What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-08-13 compared with 2025-05-14 · 132 added, 71 removed, 204 unchanged (50% 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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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.

Charlotte's Web products are distributed to retailers and health care practitioners, and online through the Company's website at www.CharlottesWeb.com.

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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.

As of June 30, 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 to assess a lower-level unit of operations in isolation.

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

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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.

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

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).

At the cutting edge of innovative natural sleep solutions, these 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).

This is the first CBN sleep product supported by placebo-controlled peer-reviewed research study, offering a 20 mg dose of CBN.

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, 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.

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.

As of June 30, 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.

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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").

The FDA has cleared DeFloria to 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.

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For the Three Months Ended

For the Six Months Ended

2025 2024 2025 2024

Total revenues

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6,816 9,707 12,848 14,920

5,990 2,582 12,220 9,493

Selling, general, and administrative expenses

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(675) (6) (1,413) 605

Net loss before income taxes

$ (6,290) $ (11,011) $ (12,502) $ (20,629)

Total assets $ 87,976 $ 129,794

Total liabilities $ 73,047 $ 93,966

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

For The Three Months Ended June 30, 2025 and 2024

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.

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

Three Months Ended June 30, % Change

Product revenue

$ 12,731 $ 12,215 4.2 %

Service revenue 75 74 1.4 %

Total revenue $ 12,806 $ 12,289 4.2 %

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.

Total revenue for the three months ended June 30, 2025 was $12,806 , an increase of 4.2% compa red to the three months ended June 30, 2024.

Total product revenue was $12,731, representing a 4.2% year over year increase, supported by sales traction across the Company's expanded product portfolio, including functional mushroom wellness gummies, CBG Focus Gummies, and the newly launched Brightside™ hemp low-dose THC gummy collection.

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, % Change

Three Months Ended June 30, % Change

Inventory expensed to cost of goods sold 4,024 4,316 (6.8) %

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Cost of goods sold $ 6,816 $ 9,707 (29.8) %

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.

Cost of goods sold decreased 29.8% for the three months ended June 30, 2025 compared to the three months ended June 30, 2024.

For the three months ended June 30, 2024, the Company recorded a $3.8 million non-cash inventory provision related to a one-time wholesale hemp biomass transaction.

The decrease was partially offset by increased variable operating costs in the current quarter, including startup costs associated with the transition to in-house gummy production.

Depreciation and amortization expense for the three months ended June 30, 2025 and June 30, 2024 was $512 and $2,489, respectively, of which $788 and $849, respectively, was expensed to cost of goods sold.

The remaining depreciation and amortization expenses of $276 and $1,640, respectively, was expensed to Selling, general, and administrative expenses.

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Gross profit and gross profit margin are as follows:

Three Months Ended March 31, % Change

Three Months Ended June 30, % Change

Gross profit $ 5,990 $ 2,582 132.0 %

Gross margin 46.8 % 21.0 % 122.9 %

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.

Gross profit increased 132.0% for the three months ended June 30, 2025 compared to the three months ended June 30, 2024.

The increase is primarily related to the absence of a $3.8 million inventory provision that impacted the prior year quarter related to a one-time wholesale hemp biomass transaction.

The current quarter gross margin of 46.8% reflects startup costs associated with the transition to in-house gummy production, as well as the impact of related-party service and supply sales to DeFloria recorded at zero gross margin to support clinical trials.

Selling, General, and Administrative Expenses

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

Three Months Ended March 31, % Change

Three Months Ended June 30, % Change

Selling, general, and administrative expenses $ 10,062 $ 14,727 (31.7) %

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.

Total Selling, general, and administrative expenses for the three months ended June 30, 2025 and June 30, 2024 were $10,062 and $14,727, respectively.

The 31.7% decrease included a reduction in amortization expense of $1.9 million related to the termination of the MLB Promotional Rights Agreement.

Additionally, a decrease in personnel 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.

Depreciation and amortization expensed to Selling, general, and administrative expenses for the three months ended June 30, 2025 was a recovery of expense of $276 due to the termination of the MLB agreement.

Depreciation and amortization expensed to Selling, general, and administrative expenses for the three months ended June 30, 2024 was $1,640.

Total research and development costs expensed to Selling, general, and administrative expense for the three months ended June 30, 2025 and June 30, 2024 were $522 and $648, 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 March 31, % Change

Three Months Ended June 30, % Change

Change in fair value of financial instruments $ (1,543) $ 1,140 (235.4) %

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.

Total change in fair value of financial instruments for the three months ended June 30, 2025 and June 30, 2024 was $(1,543) and $1,140, respectively.

The change in fair value of financial instruments was primarily due to a loss of $1,100 for the three months ended June 30, 2025, compared to a gain of $1,000 for the three months ended June 30, 2024 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.

For the Six Months Ended June 30, 2025 and 2024

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.

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

Six Months Ended June 30, % Change

Product revenue

$ 24,918 $ 24,028 3.7 %

Service revenue 150 $ 385 (61.0) %

Total revenue $ 25,068 $ 24,413 2.7 %

Total revenue for the six months ended June 30, 2025 was $25,068, a increase of 2.7% compared to the six months ended June 30, 2024.

Total product revenue was $24,918, representing a 3.7% increase.

Revenues growth was supported by sales of the Company’s botanical wellness innovations including functional mushroom gummies, CBG Focus Gummies, and new Brightside™ low-THC hemp gummy collection.

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, % Change

Inventory expensed to cost of goods sold 7,755 7,698 0.7 %

Inventory provision, net (4) 3,926 (100.1) %

Other production costs 3,337 1,206 176.7 %

Service costs 150 385 (61.0) %

Depreciation and amortization 1,610 1,705 (5.6) %

Cost of goods sold $ 12,848 $ 14,920 (13.9) %

Cost of goods sold decreased 13.9% for the six months ended June 30, 2025, compared to the six months ended June 30, 2024.

The decrease was primarily due to the prior year period including a $3.9 million non-cash inventory provision related to wholesale hemp biomass transactions partially offset by an increase in variable operating costs in the current period, including startup costs associated with the transition to in-house gummy production and expanded product offerings.

Depreciation and amortization expense for the six months ended June 30, 2025 and June 30, 2024 was $2,961 and $4,982, respectively, of which $1,610 and $1,705, respectively, was expensed to cost of goods sold.

The remaining depreciation and amortization expenses of $1,351 and $3,277, 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, product sales mix, promotional and sales discount rate, manufacturing spend, transportation costs, and changes in inventory provisions.

Gross profit for the six months ended June 30, 2025 and June 30, 2024 is as follows:

Six Months Ended June 30, % Change

Gross profit $ 12,220 $ 9,493 28.7 %

Gross margin 48.7 % 38.9 % 25.2 %

Gross profit increased 28.7% year-over-year for the six months ended June 30, 2025 compared to the six months ended June 30, 2024.

The increase is primarily related to the absence of the inventory provision of $3.9 million for the six months ending June 30, 2025.

Selling, General, and Administrative Expenses

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

Six Months Ended June 30, % Change

Selling, general, and administrative expenses $ 21,640 $ 30,007 (27.9) %

Total selling, general, and administrative expenses for the six months ended June 30, 2025 and June 30, 2024 were $21,640 and $30,007, respectively.

The 27.9% decrease was primarily attributable to a reduction in amortization expense of $1.9 million related to the termination of the MLB Promotional Rights Agreement.

Additionally, a decrease in personal costs due to the cost cutting measures

undertaken by the company between the comparable periods.

Depreciation and amortization expensed to Selling, general, and administrative expenses for the six months ended June 30, 2025 and June 30, 2024 were $1,351 and $3,277, respectively.

Total research and development costs expensed to Selling, general, and administrative expense for the six months ended June 30, 2025 and June 30, 2024 were $1,025 and $1,399, 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 Fair Value of Financial Instruments

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

Six Months Ended June 30, % Change

Change in fair value of financial instruments $ (1,669) $ (720) 132 %

Total change in fair value of financial instruments for the six months ended June 30, 2025 and June 30, 2024 was a loss of $1,669 and a loss of $720, respectively.

The change in fair value of financial instruments was primarily due to a loss of $1,200 for the six months ended June 30, 2025, compared to a gain of $200 for the six months ended June 30, 2024 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.

Liquidity and Capital Resources

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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.

As of June 30, 2025 and December 31, 2024 , the Company had total current liabilities of $10,364 and $15,936, respectively, and cash and cash equivalents of $15,268 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, as well as additional reductions projected in the second half of 2025.

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.

The Company’s ability to fund its operations for the longer term will depend on the future operating performance, particularly revenue growth and expense management, 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.

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Cash from Operating Activities

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 for the six months ended June 30, 2025 and June 30, 2024 were as follows:

Six Months Ended June 30,

Net cash used in operating activities $ (6,786) $ (11,883)

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.

For the six months ended June 30, 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 six months ended June 30, 2024.

Cash from Investing Activities

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 for the six months ended June 30, 2025 and June 30, 2024 were as follows:

Six Months Ended June 30,

Net cash used in investing activities $ (539) $ (3,288)

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,

For the six months ended June 30, 2025, the project to in-source topical and gummy production is complete resulting in a decrease in cash used in investing activities compared to the six months ended June 30, 2024.

Cash from Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2025 and June 30, 2024 were as follows:

Six Months Ended June 30,

Net cash used in financing activities $ (25) $ (118)

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.

For the six months ended June 30, 2025, the change was primarily due to the vesting of restricted stock units.

Off-Balance Sheet Arrangements

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.

As of June 30, 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

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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.

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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.

BAT holds an equity interest in the entity in the form of approximately 2,000,000 preferred units following its initial $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 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 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.

As of June 30, 2025 and December 31, 2024 , the remaining note receivable of $37 and $71, respectively, is presented in other assets in the condensed consolidated balance sheets.

On April 6, 2023, the Company and DeFloria entered into a supply agreement in which the Company shall supply raw material that will be used in the development of the new drug.

The price charged by the Company is at cost of goods sold level.

For the three and six months ended June 30, 2025, the Company recognized $641 in revenue and cost of goods sold, respectively, related to the supply agreement with DeFloria.

Similarly, 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, 2025, the Company recognized $75 and $150 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 $1,059 and $648 as of June 30, 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.

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

On July 15, 2025, the Company entered into a promissory note, as lender, where the Company loaned $750 to DeFloria.

The note and accrued interest is due and payable by DeFloria upon the later of December 31, 2026, or the date the Company shall issue and sell units of a newly-authorized series of preferred units in a bona fide financing transaction to one or more investors for aggregate cash proceeds to DeFloria or any other convertible debt of DeFloria of not less than $10 million.

Upon any event of default by DeFloria under the note, which include DeFloria’s failure to pay amounts within 3 business days of when due and breaches of DeFloria’s obligations pursuant to the note, the Company will be entitled to exercise its rights under the note

Recently Adopted Accounting Principles

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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

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.

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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 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 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 March 31, 2025 and 2024, respectively.

There were no impairment losses recognized for the three months ended June 30, 2025 and 2024, 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.

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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

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.

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 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.

The Company has recorded an uncertain tax position as of June 30, 2025 and December 31, 2024.

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