What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-05-14 compared with 2024-11-14 · 103 added, 187 removed, 172 unchanged (63% 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, 2024.

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.

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 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, broad spectrum botanical CBD, mushrooms, and pet 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, functional mushrooms,and pet products.

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

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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 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.

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

As of March 31, 2025, the Company operated in a single operating and reportable segment, hemp-derived CBD wellness products, making up the majority of the revenue of the Company.

The executive officers reviewed overall operating results in order to assess financial performance and to make resource allocation decisions, rather than assessing any lower-level unit of operations in isolation.

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

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

Where research provides evidence that a greater than 0.3% THC level may have a potential therapeutic use, the Company may consider pursuing development of that use in jurisdictions where it is legal to do so in accordance with applicable regulations and if consistent with the Company's founding principles.

The Company does not currently 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, and Canada.

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

Recent Developments

With an increased commitment to innovation, Charlotte's Web has refreshed its mission to "Unearth the Science of Nature to Revolutionize Wellness," and is evolving its wellness offerings both to strengthen our core leadership in CBD, and extend beyond CBD to include a broader range of botanical wellness solutions, including minor cannabinoids.

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

With an increased commitment to innovation, Charlotte's Web has refreshed its mission to "Unearth the Science of Nature to Revolutionize Wellness," and is evolving its wellness offerings both to strengthen the Company's core leadership in CBD, and extend beyond CBD to include a broader range of botanical-based wellness solutions, including minor cannabinoids.

A testament to this expansion is the launch of Charlotte's Web Stay Asleep Cannabidiol ("CBN") gummies.

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

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The Stay Asleep gummy demonstrates Charlotte's Web's commitment to science-backed products, providing an effective alternative to more traditional sleep supplements and medications.

Charlotte's Web believes expanding beyond CBD leverages the Company's brand recognition, intellectual property, and partnerships, including an ongoing collaboration with DeFloria LLC ("DeFloria") for botanical drug development.

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 through the remainder of the year.

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

To better leverage its leading brand equity, the Company consolidated its CBD Medic and CBD Clinic brands under a unified Charlotte’s Web brand architecture.

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 with the U.S.

Premier Lacrosse League and Major League Baseball©.

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.

Charlotte's Web believes expanding beyond CBD leverages the Company's brand recognition, intellectual property, and partnerships, including an ongoing collaboration with DeFloria, Inc.

("DeFloria") for botanical drug development.

As of March 31, 2025 , 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, 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.

The Company continues to assess the business and financial impacts of the new regulations, including steps that can be taken to address the new product formulation, and labeling requirements, as well as costs and potential revenue impacts and anticipated timing for such impacts to the Company in these states.

The Company continues to invest in R&D efforts to identify new product opportunities.

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

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

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

In addition, the Company is expanding its product line beyond hemp-based products should the science and the Company's strategic vision support such expansion.

On February 24, 2025, the Company announced that the U.S.

Food and Drug Administration ("FDA") has completed its review of the Phase 1 data and Investigational New Drug ("IND") application submitted by DeFloria.

The FDA has concluded that DeFloria may now proceed with its planned FDA Phase 2 clinical trial for its botanical pharmaceutical candidate, AJA001 Oral Solution, a treatment for symptoms of autism spectrum disorder ("ASD").

DeFloria is a collaboration including the Company and AJNA to develop AJA001 as a treatment for irritability associated with ASD.

AJA001 employs the Company's proprietary full-spectrum cannabidiol hemp extract derived from one of its patented cultivars.

The Company and MLB entered into a letter agreement ("PRA Letter Agreement") terminating the MLB Promotional Rights Agreement as of May 13, 2025 and waives the Company's obligation to pay the remaining aggregate rights fee of $18 million for the current and remainder of the term of the MLB Promotional Rights Agreement.

Selected Financial Information

For the Three Months Ended

September 30,

For the Nine Months Ended

September 30,

2024 2023 2024 2023

Total revenues

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$ 6,230 $ 6,911

6,673 7,929 16,166 26,764

Selling, general, and administrative expenses

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Operating loss $ (5,348) $ (8,369)

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

Change in fair value of financial instruments (126) (1,860)

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$ (6,212) $ (9,634)

Loss before income taxes

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

Total assets $ 108,023 $ 141,778

Total liabilities $ 86,961 $ 95,110

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 September 30, % Increase (Decrease)

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

Business-to-business ("B2B") revenue 4,347 4,866 (10.7) %

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

Service revenue is attributable to the Company and DeFloria entering into a Master Services Agreement ("Services Agreement") pursuant to which the Company is compensated for the provision of certain services to DeFloria.

Three Months Ended March 31, % Change

Product revenue $ 12,187 $ 11,813 3.2 %

Service revenue 75 311 (75.9) %

Total revenue $ 12,262 $ 12,124 1.1 %

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.

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 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.

Total revenue for the three months ended March 31, 2025 was $12,262, an increase of 1.1% compared to the three months ended March 31, 2024.

Total product revenue was $12,187, representing a 3.2% increase, propelled by the Company's upgraded e-commerce platform.

Introduced in mid-2024, the new platform has delivered measurable improvements in marketing effectiveness, customer engagement, and sales volumes.

The Company also continues to generally outperform retail category benchmarks, reflecting the strength of its recent product innovations and the effectiveness of its strategic retail partnerships.

This is the first period of year-over-year growth reported since the second quarter of 2021 and follows a consecutive quarterly growth trend in 2024.

Cost of Goods Sold

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

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

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

The components of cost of goods sold are as follows:

Three Months Ended September 30, % Increase (Decrease)

Three Months Ended March 31, % Change

Inventory expensed to cost of goods sold 3,731 3,382 10.3 %

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Cost of goods sold $ 6,032 $ 5,213 15.7 %

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.

Cost of goods sold increased 15.7% for the three months ended March 31, 2025 compared to the three months ended March 31, 2024, primarily due to higher unit sales volume and an increase in variable operating costs.

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

Depreciation and amortization expense for the three months ended March 31, 2025 and March 31, 2024 was $2,449 and $2,493, respectively, of which $822 and $856, respectively, was expensed to cost of goods sold.

The remaining depreciation and amortization expenses of $1,627 and $1,637, 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 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 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 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 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 Fair Value of Financial Instruments

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

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 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 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.

Nine Months Ended September 30, % Increase (Decrease)

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

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

Service revenue 459 $ — 100.0 %

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

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 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.

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:

Nine Months Ended September 30, % Increase (Decrease)

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

Inventory provision, net 3,926 730 437.8 %

Other production costs 2,133 2,485 (14.2) %

Service costs 460 — 100.0 %

Depreciation and amortization 2,549 2,689 (5.2) %

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

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, 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 and gross profit margin are as follows:

Three Months Ended March 31, % Change

Gross profit $ 6,230 $ 6,911 (9.9) %

Gross margin 50.8 % 57.0 % -10.9 %

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.

Gross profit decreased 9.9% for the three months ended March 31, 2025 compared to the three months ended March 31, 2024.

For the three months ended March 31, 2025, additional costs of goods sold related to materials and shipping costs.

Selling, General, and Administrative Expenses

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

Nine Months Ended September 30, % Increase (Decrease)

Three Months Ended March 31, % Change

Selling, general, and administrative expenses $ 11,578 $ 15,280 (24.2) %

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.

Total Change in Gain on Investment in Unconsolidated Entity

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

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 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.

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 Selling, general, and administrative expenses for the three months ended March 31, 2025 and March 31, 2024 were $11,578 and $15,280, respectively.

The 24.2% decrease was primarily attributable to a decrease in personal costs due to the cost cutting measures undertaken by the company between the comparable periods.

These measures included adjusting the size of the workforce to properly align with the revenue scope, as well as improving the Company's insurance program and aligning with more cost-efficient software options and improved operating efficiencies.

Depreciation and amortization expensed to Selling, general, and administrative expenses for the three months ended March 31, 2025 and March 31, 2024 were $1,627 and $1,637, respectively.

Total research and development expenses expensed to Selling, general, and administrative expense for the three months ended March 31, 2025 and March 31, 2024 were $503 and $751, 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 Change in Fair Value of Financial Instruments

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

Nine Months Ended September 30, % Increase (Decrease)

Three Months Ended March 31, % Change

Change in fair value of financial instruments $ (126) $ (1,860) (93.2) %

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.

Total change in fair value of financial instruments for the three months ended March 31, 2025 and March 31, 2024 was loss of $126 and $1,860, respectively.

For the three months ending March 31, 2025, the change in fair value of financial instruments was primarily due to a loss of $100 in the investment of DeFloria.

The decrease was primarily due to the financial projections extended for an additional year based on timing of completing clinical trials.

For the three months ending March 31, 2024, the change in fair value of financial instruments was due to a loss of $951 in the fair value of the SBH Purchase Option as well as a loss of $800 in the investment of DeFloria.

The fair value of the SBH Purchase Option and the investment in DeFloria are revalued at each reporting date with changes primarily based on financial projections.

Liquidity and Capital Resources

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.

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

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

As of March 31, 2025 and December 31, 2024, the Company had total current liabilities of $18,488 and $15,936, respectively, and cash and cash equivalents of $19,357 and $22,618, respectively, to meet its current obligations.

The Company expects a reduction in overall selling, general, and administrative expenses in 2025 as a result of several actions taken in the second half 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.

Management believes that the Company's existing cash and cash equivalents, and short-term investments will provide sufficient liquidity to fund operations and planned capital expenditures for the next 12 months.

The Company’s ability to fund its operations for the longer term will depend on the future operating performance, particularly revenue growth, which can be affected by general economic conditions, industry regulatory changes, and other factors beyond the Company’s control.

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

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

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

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

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

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.

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

Cash from Operating Activities

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 for the three months ended March 31, 2025 and March 31, 2024 were as follows:

Three Months Ended March 31,

Net cash used in operating activities $ (2,768) $ (7,179)

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.

For the three months ended March 31, 2025, the decrease in cash used in operations is primarily due to operating cost saving measures, as well as, a reduction in payments associated with the MLB Promotional Rights Agreement, compared to $2,500 for the three months ended March 31, 2024.

Cash from Investing Activities

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 for the three months ended March 31, 2025 and March 31, 2024 were as follows:

Three Months Ended March 31,

Net cash used in investing activities $ (493) $ (2,033)

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

Nine Months Ended September 30,

For the three months ended March 31, 2025, the project to in-source topical and gummy production is substantially complete resulting in a decrease in cash used in investing activities compared to the the three months ended March 31, 2024.

Net cash provided by financing activities for the three months ended March 31, 2025 and March 31, 2024 were as follows:

Three Months Ended March 31,

Net cash used in financing activities $ — $ (98)

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

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

There were no vesting of restricted stock units for the three months ended March 31, 2025.

Off-Balance Sheet Arrangements

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.

As of March 31, 2025 and December 31, 2024, we do not have any off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on our results of operations or financial condition, including, and without limitation, such considerations as liquidity and capital resources.

Related party transactions

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

The note receivable was secured by equity instruments with certain of the Stanley Brothers, 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, which date was subsequently extended.

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

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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.

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

Effective January 5, 2023, the Company entered into a Brand License and Option Agreement with JMS Brands LLC, an entity owned by one of the Stanley Brothers.

Pursuant to the Brand License and Option Agreement, the Company licensed certain intellectual property from JMS Brands LLC, for an annual license fee of $500.

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

On April 6, 2023, the Company jointly formed an entity, DeFloria, with AJNA and BAT.

AJNA is a botanical drug development company.

AJNA is partially owned and was co-founded by a co-founder of Charlotte's Web.

BAT holds an equity interest in the entity in the form of 200,000 preferred units following its $10 million initial investment and has the right to participate in future equity issuances to maintain its pro rata equity position.

AJNA is partially owned and was co-founded by a member of the Stanley Brothers.

BAT holds an equity interest in the entity in the form of 2,000,000 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 4,000,000 of the entity's voting common units (Note 3).

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

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).

As of March 31, 2025 and December 31, 2024 , the remaining note receivable of $51 and $71 , respectively, is presented in other assets in the condensed consolidated balance sheets.

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 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.

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

For the three months ended March 31, 2025 and March 31, 2024, the Company recognized $75 and $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 $342 and $648 as of March 31, 2025 and December 31, 2024, respectively.

On June 21, 2024, the Company entered into a consulting agreement with Jared Stanley, former executive of the Company, and current member of the Board of Directors.

In consideration for Mr.

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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 that had or may have a material impact on the accompanying unaudited interim condensed consolidated financial statements.

Critical Policies and Accounting Estimates

In November 2023 the FASB issued ASU 2023-07—Segment Reporting .

The guidance was issued to provide financial statement users with more disaggregated expense information about a public entity’s reportable segments.

The guidance is effective for the year ended December 31, 2024, and the expanded interim disclosures are effective in entities in 2025 and will be applied retrospectively to all prior periods presented.

Critical Accounting Policies and Estimates

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

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

Fair Value Option

The Company has elected the fair value option in accordance with ASC 825-10 guidance to record its SBH Purchase Option.

Under ASC 825-10, a business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.

The SBH Purchase Option is classified as a financial asset in the condensed consolidated balance sheets 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.

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 asserted by the Company.

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

Investment in Unconsolidated Entities

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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 the 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.

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

The Company's inventory production process for cannabinoid products includes cultivating of

botanical raw material.

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

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

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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 and nine months ended September 30, 2024 and 2023, respectively.

There were no impairment losses recognized for the three months ended March 31, 2025 and 2024, respectively.

Convertible Debenture

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

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

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

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

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

The Company has recorded an uncertain tax position as of 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.

The Company has recorded an uncertain tax position as of March 31, 2025 and December 31, 2024.

The Company's policy is to recognize interest and penalties on taxes, if any, within the statement 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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The Company recognizes as revenue, the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

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

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

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

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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.

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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