What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-08-13 compared with 2026-05-13 · 136 added, 78 removed, 210 unchanged (50% of the section changed)

4 unchanged sentences

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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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, 2026, the Company operated in a single operating and reportable segment, with hemp-derived CBD wellness products making up the majority of the revenue of the Company products.

As of June 30, 2026, the Company operated in a single operating and reportable segment, with hemp-derived CBD wellness products, making up the majority of the revenue of the Company products.

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.

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The platform combines eCommerce technology with advanced data security to protect patient and physician information and part of the Company's continued expansion to its already established medical channel business.

On March 30, 2026, the Company announced that it has entered into an agreement to complete a transaction with BAT comprised of two components:

(i) amendment and conversion of BAT’s outstanding C$75.3 million convertible debenture, as well as, all accrued interest, into Charlotte’s Web's common shares at a conversion price of C$0.94 per share;

and (ii) a concurrent additional equity investment by BAT of $10 million (approximately C$13.6 million at current exchange rates) by way of a private placement at a price equal to the greater of (a) C$0.94 per share, and (b) a dollar amount equal to the maximum discount available pursuant to section 607 of the TSX Company Manual applied to the 5-day volume weighted average price ("VWAP") of the Company’s common shares on the TSX prior to the closing date (collectively, the “Transaction”).

The Transaction will result in the issuance of approximately 110 million Charlotte's Web's common shares to BAT and represents a total equity commitment of approximately C$103 million (approximately $75 million).

Completion of the Transaction is subject to, among other conditions, TSX and shareholder approval.

The Company's shareholders will be asked to approve the Transaction at an annual general and special meeting of the shareholders to be held on or about May 28, 2026

On May 28, 2026, the Company entered into a transaction with BT DE comprised of two components:

(i) amendment and conversion of BT DE’s outstanding C$75.3 million Convertible Debenture, as well as, all accrued interest, into Charlotte’s Web's common shares at a conversion price of C$0.94 per share;

and (ii) a concurrent additional equity investment by BAT of $10 million (approximately C$13.6 million at the then applicable exchange rate) by way of a private placement (the "Investment") at a price equal of C$0.94 per share (collectively, the "Transaction").

The convertible debenture issued by Charlotte's Web to BAT on November 14, 2022, in the original principal amount of C$75.3 million (US$54.7 million), was amended and converted in full into common shares of Charlotte's Web at a conversion price of C$0.94 per share.

The converted amount includes the full principal amount of C$75.3 million together with C$14.2 million (US$10.3 million) in accrued interest, for a total converted amount of C$89.6 million (US$65 million), resulting in the issuance of 95,281,277 common shares to BAT in full and final settlement of the convertible debenture.

Concurrently with the debenture conversion, BAT subscribed for an additional private placement of 14,662,765 common shares, for gross proceeds of US$10 million (C$13.8 million).

The net proceeds of the cash will be used to support the Company's participation in the anticipated CMMI Medicare pilot program and other medical channel initiatives.

Selected Financial Information

For the Three Months Ended

For the Six Months Ended

Total revenues

3 unchanged sentences

Change in fair value of financial instruments 5,557

Loss from extinguishment of debt (4,216)

Other income (expense), net

Income tax benefit (expense) 3

Net loss before income taxes

Total liabilities

For The Three Months Ended June 30, 2026 and 2025

The majority of the Company’s revenue is derived from sales of branded products to consumers via the Company’s DTC eCommerce website, and distributors.

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 March 31,

Three Months Ended June 30,

Product revenue

1 unchanged sentence

Total revenue

Total revenue for the three months ended March 31, 2026 was $11,159, a decrease of 9.0% compared to the three months ended March 31, 2025.

Total product revenue decreased by $1.1 million driven by the Company's decision to shift the majority of the retail business to a more margin-accretive distributor model during the third quarter of 2025.

Total revenue for the three months ended June 30, 2026 was $10,855, a decrease of 15.2% compared to the three months ended June 30, 2025.

Total product revenue was $10,780, representing a 15.3% year over year decrease, driven by the Company's decision to shift the majority of the retail business to a more margin-accretive distributor model during the third quarter of 2025.

Cost of Goods Sold

1 unchanged sentence

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,

Three Months Ended June 30,

Inventory expensed to cost of goods sold

4 unchanged sentences

Cost of goods sold

Cost of goods sold decreased 1.3% for the three months ended March 31, 2026 compared to the three months ended March 31, 2025, primarily due to the Company's decision to shift the majority of the retail business to a more margin-accretive distributor model.

The decrease is partially offset by an increase in variable operating costs in the current period, including startup costs associated with the transition to in-house manufacturing.

Depreciation and amortization expense for the three months ended March 31, 2026 and March 31, 2025 was $1,678 and $2,449, respectively, of which $956 and $822, respectively, was expensed to cost of goods sold.

Cost of goods sold decreased 16.4% for the three months ended June 30, 2026 compared to the three months ended June 30, 2025.

The decrease was primarily driven by a $982 or 24.4% reduction in inventory expensed to cost of goods sold, reflecting lower sales volume and improved product and channel mix following the shift of the majority of the retail business to a distributor model in the third quarter of 2025, together with a $331 or 17.0%, decrease in other production costs.

These decreases were partially offset by a $178 or 22.6%, increase in depreciation and amortization expensed to cost of goods sold related to insourcing assets placed in service.

Depreciation and amortization expense for the three months ended June 30, 2026 and June 30, 2025 was $1,494 and $512, respectively, of which $966 and $788, respectively, was expensed to cost of goods sold.

The remaining depreciation and amortization expenses of $528 and $276, 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 eCommerce and B2B retail, product sales mix, promotional and sales discount rate, manufacturing spend, transportation costs, and changes in inventory provisions.

The primary factors that can impact gross profit margins include the volume of products sold, revenue mix between DTC eCommerce and B2B distributors, product sales mix, promotional and sales discount rate, manufacturing spend, transportation costs, and changes in inventory provisions.

Gross profit and gross profit margin are as follows:

Three Months Ended March 31,

Gross profit decreased 16.5% for the three months ended March 31, 2026 compared to the three months ended March 31, 2025.

For the three months ended March 31, 2026, gross profit decreased due to an increase in variable startup operating costs in the current period as well as a decrease sales volume.

Three Months Ended June 30,

Gross profit decreased 13.9% for the three months ended June 30, 2026 compared to the three months ended June 30, 2025.

Gross margin improved to 47.5% from 46.8%, an increase of approximately 70 basis points, reflecting improved product and channel mix following the shift of the majority of the retail business to a distributor model in the third quarter of 2025.

The margin improvement was achieved notwithstanding higher depreciation expensed to cost of goods sold and the impact of related-party 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,

Three Months Ended June 30,

Selling, general, and administrative expenses

Total Selling, general, and administrative expenses for the three months ended March 31, 2026 and March 31, 2025 were $9,528 and $11,578, respectively.

The 17.7% decrease was primarily attributable to cost cutting measures in personnel costs undertaken by the Company between the comparable periods.

Total Selling, general, and administrative expenses for the three months ended June 30, 2026 and June 30, 2025 were $9,515 and $10,062, respectively.

The 5.4% decrease was primarily attributable to cost cutting measures undertaken by the company between the comparable periods.

The decrease was partially offset by a one-time recovery of amortization expense recognized during the three months ended June 30, 2025 related to the termination of the MLB Promotional Rights Agreement.

Depreciation and amortization expensed to Selling, general, and administrative expenses for the three months ended June 30, 2026 and June 30, 2025 were $528 and $276, respectively.

Total research and development costs expensed to Selling, general, and administrative expense for the three months ended June 30, 2026 and June 30, 2025 were $404 and $522, 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 June 30,

Change in fair value of financial instruments

Total change in fair value of financial instruments for the three months ended June 30, 2026 and June 30, 2025 resulted in a gain of $5,557 and a loss of $1,543, respectively.

For the three months ending June 30, 2026, the change 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, which

resulted in a net gain of $5,858, offset by a loss of $300 in the investment of DeFloria.

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

Loss from extinguishment of debt

Total losses from extinguishment of debt are as follows:

Three Months Ended June 30,

Loss from extinguishment of debt

Total loss from extinguishment of debt for the three months ended June 30, 2026 and June 30, 2025 was $4,216 and $—, respectively.

The $4,216 loss from extinguishment of debt for the three months ended June 30, 2026 was due to the conversion of the Company's C$75.3 million Convertible Debenture and accrued interest held by BAT into common shares on May 28, 2026.

For the Six Months Ended June 30, 2026 and 2025

The majority of the Company’s revenue is derived from sales of branded products to consumers via the Company’s DTC eCommerce website, and distributors.

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,

Product revenue

Service revenue

Total revenue

Total revenue for the six months ended June 30, 2026 was $22,014, a decrease of 12.2% compared to the six months ended June 30, 2025.

Total product revenue was $21,864, representing a 12.3% decrease, driven by the Company's decision to shift the majority of the retail business to a more margin-accretive distributor model during the third quarter of 2025.

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,

Inventory expensed to cost of goods sold

Inventory provision, net

Other production costs

Service costs

Depreciation and amortization

Cost of goods sold

Cost of goods sold decreased 9.3% for the six months ended June 30, 2026, compared to the six months ended June 30, 2025.

The decrease was primarily driven by a $1,836 or 23.7% reduction in inventory expensed to cost of goods sold, reflecting lower sales volume and improved product and channel mix following the shift of the majority of the retail business to a distributor model in the third quarter of 2025.

The decrease was partially offset by a $326 or 9.8%, increase in other production costs, including startup costs associated with the transition to in-house gummy production and expanded product offerings, and a $311 or 19.3%, increase in depreciation and amortization expensed to cost of goods sold.

Depreciation and amortization expense for the six months ended June 30, 2026 and June 30, 2025 was $3,171 and $2,961, respectively, of which $1,921 and $1,610, respectively, was expensed to cost of goods sold.

The remaining depreciation and amortization expenses of $1,250 and $1,351, 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 eCommerce and B2B distributors, 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, 2026 and June 30, 2025 is as follows:

Six Months Ended June 30,

Gross profit decreased 15.2% year-over-year for the six months ended June 30, 2026 compared to the six months ended June 30, 2025, reflecting a 12.2% decrease in revenue.

Gross margin declined to 47.1% from 48.7% for the six months ended June 30, 2026, a decrease of approximately 160 basis points, primarily reflecting higher other production costs and higher depreciation and amortization expensed to cost of goods sold as a percentage of a lower revenue base, partially offset by improved product and channel mix.

Selling, General, and Administrative Expenses

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

Six Months Ended June 30,

Selling, general, and administrative expenses

Total selling, general, and administrative expenses for the six months ended June 30, 2026 and June 30, 2025 were $19,043 and $21,640, respectively.

The 12.0% decrease was primarily attributable to 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.

Depreciation and amortization expensed to Selling, general, and administrative expenses for the three months ended March 31, 2026 and March 31, 2025 were $722 and $1,627, respectively.

Total research and development expenses expensed to Selling, general, and administrative expense for the three months ended March 31, 2026 and March 31, 2025 were $411 and $503, respectively.

Depreciation and amortization expensed to Selling, general, and administrative expenses for the six months ended June 30, 2026 and June 30, 2025 were $1,250 and $1,351, respectively.

Total research and development costs expensed to Selling, general, and administrative expense for the six months ended June 30, 2026 and June 30, 2025 were $815 and $1,025, 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 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,

Six Months Ended June 30,

Change in fair value of financial instruments

Total change in fair value of financial instruments for the three months ended March 31, 2026 and March 31, 2025 was loss of $8,868 and $126, respectively.

For the three months ending March 31, 2026, the change 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, which resulted in a net loss of $8,668, as well as a loss of $200 in the investment of DeFloria.

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 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 six months ended June 30, 2026 and June 30, 2025 resulted in a loss of $3,311 and $1,669, respectively.

For the six months ending June 30, 2026, the change 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, which resulted in a net loss of $2,811, as well as a loss of $500 in the investment of DeFloria.The change in fair value of financial instruments for the three months ended June 30, 2025 was primarily due to a loss of $1,100 in the investment of DeFloria.

Loss from extinguishment of debt

Total losses from extinguishment of debt are as follows:

Six Months Ended June 30,

Loss from extinguishment of debt

Total loss from extinguishment of debt for the six months ended June 30, 2026 and June 30, 2025 was $4,216 and $—, respectively.

The $4,216 loss from extinguishment of debt for the six months ended June 30, 2026 was due to the conversion of the Company's C$75.3 million Convertible Debenture and accrued interest held by BAT into common shares on May 28, 2026.

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, 2026 and December 31, 2025, the Company had total current liabilities of $8,100 and $8,659, respectively, and cash and cash equivalents of $5,198 and $8,035, respectively, to meet its current obligations.

As of June 30, 2026 and December 31, 2025 , the Company had total current liabilities of $8,256 and $8,659, respectively, and cash and cash equivalents of $13,988 and $8,035, respectively, to meet its current obligations.

The Company expects a continued cost containment strategy in overall selling, general, and administrative expenses in 2026 as a result of several actions taken over the prior two years.

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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.

Specifically, on March 30, 2026, the Company announced that it had entered into an agreement to complete the Transaction with BAT in which BAT, pursuant to which, among other things, upon satisfaction of certain conditions, including TSX and shareholder approval, BAT will make an additional equity investment by BAT of $10 million (approximately C$13.6 million at current exchange rates) by way of a private placement at a price equal to the greater of (a) C$0.94 per share, and (b) a dollar amount equal to the maximum discount available pursuant to section 607 of the TSX Company Manual applied to the 5-day volume weighted average price of the Company’s common shares on the TSX prior to the closing date.

Upon completion of the Transaction, approximately $65 million of total debt will be eliminated from the Company's balance sheet, interest on the debenture will stop accruing, and liquidity will increase for near-term operations.

The Company would operate with no long-term debt and with a simplified equity structure.

The Company's shareholders will be asked to approve the Transaction at the Annual General and Special Meeting of the Shareholders to be held on May 28, 2026.

On May 28, 2026, the Company entered into an agreement with BAT comprised of two components:

and (ii) a concurrent additional equity investment by BAT of $10 million (approximately C$13.9 million at current exchange rates) by way of a private placement at a price equal to the greater of (a) C$0.94 per share, and (b) a dollar amount equal to the maximum discount available pursuant to section 607 of the TSX Company Manual applied to the 5-day volume weighted average price of the Company’s common shares on the TSX prior to the closing date (collectively, the “Transaction”) provided that the maximum number of Common Shares to be issued to BAT under the Investment would not exceed 14,760,638 Common Shares.

The Transaction resulted in the issuance of 109,944,042 common shares to BAT, comprising 95,281,277 common shares issued on conversion of the debenture and accrued interest and 14,662,765 common shares issued under the private placement.

BAT holds approximately 40.6% of the issued and outstanding common shares on a non-diluted basis.

Cash Flow from Operating Activities

Net cash used in operating activities for the three months ended March 31, 2026 and March 31, 2025 were as follows:

Three Months Ended March 31,

Net cash used in operating activities for the six months ended June 30, 2026 and June 30, 2025 were as follows:

Six Months Ended June 30,

Net cash used in operating activities

For the three months ended March 31, 2026, the cash used in operations increased by less than 1% compared to the three months ended March 31, 2025.

The Company has stabilized operating costs over the respective periods.

For the six months ended June 30, 2026, the decrease in cash used in operations is primarily due to operating cost saving measures implemented during the period.

Cash Flow from Investing Activities

Net cash used in investing activities for the three months ended March 31, 2026 and March 31, 2025 were as follows:

Three Months Ended March 31,

Net cash used in investing activities for the six months ended June 30, 2026 and June 30, 2025 were as follows:

Six Months Ended June 30,

Net cash used in investing activities

For the three months ended March 31, 2026, the Company has spent minimal amounts on capital expenditures, compared to the three months ended March 31, 2025 in which the Company was finalizing the in-source projects for gummies and topicals.

Cash Flow from Financing Activities

Net cash used by financing activities for the three months ended March 31, 2026 and March 31, 2025 were as follows:

Three Months Ended March 31,

Net cash used in financing activities

For the three months ended March 31, 2026, 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, 2026, the Company has spent minimal amounts on capital expenditures, compared to the six months ended June 30, 2025, in which the Company was finalizing the in-source projects for gummies and topicals.

Net cash provided by (used in) financing activities for the six months ended June 30, 2026 and June 30, 2025 were as follows:

Six Months Ended June 30,

Net cash provided by (used in) financing activities

For the six months ended June 30, 2026, the change was primarily due to the $10 million proceeds from issuance of common stock related to the conversion of the Company's convertible debenture and accrued interest into common shares on May 28, 2026.

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, 2026 and December 31, 2025, the Company does not have any off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on the results of operations or financial condition, including, and without limitation, such considerations as liquidity and capital resources.

As of June 30, 2026 and December 31, 2025, the Company does not have any off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on the results of operations or financial condition, including, and without limitation, such considerations as liquidity and capital resources.

Related party transactions

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

The note has been fully reserved for as of December 31, 2025 .

The note has been fully reserved for as of June 30, 2026 and December 31, 2025 .

On March 2, 2021, the Company entered into the SBH Purchase Option with Stanley Brothers USA as discussed above ( Note 3 "Fair Value Measurement").

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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.

The Company is not obligated to exercise the SBH Purchase Option and as such the unexercised option expired as of March 31, 2026.

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.

The Company was not obligated to exercise the SBH Purchase Option and as such the unexercised option expired as of February 26,

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

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

As of March 31, 2026 and December 31, 2025 , the remaining note receivable of $8 and $19 , respectively, is presented in other assets in the condensed consolidated balance sheets.

As of June 30, 2026 and December 31, 2025 , the remaining note receivable of $0 and $19, 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, 2026, the Company recognized $68 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 months ended March 31, 2026 and March 31, 2025, the Company recognized $75 and $75 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 $1,546 and $1,471 as of March 31, 2026 and December 31, 2025, respectively.

For the three and six months ended June 30, 2026, 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 $1,689 and $1,471 as of June 30, 2026 and December 31, 2025, respectively.

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 includes 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.

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.

The funds were distributed monthly between July and November 2025.

The balance of the promissory note including accrued interest as of March 31, 2026 and December 31, 2025 is $805 and $784, respectively.

The balance of the promissory note including accrued interest as of June 30, 2026 and December 31, 2025 is $827 and $784, respectively.

On June 4, 2026, 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.

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

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

Recently Adopted Accounting Principles

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Cost is determined by use of the weighted average method.

To determine if a provision for inventories is required, the Company

periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on its assessment of market conditions, including forecasted demand compared to quantities on hand, as well as other factors such as potential excess or aged inventories based on product shelf life, and other factors that affect inventory obsolescence.

To determine if a provision for inventories is required, the Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on its assessment of market conditions, including forecasted demand compared to quantities on hand, as well as other factors such as potential excess or aged inventories based on product shelf life, and other factors that affect inventory obsolescence.

The Company's inventories of harvested hemp are recorded at cost to grow and harvest.

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, 2026 and 2025, respectively.

There were no impairment losses recognized for the three months ended June 30, 2026 and 2025, respectively.

Convertible Debenture

The Company determined that the debenture is a freestanding financial instrument, which includes embedded derivatives.

The embedded derivatives have been bifurcated from the debenture and accounted for separately in accordance with the provisions of ASC 815, Derivatives and Hedging .

The Company reviewed the terms of the debenture and identified two material embedded features which required bifurcation and separate accounting pursuant to the provisions of ASC 815:

The Company determined that the Convertible Debenture is a freestanding financial instrument, which includes embedded derivatives.

The embedded derivatives have been bifurcated from the Convertible Debenture and accounted for separately in accordance with the provisions of ASC 815, Derivatives and Hedging .

The Company reviewed the terms of the Convertible Debenture and identified two material embedded features which required bifurcation and separate accounting pursuant to the provisions of ASC 815:

1) the interest rate conversion feature based on changes in federal regulations, and 2) the debt conversion option to common shares.

1 unchanged sentence

The debt conversion option is classified as a derivative liability and measured at fair value using a Black-Scholes option pricing model.

The Company allocated proceeds first to the derivatives measured at fair value and the residual amount was allocated to the debenture.

Debt issuance costs are allocated to the debenture.

The debt issuance costs are presented as a direct reduction from the face value of the debenture and amortized over the stated term of the debenture.

The Company allocated proceeds first to the derivatives measured at fair value and the residual amount was allocated to the Convertible Debenture.

Debt issuance costs are allocated to the Convertible Debenture.

The debt issuance costs are presented as a direct reduction from the face value of the debenture and amortized over the stated term of the Convertible Debenture.

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

9 unchanged sentences

The Company accounts for uncertainties in income taxes under ASC Topic 740, which prescribes a recognition threshold and measurement methodology to recognize and measure an income tax position taken, or expected to be taken, in a tax return.

With respect to any tax

positions that do not meet the recognition threshold, a corresponding liability, including interest and penalties, is recorded in the condensed consolidated financial statements.

With respect to any tax positions that do not meet the recognition threshold, a corresponding liability, including interest and penalties, is recorded in the condensed consolidated financial statements.

The Company may be subject to examination by tax authorities where the Company conducts operations.

The earliest income tax year that may be subject to examination is 2022.

The Company has recorded an uncertain tax position as of March 31, 2026 and December 31, 2025.

The Company has recorded an uncertain tax position as of June 30, 2026 and December 31, 2025.

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.

19 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