What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-14 compared with 2024-08-08 · 96 added, 113 removed, 263 unchanged (44% of the section changed)

26 unchanged sentences

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™.

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.

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 Cannabidiol ("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 product categories include full spectrum hemp extract oil tinctures (liquid products), gummies, capsules, CBD topical creams and lotions, broad spectrum botanical CBD, mushrooms, and pet products.

The Company also offers NSF Certified for Sport® 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 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 June 30, 2024, the Company operated in a single operating and reportable segment, hemp-derived CBD wellness products.

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

As of September 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, Colorado, 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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A testament to this expansion is the launch of Charlotte's Web Stay Asleep Cannabinol ("CBN") gummies.

Similar to Cannabidiol ("CBD"), CBN is a non-intoxicating cannabinoid found in the hemp plant.

Similar to CBD, CBN is a non-intoxicating cannabinoid found in the hemp plant.

At the cutting edge of innovative natural sleep solutions, these new melatonin free gummies could offer distinct benefits for the approximately 67% of adults who report waking up during the night (Phillips Global Sleep Survey, 2019).

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Additionally, the Company's ReCreate brand has been absorbed under the recognized Charlotte’s Web brand to better penetrate the lifestyles category.

Charlotte’s Web NSF Certified for Sport® will benefit from the Company’s valuable professional sports partnerships, including the Angel City Football Club, U.S.

Charlotte’s Web NSF Certified for Sport® will benefit from the Company’s valuable professional sports partnerships, including with the U.S.

Premier Lacrosse League and Major League Baseball©.

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.

As of September 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, including the emergency regulations enacted in September 2024 in the State of California.

Many of these states have also implemented new THC/CBD limits, age verification, testing, 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, packaging, and labeling requirements, as well as costs and potential revenue impacts and anticipated timing for such impacts to the Company in these states.

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For the Three Months Ended

For the Six Months Ended

September 30,

For the Nine Months Ended

September 30,

2024 2023 2024 2023

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

— 10,700 — 10,700

Change in fair value of financial instruments 1,422 (4,024) 702 5,588

1 unchanged sentence

(1,189) 841 (584) (1,234)

Income (loss) before income taxes

Loss before income taxes

$ (5,787) $ (15,143) $ (26,416) $ (15,211)

1 unchanged sentence

Total liabilities $ 89,401 $ 100,129

For The Three Months Ended June 30, 2024 and 2023

For The Three Months Ended September 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 June 30, % Increase (Decrease)

Three Months Ended September 30, % Increase (Decrease)

Direct-to-consumer ("DTC") revenue $ 8,166 $ 9,428 (13.4) %

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Total revenue $ 12,587 $ 14,294 (11.9) %

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.

Total revenue for the three months ended September 30, 2024 was $12,587 , a dec rease of 11.9% compa red to the three months ended September 30, 2023.

On a quarter-over-quarter basis, total revenue increased 2.4% , marking a second consecutive quarter of growth in 2024.

DTC net revenue decreased 13.4% 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.

At the end of the second quarter, the Company transitioned to a new e-commerce platform which provides improved software integrations, advanced target marketing tools, and superior customer relationship management software.

On a quarter-over-quarter basis DTC net revenue increased 4.4% compared to the second quarter of 2024.

B2B net revenue decreased 10.7% year-over-year, primarily due to reductions or removals of shelf space allocations to CBD products by certain retailers over the past 12 months.

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;

B2B net revenue decreased 1.1% quarter-over-quarter compared to the second quarter of 2024.

The Company added Walmart as a retail partner in the second quarter of 2024 with the launch of a new CBD isolate topical products, including product rollout to 827 Walmart stores across five states;

California, Illinois, Florida, Texas, and Pennsylvania.

For the third quarter the Company saw continued sales growth in its gummy product line.

Cost of Goods Sold

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The components of cost of goods sold are as follows:

Three Months Ended June 30, % Increase (Decrease)

Three Months Ended September 30, % Increase (Decrease)

Inventory expensed to cost of goods sold 4,068 4,454 (8.7) %

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Cost of goods sold $ 5,914 $ 6,365 (7.1) %

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.

Cost of goods sold decreased 7.1% for the three months ended September 30, 2024 compared to the three months ended September 30, 2023.

The decrease was primarily due to lower inventory expense associated with lower revenue in 2024.

Depreciation and amortization expense for the three months ended September 30, 2024 and September 30, 2023 was $2,523 and $3,741, respectively, of which $844 and $893, respectively, was expensed to cost of goods sold.

The remaining depreciation and amortization expenses of $1,679 and $2,848, 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 for the three months ended June 30, 2024 and June 30, 2023 is as follows:

Three Months Ended June 30, % Increase (Decrease)

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

Three Months Ended September 30, % Increase (Decrease)

Gross profit $ 6,673 $ 7,929 (15.8) %

Gross margin 53.0 % 55.5 % (4.5) %

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.

Gross profit decreased to 53.0% for the three months ended September 30, 2024 compared to 55.5% for the three months ended September 30, 2023.

The decrease is primarily related to the revenue decrease of 11.9% impacting fixed cost absorption, and 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 June 30, % Increase (Decrease)

Three Months Ended September 30, % Increase (Decrease)

Selling, general, and administrative expenses $ 12,693 $ 19,889 (36.2) %

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 Selling, general, and administrative expenses for the three months ended September 30, 2024 and September 30, 2023 were $12,693 and $19,889, respectively.

The amended MLB Promotional Rights Agreement resulted in a decrease in amortization expense related to MLB assets of approximately $1.2 million compared to the three months ended September 30, 2023.

Additionally, the decrease is due to operating expense reductions.

The Company made additional cost cutting measures in the third quarter to further align with current revenue levels.

Depreciation and amortization expensed to Selling, general, and administrative expenses for the three months ended September 30, 2024 and September 30, 2023 were $1,679 and $2,848, respectively.

Total research and development costs expensed to Selling, general, and administrative expense for the three months ended September 30, 2024 and September 30, 2023 were $556 and $733, respectively.

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

Total Change in Gain on Investment in Unconsolidated Entity

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

Three Months Ended June 30, % 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 June 30, % Increase (Decrease)

Three Months Ended September 30, % Increase (Decrease)

Change in fair value of financial instruments $ 1,422 $ (4,024) (135.3) %

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.

Total change in fair value of financial instruments for the three months ended September 30, 2024 and September 30, 2023 was a net gain of $1,422 and a net loss of $4,024, respectively.

For the three months ended September 30, 2024, primarily due to the revaluation of the fair value of the Company's debt conversion option and debt interest rate conversion feature resulting in a gain of $1.6 million, compared to a net loss of $4.7 million for the three months ended September 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.

For the Six Months Ended June 30, 2024 and 2023

For the Nine Months Ended September 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)

Nine Months Ended September 30, % Increase (Decrease)

Direct-to-consumer ("DTC") revenue $ 23,758 $ 31,430 (24.4) %

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

Business-to-business ("B2B") revenue 12,783 15,880 (19.5) %

8,436 11,014 (23.4) %

Service revenue 459 $ — 100.0 %

Total revenue $ 37,000 $ 47,310 (21.8) %

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.

Total revenue for the nine months ended September 30, 2024 was $37,000, a decrease of 21.8% compared to the nine months ended September 30, 2023.

DTC revenue decreased 24.4%, 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.

B2B revenue decreased 19.5% compared to the nine months ended September 30, 2023.

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

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The components of cost of goods sold are as follows:

Six Months Ended June 30, % Increase (Decrease)

Nine Months Ended September 30, % Increase (Decrease)

Inventory expensed to cost of goods sold 11,766 14,642 (19.6) %

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Cost of goods sold $ 20,834 $ 20,546 1.4 %

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.

Cost of goods sold increased 1.4% for the nine months ended September 30, 2024, despite lower revenue compared to the nine months ended September 30, 2023.

The increase was primarily due to a $3.7 million increase in inventory provisions during the three months ended June 30, 2024 due to the revaluation on aged hemp based on current market conditions.

The increase was partially offset by lower inventory expense and other variable costs associated with lower revenue in 2024.

Depreciation and amortization expense for the nine months ended September 30, 2024 and September 30, 2023 was $7,505 and $11,509, respectively, of which $2,549 and $2,689, respectively, was expensed to cost of goods sold.

The remaining depreciation and amortization expenses of $4,956 and $8,820, 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)

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, manufacturing spend, transportation costs, and changes in inventory provisions.

Gross profit for the nine months ended September 30, 2024 and September 30, 2023 is as follows:

Nine Months Ended September 30, % Increase (Decrease)

Gross profit $ 16,166 $ 26,764 (39.6) %

Gross margin 43.7 % 56.6 % (22.8) %

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.

Gross profit decreased 39.6% year-over-year for the nine months ended September 30, 2024 primarily related to the revenue decrease of 21.8% impacting fixed cost absorption, and 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:

Six Months Ended June 30, % Increase (Decrease)

Nine Months Ended September 30, % Increase (Decrease)

Selling, general, and administrative expenses $ 42,700 $ 57,029 (25.1) %

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.

Total selling, general, and administrative expenses for the nine months ended September 30, 2024 and September 30, 2023 were $42,700 and $57,029, respectively.

The amended MLB Promotional Rights Agreement resulted in a decrease in amortization and media expense related to MLB assets of approximately $3.1 million compared the prior period.

Additionally, the decrease is due to operating expense reductions.

For the nine months ended, the Company has made cost cutting measures to further align with current revenue levels.

Depreciation and amortization expensed to Selling, general, and administrative expenses for the nine months ended September 30, 2024 and September 30, 2023 were $4,956 and $8,820, respectively.

Total research and development costs expensed to Selling, general, and administrative expense for the nine months ended September 30, 2024 and September 30, 2023 were $1,955 and $2,194, 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.

1 unchanged sentence

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

Six Months Ended June 30, % Increase (Decrease)

Nine Months Ended September 30, % Increase (Decrease)

Change in gain on investment in unconsolidated entity

$ — $ 10,700 (100.0) %

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.

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

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

2 unchanged sentences

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

Six Months Ended June 30, % Increase (Decrease)

Nine Months Ended September 30, % Increase (Decrease)

Change in fair value of financial instruments $ 702 $ 5,588 (87.4) %

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.

Total change in fair value of financial instruments for the nine months ended September 30, 2024 and September 30, 2023 was a gain of $702 and a gain of $5,588, respectively.

For the nine months ended September 30, 2024, the gain 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, compared to a net gain of $5.6 million for the nine months ended September 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 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 of September 30, 2024 and December 31, 2023 , the Company had total current liabilities of $16,483 and $23,646, respectively, and cash and cash equivalents of $24,620 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.

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

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

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

Cash from Operating Activities

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

Six Months Ended June 30,

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

Nine Months Ended September 30,

Net cash used in operating activities $ (19,469) $ (12,849)

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.

For the nine months ended September 30, 2024, the $6,620 increase in cash used in operations were primarily due to the Company's collection of $4,261 from income tax refunds due during the nine months ended September 30, 2023.

Additionally, the increase in cash used was due to decrease in sales and working capital, resulting in a decrease of net cash inflow.

Cash from Investing Activities

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 for the nine months ended September 30, 2024 and September 30, 2023 were as follows:

Nine Months Ended September 30,

Net cash used in investing activities $ (3,598) $ (2,896)

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..

For the nine months ended September 30, 2024 and September 30, 2023, the 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 for the nine months ended September 30, 2024 and September 30, 2023 were as follows:

Nine Months Ended September 30,

Net cash used in financing activities $ (133) $ (202)

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

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

Off-Balance Sheet Arrangements

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.

As of September 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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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.

Effective November 13, 2024, the Company entered into a third amendment of the promissory note to extend the maturity date until November 13, 2029.

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

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

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

As of September 30, 2024 , the remaining note receivable of $85, 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.

For the three and nine months ended September 30, 2024, the Company recognized $74 and $459, 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, as of September 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.

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Recently Adopted Accounting Principles

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.

There are no new recent accounting pronouncements that have been issued by the Financial Accounting Standards Board ("FASB") and adopted by the Company that 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.

Please also refer to Note 2 of our notes to condensed consolidated financial statements for a discussion on recently adopted and issued accounting pronouncements.

Please also refer to Note 2 of our notes to the condensed consolidated financial statements for a discussion on recently adopted and issued accounting pronouncements.

Fair Value Option

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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 the 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 of 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.

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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.

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

Convertible Debenture

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

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

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

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

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

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 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.

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

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

Revenue Recognition

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customer ("ASC 606").

The Company elected to early adopt ASC 606 as of January 1, 2018, as permitted by the standard.

The Company performs the following five steps:

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis