Charlottes Web Holdings Inc

Previous wording

The following discussion and analysis of financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by, the unaudited condensed consolidated financial statements and the accompanying notes in this Form 10-Q and the sections entitled "Item 1A. Risk Factors" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2023. Except for historical information, the discussion in this section contains forward-looking statements that involve risks and uncertainties, as discussed in the "Cautionary Note Regarding Forward Looking Statements." Future results could differ materially from those discussed below for many reasons, including the risks described in Item 1A—"Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2023 and in Part II, Item 1A—"Risk Factors" of this Form 10-Q.

Current wording

The following discussion and analysis of financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by, the unaudited condensed consolidated financial statements and the accompanying notes in this Form 10-Q and the sections entitled "Item 1A. Risk Factors" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2023. Except for historical information, the discussion in this section contains forward-looking statements that involve risks and uncertainties, as discussed in the "Cautionary Note Regarding Forward Looking Statements." Future results could differ materially from those discussed below for many reasons, including the risks described in Item 1A—"Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2023.

Previous wording

The Company grows its proprietary hemp domestically in the United States on farms leased in northeastern Colorado and sources hemp through contract farming operations in Arizona, Kentucky, Oregon, and Canada. The Hemp grown in Canada is utilized exclusively in the Canadian markets or for research purposes and not in the Company's products sold within the United States.

Current wording

The Company grows its proprietary hemp domestically in the United States on farms leased in northeastern Colorado and sources hemp through contract farming operations in Arizona, Colorado, Kentucky, Oregon, and Canada. The Hemp grown in Canada is utilized exclusively in the Canadian markets or for research purposes and not in the Company's products sold within the United States.

Previous wording

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

Current wording

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.

Previous wording

Total revenue for the three months ended March 31, 2024 was $12,124, a decrease of 28.7% compared to the three months ended March 31, 2023. DTC e-commerce revenue decreased 31.0% year-over-year. The decrease compared to the prior year period was primarily due to lower organic traffic volume and prior consumers stocking up on product during the heavy holiday promotions in the fourth quarter of 2023. Website traffic and new consumer acquisition was also lower in the quarter due to a temporary reduction in paid media programs as part of an evaluation as the Company transitions its e-commerce platform and associated marketing.

Current wording

For The Three Months Ended June 30, 2024 and 2023

Previous wording

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

Current wording

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

Previous wording

Depreciation and amortization expense for the three months ended March 31, 2024 and March 31, 2023 was $2,493 and $3,792, respectively, of which $856 and $899, respectively, was expensed to cost of goods sold. The remaining depreciation and amortization expenses of $1,637 and $2,893, respectively, was expensed to Selling, general, and administrative expenses.

Current wording

Depreciation and amortization expense for the three months ended June 30, 2024 and June 30, 2023 was $2,489 and $3,977, respectively, of which $849 and $897, respectively, was expensed to cost of goods sold. The remaining depreciation and amortization expenses of $1,640 and $3,080, respectively, was expensed to Selling, general, and administrative expenses.

Previous wording

Total Selling, general, and administrative expenses for the three months ended March 31, 2024 and March 31, 2023 were $15,280 and $17,513, respectively. The 12.8% decrease was primarily attributable to $1 million in cost saving measures within e-commerce and marketing compared to the to the three months ended March 31, 2023. Additionally, the amended MLB Promotional Rights Agreement resulted in a decrease in amortization expense related to MLB assets of approximately $850 compared the prior period. To better align expenses to current revenue levels, the Company has taken actions to significantly reduce expenses company-wide in 2024 by approximately $15 million year-over-year, mainly through operating efficiency improvements, and stringent cost controls.

Current wording

Total Selling, general, and administrative expenses for the three months ended June 30, 2024 and June 30, 2023 were $14,727 and $19,627, respectively. The amended MLB Promotional Rights Agreement resulted in a decrease in amortization expense related to MLB assets of approximately $1 million compared to the three months ended June 30, 2023. Additionally, the decrease is due to a reduction in personnel, share based compensation, and consulting costs compared to the prior period.

Previous wording

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

Current wording

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

Previous wording

Total research and development expenses expensed to Selling, general, and administrative expense for the three months ended March 31, 2024 and March 31, 2023 were $751 and $546, respectively. Research and development expenses primarily include personnel costs related to our R&D science division as well as R&D related projects advancing Hemp cannabinoid science through research programs that provide a better understanding of the therapeutic uses of cannabinoids.

Current wording

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

Previous wording

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

Current wording

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

Previous wording

The Company's primary sources of liquidity are its net cash on hand from operations and sales of its securities from time to time. The Company's ability to fund its operations for the next twelve months and thereafter will depend on its future operating performance, particularly revenue growth, which can be affected by general economic conditions, industry regulatory changes, and other factors beyond the Company's control. We believe that our existing cash and cash equivalents, and short-term investments will provide sufficient liquidity to fund operations and planned capital expenditures for the next 12 months.

Current wording

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.

Previous wording

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 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.

Current wording

The Company expects to meet our liquidity requirements for at least the next twelve months through various sources of capital, including cash on hand and provided by operations over time. The Company regularly considers fundraising opportunities and may decide, from time to time, to raise capital through borrowings or issuances of additional equity and/or debt securities. The Company's ability to incur additional debt is dependent upon a number of factors, including the state of the credit markets, our degree of leverage, the value of our unencumbered assets and borrowing restrictions imposed by lenders, including restrictions on the industry. The Company's ability to raise funds through the issuance of additional equity and/or debt securities is also dependent on a number of factors including the current state of the capital markets, investor sentiment and intended use of proceeds. The Company's ability to raise funds through the issuance of equity securities depends on, among other things, general market conditions for companies in the Hemp industry and market perceptions about us. There can be no assurance the Company will have the ability to raise additional funds and, if raised privately or publicly, will be available to the Company when needed or on terms which are acceptable.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

For the three months ended March 31, 2024, the increase in cash used in investing activities was driven primarily by machinery purchases as part of the Company's plan to in-source topical and gummy production.

Current wording

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

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

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 December 28, 2023, the Company entered into a second amendment of the promissory note to extend the maturity date until November 13, 2024. 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, 2023.

Current wording

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 December 28, 2023, the Company entered into a second amendment of the promissory note to extend the maturity date until November 13, 2024. 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, 2023.

Previous wording

On March 2, 2021, the Company entered into the SBH Purchase Option with Stanley Brothers USA as discussed above (Note 3 "Fair Value Measurement"). The SBH Purchase Option was purchased for total consideration of $8,000. Certain founders of the Company, who are or were employees at the time, are the majority shareholders of Stanley Brothers USA.

Current wording

On March 2, 2021, the Company entered into the SBH Purchase Option with Stanley Brothers USA as discussed above (Note 3 "Fair Value Measurement"). The SBH Purchase Option was purchased for total consideration of$8,000. Certain founders of the Company, who are or were employees at the time, are the majority shareholders of Stanley Brothers USA.

Previous wording

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 investment and has the right to participate in future equity issuances to maintain its pro rata equity position. The Company and AJNA each hold 400,000 of the entity's voting common units (Note 3). Effective May 1, 2023, the Company entered into an 8% interest bearing note receivable with DeFloria for the sale of lab equipment in the amount of $170. The principal and interest of the note receivable will be paid in 36 monthly installments. As of March 31, 2024, the remaining note receivable of$113 is presented in other assets in the condensed consolidated balance sheets. On February 12, 2024, BAT invested an additional $3 million in DeFloria in the form of convertible debt. Additionally on February 12, 2024, the Company and DeFloria entered into a separate master services agreement in which the Company will be compensated for the provision of certain services to DeFloria. For the three months ended March 31, 2024, the Company recognized $311 in revenue and cost of goods sold, respectively, related to the service agreement with DeFloria. Additionally, the Company has an accounts receivable balance due from DeFloria of $74 for the three months ended March 31, 2024.

Current wording

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. The Company and AJNA each hold 400,000 of the entity's voting common units (Note 3). Effective May 1, 2023, the Company entered into an 8% interest bearing note receivable with DeFloria for the sale of lab equipment in the amount of$170. The principal and interest of the note receivable will be paid in 36 monthly installments. As of June 30, 2024, the remaining note receivable of$99, is presented in other assets in the condensed consolidated balance sheets. In 2024, BAT and AJNA invested an additional $5 million and $2 million, respectively, in DeFloria in the form of convertible debt (refer to Note 3). Additionally, on February 12, 2024, the Company and DeFloria entered into a separate master services agreement pursuant to which the Company will be compensated for the provision of certain services to DeFloria. For the three and six months ended June 30, 2024, the Company recognized $74 and $385, respectively, in revenue and cost of goods sold, respectively, related to the service agreement with DeFloria. Additionally, the Company has an accounts receivable balance due from DeFloria of $74, respectively, for the three and six months ended June 30, 2024.

Previous wording

There are no new accounting pronouncements adopted by the FASB that had or may have a material impact on the accompanying consolidated financial statements.

Current wording

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

Previous wording

Inventories are stated at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less any applicable selling expenses. Cost includes all expenses for direct raw materials inputs, as well as costs directly attributable to the manufacturing process as well as suitable portions of related production overheads, based on normal operating capacity. 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. 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. Because of the duration of the cultivation process, a portion of the inventory will not be sold within one year. Consistent with the practice in other industries that cultivate botanical raw materials, all inventory is classified as a current asset.

Current wording

Inventories are stated at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less any applicable selling expenses. Cost includes all expenses for direct raw materials inputs, as well as costs directly attributable to the manufacturing process as well as suitable portions of related production overheads, based on normal operating capacity. 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. 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 of botanical raw material. Because of the duration of the cultivation process, a portion of the inventory will not be sold within one year. Consistent with the practice in other industries that cultivate botanical raw materials, all inventory is classified as a current asset.

Previous wording

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. 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 2019. The Company has recorded an uncertain tax position as of March 31, 2024 and December 31, 2023. The Company's policy is to recognize interest and penalties on taxes, if any, within the statement of operations as income tax expense.

Current wording

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. 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 2019. The Company has recorded an uncertain tax position as of June 30, 2024 and December 31, 2023. The Company's policy is to recognize interest and penalties on taxes, if any, within the condensed consolidated statement of operations as income tax expense.

Previous wording

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. Sales tax collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenue in the condensed consolidated statements of operations. Contracts are written to include standard discounts and allowances. Contracts are not written to include advertising allowances, tiered discounts or any other performance obligation. Since the Company's contracts involve the delivery of various tangible products, the arrangements are considered to contain only a single performance obligation, as such there is no allocation of the transaction price. The Company also offers e-commerce discounts and promotions through its online rewards program. The Charlotte's Web Loyalty Program offers customers rewards points for every dollar spent through the Company website to earn store credit for future purchases. The Company defers recognition of revenue for unredeemed awards until the following occurs: (1) rewards are redeemed by the consumer, (2) points or certificates expire, or (3) an estimate of the expected unused portion of points or certificates is applied, which is based on historical redemption patterns.

Current wording

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. Sales tax collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenue in the condensed consolidated statements of operations. Contracts are written to include standard discounts and allowances. Contracts are not written to include advertising allowances, tiered discounts or any other performance obligation. Since the Company's contracts involve the delivery of various tangible products, the arrangements are considered to contain only a single performance obligation, as such there is no allocation of the transaction price. The Company also offers e-commerce discounts and promotions through its online rewards program. The Charlotte's Web Loyalty Program offers customers rewards points for every dollar spent through the Company website to earn store credit for future purchases. The Company defers recognition of revenue for unredeemed awards until the following occurs: (1) rewards are redeemed by the consumer, (2) points or certificates expire, or (3) an estimate of the expected unused portion of points or certificates is applied, which is based on historical redemption patterns.