Charlotte's Web Holdings Inc.
11/14/2024 | Press release | Distributed by Public on 11/14/2024 06:09
Quarterly Report for Quarter Ending September 30, 2024 (Form 10-Q)
cweb-20240930
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period ended September 30, 2024
OR
| ☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from to
Commission file number 000-56364
Charlotte's Web Holdings, Inc.
(Exact name of registrant as specified in its charter)
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British Columbia
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98-1508633
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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700 Tech Court
Louisville, CO 80027
(Address of principal executive offices and zip code)
(720) 484-8930
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| N/A | N/A | N/A |
Securities registered pursuant to section 12(g) of the Act:
Common stock, no par value
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer |
o
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Accelerated filer
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o
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Non-accelerated filer
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x
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Smaller reporting company
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x
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Emerging growth company
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x
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The registrant had outstanding 157,762,229 shares of common shares as of November 12, 2024.
CHARLOTTE'S WEB HOLDINGS, INC.
FORM 10-Q
For the Quarter Ended September 30, 2024
TABLE OF CONTENTS
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Part I
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FINANCIAL INFORMATION
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Item 1.
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Condensed Consolidated Financial Statements (Unaudited)
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1
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- Condensed Consolidated Balance Sheets
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2
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- Condensed Consolidated Statements of Operations
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3
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- Condensed Consolidated Statements of Changes in Shareholders' Equity
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4
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- Condensed Consolidated Statements of Cash Flows
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5
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- Notes to Condensed Consolidated Financial Statements
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6
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Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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Item 3.
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Quantitative and Qualitative Disclosures about Market Risk
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Item 4.
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Controls and Procedures
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Part II
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OTHER INFORMATION
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Item 1.
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Legal Proceedings
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Item 1A.
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Risk Factors
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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Item 3.
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Defaults Upon Senior Securities
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Item 4.
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Mine Safety Disclosures
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Item 5.
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Other Information
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Item 6.
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Exhibits
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SIGNATURES
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PART I
Item 1. Financial Statements
1
CHARLOTTE'S WEB HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
| September 30, |
December 31,
|
|||
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2024 (unaudited)
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2023 | |||
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ASSETS
|
||||
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Current assets:
|
||||
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Cash and cash equivalents
|
$ | 24,620 | $ | 47,820 |
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Accounts receivable, net
|
1,605 | 1,950 | ||
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Inventories, net
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19,532 | 21,538 | ||
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Prepaid expenses and other current assets
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4,236 | 6,864 | ||
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Total current assets
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49,993 | 78,172 | ||
| Property and equipment, net | 27,102 | 27,513 | ||
| License and media rights | 14,816 | 17,070 | ||
| Operating lease right-of-use assets, net | 13,275 | 14,601 | ||
| Investment in unconsolidated entity | 11,400 | 11,000 | ||
| SBH purchase option and other derivative assets | 1,328 | 2,602 | ||
| Intangible assets, net | 1,082 | 887 | ||
| Other long-term assets | 648 | 703 | ||
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Total assets
|
$ | 119,644 | $ | 152,548 |
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LIABILITIES AND SHAREHOLDERS' EQUITY
|
||||
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Current liabilities:
|
||||
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Accounts payable
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$ | 3,357 | $ | 2,860 |
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Accrued and other current liabilities
|
5,601 | 8,682 | ||
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Lease obligations - current
|
2,316 | 2,252 | ||
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License and media rights payable - current
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5,209 | 9,852 | ||
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Total current liabilities
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16,483 | 23,646 | ||
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Convertible debenture
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45,170 | 42,528 | ||
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Lease obligations
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13,937 | 15,655 | ||
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License and media rights payable
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11,636 | 11,338 | ||
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Derivatives and other long-term liabilities
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2,175 | 3,823 | ||
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Total liabilities
|
89,401 | 96,990 | ||
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Commitments and contingencies (Note 7)
|
||||
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Shareholders' equity:
|
||||
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Common shares, nil par value; unlimited shares authorized; 157,762,229 and 154,332,366 shares issued and outstanding as of September 30, 2024 and December 31, 2023
|
1 | 1 | ||
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Additional paid-in capital
|
328,443 | 327,280 | ||
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Accumulated deficit
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(298,201) | (271,723) | ||
| Total shareholders' equity | 30,243 | 55,558 | ||
|
Total liabilities and shareholders' equity
|
$ | 119,644 | $ | 152,548 |
See Notes to Unaudited Condensed Consolidated Financial Statements
2
CHARLOTTE'S WEB HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
|
Three Months Ended September 30, (unaudited)
|
Nine Months Ended September 30, (unaudited)
|
|||||||
| 2024 | 2023 | 2024 | 2023 | |||||
| Revenue | $ | 12,587 | $ | 14,294 | $ | 37,000 | $ | 47,310 |
| Cost of goods sold | 5,914 | 6,365 | 20,834 | 20,546 | ||||
| Gross profit | 6,673 | 7,929 | 16,166 | 26,764 | ||||
| Selling, general and administrative expenses | 12,693 | 19,889 | 42,700 | 57,029 | ||||
|
Operating loss
|
(6,020) | (11,960) | (26,534) | (30,265) | ||||
|
Gain on initial investment in unconsolidated entity
|
- | - | - | 10,700 | ||||
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Change in fair value of financial instruments
|
1,422 | (4,024) | 702 | 5,588 | ||||
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Other income (expense), net
|
(1,189) | 841 | (584) | (1,234) | ||||
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Loss before provision for income taxes
|
(5,787) | (15,143) | (26,416) | (15,211) | ||||
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Income tax expense
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- | - | (62) | - | ||||
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Net loss
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$ | (5,787) | $ | (15,143) | $ | (26,478) | $ | (15,211) |
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Per common share amounts (Note 10)
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||||||||
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Net loss per common share, basic and diluted
|
$ | (0.04) | $ | (0.10) | $ | (0.17) | $ | (0.10) |
See Notes to Unaudited Condensed Consolidated Financial Statements
3
CHARLOTTE'S WEB HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share amounts)
(unaudited)
|
Common Shares
|
Additional
Paid-in Capital |
Accumulated Deficit
|
Total
Shareholders' Equity |
||||||
|
Shares
|
Amount
|
||||||||
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Balance-December 31, 2023
|
154,332,366 | $ | 1 | $ | 327,280 | $ | (271,723) | $ | 55,558 |
| Common shares issued upon vesting of restricted share units, net of withholding | 2,895,489 | - | (98) | - | (98) | ||||
| Share-based compensation | - | - | 842 | - | 842 | ||||
| Net income (loss) | - | (9,634) | (9,634) | ||||||
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Balance- March 31, 2024
|
157,227,855 | $ | 1 | $ | 328,024 | $ | (281,357) | $ | 46,668 |
| Common shares issued upon vesting of restricted share units, net of withholding | 267,187 | - | (20) | - | (20) | ||||
| Share-based compensation | - | - | 237 | - | 237 | ||||
| Net income (loss) | - | - | - | (11,057) | (11,057) | ||||
|
Balance-June 30, 2024
|
157,495,042 | $ | 1 | $ | 328,241 | $ | (292,414) | $ | 35,828 |
| Common shares issued upon vesting of restricted share units, net of withholding | 267,187 | - | (15) | - | (15) | ||||
| Share-based compensation | - | - | 217 | - | 217 | ||||
| Net income (loss) | - | - | - | (5,787) | (5,787) | ||||
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Balance-September 30, 2024
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157,762,229 | $ | 1 | $ | 328,443 | $ | (298,201) | $ | 30,243 |
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Balance-December 31, 2022
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152,135,026 | $ | 1 | $ | 325,431 | $ | (247,927) | $ | 77,505 |
| Common shares issued upon vesting of restricted share units, net of withholding | 297,888 | - | (69) | - | (69) | ||||
| Share-based compensation | - | - | 375 | - | 375 | ||||
| Net income (loss) | - | - | - | (2,912) | (2,912) | ||||
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Balance-March 31, 2023
|
152,432,914 | $ | 1 | $ | 325,737 | $ | (250,839) | $ | 74,899 |
| Common shares issued upon vesting of restricted share units, net of withholding | 392,204 | - | (6) | - | (6) | ||||
| Share-based compensation | - | - | 624 | - | 624 | ||||
| Net income (loss) | - | - | - | 2,844 | 2,844 | ||||
|
Balance-June 30, 2023
|
152,825,118 | $ | 1 | $ | 326,355 | $ | (247,995) | $ | 78,361 |
| Common shares issued upon vesting of restricted share units, net of withholding | 954,738 | - | (127) | - | (127) | ||||
| Share-based compensation | - | - | 647 | - | 647 | ||||
| Net income (loss) | - | - | - | (15,143) | (15,143) | ||||
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Balance-September 30, 2023
|
153,779,856 | $ | 1 | $ | 326,875 | $ | (263,138) | $ | 63,738 |
See Notes to Unaudited Condensed Consolidated Financial Statements
4
CHARLOTTE'S WEB HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
Nine Months Ended September 30, (unaudited)
|
||||
| 2024 | 2023 | |||
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Cash flows from operating activities:
|
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Net loss
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$ | (26,478) | $ | (15,211) |
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Adjustments to reconcile net loss to net cash used in operating activities:
|
||||
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Depreciation and amortization
|
7,505 | 11,509 | ||
|
Inventory provision
|
3,926 | 730 | ||
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Convertible debenture and other accrued interest
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2,836 | 2,916 | ||
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Share-based compensation
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1,296 | 1,646 | ||
| Changes in right-of-use assets | 1,373 | 1,453 | ||
| Allowance for credit losses | 138 | 1,187 | ||
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Change in fair value of financial instruments
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(702) | (5,588) | ||
| Gain on initial investment in unconsolidated entity | - | (10,700) | ||
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Gain on foreign currency transaction
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(870) | (63) | ||
| Other | 524 | 1,657 | ||
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Changes in operating assets and liabilities:
|
||||
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Accounts receivable, net
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(167) | (1,151) | ||
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Inventories, net
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(1,884) | 3,593 | ||
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Prepaid expenses and other current assets
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1,305 | (589) | ||
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Accounts payable, accrued and other liabilities
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(1,266) | (328) | ||
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Operating lease obligations
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(1,701) | (1,722) | ||
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License and media rights
|
(5,000) | (6,000) | ||
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Income taxes receivable
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- | 4,261 | ||
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Other operating assets and liabilities, net
|
(304) | (449) | ||
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Net cash used in operating activities
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(19,469) | (12,849) | ||
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Cash flows from investing activities:
|
||||
| Purchases of property and equipment and intangible assets | (3,631) | (3,015) | ||
| Proceeds from sale of assets | 33 | 119 | ||
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Net cash used in investing activities
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(3,598) | (2,896) | ||
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Cash flows from financing activities:
|
||||
| Other financing activities | (133) | (202) | ||
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Net cash used in financing activities
|
(133) | (202) | ||
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Net decrease in cash and cash equivalents
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(23,200) | (15,947) | ||
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Cash and cash equivalents -beginning of period
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47,820 | 66,963 | ||
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Cash and cash equivalents -end of period
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$ | 24,620 | $ | 51,016 |
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Non-cash activities:
|
||||
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Non-cash purchase of property and equipment and intangible assets
|
(8) | (81) | ||
| Non-cash issuance of note receivable | - | (142) |
See Notes to Unaudited Condensed Consolidated Financial Statements
5
CHARLOTTE'S WEB HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
(unaudited)
1. DESCRIPTION OF BUSINESS AND PRESENTATION OF FINANCIAL STATEMENTS
Description of the Business
Charlotte's Web Holdings, Inc. together with its subsidiaries (collectively "Charlotte's Web" or the "Company") is a public company incorporated pursuant to the laws of the Province of British Columbia and a Certified B Corp. The Company's common shares are publicly listed on the Toronto Stock Exchange ("TSX") under the symbol "CWEB" and quoted on the OTCQX under the symbol "CWBHF." The Company's corporate headquarters is located in Louisville, Colorado in the United States of America. The majority of the Company's business is conducted in the United States of America.
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. Hemp extracts are produced from the plant Cannabis sativa L. ("Cannabis" or "CBD"), and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol ("THC") concentration of not more than 0.3% on a dry weight basis ("hemp"). The Company is engaged in research involving the effectiveness of a broad variety of compounds derived from hemp. The Company does not currently produce or sell medical or recreational marijuana or products derived from high THC Cannabis plants. The Company does not currently have any plans to expand into such high THC products in the near future.
The Company's current product categories include full spectrum hemp extract oil tinctures (liquid product), gummies, capsules, soft-gels, CBD topical creams and lotions, broad spectrum botanical CBD, mushrooms, and pet products. The Company's products are distributed through its e-commerce website, third-party e-commerce websites, select distributors, health practitioners, and a variety of brick-and-mortar specialty retailers.
The Company grows its proprietary hemp domestically in the United States on farms leased in northeastern Colorado and sources hemp through contract farming operations in Arizona, Colorado, Kentucky, and Canada. The hemp grown in Canada is utilized exclusively in the Canadian markets or for research purposes and not in products sold within the United States.
In furtherance of the Company's research and development ("R&D") efforts, the Company established CW Labs, an internal division for R&D, to expand the Company's efforts around the science of hemp derived compounds. CW Labs is currently engaged in clinical trials addressing hemp-based health solutions. CW Labs is located in Louisville, Colorado at the Company's current good manufacturing practice ("cGMP") production and distribution facility.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND USE OF ESTIMATES
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Any reference in these notes to applicable guidance is meant to refer to U.S. GAAP as found in the Accounting Standards Codification ("ASC") and Accounting Standards Updates ("ASU") of the Financial Accounting Standards Board ("FASB").
In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the financial statements) considered necessary to present fairly the Company's financial position as of September 30, 2024 and its results of operations for the three and nine months ended September 30, 2024 and 2023, cash flows for the nine months ended September 30, 2024 and 2023, and stockholders' equity for the three and nine months ended September 30, 2024 and 2023. Operating results for the three and nine months ended September 30, 2024, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2024. The unaudited interim condensed consolidated financial statements presented herein do not contain the required disclosures under U.S. GAAP for annual consolidated financial statements. Certain amounts presented in prior periods have been reclassified to conform with the current period presentation. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the
6
CHARLOTTE'S WEB HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
(unaudited)
annual audited consolidated financial statements and related notes as of and for the year ended December 31, 2023 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 21, 2024.
Inventories
Inventories are stated at the lower of cost or net realizable value. 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. The Company's inventory production process for cannabinoid products includes the cultivation of botanical raw material. Due to 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.
Revenue Recognition
The majority of the Company's revenue is derived from sales of branded products to consumers via the Company's direct-to-consumer e-commerce website, as well as distributors, retail and wholesale business-to-business customers. Additionally, on February 12, 2024, the Company and DeFloria LLC ("DeFloria") entered into a Master Services Agreement ("Services Agreement") pursuant to which the Company is compensated for the provision of certain services to DeFloria. Refer to Note 13 for additional disclosure on the DeFloria Service Agreement. The following table sets forth the disaggregation of the Company's revenue:
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||
| 2024 | 2023 | 2024 | 2023 | |||||
| Direct-to-consumer | $ | 8,166 | $ | 9,428 | $ | 23,758 | $ | 31,430 |
| Business-to-business | 4,347 | 4,866 | 12,783 | 15,880 | ||||
| Service revenue | 74 | - | 459 | - | ||||
|
Total revenue
|
$ | 12,587 | $ | 14,294 | $ | 37,000 | $ | 47,310 |
Substantially all of the Company's revenue is earned in the United States.
Recently Adopted Accounting Pronouncements
There are no new recent accounting pronouncements that have been issued by the FASB and adopted by the Company that had or may have a material impact on the accompanying unaudited interim condensed consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
Other than described below, no new accounting pronouncements issued by the FASB may have a material impact on the Company's consolidated financial statements and related disclosures.
On December 14, 2023, the FASB issued a final standard on improvements to income tax disclosures, ASU 2023-09, Improvements to Income Tax Disclosures. The standard requires disaggregated information about a reporting entity's effective tax rate reconciliation as well as information on income taxes paid. The standard is intended to benefit investors by providing more detailed income tax disclosures that would be useful in making capital allocation decisions. For public business entities, the new requirements will be effective for annual periods beginning after December 15, 2024. The Company is currently evaluating the impact, if any, that the updated standard will have on the Company's consolidated financial statements and related disclosures.
On November 27, 2023, the FASB issued ASU 2023-07-Segment Reporting. The new guidance was issued primarily to provide financial statement users with more disaggregated expense information about a public entity's reportable segments. The guidance is effective for calendar year public entities in 2024 year-end financial statements and should be adopted retrospectively unless impracticable. The
7
CHARLOTTE'S WEB HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
(unaudited)
Company is currently evaluating the impact, if any, that the updated standard will have on the Company's consolidated financial statements and related disclosures.
3. FAIR VALUE MEASUREMENT
The following table sets forth the Company's financial instruments that were measured at fair value on a recurring basis at September 30, 2024 and December 31, 2023, by level within the fair value hierarchy:
| September 30, 2024 | ||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||
|
Financial assets:
|
||||||||
|
Stanley Brothers USA Holdings purchase option
|
$ | - | $ | - | $ | 370 | $ | 370 |
| Debt interest rate conversion feature | - | - | 958 | 958 | ||||
|
Total financial assets
|
$ | - | $ | - | $ | 1,328 | $ | 1,328 |
| Investment in unconsolidated entity: | $ | - | $ | - | $ | 11,400 | $ | 11,400 |
|
Financial liabilities:
|
||||||||
| Debt conversion option | $ | - | $ | 1,589 | $ | - | $ | 1,589 |
| December 31, 2023 | ||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||
|
Financial assets:
|
||||||||
|
Stanley Brothers USA Holdings purchase option
|
$ | - | $ | - | $ | 1,730 | $ | 1,730 |
| Debt interest rate conversion feature | - | - | 872 | $ | 872 | |||
|
Total financial assets
|
$ | - | $ | - | $ | 2,602 | $ | 2,602 |
| Investment in unconsolidated entity: | $ | - | $ | - | $ | 11,000 | $ | 11,000 |
| Financial liabilities: | ||||||||
| Debt conversion option | $ | - | $ | 3,213 | $ | - | 3,213 |
There were no transfers between levels of the fair value hierarchy and there were no changes in the fair value methodologies during the three and nine month periods ended September 30, 2024 and the year ended December 31, 2023.
Investment in Unconsolidated Entity
On April 6, 2023, the Company jointly formed an entity, DeFloria, with AJNA BioSciences PBC ("AJNA"), and a subsidiary of British American Tobacco PLC (LSE: BATS and NYSE: BTI) ("BAT"). AJNA is a botanical drug development company. AJNA is partially owned and was co-founded by a co-founder of Charlotte's Web. The entity was established to pursue FDA-approval for a botanical drug to target a certain neurological condition.
BAT holds an equity interest in DeFloria in the form of 200,000 or 100% 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. In 2024, BAT and AJNA invested an additional $5 million and $2 million, respectively, into DeFloria in exchange for a convertible debenture. The Company and AJNA each hold 400,000 or approximately 50%, respectively, of DeFloria's voting common units. The Company's contribution to DeFloria is a license
8
CHARLOTTE'S WEB HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
(unaudited)
permitting the use of certain proprietary hemp intellectual property, including clinical and consumer data. Additionally, the Company has a supply agreement with DeFloria, under which the Company supplies the oils at cost used to produce and develop the new drug. AJNA's contribution to the entity is laboratory and regulatory services, clinical expertise, and the provision of clinical services. DeFloria is expected to use the investments for the clinical development of a hemp botanical Investigational New Drug application and has commenced Phase I clinical development.
Concurrently with the formation of DeFloria, the Company was issued a warrant to purchase 865,052 shares of Class A Common Stock of AJNA for an exercise price of $2.89 per share. Management determined the warrant should be accounted for in accordance with ASC 321, which requires the warrant to be measured at fair value at issuance and subsequently remeasured at fair value each reporting period. All changes from the remeasurement of the warrant will be recorded as a change in fair value of financial instruments in the condensed consolidated statements of operations. The Company determined the fair value of the AJNA warrants to be de minimis and as such no value was recorded as of September 30, 2024.
The Company determined that it has a variable interest in the investment in DeFloria; however, the Company is not the primary beneficiary of DeFloria as it lacks the power to direct DeFloria's key activities. The Company concluded that the investment in DeFloria should not be consolidated. The maximum exposure to loss in the investment in DeFloria is limited to the Company's investment, which is represented by the financial statement carrying amount of its retained interest.
In accordance with ASC 825-10, equity method investments are eligible for the fair value option as they represent recognized financial assets. As the Company is 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. Upon formation of the entity, the Company elected the fair value option because it allowed the investment to be valued based on current market conditions. For the nine month ended September 30, 2023, the Company recognized a gain for the initial investment in DeFloria of $10,700 within gain on initial investment in unconsolidated entity in the condensed consolidated statements of operations.
The investment has been remeasured at fair value at each reporting date, with changes recognized in the condensed consolidated statements of operations as changes in fair value of financial instruments for the period. For the three months ended September 30, 2024 and September 30, 2023, a gain of $200 and $400, respectively, related to the investment in DeFloria was recognized as a change in fair value of financial instruments in the condensed consolidated statements of operations. Additionally, for the nine months ended September 30, 2024 and September 30, 2023, a gain of $400 and $400, respectively, related to the investment in DeFloria was recognized as a change in fair value of financial instruments in the condensed consolidated statements of operations. As of September 30, 2024 and December 31, 2023, the DeFloria investment represents an investment of $11,400 and $11,000, respectively, within the condensed consolidated balance sheets.
The use of assumptions for the fair value determination includes a high degree of subjectivity and judgment using unobservable inputs (level 3 on the fair value hierarchy), which results in estimation uncertainty. To determine the value of the investment, the Company utilizes an Option Pricing Model ("OPM"). The OPM considers the various terms of the stockholder agreements, including the level of seniority among the securities, dividend policy, conversion ratios, and cash allocations upon liquidation of the entity. The OPM is appropriate when the range of potential future outcomes is difficult to predict with any certainty.
The following additional assumptions are used in the model:
| September 30, | December 31, | |
| 2024 | 2023 | |
|
Expected term (years)
|
5.5 | 6.3 |
| Volatility | 84.1% | 70.0% |
| Risk-free interest rate | 4.2% | 3.9% |
| Expected dividend yield | -% | -% |
| Discount for lack of marketability | 31.0% | 20.0% |
9
CHARLOTTE'S WEB HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
(unaudited)
Convertible Debt Derivatives
On November 14, 2022, the Company entered into a subscription agreement (the "Subscription Agreement") with BT DE Investments, Inc. a wholly-owned subsidiary of BAT Group (LSE: BATS and NYSE: BTI) (the "Lender"), providing for the issuance of $56.8 million (C$75.3 million) convertible debenture (the "debenture"). The debenture was denominated in Canadian Dollars ("CAD" or "C$"). The debenture is convertible into 19.9% ownership of the Company's common shares at a conversion price of C$2.00 per common share of the Company on the TSX. The debenture will accrue interest at a stated annualized rate of 5% until such time that there is federal regulation permitting the use of cannabidiol, a phytocannabinoid derived from the plant Cannabis sativa L.as an ingredient in food products and dietary supplements in the United States. (The term "federal regulation" is defined as the date that federal laws in the United States permit, authorize or do not prohibit the use of CBD as an ingredient in food products and dietary supplements). Following federal regulation of CBD, the annualized rate of interest shall reduce to 1.5%. The maturity date for the debenture is November 14, 2029 (the "Maturity Date").
Debt Interest Rate Conversion Feature
The debt interest rate conversion feature is classified as a financial asset and is remeasured at fair value at each reporting date, with changes recognized in the condensed consolidated statements of operations as changes in fair value of financial instruments for the period. The use of assumptions for the fair value determination includes a high degree of subjectivity and judgment using unobservable inputs (level 3 on the fair value hierarchy), which results in estimation uncertainty. The debt interest rate conversion feature, if triggered, reduces the stated interest rate of the debenture to 1.5% upon federal regulation of CBD in the United States.
For the three months ended September 30, 2024 and September 30, 2023, a gain of $259 and a loss of $38, respectively, related to the debt interest rate conversion feature was recognized as a change in fair value of financial instruments in the condensed consolidated statements of operations. Additionally, for the nine months ended September 30, 2024 and September 30, 2023, a gain of $105 and a loss $544, respectively, related to the debt interest rate conversion feature was recognized as a change in fair value of financial instruments in the condensed consolidated statements of operations. As of September 30, 2024 and December 31, 2023, the debt interest rate conversion feature represents a financial asset of $958 and $872, respectively, within SBH purchase option and other derivative assets in the condensed consolidated balance sheets.
To determine the value of the debt interest rate conversion feature, the Company utilizes a probability weighted income approach. This method calculates the present value of the reduced interest accrued on the debenture assuming the feature is triggered at a certain time, after accounting for the probability of federal regulation of CBD. This approach is useful when ultimate valuation is based on an unverifiable outcome, such as an event outside of the Company's influence. The following additional assumptions are used in the model:
| September 30, | December 31, | |
| 2024 | 2023 | |
| Stated interest rate | 5.0% | 5.0% |
| Adjusted interest rate | 1.5% | 1.5% |
| Implied debt yield | 10.2% | 11.0% |
| Federal regulation probability | Various | Various |
| Year of event | Various | Various |
Debt Conversion Option
Per the debenture, the Lender has the option, at any time before the Maturity Date at no additional consideration, for all or any part of the principal amount to be converted into fully paid and non-assessable common shares. The Company assessed this conversion feature and determined that the debt conversion option is an embedded derivative that requires bifurcation and is classified as a financial liability within the condensed consolidated balance sheet. The debt conversion option is initially measured at fair value and is revalued at each reporting period using the Black-Scholes option pricing model based on Level 2 observable inputs. The assumptions used by the Company are the quoted price of the Company's common shares in an active market, risk-free interest rate, volatility and expected life, and assumes
10
CHARLOTTE'S WEB HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
(unaudited)
no dividends. Volatility is based on the actual historical market activity of the Company's shares. The expected life is based on the remaining contractual term of the debenture and the risk-free interest rate is based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the expected maturity of the debenture.
For the three months ended September 30, 2024 and September 30, 2023, a gain of $1,338 and a loss of $4,661, respectively, related to the debt conversion option was recognized as a change in fair value of financial instruments in the condensed consolidated statements of operations. For the nine months ended September 30, 2024 and September 30, 2023, a gain of $1,558 and $5,700, respectively, related to the debt conversion option was recognized as a change in fair value of financial instruments in the condensed consolidated statements of operations. As of September 30, 2024 and December 31, 2023, the debt conversion option represents a financial liability of $1,589 and $3,213, respectively, within derivative and other long-term liabilities in the condensed consolidated balance sheets.
The following table provides the assumptions regarding Level 2 fair value measurements inputs at their measurement dates:
| September 30, | December 31, | |
| 2024 | 2023 | |
|
Expected volatility
|
88.0% | 87.4% |
|
Expected term (years)
|
5.1 | 5.9 |
|
Risk-free interest rate
|
3.7% | 3.9% |
|
Expected dividend yield
|
-% | -% |
|
Value of underlying share
|
C$0.19 | C$0.27 |
| Exercise price | C$2.00 | C$2.00 |
Stanley Brothers USA Holdings Purchase Option
In 2021, the Company entered into an option purchase agreement (the "SBH Purchase Option") with Stanley Brothers USA Holdings, Inc ("Stanley Brothers USA"). The SBH Purchase Option was purchased for total consideration of $8,000 and has a term of five years (extendable for an additional two years upon payment of additional consideration). The SBH Purchase Option provides the Company the option to acquire all or substantially all the shares of Stanley Brothers USA at a purchase price to be determined at the time of exercise of the SBH Purchase Option. Upon exercise of the SBH Purchase Option, the purchase price will be determined based on application of predetermined multiples of Stanley Brothers USA revenue and earnings before interest, taxes, depreciation, and amortization ("EBITDA") measures. The Company is not obligated to exercise the SBH Purchase Option. As part of the SBH Purchase Option agreement, Stanley Brothers USA issued the Company a warrant exercisable to purchase 10% of the outstanding Stanley Brothers USA shares and convertible securities that are considered in-the-money, subject to certain conditions and exclusions. The warrant is exercisable at the Company's election for a nominal exercise price in the event the Company elects not to acquire all or substantially all shares of Stanley Brothers USA and expires 60 days after the expiration of the option.
The Company elected the fair value option in accordance with ASC 825-10 guidance to record its SBH Purchase Option. The SBH Purchase Option is classified as a financial asset and is remeasured at fair value at each reporting date, with changes to fair value recognized in the condensed consolidated statements of operations for the period. The use of assumptions for the fair value determination includes a high degree of subjectivity and judgment using unobservable inputs (level 3 on the fair value hierarchy), which results in estimation uncertainty. Changes in assumptions that reasonably could have been different at the reporting date may result in a higher or lower determination of fair value. Changes in fair value measurements, if significant, may affect performance of cash flows. For the three months ended September 30, 2024 and September 30, 2023, a loss of $375 and a gain of $275, respectively, related to the SBH Purchase Option was recognized as change in fair value of financial instruments in the statements of operations. For the nine months ended September 30, 2024 and September 30, 2023, a loss of $1,360 and a gain of $32, respectively, related to the SBH Purchase Option was recognized as change in fair value of financial instruments in the condensed consolidated statements of operations. As of September 30, 2024 and December 31, 2023, the SBH Purchase Option represents a financial asset of $370 and $1,730, respectively, within SBH purchase option and other derivative assets in the condensed consolidated balance sheets.
11
CHARLOTTE'S WEB HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
(unaudited)
The Monte Carlo valuation model considers multiple revenue and EBITDA outcomes for Stanley Brothers USA and other probabilities in assigning a fair value. Primary assumptions utilized include financial projections of Stanley Brothers USA and the probability and timing of exercise. The following additional assumptions are used in the fair value model of the SBH Purchase Option:
| September 30, | December 31, | |
| 2024 | 2023 | |
|
Expected volatility
|
127.0% | 125.0% |
|
Expected term (years)
|
1.4 | 2.2 |
|
Risk-free interest rate
|
4.2% | 4.2% |
|
Weighted average cost of capital
|
51.9% | 50.6% |
4. INVENTORIES
Inventories consist of the following:
| September 30, |
December 31,
|
|||
| 2024 | 2023 | |||
|
Harvested hemp and seeds
|
$ | 3,553 | $ | 9,300 |
|
Raw materials
|
11,892 | 9,726 | ||
|
Finished goods
|
6,780 | 6,320 | ||
| 22,225 | 25,346 | |||
|
Less: inventory provision
|
(2,693) | (3,808) | ||
|
Total inventory
|
$ | 19,532 | $ | 21,538 |
Inventory Provision
For the nine months ended September 30, 2024, inventory provisions of $3,926 were expensed through cost of goods sold in the condensed consolidated statements of operations. The increase in the inventory provision was primarily due to the revaluation on aged hemp based on current market conditions. For the nine months ended September 30, 2024, write-offs of inventory previously reserved for of $5,041 were recognized.
Additionally, for the nine months ended September 30, 2024 and 2023, the Company sold harvested hemp that had a full inventory provision. The sale of hemp resulted in a $235 and $12,854 reduction to the inventory provision as of September 30, 2024 and 2023, respectively.
5. LICENSE AND MEDIA RIGHTS
MLB Promotion Rights Agreement
On October 11, 2022, the Company entered into a Promotional Rights Agreement (the "MLB Promotional Rights Agreement") with MLB Advanced Media L.P., on its own behalf and on behalf of Major League Baseball Properties, Inc., the Office of the Commissioner of Baseball, The MLB Network, LLC and the Major League Baseball Clubs (collectively, the "MLB"), pursuant to which the Company entered into a strategic partnership with MLB to promote the Company's new NSF-Certified for Sport® product line. On January 29, 2024, the Company and MLB entered into the First Amendment to the Promotional Rights Agreement ("First Amendment"). The First Amendment extended the agreement through December 31, 2027, with an aggregate rights fee of $23 million for the remainder of the term.
12
CHARLOTTE'S WEB HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
(unaudited)
As consideration under the MLB promotional rights agreement, the Company has paid and is committed to pay a combination of cash over the license period, along with upfront non-cash consideration in the form of equity, as well as contingent consideration in the form of contingent payments based on revenue.
As of September 30, 2024 and December 31, 2023, the carrying value of the licensed properties was $12,666 and $14,589, respectively, recorded as a license and media rights asset within the condensed consolidated balance sheets. As of September 30, 2024 and December 31, 2023, the carrying value of the media rights was $3,150 and $4,982, respectively, recorded as a prepaid asset and a license and media rights asset within the condensed consolidated balance sheets. For the three months ended September 30, 2024 and September 30, 2023, the Company paid MLB $2,500 and $2,000, respectively, as part of the committed cash payments, and recognized $1,774 and $2,949, respectively, in amortization expense related to the license and media right assets. For the nine months ended September 30, 2024 and September 30, 2023, the Company paid MLB $5,000 and $6,000, respectively, as part of the committed cash payments, and recognized $3,773 and $6,846, respectively, in amortization expense related to the license and media right assets. Licensed properties are amortized straight line and media rights are amortized as incurred.
The MLB First Amendment agreement extended the maturities of the future payment by an additional 2 years. Maturities of the MLB license and media rights payable as of September 30, 2024 are as follows:
|
2024 (3 months remaining)
|
$ | - |
| 2025 | 5,500 | |
| 2026 | 6,000 | |
| 2027 | 6,500 | |
|
Total payments
|
$ | 18,000 |
|
Less: Imputed interest
|
(1,155) | |
|
Total license and media rights payable
|
$ | 16,845 |
|
Less: Current license liabilities
|
(5,209) | |
|
Total non-current license and media rights payable
|
$ | 11,636 |
As of September 30, 2024, expected amortization of licensed properties are as follows:
|
2024 (3 months remaining)
|
$ | 975 |
| 2025 | 3,897 | |
| 2026 | 3,897 | |
| 2027 | 3,897 | |
|
Total future amortization
|
$ | 12,666 |
6. DEBT
Convertible Debenture
On November 14, 2022, the Company entered into the Subscription Agreement with BT DE Investments, Inc., providing for the issuance of a $56.8 million(C$75.3 million) convertible debenture. The debenture is convertible into 19.9%ownership of the Company's common shares at a conversion price of C$2.00per common share of the Company. The debenture will accrue interest at a stated annualized rate of 5%until such time that there is federal regulation permitting the use of CBD as an ingredient in food products and dietary supplements in the United States. Following federal regulation of CBD, the stated annualized rate of interest shall reduce to 1.5%. The maturity date for the debenture is November 14, 2029.
13
CHARLOTTE'S WEB HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
(unaudited)
The following is a summary of the Company's convertible debenture as of September 30, 2024:
|
As of September 30, 2024
|
||||||
| Principal Amount | Unamortized Debt Discount and Costs | Net Carrying Amount | ||||
| Convertible Debenture | ||||||
| Convertible debenture due November 2029 | $ | 61,115 | $ | (15,945) | $ | 45,170 |
The following is a summary of the Company's convertible debenture as of December 31, 2023:
|
As of December 31, 2023
|
||||||
| Principal Amount | Unamortized Debt Discount and Costs | Net Carrying Amount | ||||
| Convertible Debenture | ||||||
| Convertible debenture due November 2029 | $ | 60,116 | $ | (17,588) | $ | 42,528 |
The debenture was C$75.3 million per the subscription agreement and was translated to USD on the transaction date. For the three months ended September 30, 2024 and September 30, 2023, the Company recognized a foreign currency loss of $533 and a gain of $994, respectively, related to the net carrying value of the debenture within the condensed consolidated statement of operations. Additionally, for the nine months ended September 30, 2024 and September 30, 2023, the Company recognized a foreign currency gain of $822 and $174, respectively, related to the net carrying value of the debenture within the condensed consolidated statement of operations.
Interest is accrued annually and payable on the maturity date or date of earlier conversion. On conversion, accrued interest will either be converted into common shares equal to the amount of accrued interest or will be paid in cash if agreed with the Lender. As of September 30, 2024 and September 30, 2023, the principal amount of the debenture includes $5,360 and $2,479, respectively, of accrued interest expense. The following is a summary of the interest expense and amortization expense, recorded within the statement of operation, of the Company's convertible debenture for the three and nine months ended September 30, 2024 and September 30, 2023:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| Interest and Amortization Expense | 2024 | 2023 | 2024 | 2023 | ||||
| Interest expense | $ | 724 | $ | 702 | $ | 2,178 | $ | 2,100 |
| Amortization of debt discounts and costs | 458 | 378 | 1,286 | 1,046 | ||||
| Total | $ | 1,182 | $ | 1,080 | $ | 3,464 | $ | 3,146 |
7. COMMITMENTS AND CONTINGENCIES
Legal Contingencies
From time to time, the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. Although the ultimate aggregate amount of monetary liability or financial impact with respect to these matters is subject to many uncertainties and is therefore not predictable with assurance, management believes that as of September 30, 2024 there is no litigation pending that could have, individually or in the aggregate, a material adverse effect on the Company's financial position, results of operations or cash flows.
8. LEASES
The Company has lease arrangements related to office space, warehouse and production space, and land to facilitate agricultural operations. The leases have remaining lease terms of less than one year to ten years, some of which include options to extend the leases for up to five years. Generally, the lease agreements do not include options to terminate the lease.
14
CHARLOTTE'S WEB HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
(unaudited)
Maturities of operating lease liabilities as of September 30, 2024 are as follows:
| Operating Leases | ||
|
2024 (3 months remaining)
|
$ | 826 |
|
2025
|
2,892 | |
|
2026
|
2,169 | |
|
2027
|
1,844 | |
|
2028
|
1,762 | |
|
Thereafter
|
11,884 | |
|
Total lease obligation
|
21,377 | |
|
Less: Imputed interest
|
(5,124) | |
|
Total lease liabilities
|
16,253 | |
|
Less: Current lease liabilities
|
(2,316) | |
|
Total non-current lease liabilities
|
$ | 13,937 |
9. SHAREHOLDERS' EQUITY
As of September 30, 2024 and December 31, 2023, the Company's share capital consists of one class of issued and outstanding shares: common shares. The Company is also authorized to issue preferred shares issuable in series. To date, no preferred shares have been issued or are outstanding.
Common Shares
As of September 30, 2024 and December 31, 2023, the Company was authorized to issue an unlimited number of common shares, which have no par value.
10. LOSS PER SHARE
The Company computes loss per share of common shares. Basic net loss per common share is computed by dividing the net loss by the weighted-average number of common shares outstanding. Diluted loss per common share is computed by dividing the net loss by the weighted-average number of common shares together with the number of additional common shares that would have been outstanding if all potentially dilutive common shares had been issued, unless anti-dilutive.
The following table sets forth the computation of basic and dilutive net loss per share attributable to common shareholders:
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||
| 2024 | 2023 | 2024 | 2023 | |||||
|
Net loss
|
$ | (5,787) | $ | (15,143) | $ | (26,478) | $ | (15,211) |
| Weighted-average number of common shares - basic | 157,495,042 | 153,094,229 | 156,921,955 | 152,632,806 | ||||
| Dilutive effect of securities | - | - | - | - | ||||
|
Weighted-average number of common shares - diluted
|
157,495,042 | 153,094,229 | 156,921,955 | 152,632,806 | ||||
|
Loss per common share - basic
|
$ | (0.04) | $ | (0.10) | $ | (0.17) | $ | (0.10) |
|
Loss per common share - diluted
|
$ | (0.04) | $ | (0.10) | $ | (0.17) | $ | (0.10) |
As of September 30, 2024 and September 30, 2023, potentially dilutive securities include stock options, restricted share units, and convertible debenture conversion. When the Company recognizes a net loss from continuing operations, all potentially dilutive shares are
15
CHARLOTTE'S WEB HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
(unaudited)
anti-dilutive and are consequently excluded from the calculation of diluted net loss per share. The potentially dilutive awards outstanding for each period are presented in the table below:
|
Three and Nine Months Ended September 30,
|
||
| 2024 | 2023 | |
| Outstanding options | 3,742,095 | 6,535,407 |
| Outstanding restricted share units | 4,956,167 | 3,559,769 |
|
Total
|
8,698,262 | 10,095,176 |
The Company's debenture is convertible into 19.9% ownership of the Company's common shares at a conversion price of C$2.00 per common share of the Company. The Company can settle the convertible debenture in shares. If the convertible debenture in diluted EPS is anti-dilutive, or if the conversion value of the debenture does not exceed their conversion price for a reporting period, then the shares underlying the notes will not be reflected in the Company's calculation of diluted EPS. For the three and nine months ended September 30, 2024 and September 30, 2023, the price of the Company's shares did not exceed the conversion price and therefore there was no impact to diluted EPS during those periods.
11. SHARE-BASED COMPENSATION
Stock options
Stock options vest over a prescribed service period and are approved by the Company's board of directors on an award-by-award basis. Options have a prescribed service period generally lasting up to four years, with certain options vesting immediately upon issuance. Upon the exercise of any stock options, the Company issues shares to the award holder from the pool of authorized but unissued common shares.
There were no options granted for the nine months ended September 30, 2024. The fair values of options granted for the nine months ended September 30, 2023 were determined using a Black-Scholes model. The following principal inputs were used in the valuation of awards issued for the nine months ended September 30, 2023:
| Nine Months Ended September 30, | |
| 2023 | |
|
Expected volatility
|
88.8% |
|
Expected term (years)
|
5.5-6.5
|
|
Risk-free interest rate
|
3.4% |
|
Expected dividend yield
|
0% |
|
Value of underlying share
|
$0.36 |
16
CHARLOTTE'S WEB HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
(unaudited)
Detail of the number of stock options outstanding for the nine months ended September 30, 2024 under the Company's 2015 legacy option plan and the Company's amended 2018 long term incentive plan (collectively, the "Plans") is as follows:
|
Number of Options
|
Weighted-
Average Exercise Price per Option |
Weighted-
Average Remaining Contract Term (in years) |
Aggregate
Intrinsic Value |
|||
|
Outstanding as of December 31, 2023
|
5,780,134 | $ | 0.75 | 8.56 | $ | - |
|
Granted
|
- | - | ||||
|
Exercised
|
- | - | ||||
|
Forfeited (and expired)
|
(2,038,039) | 0.56 | ||||
|
Outstanding as of September 30, 2024
|
3,742,095 | $ | 0.86 | 7.56 | $ | - |
|
Exercisable/vested as of September 30, 2024
|
2,810,305 | $ | 0.93 | 7.19 | $ | - |
There were no options granted during the nine months ended September 30, 2024. The weighted average grant-date fair value of options granted during the nine months ended September 30, 2023 was $0.38.
There were no options exercised during the nine months ended September 30, 2024 and 2023.
Restricted share units
The Company has issued time-based restricted share units to certain employees as permitted under the 2018 long term incentive plan ("the 2018 Plan"). The restricted share units granted vest in accordance with the board-approved agreement, typically over equal installments up to four years. Upon vesting, one share of the Company's common shares is issued for each restricted share unit awarded. The fair value of each restricted share unit granted is equal to the market price of the Company's shares at the date of the grant. The fair value of shares vested during the nine months ended September 30, 2024 and 2023 was $1,024 and $1,150, respectively.
Details of the number of restricted share units outstanding under the 2018 Plan is as follows:
|
Number of Shares
|
Weighted-
Average Grant Date Fair Value |
||
|
Outstanding as of December 31, 2023
|
7,250,766 | $ | 0.31 |
|
Granted
|
3,256,276 | $ | 0.21 |
|
Forfeited
|
(1,385,840) | $ | 0.23 |
|
Vested
|
(3,429,863) | $ | 0.30 |
|
Shares withheld upon vesting
|
(735,172) | $ | 0.46 |
|
Outstanding as of September 30, 2024
|
4,956,167 | $ | 0.26 |
Share-based Compensation Expense
Share-based compensation expense for all equity arrangements for the three months ended September 30, 2024 and 2023 was $217 and $647, respectively, included in selling, general and administrative expense in the condensed consolidated statements of operations. Share-
17
CHARLOTTE'S WEB HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
(unaudited)
based compensation expense for all equity arrangements for the nine months ended September 30, 2024 and 2023 was $1,296 and $1,646, respectively, included in selling, general and administrative expense in the condensed consolidated statements of operations.
As of September 30, 2024, $1,461 of total unrecognized share-based compensation expense related to unvested options and restricted stock units granted to employees is expected to be recognized over a weighted-average period of 2.11 years.
12. INCOME TAXES
The Company reported income tax expense of $0 for the three months ended September 30, 2024 and 2023, respectively. Additionally, income tax expense for the nine months ended September 30, 2024 and 2023 was of $62 and $0, respectively. The Company's effective tax rate as of September 30, 2024and September 30, 2023was 0.2% and 0%, respectively. The Company's effective tax rates differ from the U.S. federal statutory rate of 21%for the ninemonths end September 30, 2024and September 30, 2023, respectively, primarily due to the valuation allowance. The effective tax rate as of September 30, 2024is consistent with the ninemonths ended September 30, 2023, as the Company has been in a full valuation allowance for both periods.
13. RELATED PARTY TRANSACTIONS
Effective November 2020, the Company issued a secured promissory note, where $1,000was loaned to one of the Company's founders. The note receivable was secured by equity instruments with certain founders of the Company, bore interest at 3.25%per annum, and required the unpaid principal and unpaid interest balances to be paid on or before the maturity date of November 13, 2021. Effective November 13, 2024, the Company entered into a third amendment of the promissory note to extend the maturity date until November 13, 2029. According to the terms of the agreement, no additional interest will accrue through the payment date. The note has been fully reserved for as of December 31, 2023.
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 of the Company at the time, are the majority shareholders of Stanley Brothers USA.
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 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 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 September 30, 2024, the remaining note receivable of $85, is presented in other assets in the condensed consolidated balance sheets. In 2024, BAT and AJNA invested an additional $5 million and $2 million, respectively, in DeFloria in the form of convertible debt (refer to Note 3). Additionally, on February 12, 2024, the Company and DeFloria entered into a separate master services agreement pursuant to which the Company will be compensated for the provision of certain services to DeFloria. For the three and nine months ended September 30, 2024, the Company recognized $74 and $459 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 as of September 30, 2024.
On June 21, 2024, the Company entered into a consulting agreement with Jared Stanley, Co-Founder of Charlotte's Web, former executive of the Company, and current member of the Board of Directors. The consulting agreement will remain in effect until June 13, 2025. In consideration for Mr. Stanley's services, he will receive a bi-weekly fee of $6.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q ("Form 10-Q") contains statements that are, or may be considered to be, "forward-looking statements" under Canadian securities laws and within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are intended to be subject to the "safe harbor" created by those sections and other applicable laws. Forward-looking statements are neither historical facts nor assurances of future performance. 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. 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. Furthermore, forward-looking statements may be included in various filings that the Company makes with the SEC, on SEDAR +, or in press releases or oral statements made by or with the approval of one of the Company's authorized executive officers. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, it cannot assure you that these expectations will prove to be correct. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. All capitalized and undefined terms used in this section shall have the same meanings hereafter defined in this Quarterly Report on Form 10-Q.
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.
Management's Discussion & Analysis of Charlotte's Web Holdings, Inc.
For purposes of this discussion, "Charlotte's Web," "CW," "we," "our", "us", or the "Company" refers to Charlotte's Web Holdings, Inc. and its subsidiaries: Charlotte's Web, Inc. and Abacus Products, Inc., and its wholly-owned subsidiaries: Abacus Health Products, Inc., Abacus Wellness, Inc. and CBD Pharmaceuticals Ltd. The results herein have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").
Amounts are presented in thousands of United States dollars, unless otherwise indicated.
BUSINESS OVERVIEW
Charlotte's Web Holdings, Inc., is a Certified B Corp headquartered in Louisville, Colorado, which conducts the majority of its business in the United States. The Company is a market leader in innovative hemp extract wellness products under a family of brands which includes Charlotte's Web™, CBD Medic™, and CBD Clinic™. Charlotte's Web premium quality products start with proprietary hemp genetics that are 100% North American farm grown and are then manufactured into hemp extracts containing naturally occurring phytocannabinoids including Cannabidiol ("CBD"), cannabichromene ("CBC"), cannabigerol ("CBG"), terpenes, flavonoids and other cannabinoids and beneficial hemp compounds. The Company is headquartered in a cGMP compliant facility in Louisville, Colorado, where the Company conducts its production of tinctures, distribution, and quality control activities, as well as research and development ("R&D"). Charlotte's Web product categories include full spectrum hemp extract oil tinctures (liquid products), gummies, capsules, CBD topical creams and lotions, broad spectrum botanical CBD, mushrooms, and pet products. The Company also offers NSF Certified for Sport® broad spectrum tincture and gummy products. Charlotte's Web products are distributed to retailers and health care practitioners, and online through the Company's website at www.CharlottesWeb.com. The information provided on the website is not part of this MD&A.
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The Company's business consists of the farming, manufacturing, marketing, and sales of hemp-derived CBD and botanical wellness products. As of September 30, 2024, the Company operated in a single operating and reportable segment, hemp-derived CBD wellness products. The executive officers reviewed overall operating results in order to assess financial performance and to make resource allocation decisions, rather than to assess a lower-level unit of operations in isolation.
The Company's primary products are made from proprietary strains of whole-plant hemp extracts containing a full spectrum of phytocannabinoids, terpenes, flavonoids and other hemp compounds. The Company believes the presence of these various compounds work synergistically to heighten the effects of the products, making them superior to single-compound isolates.
Hemp extracts are produced from Cannabis and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a THC concentration of not more than 0.3% on a dry weight basis. The Company is engaged in research involving a broad variety of compounds derived from hemp. Where research provides evidence that a greater than 0.3% THC level may have a potential therapeutic use, the Company may consider pursuing development of that use in jurisdictions where it is legal to do so in accordance with applicable regulations and if consistent with the Company's founding principles. The Company does not currently have any plans to expand into high THC products in the near future.
The Company grows its proprietary hemp domestically in the United States on farms leased in northeastern Colorado and sources hemp through contract farming operations in Arizona, Colorado, Kentucky, and Canada. The hemp grown in Canada is utilized exclusively in the Canadian markets or for research purposes and not in the Company's products sold within the United States.
Recent Developments
With an increased commitment to innovation, Charlotte's Web has refreshed its mission to "Unearth the Science of Nature to Revolutionize Wellness," and is evolving its wellness offerings both to strengthen our core leadership in CBD, and extend beyond CBD to include a broader range of botanical wellness solutions, including minor cannabinoids. A testament to this expansion is the launch of Charlotte's Web Stay Asleep Cannabinol ("CBN") gummies. 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). 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 LLC ("DeFloria") for botanical drug development.
During the first quarter of 2024, Charlotte's Web unveiled a significant competitive price reduction of its leading CBD oils, without sacrificing its proprietary formulation or quality. This was accomplished by passing through improved operational efficiencies to consumers, with modest gross margin reduction expected to be offset with additional volume through the remainder of the year. More affordable pricing improves consumer accessibility, and broadens the total addressable consumer segments, attracting new consumers.
To better leverage its leading brand equity, the Company consolidated its CBD Medic and CBD Clinic brands under a unified Charlotte's Web brand architecture. Additionally, the Company's ReCreate brand has been absorbed under the recognized Charlotte's Web brand to better penetrate the lifestyles category. Charlotte's Web NSF Certified for Sport® will benefit from the Company's valuable professional sports partnerships, including with the U.S. Premier Lacrosse League and Major League Baseball©.
As of September 30, 2024, several states have adopted new regulations that will impact the Company's ability to sell certain products as currently formulated or packaged in these states, including the emergency regulations enacted in September 2024 in the State of California. Many of these states have also implemented new THC/CBD limits, age verification, testing, labeling and packaging requirements. The Company continues to assess the business and financial impacts of the new regulations, including steps that can be taken to address the new product formulation, packaging, and labeling requirements, as well as costs and potential revenue impacts and anticipated timing for such impacts to the Company in these states.
The Company continues to invest in R&D efforts to identify new product opportunities. The Company is working to capitalize on the rapidly emerging botanical wellness products industry by driving customer acquisition and retention, as well as accelerating retail expansion. In addition, the Company may consider expanding its product line beyond hemp-based products should the science and the Company's founding principles support such expansion.
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Selected Financial Information
|
For the Three Months Ended
September 30,
|
For the Nine Months Ended
September 30,
|
|||||||
| 2024 | 2023 | 2024 | 2023 | |||||
|
Total revenues
|
$ | 12,587 | $ | 14,294 | $ | 37,000 | $ | 47,310 |
|
Cost of goods sold
|
5,914 | 6,365 | 20,834 | 20,546 | ||||
|
Gross profit
|
6,673 | 7,929 | 16,166 | 26,764 | ||||
|
Selling, general, and administrative expenses
|
12,693 | 19,889 | 42,700 | 57,029 | ||||
| Operating loss | (6,020) | (11,960) | (26,534) | (30,265) | ||||
| Gain on initial investment in unconsolidated entity | - | - | - | 10,700 | ||||
| Change in fair value of financial instruments | 1,422 | (4,024) | 702 | 5,588 | ||||
|
Other income (expense), net
|
(1,189) | 841 | (584) | (1,234) | ||||
|
Loss before income taxes
|
$ | (5,787) | $ | (15,143) | $ | (26,416) | $ | (15,211) |
| Total assets | $ | 119,644 | $ | 163,867 | ||||
| Total liabilities | $ | 89,401 | $ | 100,129 |
For The Three Months Ended September 30, 2024 and 2023
Revenue
The majority of the Company's revenue is derived from sales of branded products to consumers via the Company's DTC e-commerce website, and distributors, retail and wholesale B2B customers.
| Three Months Ended September 30, | % Increase (Decrease) | |||||
| 2024 | 2023 | |||||
| Direct-to-consumer ("DTC") revenue | $ | 8,166 | $ | 9,428 | (13.4) | % |
| Business-to-business ("B2B") revenue | 4,347 | 4,866 | (10.7) | % | ||
| Service revenue | 74 | - | 100.0 | % | ||
| Total revenue | $ | 12,587 | $ | 14,294 | (11.9) | % |
Total revenue for the three months ended September 30, 2024 was $12,587, a decrease of 11.9% compared to the three months ended September 30, 2023. On a quarter-over-quarter basis, total revenue increased 2.4%, marking a second consecutive quarter of growth in 2024.
DTC net revenue decreased 13.4% year-over-year, primarily due to lower comparable online traffic to the Company's web store. At the end of the second quarter, the Company transitioned to a new e-commerce platform which provides improved software integrations, advanced target marketing tools, and superior customer relationship management software. On a quarter-over-quarter basis DTC net revenue increased 4.4% compared to the second quarter of 2024.
B2B net revenue decreased 10.7% year-over-year, primarily due to reductions or removals of shelf space allocations to CBD products by certain retailers over the past 12 months. Inflationary impact on discretionary consumer spending activity and product mix shift away from higher-priced tinctures were additional contributing factors. B2B net revenue decreased 1.1% quarter-over-quarter compared to the second quarter of 2024. The Company added Walmart as a retail partner in the second quarter of 2024 with the launch of a new CBD isolate topical products, including product rollout to 827 Walmart stores across five states; California, Illinois, Florida, Texas, and Pennsylvania. For the third quarter the Company saw continued sales growth in its gummy product line.
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Cost of Goods Sold
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.
The components of cost of goods sold are as follows:
| Three Months Ended September 30, | % Increase (Decrease) | |||||
| 2024 | 2023 | |||||
| Inventory expensed to cost of goods sold | 4,068 | 4,454 | (8.7) | % | ||
| Inventory provision, net | - | 410 | (100.0) | % | ||
| Other production costs | 927 | 608 | 52.5 | % | ||
| Service costs | 75 | - | 100.0 | % | ||
| Depreciation and amortization | 844 | 893 | (5.5) | % | ||
| Cost of goods sold | $ | 5,914 | $ | 6,365 | (7.1) | % |
Cost of goods sold decreased 7.1% for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The decrease was primarily due to lower inventory expense associated with lower revenue in 2024.
Depreciation and amortization expense for the three months ended September 30, 2024 and September 30, 2023 was $2,523 and $3,741, respectively, of which $844 and $893, respectively, was expensed to cost of goods sold. The remaining depreciation and amortization expenses of $1,679 and $2,848, respectively, was expensed to Selling, general, and administrative expenses.
Gross Profit
The primary factors that can impact gross profit margins include the volume of products sold, revenue mix between DTC e-commerce and B2B, product sales mix, promotional and sales discount rate, manufacturing spend, transportation costs, and changes in inventory provisions.
Gross profit for the three months ended September 30, 2024 and September 30, 2023 is as follows:
| Three Months Ended September 30, | % Increase (Decrease) | |||||
| 2024 | 2023 | |||||
| Gross profit | $ | 6,673 | $ | 7,929 | (15.8) | % |
| Gross margin | 53.0 | % | 55.5 | % | (4.5) | % |
Gross profit decreased to 53.0% for the three months ended September 30, 2024 compared to 55.5% for the three months ended September 30, 2023. The decrease is primarily related to the revenue decrease of 11.9% impacting fixed cost absorption, and lower blended margin following price reductions on oil tincture products initiated in the first quarter of 2024.
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Selling, General, and Administrative Expenses
Total Selling, general, and administrative expenses are as follows:
| Three Months Ended September 30, | % Increase (Decrease) | |||||
| 2024 | 2023 | |||||
| Selling, general, and administrative expenses | $ | 12,693 | $ | 19,889 | (36.2) | % |
Total Selling, general, and administrative expenses for the three months ended September 30, 2024 and September 30, 2023 were $12,693 and $19,889, respectively. The amended MLB Promotional Rights Agreement resulted in a decrease in amortization expense related to MLB assets of approximately $1.2 million compared to the three months ended September 30, 2023. Additionally, the decrease is due to operating expense reductions. The Company made additional cost cutting measures in the third quarter to further align with current revenue levels.
Depreciation and amortization expensed to Selling, general, and administrative expenses for the three months ended September 30, 2024 and September 30, 2023 were $1,679 and $2,848, respectively.
Total research and development costs expensed to Selling, general, and administrative expense for the three months ended September 30, 2024 and September 30, 2023 were $556 and $733, respectively. Research and development expenses primarily include personnel costs related to our R&D science division as well as R&D related projects advancing hemp cannabinoid science through research programs that provide a better understanding of the possible therapeutic uses of cannabinoids.
Total Change in Fair Value of Financial Instruments
Total change in fair value of financial instruments is as follows:
| Three Months Ended September 30, | % Increase (Decrease) | |||||
| 2024 | 2023 | |||||
| Change in fair value of financial instruments | $ | 1,422 | $ | (4,024) | (135.3) | % |
Total change in fair value of financial instruments for the three months ended September 30, 2024 and September 30, 2023 was a net gain of $1,422 and a net loss of $4,024, respectively. For the three months ended September 30, 2024, primarily due to the revaluation of the fair value of the Company's debt conversion option and debt interest rate conversion feature resulting in a gain of $1.6 million, compared to a net loss of $4.7 million for the three months ended September 30, 2023. The fair value of the Company's embedded derivatives and options are revalued at each reporting date with changes impacted by variability in the Company's share price and implied debt yields.
For the Nine Months Ended September 30, 2024 and 2023
Revenue
The majority of the Company's revenue is derived from sales of branded products to consumers via the Company's DTC e-commerce website, and distributors, retail and wholesale B2B customers.
| Nine Months Ended September 30, | % Increase (Decrease) | |||||
| 2024 | 2023 | |||||
| Direct-to-consumer ("DTC") revenue | $ | 23,758 | $ | 31,430 | (24.4) | % |
| Business-to-business ("B2B") revenue | 12,783 | 15,880 | (19.5) | % | ||
| Service revenue | 459 | $ | - | 100.0 | % | |
| Total revenue | $ | 37,000 | $ | 47,310 | (21.8) | % |
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Total revenue for the nine months ended September 30, 2024 was $37,000, a decrease of 21.8% compared to the nine months ended September 30, 2023.
DTC revenue decreased 24.4%, driven by lower comparable online traffic and associated sales volume through the Company's web store. Inflationary impact on discretionary consumer spending activity and product mix shift away from higher-priced tinctures were additional contributing factors.
B2B revenue decreased 19.5% compared to the nine months ended September 30, 2023. The decrease was primarily due to the reduced retailer shelf allocations to the CBD category and inflationary impacts on consumer spending.
Cost of Goods Sold
Cost of goods sold includes the cost of inventory sold, changes in inventory provisions, and other production costs expensed. Other production costs include direct and indirect production costs including direct labor, processing, testing, packaging, quality assurance, security, shipping, depreciation of production equipment, indirect labor, including production management, and other related expenses. The primary factors that can impact cost of goods sold on a period-to-period basis include the volume of products sold, mix of product sold, third-party quality costs, transportation, overhead allocations and changes in inventory provisions.
The components of cost of goods sold are as follows:
| Nine Months Ended September 30, | % Increase (Decrease) | |||||
| 2024 | 2023 | |||||
| Inventory expensed to cost of goods sold | 11,766 | 14,642 | (19.6) | % | ||
| Inventory provision, net | 3,926 | 730 | 437.8 | % | ||
| Other production costs | 2,133 | 2,485 | (14.2) | % | ||
| Service costs | 460 | - | 100.0 | % | ||
| Depreciation and amortization | 2,549 | 2,689 | (5.2) | % | ||
| Cost of goods sold | $ | 20,834 | $ | 20,546 | 1.4 | % |
Cost of goods sold increased 1.4% for the nine months ended September 30, 2024, despite lower revenue compared to the nine months ended September 30, 2023. The increase was primarily due to a $3.7 million increase in inventory provisions during the three months ended June 30, 2024 due to the revaluation on aged hemp based on current market conditions. The increase was partially offset by lower inventory expense and other variable costs associated with lower revenue in 2024.
Depreciation and amortization expense for the nine months ended September 30, 2024 and September 30, 2023 was $7,505 and $11,509, respectively, of which $2,549 and $2,689, respectively, was expensed to cost of goods sold. The remaining depreciation and amortization expenses of $4,956 and $8,820, respectively, was expensed to Selling, general, and administrative expenses.
Gross Profit
The primary factors that can impact gross profit margins include the volume of products sold, the mix of revenue between DTC e-commerce and B2B, the mix of products sold, the promotional and sales discount rate, manufacturing spend, transportation costs, and changes in inventory provisions.
Gross profit for the nine months ended September 30, 2024 and September 30, 2023 is as follows:
| Nine Months Ended September 30, | % Increase (Decrease) | |||||
| 2024 | 2023 | |||||
| Gross profit | $ | 16,166 | $ | 26,764 | (39.6) | % |
| Gross margin | 43.7 | % | 56.6 | % | (22.8) | % |
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Gross profit decreased 39.6% year-over-year for the nine months ended September 30, 2024 primarily related to the revenue decrease of 21.8% impacting fixed cost absorption, and lower blended margin following price reductions on oil tincture products initiated in the first quarter of 2024.
Selling, General, and Administrative Expenses
Total Selling, general, and administrative expenses are as follows:
| Nine Months Ended September 30, | % Increase (Decrease) | |||||
| 2024 | 2023 | |||||
| Selling, general, and administrative expenses | $ | 42,700 | $ | 57,029 | (25.1) | % |
Total selling, general, and administrative expenses for the nine months ended September 30, 2024 and September 30, 2023 were $42,700 and $57,029, respectively. The amended MLB Promotional Rights Agreement resulted in a decrease in amortization and media expense related to MLB assets of approximately $3.1 million compared the prior period. Additionally, the decrease is due to operating expense reductions. For the nine months ended, the Company has made cost cutting measures to further align with current revenue levels.
Depreciation and amortization expensed to Selling, general, and administrative expenses for the nine months ended September 30, 2024 and September 30, 2023 were $4,956 and $8,820, respectively.
Total research and development costs expensed to Selling, general, and administrative expense for the nine months ended September 30, 2024 and September 30, 2023 were $1,955 and $2,194, respectively. Research and development expenses primarily include personnel costs related to the Company's R&D science division as well as R&D related projects advancing hemp cannabinoid science through research programs that provide a better understanding of the possible therapeutic uses of cannabinoids.
Total Change in Gain on Investment in Unconsolidated Entity
Total change in gain on investment in unconsolidated entity is as follows:
| Nine Months Ended September 30, | % Increase (Decrease) | |||||
| 2024 | 2023 | |||||
|
Change in gain on investment in unconsolidated entity
|
$ | - | $ | 10,700 | (100.0) | % |
Total change in gain on investment in unconsolidated entity for the nine months ended September 30, 2024 and September 30, 2023 was $0 and $10,700, respectively. For the nine months ended September 30, 2023, the gain was due to the Company jointly forming an entity, DeFloria, with AJNA, and BAT. DeFloria was established to pursue FDA approval for a novel botanical drug to target a neurological condition, with the botanical drug being developed from certain proprietary hemp genetics of the Company. The initial investment was measured at fair value and is remeasured at each reporting date, with changes recognized in changes in fair value of financial instruments.
Total Change in Fair Value of Financial Instruments
Total change in fair value of financial instruments is as follows:
| Nine Months Ended September 30, | % Increase (Decrease) | |||||
| 2024 | 2023 | |||||
| Change in fair value of financial instruments | $ | 702 | $ | 5,588 | (87.4) | % |
Total change in fair value of financial instruments for the nine months ended September 30, 2024 and September 30, 2023 was a gain of $702 and a gain of $5,588, respectively. For the nine months ended September 30, 2024, the gain in fair value of financial instruments was primarily due to the revaluation of the fair value of the Company's debt conversion option and debt interest rate conversion feature, compared to a net gain of $5.6 million for the nine months ended September 30, 2023. The fair value of the Company's embedded
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derivatives and options are revalued at each reporting date, with changes impacted by variability in the Company's share price and implied debt yields.
Liquidity and Capital Resources
As of September 30, 2024 and December 31, 2023, the Company had total current liabilities of $16,483 and $23,646, respectively, and cash and cash equivalents of $24,620 and $47,820, respectively, to meet its current obligations.
As a result of expense reduction actions taken in 2024, the Company expects selling, general and administrative expenses to be significantly lower compared to 2023.
The Company's ability to fund its operations for the next twelve months and thereafter will depend on its future operating performance, particularly prudent cost management, which can be affected by general economic conditions, industry regulatory changes, and other factors beyond the Company's control.
Management continually assesses liquidity in terms of the ability to generate sufficient cash flow to fund the business. Net cash flow is affected by the following items: (i) operating activities, including the cash impacts from the statements of operations, the level of accounts receivables, accounts payable, accrued liabilities and unearned revenue and deposits; (ii) investing activities, including the purchase of property and equipment; and (iii) financing activities, including the issuance of capital shares.
The Company expects to meet our liquidity requirements for at least the next twelve months through various sources of capital, including cash on hand and provided by operations over time. The Company regularly considers fundraising opportunities and may decide, from time to time, to raise capital through borrowings or issuances of additional equity and/or debt securities. The Company's ability to incur additional debt is dependent upon a number of factors, including the state of the credit markets, our degree of leverage, the value of our unencumbered assets and borrowing restrictions imposed by lenders, including restrictions on the industry. The Company's ability to raise funds through the issuance of additional equity and/or debt securities is also dependent on a number of factors including the current state of the capital markets, investor sentiment and intended use of proceeds. The Company's ability to raise funds through the issuance of equity securities depends on, among other things, general market conditions for companies in the hemp industry and market perceptions about us. There can be no assurance the Company will have the ability to raise additional funds and, if those funds are raised privately or publicly, that such funds will be available to the Company when needed or on terms which are acceptable.
Cash Flows
Cash from Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2024 and September 30, 2023 were as follows:
| Nine Months Ended September 30, | ||||
| 2024 | 2023 | |||
| Net cash used in operating activities | $ | (19,469) | $ | (12,849) |
For the nine months ended September 30, 2024, the $6,620 increase in cash used in operations were primarily due to the Company's collection of $4,261 from income tax refunds due during the nine months ended September 30, 2023. Additionally, the increase in cash used was due to decrease in sales and working capital, resulting in a decrease of net cash inflow.
Cash from Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2024 and September 30, 2023 were as follows:
| Nine Months Ended September 30, | ||||
| 2024 | 2023 | |||
| Net cash used in investing activities | $ | (3,598) | $ | (2,896) |
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For the nine months ended September 30, 2024 and September 30, 2023, the cash used in investing activities was driven primarily by machinery purchases as part of the Company's plan to in-source topical and gummy production.
Cash from Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2024 and September 30, 2023 were as follows:
| Nine Months Ended September 30, | ||||
| 2024 | 2023 | |||
| Net cash used in financing activities | $ | (133) | $ | (202) |
For the nine months ended September 30, 2024, the change was primarily due to the vesting of restricted stock units.
Off-Balance Sheet Arrangements
As of September 30, 2024 and December 31, 2023, we do not have any off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on our results of operations or financial condition, including, and without limitation, such considerations as liquidity and capital resources.
Related party transactions
Effective November 2020, the Company issued a secured promissory note, where $1,000was loaned to one of the Company's founders. The note receivable was secured by equity instruments with certain founders of the Company, bore interest at 3.25%per annum, and required the unpaid principal and unpaid interest balances to be paid on or before the maturity date of November 13, 2021. Effective November 13, 2024, the Company entered into a third amendment of the promissory note to extend the maturity date until November 13, 2029. According to the terms of the agreement, no additional interest will accrue through the payment date. The note has been fully reserved for as of December 31, 2023.
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.
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 September 30, 2024, the remaining note receivable of $85, is presented in other assets in the condensed consolidated balance sheets. In 2024, BAT and AJNA invested an additional $5 million and $2 million, respectively, in DeFloria in the form of convertible debt (refer to Note 3). Additionally, on February 12, 2024, the Company and DeFloria entered into a separate master services agreement pursuant to which the Company will be compensated for the provision of certain services to DeFloria. For the three and nine months ended September 30, 2024, the Company recognized $74 and $459, respectively, in revenue and cost of goods sold, respectively, related to the service agreement with DeFloria. Additionally, the Company has an accounts receivable balance due from DeFloria of $74, respectively, as of September 30, 2024.
On June 21, 2024, the Company entered into a consulting agreement with Jared Stanley, Co-Founder of Charlotte's Web, former executive of the Company, and current member of the Board of Directors. The consulting agreement will remain in effect until June 13, 2025. In consideration for Mr. Stanley's services, he will receive a bi-weekly fee of $6.
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Recently Adopted Accounting Principles
There are no new recent accounting pronouncements that have been issued by the Financial Accounting Standards Board ("FASB") and adopted by the Company that had or may have a material impact on the accompanying unaudited interim condensed consolidated financial statements.
Critical Policies and Accounting Estimates
Listed below are the accounting policies and estimates we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability, revenue or expense being reported. Please also refer to Note 2 of our notes to the condensed consolidated financial statements for a discussion on recently adopted and issued accounting pronouncements.
Fair Value Option
The Company has elected the fair value option in accordance with ASC 825-10 guidance to record its SBH Purchase Option. Under ASC 825-10, a business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The SBH Purchase Option is classified as a financial asset in the condensed consolidated balance sheets and is remeasured at fair value at each reporting date, with changes to fair value recognized in the condensed consolidated statements of operations for the period. The use of assumptions for the fair value determination includes a high degree of subjectivity and judgment using unobservable inputs (level 3 on the fair value hierarchy), which results in estimation uncertainty. Changes in assumptions that reasonably could have been different at the reporting date may result in a higher or lower determination of fair value. The Monte Carlo valuation model considers multiple revenue and EBITDA outcomes for Stanley Brothers USA and other probabilities in assigning a fair value. Primary assumptions utilized include financial projections of Stanley Brothers USA and the probability and timing of exercise asserted by the Company.
Investment in Unconsolidated Entities
The Company has a variable interest in the investment in DeFloria; however, the Company is not the primary beneficiary of DeFloria as it lacks the power to direct DeFloria's key activities. The Company concluded that the investment in DeFloria should not be consolidated. In accordance with ASC 825-10, equity method investments are eligible for the fair value option as they represent recognized financial assets. As the Company was not required to consolidate the investment and does not meet any of the other scope exceptions, the Company had the ability to adopt the fair value option for the investment at inception. The investment was remeasured at fair value after each reporting date, with changes recognized in the condensed consolidated statements of operations, as changes in fair value of financial instruments for the period.
The 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. To determine the value of the investment, the Company utilizes an Option Pricing Model (OPM). The OPM considers the various terms of the stockholder agreements, including the level of seniority among the securities, dividend policy, conversion ratios, and cash allocations upon liquidation of the entity. The OPM is appropriate when the range of potential future outcomes is difficult to predict with any certainty.
Inventories
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
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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.
Impairment of Long-Lived Assets
The Company reviews intangible assets with indefinite useful lives for impairment at least annually and reviews all intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. Long-lived assets, such as property and equipment and intangible assets subject to depreciation and amortization, as well as indefinite lived intangibles and goodwill are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the useful life is shorter than the Company had originally estimated. Recoverability of these assets is measured by comparison of the carrying amount of each asset or asset group to the future undiscounted cash flows the asset or asset group is expected to generate over their remaining lives. If the asset or asset group is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset or asset group. If the useful life is shorter than originally estimated, the Company amortizes the remaining carrying value over the new shorter useful life. Impairment losses are recorded in selling, general, and administrative expense in the condensed consolidated statements of operations. There were no impairment losses recognized for the three and nine months ended September 30, 2024 and 2023, respectively.
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: 1) the interest rate conversion feature based on changes in federal regulations, and 2) the debt conversion option to common shares. The debt interest rate conversion feature is classified as a derivative asset and measured at fair value using a probability weighted income approach. 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.
Income Taxes
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. Deferred income tax expense or benefit is based on the changes in the deferred income tax assets or liabilities from period to period. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized.
Significant judgment is required in determining the Company's provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against net deferred tax assets. The Company assesses the likelihood that deferred tax assets will be recovered as deductions from future taxable income. The evaluation of the need for a valuation allowance is performed on a jurisdiction-by-jurisdiction basis and includes a review of all available positive and negative evidence. Factors reviewed include projections of pre-tax book income for the foreseeable future, determination of cumulative pre-tax book income or loss, earnings history, and forecasting reliability. It is the Company's policy to offset indefinite lived deferred tax assets with indefinite lived deferred tax liabilities. The Company provided a full valuation allowance on deferred tax assets because it is more likely than not that deferred tax assets will not be realized.
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 September 30, 2024 and December 31, 2023. The Company's policy is to recognize interest and penalties on taxes, if any, within the condensed consolidated statements of operations as income tax expense.
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Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customer ("ASC 606"). The Company performs the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company applies the five-step model to arrangements that meet the definition of a contract under the standard, including when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of revenue accounting, the Company evaluates the goods or services promised within each contract related performance obligation and assesses whether each promised good or service is distinct. The Company recognizes as revenue, the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
The Company recognizes revenue from customers when control of the goods or services are transferred to the customer, generally when products are shipped, at an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services. 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.
Any product that does not meet the customer's expectations can be returned within the first 30 days of delivery in exchange for another product or for a full refund. 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. Estimates are based on actual historical and current specific data.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information under this item is not required to be provided by smaller reporting companies.
Item 4. Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of September 30, 2024, our disclosure controls and procedures were effective to ensure the timely disclosure of required information in our SEC filings.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company's internal control over financial reporting during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II
Item 1. Legal Proceedings
From time to time, the Company may be involved in various regulatory issues, claims and lawsuits arising in the ordinary course of business, none of which, in the opinion of management, is expected to have a material adverse effect on the Company's results of operations or financial condition.
At present, the Company is not a party to any material pending legal proceedings, other than ordinary routine litigation incidental to the business. Nor is the Company or its property the subject of any legal proceedings, known or contemplated, that involve a claim for damages exclusive of interest and costs that meet or exceed 10% of its current assets.
Item 1A. Risk Factors
Our Annual Report on Form 10-K for the year ended December 31, 2023 includes a detailed discussion of our risk factors under the heading "Part I, Item 1A-Risk Factors." There have been no material changes from such risk factors during the quarter ended September 30, 2024. You should consider carefully the risk factors set forth in this Form 10-Q and discussed in our Annual Report on Form 10-K for the year ended December 31, 2023 and all other information contained in or incorporated by reference in this Form 10-Q before making an investment decision. If any of the risks discussed herein or in the Annual Report on Form 10-K for the year ended December 31, 2023 actually occur, they may materially harm our business, financial condition, operating results, cash flows or growth prospects. As a result, the market price of our common shares could decline, and you could lose all or part of your investment. Additional risks and uncertainties that are not yet identified or that we think are immaterial may also materially harm our business, financial condition, operating results, cash flows or growth prospects and could result in a complete loss of your investment.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Rule 105-1 Trading Plans
During the three months ended September 30, 2024, none of the Company's directors or officers adopted or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K of the Securities Act of 1933).
Promissory Note
On November 13, 2020, the Company entered into a secured promissory note ("Note"), as lender, where the Company loaned $1,000 to one of the founders of the Company. The note receivable is secured by equity instruments with such founder of the Company. On March 22, 2022, the maturity date of the Note was extended, as allowed under the terms of the Note, resulting in an extension of the maturity date to November 13, 2023 ("First Amendment"). Effective December 28, 2023, the Company entered into a second amendment of the Note to extend the maturity date of the Note until November 13, 2024. Effective November 13, 2024, the Company entered into a third amendment of the Note ("Third Amendment") to extend the maturity date of the Note until November 13, 2029.
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The foregoing description of the Third Amendment to the Note is qualified in its entirety by reference to the Note, which is included as Exhibit 10.1 hereto.
Item 6. Exhibits
Documents filed as part of this report
| Exhibit No. | Description | Location |
|
10.1
|
Third Amendment to Secured Promissory Note, dated November 13, 2024
|
Filed herewith
|
| 31.1 |
Certification of Periodic Report by Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
|
Filed herewith |
| 31.2 |
Certification of Periodic Report by Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
|
Filed herewith |
| 32.1 |
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
Furnished herewith
|
| 32.2 |
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
Furnished herewith
|
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | Filed herewith |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | Filed herewith |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | Filed herewith |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | Filed herewith |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | Filed herewith |
| † | Indicates a management contract or compensatory plan or arrangement. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CHARLOTTE'S WEB HOLDINGS, INC. | ||
| November 14, 2024 | By: | /s/ Erika Lind |
| (Date) | Erika Lind | |
| (Chief Financial Officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
| Signatures | Title | Date |
| /s/ William Morachnick | Chief Executive Officer (Principal Executive Officer) | November 14, 2024 |
|
William Morachnick
|
||
| /s/ Erika Lind | Chief Financial Officer (Principal Financial Officer) | November 14, 2024 |
| Erika Lind | ||
| /s/ Sarah Cambridge | Chief Accounting Officer (Principal Accounting Officer) | November 14, 2024 |
| Sarah Cambridge |
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