other than statements of historical fact included in this Form 10-Q regarding the prospects of Charlotte's Web Holdings, Inc., ("Charlotte's Web", the "Company" or "we"), the industry or its prospects, plans, financial position or business strategy may constitute forward-looking statements.

In addition, forward-looking statements generally can be identified by the use of forward-looking words such as "plans," "expects" or "does not expect," "is expected," "look forward to," "budget," "scheduled," "estimates," "forecasts," "will continue," "intends," "the intent of," "have the potential," "anticipates," "does not anticipate," "believes," "should," "should not," or variations of such words and phrases that indicate that certain actions, events or results "may," "could," "would," "might," or "will," "be taken," "occur," or "be achieved," or the negative of these terms or variations of them or similar terms.

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Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2023.

Except for historical information, the discussion in this section contains forward-looking statements that involve risks and uncertainties, as discussed in the "Cautionary Note Regarding Forward Looking Statements." Future results could differ materially from those discussed below for many reasons, including the risks described in Item 1A—"Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2023 and in Part II, Item 1A—"Risk Factors" of this Form 10-Q.

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

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BUSINESS OVERVIEW

Charlotte's Web Holdings, Inc.

is a Certified B Corp headquartered in Louisville, Colorado, which conducts the majority of its business in the United States.

Charlotte's Web Holdings, Inc., 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™, CBD Medic™, and CBD Clinic™.

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

As of March 31, 2024, the Company operated in a single operating and reportable segment, hemp-derived CBD wellness products.

As of June 30, 2024, 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.

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

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

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During the first quarter of 2024, Charlotte's Web unveiled a significant competitive price reduction of its leading CBD oils, without sacrificing its proprietary formulation or quality.

This was accomplished by passing through improved operational efficiencies to consumers, with modest gross margin reduction expected to be offset with additional volume.

This was accomplished by passing through improved operational efficiencies to consumers, with modest gross margin reduction expected to be offset with additional volume through the remainder of the year.

More affordable pricing improves consumer accessibility, and broadens the total addressable consumer segments, attracting new consumers.

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Premier Lacrosse League, and Major League Baseball©.

As of March 31, 2024 , several states have adopted new regulations that will impact the Company's ability to sell certain products as currently formulated or packaged in these states.

As of June 30, 2024 , several states 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.

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For the Three Months Ended

For the Six Months Ended

2024 2023 2024 2023

Total revenues

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9,707 7,088 14,920 14,181

2,582 8,918 9,493 18,835

Selling, general, and administrative expenses

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Operating loss (12,145) (10,709) (20,514) (18,305)

Gain on initial investment in unconsolidated entity

— 10,700 — 10,700

Change in fair value of financial instruments 1,140 4,229 (720) 9,612

1 unchanged sentence

(6) (1,376) 605 (2,074)

Income (loss) before income taxes

$ (11,011) $ 2,844 $ (20,629) $ (67)

Total assets $ 129,794 $ 176,589

Total liabilities $ 93,966 $ 98,228

For The Three Months Ended June 30, 2024 and 2023

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

Three Months Ended March 31, % (Decrease)

Three Months Ended June 30, % Increase (Decrease)

Direct-to-consumer ("DTC") revenue $ 7,820 $ 10,734 (27.1) %

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Total revenue $ 12,289 $ 16,006 (23.2) %

Total revenue for the three months ended March 31, 2024 was $12,124, a decrease of 28.7% compared to the three months ended March 31, 2023.

DTC e-commerce revenue decreased 31.0% year-over-year.

The decrease compared to the prior year period was primarily due to lower organic traffic volume and prior consumers stocking up on product during the heavy holiday promotions in the fourth quarter of 2023.

Website traffic and new consumer acquisition was also lower in the quarter due to a temporary reduction in paid media programs as part of an evaluation as the Company transitions its e-commerce platform and associated marketing.

B2B revenue decreased 29.6% compared to the three months ended March 31, 2023.The decrease compared to prior period was primarily due to the reductions in retail shelf space allocated to the CBD category that occurred in 2023.

Some of the Company’s mass retail partners fully exited the CBD category, increasing the year-over-year revenue decline.

The decrease in revenue is partially offset by service revenue of $311.

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

Total revenue for the three months ended June 30, 2024 was $12,289 , a dec rease of 23.2% compa red to the three months ended June 30, 2023.

DTC net revenue decreased 27.1% year-over-year, primarily due to lower comparable online traffic to the Company’s web store.

On a quarter-over-quarter basis DTC net revenue increased 0.6% compared to the first quarter of 2024.

In June 2024, the Company transitioned to a new e-commerce platform which provides improved software integrations, advanced target marketing tools, and superior customer relationship management software.

B2B net revenue decreased 16.6% year-over-year, primarily due to reductions or removals of shelf space allocations to CBD products by certain retailers.

Inflationary impact on discretionary consumer spending activity and product mix shift away from higher-priced tinctures were additional contributing factors.

B2B net revenue increased 8.8% quarter-over-quarter compared to the first quarter of 2024.

During the second quarter of 2024, Charlotte’s Web rolled out its new CBN 'Stay Asleep' gummies to retailers.

The Company also added Walmart as a retail partner with the launch of a new CBD isolate topicals, now available at 827 Walmart stores across five states;

California, Illinois, Florida, Texas, and Pennsylvania.

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 products 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 product sold, third-party quality costs, transportation, overhead allocations and changes in inventory provisions.

The components of cost of goods sold are as follows:

Three Months Ended March 31, % (Decrease)

Three Months Ended June 30, % Increase (Decrease)

Inventory expensed to cost of goods sold 4,316 4,979 (13.3) %

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Cost of goods sold $ 9,707 $ 7,088 36.9 %

Cost of goods sold decreased 26.5% for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily due to lower unit sales volume and a decrease in variable operating costs.

The decrease was partially offset by an increase in services costs related to the DeFloria service agreement.

Depreciation and amortization expense for the three months ended March 31, 2024 and March 31, 2023 was $2,493 and $3,792, respectively, of which $856 and $899, respectively, was expensed to cost of goods sold.

Cost of goods sold increased 36.9% for the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

The increase was primarily due to a $3.7 million increase in inventory provisions during the period.

The increase in the provision was due to the revaluation on aged hemp based on current market conditions.

The decrease was partially offset by lower inventory expense associated with lower revenue in 2024, as well as production cost improvements.

Depreciation and amortization expense for the three months ended June 30, 2024 and June 30, 2023 was $2,489 and $3,977, respectively, of which $849 and $897, respectively, was expensed to cost of goods sold.

The remaining depreciation and amortization expenses of $1,640 and $3,080, respectively, was expensed to Selling, general, and administrative expenses.

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 and gross profit margin are as follows:

Three Months Ended March 31, % (Decrease)

Gross profit for the three months ended June 30, 2024 and June 30, 2023 is as follows:

Three Months Ended June 30, % Increase (Decrease)

Gross profit $ 2,582 $ 8,918 (71.0) %

Gross margin 21.0 % 55.7 % (62.3) %

Gross profit decreased 30.3% for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

The decrease is primarily related to lower net revenue in both the DTC and B2B channels as well was lower variable operating costs.

Gross profit decreased 71.0% for the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

The decrease is primarily related to the increase in inventory provision of $3.7 million for the three month ending June 30, 2024.

Additionally the decrease is directly related to the revenue decrease of 23.2%, primarily due to lower blended margin following price reductions on oil tincture products initiated in the first quarter of 2024.

Selling, General, and Administrative Expenses

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

Three Months Ended March 31, % (Decrease)

Three Months Ended June 30, % Increase (Decrease)

Selling, general, and administrative expenses $ 14,727 $ 19,627 (25.0) %

Total Selling, general, and administrative expenses for the three months ended March 31, 2024 and March 31, 2023 were $15,280 and $17,513, respectively.

The 12.8% decrease was primarily attributable to $1 million in cost saving measures within e-commerce and marketing compared to the to the three months ended March 31, 2023.

Additionally, the amended MLB Promotional Rights Agreement resulted in a decrease in amortization expense related to MLB assets of approximately $850 compared the prior period.

To better align expenses to current revenue levels, the Company has taken actions to significantly reduce expenses company-wide in 2024 by approximately $15 million year-over-year, mainly through operating efficiency improvements, and stringent cost controls.

Depreciation and amortization expensed to Selling, general, and administrative expenses for the three months ended March 31, 2024 and March 31, 2023 were $1,637 and $2,893, respectively.

Total research and development expenses expensed to Selling, general, and administrative expense for the three months ended March 31, 2024 and March 31, 2023 were $751 and $546, respectively.

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

Total Selling, general, and administrative expenses for the three months ended June 30, 2024 and June 30, 2023 were $14,727 and $19,627, respectively.

The amended MLB Promotional Rights Agreement resulted in a decrease in amortization expense related to MLB assets of approximately $1 million compared to the three months ended June 30, 2023.

Additionally, the decrease is due to a reduction in personnel, share based compensation, and consulting costs compared to the prior period.

Depreciation and amortization expensed to Selling, general, and administrative expenses for the three months ended June 30, 2024 and June 30, 2023 were $1,640 and $3,080, respectively.

Total research and development costs expensed to Selling, general, and administrative expense for the three months ended June 30, 2024 and June 30, 2023 were $648 and $916, respectively.

Total Change in Gain on Investment in Unconsolidated Entity

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

Three Months Ended June 30, % Increase (Decrease)

Change in gain on investment in unconsolidated entity

$ — $ 10,700 (100) %

The gain on investment in unconsolidated entity for the three months ended June 30, 2024 and June 30, 2023 was $0 and $10,700, respectively.

For the six months ended June 30, 2023, 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 initial investment was measured at fair value and is remeasured at each reporting date, with changes recognized in changes in fair value of financial instruments.

Total Change in Fair Value of Financial Instruments

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

Three Months Ended March 31, % (Decrease)

Three Months Ended June 30, % Increase (Decrease)

Change in fair value of financial instruments $ 1,140 $ 4,229 (73.0) %

Total change in fair value of financial instruments for the three months ended March 31, 2024 and March 31, 2023 was loss of $1,860 and gain of $5,382, respectively.

For the three months ending March 31, 2024, the decrease in the change in fair value of financial instruments was due to a loss of $951 in the fair value of the SBH Purchase Option compared to a loss of $300 as of March 31, 2023.

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

Additionally, the decrease was also partially attributable to the revaluation of the fair value of the investment in DeFloria resulting in a loss of $800.

The decrease in value for DeFloria was a result of the issuance of convertible debt during the period.

The investment in DeFloria was entered into in April 2023 and as such there was no fair value for the three months ended March 31, 2023.

Finally, the loss for the three months ended March 31, 2024 was also caused by a net loss $109 from the revaluation of the debt conversion option and debt interest rate conversion feature.

For the three months ended March 31, 2023, the Company recognized a net gain of $5,652 related to the revaluation of these instruments.

Total change in fair value of financial instruments for the three months ended June 30, 2024 and June 30, 2023 was $1,140 and $4,229, respectively.

For the three months ended June 30, 2024, the gain in fair value of financial instruments was primarily due to the revaluation of the fair value of the investment in unconsolidated entity, resulting in a gain of $1 million, compared to no gain for the three months ended June 30, 2023.

For the three months ended June 30, 2023, the gain in fair value of financial instruments was due to the Company's debt conversion option and debt interest rate conversion feature resulting in a net gain of approximately $4.2 million, compared to a net gain of $175 for the three

months ended June 30, 2024.

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

For the Six Months Ended June 30, 2024 and 2023

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

Six Months Ended June 30, % Increase (Decrease)

Direct-to-consumer ("DTC") revenue

$ 15,592 $ 22,002 (29.1) %

Business-to-business ("B2B") revenue

8,436 11,014 (23.4) %

Service revenue 385 $ — 100.0 %

Total revenue $ 24,413 $ 33,016 (26.1) %

Total revenue for the six months ended June 30, 2024 was $24,413, a decrease of 26.1% compared to the six months ended June 30, 2023.

DTC revenue decreased 29.1%, driven by lower comparable online traffic and associated sales volume through the Company’s web store.

Inflationary impact on discretionary consumer spending activity and product mix shift away from higher-priced tinctures were additional contributing factors.

B2B revenue decreased 23.4% compared to the six months ended June 30, 2023.

The decrease was primarily due to the reduced retailer shelf allocations to the CBD category and inflationary impacts on consumer spending.

Cost of Goods Sold

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

The components of cost of goods sold are as follows:

Six Months Ended June 30, % Increase (Decrease)

Inventory expensed to cost of goods sold 7,698 10,188 (24.4) %

Inventory provision, net 3,926 320 1126.9 %

Other production costs 1,206 1,877 (35.7) %

Service costs 385 — 100.0 %

Depreciation and amortization 1,705 1,796 (5.1) %

Cost of goods sold $ 14,920 $ 14,181 5.2 %

Cost of goods sold increased 5.2% for the six months ended June 30, 2024, despite lower revenue compared to the six months ended June 30, 2023.

The increase was primarily due to a $3.7 million increase in inventory provisions taken as of June 30, 2024.

The increase in the provision was due to the revaluation on aged hemp based on current market conditions.

The increase was partially offset by lower inventory expense associated with lower revenue in 2024, as well as production cost improvements.

Depreciation and amortization expense for the six months ended June 30, 2024 and June 30, 2023 was $4,982 and $7,769, respectively, of which $1,705 and $1,796, respectively, was expensed to cost of goods sold.

The remaining depreciation and amortization expenses of $3,277 and $5,973, respectively, was expensed to Selling, general, and administrative expenses.

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

Gross profit for the six months ended June 30, 2024 and June 30, 2023 is as follows:

Six Months Ended June 30, % Increase (Decrease)

Gross profit $ 9,493 $ 18,835 (49.6) %

Gross margin 38.9 % 57.0 % (31.8) %

Gross profit decreased 49.6% year-over-year for the six months ended June 30, 2024 primarily due to the lower net revenue and higher inventory provisions compared to the same period ended June 30, 2023.

Selling, General, and Administrative Expenses

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

Six Months Ended June 30, % Increase (Decrease)

Selling, general, and administrative expenses $ 30,007 $ 37,140 (19.2) %

Total selling, general, and administrative expenses for the six months ended June 30, 2024 and June 30, 2023 were $30,007 and $37,140, respectively.

The amended MLB Promotional Rights Agreement resulted in a decrease in amortization expense related to MLB assets of approximately $2 million compared the prior period.

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

Depreciation and amortization expensed to Selling, general, and administrative expenses for the six months ended June 30, 2024 and June 30, 2023 were $3,277 and $5,973, respectively.

Total research and development costs expensed to Selling, general, and administrative expense for the six months ended June 30, 2024 and June 30, 2023 were $1,399 and $1,462, respectively.

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

Total Change in Gain on Investment in Unconsolidated Entity

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

Six Months Ended June 30, % Increase (Decrease)

Change in gain on investment in unconsolidated entity

$ — $ 10,700 (100) %

Total change in gain on investment in unconsolidated entity for the six months ended June 30, 2024 and June 30, 2023 was $0 and $10,700, respectively.

For the six months ended June 30, 2023, the gain was due to the Company jointly forming an entity, DeFloria, with

AJNA, and BAT.

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

Total Change in Fair Value of Financial Instruments

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

Six Months Ended June 30, % Increase (Decrease)

Change in fair value of financial instruments $ (720) $ 9,612 (107) %

Total change in fair value of financial instruments for the six months ended June 30, 2024 and June 30, 2023 was a loss of $720 and a gain of $9,612, respectively.

For the six months ended June 30, 2024, the loss in fair value of financial instruments was primarily due to the revaluation of the fair value of the Company's SBH purchase option resulting in a loss of $1 million, compared to a loss of $243 for the six months ended June 30, 2023.

The decrease in valuation resulted from declining financial projections of SBH.

For the six month ending June 30, 2023, the gain in fair value of financial instruments was 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 approximately $9.6 million, compared to a net gain of $65 for the six months ended June 30, 2023.

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

Liquidity and Capital Resources

As of March 31, 2024 and December 31, 2023, the Company had total current liabilities of $19,632 and $23,646, respectively, and cash and cash equivalents of $38,510 and $47,820, respectively, to meet its current obligations.

The Company expects a reduction in overall selling, general, and administrative expenses in 2024 as a result of several actions taken in the first quarter of 2024.

This includes improvements in operating efficiency throughout the business, cost savings from a more efficient e-commerce platform and associated information technology upgrades, and a data-driven reorganization of its B2B business and retail partnering strategies.

Additionally, costs associated with the Company’s MLB partnership and associated Promotional Rights Agreement will be approximately $3 million lower in 2024.

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.

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.

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

As of June 30, 2024 and December 31, 2023 , the Company had total current liabilities of $18,467 and $23,646, respectively, and cash and cash equivalents of $32,531 and $47,820, respectively, to meet its current obligations.

As a result of expense reduction actions taken in 2024, the Company expects selling, general and administrative expenses to be significantly lower compared to 2023.

The Company’s ability to fund its operations for the next twelve months and thereafter will depend on its future operating performance, particularly prudent cost management, 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 the issuance of capital shares.

The Company expects to meet our liquidity requirements for at least the next twelve months through various sources of capital, including cash on hand and provided by operations over time.

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

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.

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.

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

Cash from Operating Activities

Net cash used in operating activities for the three months ended March 31, 2024 and March 31, 2023 were as follows:

Three Months Ended March 31,

Net cash used in operating activities for the six months ended June 30, 2024 and June 30, 2023 were as follows:

Six Months Ended June 30,

Net cash used in operating activities $ (11,883) $ (5,009)

For the three months ended March 31, 2024, the increase in cash used in operations is primarily due to cash outflows of $2,500 associated with the MLB Promotional Rights Agreement, compared to $2,000 for the three months ended March 31, 2023.

For the six months ended June 30, 2024, the decrease in cash used in operations is primarily due to a decrease in sales and working capital, resulting in a decrease of net cash inflow.

Additionally, for the six months ended June 30, 2023, the Company collected $4,261 from income tax refunds due.

Cash from Investing Activities

Net cash used in investing activities for the three months ended March 31, 2024 and March 31, 2023 were as follows:

Three Months Ended March 31,

Net cash used in investing activities for the six months ended June 30, 2024 and June 30, 2023 were as follows:

Six Months Ended June 30,

Net cash used in investing activities $ (3,288) $ (151)

For the three months ended March 31, 2024, 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.

Net cash provided by financing activities for the three months ended March 31, 2024 and March 31, 2023 were as follows:

Three Months Ended March 31,

For the six months ended June 30, 2024, the increase in cash used in investing activities was driven primarily by machinery purchases as part of the Company's plan to in-source topical and gummy production..

Cash from Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2024 and June 30, 2023 were as follows:

Six Months Ended June 30,

Net cash used in financing activities $ (118) $ (75)

For the three months ended March 31, 2024 and March 31, 2023, the change was primarily due to the vesting of restricted stock units.

For the six months ended June 30, 2024, the change was primarily due to the vesting of restricted stock units.

Off-Balance Sheet Arrangements

As of March 31, 2024 and December 31, 2023, we do not have any off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on our results of operations or financial condition, including, and without limitation, such considerations as liquidity and capital resources.

As of June 30, 2024 and December 31, 2023, we do not have any off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on our results of operations or financial condition, including, and without limitation, such considerations as liquidity and capital resources.

Related party transactions

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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.

BAT holds an equity interest in the entity in the form of 200,000 preferred units following its $10 million initial 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).

1 unchanged sentence

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.

Additionally on February 12, 2024, the Company and DeFloria entered into a separate master services agreement in 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.

As of June 30, 2024 , the remaining note receivable of $99, is presented in other assets in the condensed consolidated balance sheets.

In 2024, BAT and AJNA invested an additional $5 million and $2 million, respectively, 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 and six months ended June 30, 2024, the Company recognized $74 and $385, respectively, 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, respectively, for the three and six months ended June 30, 2024.

On June 21, 2024, the Company entered into a consulting agreement with Jared Stanley, Co-Founder of Charlotte's Web, former executive of the Company, and current member of the Board of Directors.

The consulting agreement will remain in effect until June 13, 2025.

In consideration for Mr.

Stanley's services, he will receive a bi-weekly fee of $6.

Recently Adopted Accounting Principles

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

There are no new recent accounting pronouncements that have been issued by the Financial Accounting Standards Board ("FASB") and adopted by the Company had or may have a material impact on the accompanying unaudited interim condensed consolidated financial statements.

Critical Policies and Accounting 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.

14 unchanged sentences

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 condensed consolidated statements of operations, as changes in fair value of financial instruments for the period.

The investment was remeasured at fair value after 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 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.

9 unchanged sentences

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 cultivating botanical raw material.

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

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

6 unchanged sentences

If the useful life is shorter than originally estimated, the Company amortizes the remaining carrying value over the new shorter useful life.

Impairment losses are

recorded in selling, general, and administrative expense in the condensed consolidated statements of operations.

There were no impairment losses recognized for the three months ended March 31, 2024 and 2023, respectively.

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

There were no impairment losses recognized for the three months ended June 30, 2024 and 2023, respectively.

Convertible Debenture

9 unchanged sentences

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

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

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

using the enacted marginal income tax rate in effect for the year in which the differences are expected to reverse.

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

10 unchanged sentences

The earliest income tax year that may be subject to examination is 2019.

The Company has recorded an uncertain tax position as of March 31, 2024 and December 31, 2023.

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 has recorded an uncertain tax position as of June 30, 2024 and December 31, 2023.

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

Revenue Recognition

6 unchanged sentences

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 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.

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

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

9 unchanged sentences

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.

2 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis