Charlotte's Web Holdings, Inc 10-K for FY2022
Charlotte's Web Holdings, Inc. (CWBHF)
10-K
2023-03-23
For: 2022-12-31
View Original
Added on
April 09, 2026
About this 10-K
Charlotte's Web Holdings, Inc filed this 10-K on March 23, 2023, covering the fiscal year ended December 31, 2022 (FY2022).
Headline figures
Fiscal year ended December 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $74.14M
- down 22.8% from $96.09M a year earlier
- Net loss
- $59.31M
- compared with a net loss of $137.72M a year earlier
- Diluted EPS
- -$0.40
- compared with -$0.98 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the fiscal year ended December 31 , 2022
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
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
(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 | ||||||
Securities registered pursuant to section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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 | Accelerated filer | o | ||||||||
x | Smaller reporting company | ||||||||||
Emerging growth company | |||||||||||
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. o
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
State the aggregate market value of the voting and no-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter.
On June 30, 2022, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of common stock, no par value held by non-affiliates (assuming for purposes of this computation only that the registrant had no affiliates) was approximately $84.3 million.
The registrant had outstanding 152,422,498 shares of common stock as of March 20, 2023.
DOCUMENTS INCORPORATED BY REFERENCE
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K ("Form 10-K") contains statements that are, or may be considered to be, “forward-looking statements.” 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-K 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 or 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.
By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that predictions, forecasts, projections and other forward-looking statements will not be achieved. The Company cautions readers not to place undue reliance on these statements as a number of important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations, anticipations, estimates and intentions expressed in such forward-looking statements. Risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, as applicable, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking information and statements include, but are not limited to the risks described in Item 1A—"Risk Factors" of this Form 10-K.
Readers are cautioned not to place undue reliance on any forward-looking statements contained in this Form 10-K, which reflect management’s opinions only as of the date hereof. Except as required by law, the Company undertakes no obligation to revise or publicly release the results of any revision to any forward-looking statements. You are advised, however, to consult any additional disclosures the Company makes in its reports to the SEC. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements contained in this Form 10-K.
Risks Factors Summary
Set forth below is summary of some of the principal risks the Company faces:
Risks Relating to the Regulatory Environment
•The regulatory environment surrounding Hemp is uncertain, varies among jurisdictions, and is subject to change.
•The future of Hemp regulation at the Federal level is unclear.
•The Company’s products are subject to numerous and diverse regulatory requirements which may restrict the Company’s ability to sell its product, and regulatory compliance costs may affect the Company’s business and financial results.
•Compliance with changes in legal, regulatory and industry standards may adversely affect the Company’s business.
•The Company is subject to regulations that could impact its ability to sell its product internationally.
•Entry into international markets diverts management attention and requires financial resources that could be spent elsewhere and poses increased costs due to numerous banking, compliance, financial, legal, market, and reputational issues.
•The designation of cannabinoids as a New Dietary Ingredient (NDI) or as an impermissible adulterant are uncertain.
•The FDA Interpretation of IND Preclusion could be disruptive to the Company’s ability to sell its products.
•FDA enforcement against the unlawful sale and marketing of CBD products under the FD&C Act could target the Company and adversely impact the Company’s business and financial position.
•The FTC may take enforcement actions against companies selling CBD products, including the Company.
•The DEA Interpretation of the 2018 Farm Bill could cause the DEA to take enforcement action against the Company’s intermediate Hemp products.
•Any inability to obtain required regulatory approval and permits could limit the Company’s ability to conduct its business.
•The Company is subject to environmental, health and safety laws, compliance with such laws may be costly, and any failure to comply with such laws could negatively impact the Company’s results of operations or financial position.
•Regulatory uncertainty with respect to anti-money laundering laws and regulations impact on the CBD and marijuana-related businesses, if revised or resolved unfavorably to the Company’s interests, may have an adverse effect on the Company’s business.
•The Company could be adversely affected by violations of the Corruption of Foreign Public Officials Act (Canada), the U.S. Foreign Corrupt Practices Act and other similar anti-bribery laws.
•As a marijuana/Cannabis related business, the Company may have difficulty accessing banking services due to the illegality of marijuana under federal law.
•The Company may have difficulty accessing public and private capital and banking services, which could negatively impact its ability to finance its operations.
•The Company could be liable for fraudulent or illegal activity by its employees, contractors and consultants resulting in significant financial losses to claims against the Company.
Risks Relating to the Company’s Business and Industry
•The Company faces security risks related to its physical facilities.
•The Company depends on the success of the Company’s products, and the Company’s products may not achieve market acceptance.
•There is no assurance that the Company’s cash flows, and debt or other financing will be sufficient to fund the Company’s operations.
•The Company’s products have a limited shelf life and product inventory may reach its expiration prior to sale.
•The Company’s quality control systems may not prove successful.
•Reliance on the Stanley Brothers brand could have negative consequences.
•The Company depends on various third parties for the supply, manufacture, and testing of the Company’s products. No assurance can be given that these relationships will continue on favorable terms, or at all.
•The Company’s manufacturers and suppliers must meet cGMP requirements and failure on their part to do so could have adverse consequences for the Company.
•The Company’s manufacturers and suppliers must remain in compliance with the Hemp production and manufacturing laws of the states in which they operate.
•If product liability claims are brought against the Company, it could incur substantial liabilities.
•The Company's operations and industry may be subject to reputational risk.
•The Company is dependent upon agricultural production of hemp for the Company's operations, which are subject to seasonal and weather-related risks.
•There may be adverse consequences to the Company's end users should they test positive for trace amounts of THC attributed to use of the Company's products.
•The Company may be unable to obtain adequate crop insurance.
•The Company may be unable to obtain or maintain high quality farmland sufficient for its hemp cultivation needs.
•Climate change could exacerbate certain of the risks inherent in the Company’s agricultural operations.
•Hemp is subject to specific agricultural risks, which could negatively impact the Company’s cultivation efforts.
•The Company relies on third-parties for the transportation of its hemp and hemp derived products, any delay or failure by these third-parties to meet the Company’s transport needs could impact the Company’s operations and financial performance.
•The Company faces intense competition.
•The business interests of the Stanley Brothers may conflict with that of the Company.
•Changing consumer preferences could impact the Company’s ability to attract and retain customers.
•The Company’s customers may not adequately support its products or its relationships with such retailers may deteriorate.
•The Company depends on the popularity and acceptance of its brand portfolio.
•Supply chain issues, including significant price fluctuations or shortages of materials, and distribution challenges may increase the Company’s cost of goods sold and cause its results of operations and financial condition to suffer.
•The Company may not be able to successfully implement its growth strategy on a timely basis or at all.
•The market for the Company’s products and industry is difficult to forecast due to limited and unreliable market data.
•The Company depends on key personnel and its ability to attract and retain employees.
•From time to time, the Company may rely on debt financing for some of its business activities and there can be no assurance the Company will be able to continue to access such credit, or that it will be able to comply with the terms of such credit.
•The Company may have difficulty obtaining insurance to cover its operational risks.
•The Company may be subject to growth-related risks, including capacity constraints and pressure on its internal systems and controls.
•The Company may acquire other companies which could divert management’s attention, result in additional dilution to the Company’s Shareholders and otherwise disrupt the Company’s and harm its operating results.
•The Company’s intellectual property may be difficult to protect.
•The Company is involved in litigation, including a class action litigation matter, and there may be additional litigation in the future in which it will be involved.
•Trade secrets may be difficult to protect.
•The Company’s status as a public benefit company and a Certified B Corp may not result in the benefits that the Company anticipates.
•As a public benefit company, the Company has a duty to balance a variety of interests that may result in actions that do not maximize Shareholder value.
•As a public benefit company, the Company may be subject to increased legal proceedings concerning its duty to balance Shareholder and public benefit interests, the occurrence of which may have an adverse impact on the Company’s financial condition and results of operations.
•The Company contracts with certain third parties for portions of its operations; should a third party be subject to insolvency or otherwise be unable or unwilling to perform their obligations to the Company, it could negatively impact the Company's operations.
Risks Relating to the Company’s Securities
•The Company has a history of losses and may continue to incur losses in the future.
•The Company may require additional financing to operate its business and it may face difficulties acquiring additional financing on terms acceptable to the Company or at all.
•The Company has discretion in the use of proceeds from its securities issuances.
•There is a limited market for the Company’s Common Shares and warrants.
•The market price of the Company’s Common Shares and other listed securities may be volatile.
•The Company does not intend to pay dividends on its Common Shares and, consequently, the ability of investors to achieve a return on their investment will depend entirely on appreciation in the price of the Company’s Common Shares.
•The Company is a holding company and its earnings depend on the earnings and distributions of its subsidiaries.
•Future sales of Common Shares by Shareholders, directors or officers could create volatility in the Company’s share price.
•A small number of Shareholders may exercise significant influence on matters submitted to Shareholders for approval.
•The Company may issue an unlimited number of Common Shares, and additional issuances could dilute a Shareholder’s holdings.
•Purchasers of the Company’s Common Shares may experience immediate and substantial dilution of their investment.
•The elimination of monetary liability against the Company’s directors, officers, and employees under British Columbia law and the existence of indemnification rights for the Company’s obligations to its directors, officers, and employees may result in substantial expenditures by the Company and may discourage lawsuits against its directors, officers, and employees.
•There may be difficulty in enforcing judgments and effecting service of process on directors and officers that are not citizens of the United States.
•The Company’s Articles provide that the Supreme Court of British Columbia, Canada and the Court of Appeal of British Columbia, Canada shall, to the fullest extent permitted by law, be the sole and exclusive forum for derivative actions, actions relating to breaches of fiduciary duty, and other matters, creating a conflict with U.S. federal securities laws, which may limit the ability to obtain a favorable judicial forum for disputes with the Company.
•The Company is subject to U.S. and other income tax and is treated as a U.S. domestic company for U.S. federal income tax purposes.
•Debt and convertible debenture agreements that the Company currently has in place may limit other future potential strategic investor interests.
General Risk Factors
•Investment in the Company’s Common Shares is speculative, involves risk, and there is no guarantee of a return.
•Product recalls and returns could adversely affect the Company’s operating results and financial condition.
•The Company may be subject to impairment of goodwill and intangible assets, which could adversely impact the Company’s financial results.
•Certain employees or directors of the Company may have interests that conflict with those of the Company.
•The future growth of the Company depends on the effectiveness and efficiency of its advertising and promotional expenditures to attract and retain customers.
•The use of customer information and other personal and confidential information creates compliance risks.
•The Company faces risks related to its information technology systems and potential cyber-attacks and security and privacy breaches.
•Demand for the Company’s products and services are influenced by general economic and consumer trends beyond the Company’s control.
•The costs of being a public company are high and may strain the Company’s resources.
•The Company’s internal controls over financial reporting may not be effective, and the Company’s independent auditors may be unwilling or unable to provide us, when required, with an attestation report on the effectiveness of internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act.
•The Company may have to amend prior financial reporting.
•If securities or industry analysts do not publish or cease publishing research or reports or publish misleading, inaccurate or unfavorable research about the Company, its business or its market, its share price and trading volume could decline.
•Changes in tax laws could require the Company to pay additional tax amounts, decreasing the amount of capital available to the Company.
•Recent macroeconomic trends, including inflation, a recession or slowed economic growth, may adversely affect our business, financial condition and results from operations.
CHARLOTTE'S WEB HOLDINGS, INC.
FORM 10-K
For the Year Ended December 31, 2022
TABLE OF CONTENTS
PART I
Item 1. Business
General
Charlotte’s Web Holdings, Inc., (“Charlotte’s Web”, the “Company” or “we”), a benefit company under the Business Corporations Act (British Columbia) ("BCBCA"), S.B.C. 2002, c. 57, as amended, including the regulations promulgated thereunder, and a Certified B Corp headquartered in Louisville, Colorado, was incorporated under the BCBCA on May 18, 2018 under the name Stanley Brothers Holdings Inc. On July 12, 2018, the Company changed its name to Charlotte’s Web Holdings, Inc. On August 29, 2018, the Company filed articles of amendment to amend its share capital in connection with its initial public offering to authorize the issuance of common shares ("Common Shares"), preferred shares and proportionate voting shares ("Proportionate Voting Shares") of the Company. On November 3, 2021, all outstanding Proportionate Voting Shares of the Company were converted by way of mandatory conversion in accordance with the Company’s Articles and at the discretion of the Company, into Common Shares. Pursuant to the Company’s Articles, the Company is no longer authorized to issue additional Proportionate Voting Shares. The Company’s Common Shares are listed on the Toronto Stock Exchange ("TSX") under the symbol, “CWEB.” The Company’s Common Shares are also quoted on the over-the-counter stock market, the OTCQX, in the United States under the symbol, “CWBHF."
The Company is a market leader in the United States in innovative hemp extract wellness products under a family of brands which includes Charlotte’s Web™, CBD Medic™, CBD Clinic™, and Harmony Hemp™. Charlotte’s Web branded premium quality products start with proprietary hemp genetics that are 100% North American farm grown and manufactured into hemp extracts containing naturally occurring phytocannabinoids including cannabidiol ("CBD"), cannabichromene ("CBC"), cannabigerol ("CBG"), cannabinol ("CBN"), terpenes, flavonoids and other beneficial hemp compounds. The Company moved into its new current good manufacturing practices ("cGMP") compliant facility in Louisville, Colorado, (the "LOFT"), during the second quarter of 2020 at which the Company conducts its production, distribution, and quality control activities, and has expanded its research and development ("R&D"). Charlotte’s Web product categories include full spectrum hemp extract oil tinctures (liquid products), gummies (sleep, calm, immunity, exercise recovery, daily wellness, THC-free), capsules, topical creams and lotions, as well as products for pets. Charlotte’s Web products are distributed to retail outlets and health care practitioners, as well as online through the Company’s website at www.Charlottesweb.com. The information provided on the Company's website is not part of this report or any other report we file with or furnish to the SEC.
The business of the Company consists of the farming, manufacturing, sales, and marketing of hemp-derived CBD wellness products. As of December 31, 2022, the Company operated in a single operating and reportable segment, hemp-derived CBD wellness products, as its 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.
Hemp extracts are produced from the plant Cannabis sativa L. ("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 delta-9 tetrahydrocannabinol ("THC") concentration of not more than 0.3% on a dry weight basis ("Hemp"). The Company is engaged in research involving a broad variety of compounds derived from Hemp. Where such research indicates that a product 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 produce or sell medicinal or recreational marijuana or products derived from high-THC Cannabis plants. On March 2, 2021, Charlotte’s Web executed an Option Purchase Agreement (the “SBH Purchase Option”) pursuant to which the Company has the option to acquire Stanley Brothers USA Holdings, Inc. (“Stanley Brothers USA”), a Cannabis wellness incubator. Until the SBH Purchase Option is exercised, both Charlotte’s Web and Stanley Brothers USA will continue to operate as standalone entities in the US. Outside of the
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US, the companies are able to explore opportunities where Cannabis is federally permissible. At this time, however, the Company does not have any plans to expand into high-THC products in the near future.
In the US, the Company holds the number one market share position in the CBD market relative to retail dollars, this is based on market share data from leading third-party analysts such as Nielsen Company (US), LLC (“Nielsen”), SPINS, LLC (“Spins”) and Brightfield Group (“Brightfield”), respectively.
The Company grows its proprietary hemp domestically in the United States on farms leased in northeastern Colorado and sources high quality hemp through contract farming operations in Kentucky, Oregon and Canada. The Hemp grown in Canada is utilized exclusively for the Canadian market and not in products sold in the United States.
The Company continues to invest in R&D efforts to identify new product opportunities. Management is working to expand the Company’s production capacity, and to find opportunities for continuous improvement in the supply chain including insourcing production to reduce its dependence on third party contract manufacturers. The Company is working to capitalize on the rapidly emerging botanical wellness products industry by driving customer acquisition and retention, as well as accelerating national and international 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.
In furtherance of the Company’s R&D efforts, in February 2020, the Company established CW Labs, an internal division for R&D, to substantially expand the Company’s efforts around the science of hemp derived compounds. CW Labs is currently engaged in clinical trials addressing Hemp-based solutions. CW Labs is located in Louisville, Colorado at the Company’s current good manufacturing practice (“cGMP”) production and distribution facility.
On October 11, 2022, Charlotte’s Web Holdings, Inc. (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 an exclusive strategic partnership with MLB to promote the Company’s new NSF-Certified for Sport® product line.
In October, 2022, the Company launched a product line catering to the sports vertical (the “SPORT Line”), which is designed specifically for athletes. The products in the SPORT Line have undergone the NSF for Sport® certification process with NSF, a third-party organization that manufacturers, regulators, and consumers look to for the development of public health standards and certification marks that help protect the world's food, water, consumer products, and environment.
Effective as of November 1, 2022, the Company entered into a Manufacturing and Sales License Agreement with Aphria, Inc., an Ontario corporation, an affiliate of Tilray Brands, Inc. (“Tilray”), in which the parties entered into a strategic alliance by which Tilray will have the rights to licensing, manufacturing, quality, marketing and distribution of Charlotte’s WebTM CBD hemp extract products in Canada.
Effective as of 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), providing for the issuance of an approximately $56.8 million ("Canadian Dollar" C$75.3 million) convertible debenture (the “debenture”) 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 Toronto Stock Exchange (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. (“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 2029.
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Public Benefit Company Status
In August 2019, at the annual general and special meeting of the holders (the "Shareholders") of the Company's voting shares, the Company’s Shareholders approved an amendment to the Company’s Notice of Articles and Articles to allow the Company to become a benefit company under the BCBCA, as a demonstration of its long-term commitment to conducting its business in a responsible and sustainable manner and promoting one or more public benefits. The Company became a benefit company under the BCBCA on July 24, 2020.
Benefit companies are a relatively new class of corporations in British Columbia that are formally and legally empowered to conduct their business in a responsible and sustainable manner and promote one or more public benefits. Under British Columbia law, benefit companies are required to identify in their Articles the public benefit or benefits they will promote. Their directors have a duty to act honestly and in good faith with a view to conducting business in a responsible and sustainable manner and to promote the company’s public benefits and must balance this duty with their general fiduciary duties under section 142(1)(a) of the BCBCA to act honestly and in good faith with a view to the best interests of the company. As a benefit company, the Company must balance a variety of interests that may result in actions that do not maximize shareholder value as the board of directors of the Company (the "Board" or the "Board of Directors") must balance the interests of shareholders and stakeholders in working to achieve the Company’s public benefits. See “Risk Factors – As a public benefit company, the Company has a duty to balance a variety of interests that may result in actions that do not maximize Shareholder value.”
In practice, the Board of Directors of the Company takes an expanded view of decision making to balance their fiduciary duties and their duty to act honestly and in good faith with a view to conducting business in a responsible and sustainable manner and to promote the Company’s public benefits, including weighing potential conflicts of interest and ultimately making decisions that the Board believes most appropriately address all of the Board’s duties. British Columbia courts have generally been deferential to the business decisions of directors, as directors are in the best position to take into account the diverse interests of a company and its stakeholders (including what weight to give to shareholder interests), as long as the business decision lies within the range of reasonable alternatives. However, as a new type of corporate entity, there is uncertainty as to how British Columbia courts would view the balancing of these interests and the weighing of shareholder and stakeholder concerns. See “Risk Factors - As a benefit company, the Company may be subject to increased legal proceedings concerning its duty to balance Shareholder and public benefit interests, the occurrence of which may have an adverse impact on the Company’s financial condition and results of operations.”
Benefit companies also are required under the BCBCA to publish on their websites and provide to their shareholders an annual benefit report that assesses, against a selected third-party standard, their performance, in carrying out the commitments set out in the benefit company’s benefit provisions. The Company’s annual benefit report discloses, in relation to the most recently completed fiscal year, (a) a fair and accurate description of the ways it demonstrated commitment to conducting its business in a responsible and sustainable manner, and to promoting the public benefits specified in its Articles; (b) a record of assessment based on a third-party standard; and (c) the circumstances, if any, that hindered the Company’s endeavors to carry out the commitments set out in the Company’s benefit provision. For so long as the Company is a benefit company under the BCBCA, the Company will include an annual benefit report as part of its annual proxy materials sent to its Shareholders and post the report to its website.
For the Company’s benefit report relating to the year ended December 31, 2021, the Company selected B Lab as the third-party standard against which to measure its performance. B Lab conducted a B Impact Assessment of the Company. The B Impact Assessment is an assessment of a company’s governance and its impact on its workers, customers, community, and environment. The B Impact Assessment of the Company is posted on the B Lab website and was included in the Company’s proxy statement in respect of the year ended December 31, 2021.
The Company’s public benefit, as provided in its Articles, is “to pioneer the way to healthier lives, stronger communities, and a more bountiful planet by making it easier for everyone to access the natural restorative power of plants.” Accordingly, this social focus includes contributing to non-profit organizations and charities, which are made on an ad hoc basis, concentrating first on those entities that have historically supported the business through education of existing and potential customers. The Company also supports non-profits that it believes can utilize the
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wellness aspects of its products (i.e., military veterans, adaptive athletes, educational organizations, etc.). By doing so, the Company believes that socially oriented actions will ultimately have a positive impact on the Company, its employees, and its Shareholders.
In addition to being a benefit company, the Company is a “Certified B Corp”, as certified by B Lab, the US non-profit organization which administers this certification. Certified B Corps (also referred to as "B Corps" or "B Corporations") are for-profit companies that use the power of business to build a more inclusive and sustainable economy. Certified B Corps are required to consider the impact of their decisions on all stakeholders: customers, workers, communities, and the environment. These requirements are aligned with the Company’s socially conscious founding principles, and formalizes its commitment to environmental, social, and governance issues for stakeholders. The Company’s status as a Certified B Corp is distinct from and has no impact on its status as a benefit company under the BCBCA. Though the Company has chosen to use B Lab’s criteria for its required annual impact assessment under the BCBCA, the Company is not required to do so and could select another criteria if it desired.
As a Certified B Corp, the Company is a socially conscious company, and is committed to using business as a force for good and a catalyst for innovation. The Company weighs sound business decisions with consideration for how its efforts affect its employees, customers, the environment, and the communities where its employees live and where it does business. This social awareness includes contributions to non-profits, which are made on an ad hoc basis, concentrating first on those entities that have historically supported the business through education of existing and potential customers. The Company has historically donated and plans to continue to donate to charitable organizations. The Company also supports non-profit organizations that it believes can utilize the wellness aspects of its products (i.e., military veterans, adaptive athletes, educational organizations, etc.).
History and Development of the Company
The seven Stanley brothers (the "Stanley Brothers") founded CWB Holdings, Inc. (predecessor to Charlotte's Web, Inc. ("CW"), a subsidiary of the Company) on December 8, 2013. CWB Holdings, Inc. was initially formed under the Colorado Business Corporation Act ("CBCA") under the name Stanley Brothers Social Enterprises, LLC, and on June 19, 2015, changed its name to CWB Holdings, LLC. On December 30, 2015, it converted from a limited liability company to a corporation pursuant to Colorado law and changed its name to CWB Holdings, Inc. On August 30, 2018, CWB Holdings, Inc. merged into Stanley Brothers, Inc. and the resulting entity, a wholly-owned subsidiary of Charlotte’s Web Holdings, Inc., changed its name to Charlotte’s Web, Inc.
On August 30, 2018, the Company announced the closing of its initial public offering and secondary offering of its Common Shares at a price of C$7.00 per Common Share for total gross proceeds of C$115,115,000. Charlotte’s Web sold 13,312,150 Common Shares under the initial public offering ("IPO"), for total gross proceeds to the Company of C$93,185,050, while certain selling shareholders under the IPO sold an aggregate of 3,132,850 Common Shares, for total gross proceeds to the selling shareholders of C$21,929,950.
Financial year ended December 31, 2020
On February 14, 2020, the Company announced the manufacturing facility in Boulder, CO obtained NSF International’s certification (“NSF certification”) as a dietary supplements manufacturer that follows all cGMPs as outlined by the U.S. Food and Drug Administration ("FDA") regulations in Title 21 of the Code of Federal Regulation, Part 111 (21 CFR § 111). NSF certification verifies that the facility has the proper methods, equipment, facilities and controls in place to produce dietary supplement products in a cGMP compliant manner. The Company contracted with NSF, a third-party provider of auditing and certification services for the manufacturing of dietary supplements. While the Boulder manufacturing facility is an FDA registered facility and follows all regulations under 21 CFR § 111 relating to cGMPs in manufacturing, packaging, labeling, or holding operations for dietary supplements, the FDA has not inspected this facility. If inspected by the FDA, the FDA could find that the facility is not in compliance with cGMPs despite the NSF certification and the Company’s belief that the facility is in compliance.
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On February 20, 2020, the Company announced that its edible pet supplements were approved to carry seals of approval from the National Animal Supplement Council, a non-profit group dedicated to protecting and enhancing the health of companion animals throughout the country, and the U.S. Hemp Authority™, an organization created for the purpose of helping create standardization and quality across the hemp industry. In addition, the Company announced that Charlotte’s Web pet products would also feature labels confirming Non-GMO, grain-free and USA grown hemp as part of the Company’s commitment to corporate responsibility, health and wellness, and sustainable farming practices.
The Company announced on March 17, 2020 that an expert panel unanimously concluded that the Company’s full spectrum hemp extract is Generally Recognized as Safe (“GRAS”) for use in certain foods in accordance with stringent regulatory safety guidelines and safety data available using well accepted toxicological principles.
On March 23, 2020, the Company announced it had entered into an arrangement (the "Arrangement Agreement") with Abacus Health Products ("Abacus"), pursuant to which the Company proposed to acquire all of the issued and outstanding subordinate voting shares of Abacus (the "Abacus Shares"). Under the terms of the Arrangement Agreement, shareholders of Abacus would receive 0.85 of a Common Share for each Abacus Share held (the “Exchange Ratio”). The Exchange Ratio implied a price per Abacus Share of C$4.39, representing a premium of 38% based on the 10-day volume weighted average price (“VWAP”) of the Abacus Shares on the CSE and the 10-day VWAP of the Common Shares on the TSX as of March 20, 2020, for implied total equity consideration of approximately C$99 million.
On March 23, 2020, the Company announced that it had entered into a new asset backed line of credit with J.P. Morgan for $10 million with an accordion feature to extend the line to $20 million with a three year maturity. In addition, the Company announced that it engaged J.P. Morgan for commercial banking services, including merchant processing services to support the Company’s global growth. As of December 31, 2021, the Company was not in compliance with certain debt covenants and as of March 9, 2022 the line of credit was on hold. On July 27, 2022, this asset backed line of credit was terminated by the Company. No amounts were ever drawn on line of credit.
Effective as of June 11, 2020, the Company and Abacus completed an arrangement (the "Arrangement") pursuant to the Arrangement Agreement and the Company acquired all of the issued and outstanding Abacus Shares. Upon completion of the Arrangement, former shareholders of Abacus held approximately 14.41% of the Common Shares (assuming conversion of all outstanding Proportionate Voting Shares of the Company) and Abacus became a wholly-owned subsidiary of the Company. Under the terms of the Arrangement, each option and common share purchase warrant of Abacus was exchanged for an option and common share purchase warrant (the “Replacement Warrants”) of the Company, respectively, that entitle the holder to acquire Common Shares of the Company in lieu of Abacus Shares, subject to adjustment in number and exercise price to give effect to the Exchange Ratio. Certain of the Replacement Warrants were listed on the TSX under the symbol “CWEB.WS” and were governed by a Supplemental Warrant Indenture between the Company, Abacus and Odyssey Trust Company, as warrant agent, dated June 11, 2020.
Prior to the Arrangement, Abacus, through an indirect wholly-owned subsidiary, Abacus Wellness, Inc., acquired the principal assets of Benefits US, LLC, a Colorado limited liability company, and Harmony Products, LLC, a Utah limited liability company, which are the companies owning the Harmony Hemp™ brand. Pursuant to the terms of the asset purchase agreement, Abacus U.S., and therefore the Company, was obligated to pay the remaining purchase price payable for Harmony Hemp.
On June 18, 2020, the Company closed an underwritten public offering of 11,500,000 units (“2020 Units”) at a price of C$6.75 per 2020 Unit for gross proceeds to the Company of C$77,625,000. Each 2020 Unit was comprised of one Common Share and one half of one Common Share purchase warrant (the “2020 Warrants”), exercisable for a period of two years following the closing date at an exercise price of C$8.50. The 2020 Warrants are listed on the TSX under the symbol “CWEB.WR.”
The 2020 Warrants were issued pursuant to a warrant indenture between the Company and Odyssey Trust Company, as warrant agent, dated June 18, 2020. The offering was conducted pursuant to the terms of an underwriting
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agreement among the Company, Canaccord Genuity Corp., as lead underwriter, Cormark Securities Inc., Eight Capital and PI Financial Corp. dated June 16, 2020 (the “2020 Underwriting Agreement”). In connection with this offering, the Company filed a prospectus supplement dated June 16, 2020 to the final base shelf prospectus of the Company dated April 8, 2019. Pursuant to the terms of the 2020 Underwriting Agreement, in consideration for their services in connection with the offering, the Company paid the underwriters a cash fee equal to 5.0% of the aggregate gross proceeds of the offering (C$0.34 per Common Share), for an aggregate cash commission of C$3,881,250.
On August 28, 2020, the Company announced it had earned a designation as a Certified B Corp from B Labs, an independent nonprofit organization, that establishes standards of social and environmental performance, accountability and transparency. The certification will further expand the ways in which the Company can fulfill its mission of benefitting the planet and all who live upon it. Certified B Corporations (also referred to as Certified B Corps) are for- profit companies that use the power of business to build a more inclusive and sustainable economy.
Financial year ended December 31, 2021
On January 12, 2021, the Company announced that Charlotte’s Web has been granted U.S. Utility Patents for its hemp genetics by the U.S. Patent and Trademark Office (“USPTO”). The newly issued patents cover two of the Company’s new feminized seed hybrid hemp varieties developed under the Company’s breeding program; ‘Kirsche’ (US Patent No. 10,888,060) and ‘Lindorea’ (US Patent No. 10,888,059). ‘Lindorea’ and ‘Kirsche’ are the world’s first two allowed U.S. Utility Patents reading on feminized hybrid hemp plants. See “Business of the Company – Intellectual Property.”
On February 26, 2021, the Company announced a long-term scientific collaboration between McLean Hospital, a Harvard Medical School affiliate, and the Company, with funding and product support being provided by the CW Labs division of Charlotte’s Web, Inc. The collaboration includes two clinical trials to investigate the efficacy of a custom-formulated, hemp-derived high-CBD product.
On March 2, 2021, the Company entered into the SBH Purchase Option with Stanley Brothers USA, a privately held Delaware company, and the shareholders of Stanley Brothers USA. The SBH Purchase Option was purchased for total consideration of $8,000,000 and has a five-year term (extendable for an additional two years upon payment of additional consideration), and it provides Charlotte’s Web the option to acquire all or substantially all of Stanley Brothers USA on the earlier of February 26, 2024 and federal legalization of Cannabis in the United States, or such earlier time as Stanley Brothers USA and Charlotte’s Web may agree, at a purchase price to be determined at the time of exercise of the SBH Purchase Option. The Company is not obligated to exercise the SBH Purchase Option.
In addition to the SBH Purchase Option, 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 for a nominal exercise price of $0.001 per share in the event the Company elects not to exercise the SBH Purchase Option.
Effective March 2, 2021, Charlotte’s Web co-founders Joel Stanley and Jared Stanley resigned as members of the Charlotte’s Web Board of Directors.
Effective March 8, 2021, the Company announced the launch of new Charlotte’s Web THC-Free 25mg CBD Oil Tinctures in 10 or 30 milliliter sizes. The Company is expanding its product offerings for consumers seeking a THC-Free option.
Effective March 23, 2021, the Company reported the clinical results of a joint study with Validcare. The study’s preliminary results showed no evidence of liver disease, and no increase in the prevalence of elevated liver function was found among users of Charlotte’s Web™ hemp derived CBD extracts and the other CBD products studied. Charlotte’s Web and 11 other companies supported the study to provide scientific data on liver toxicity to federal and state regulators including U.S Congress and the FDA. Researchers reported of the 839 participants, zero liver toxicity or disease was detected.
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On April 16, 2021, pursuant to an amending agreement, the name and likeness and license agreement between the Company and Leeland & Sig LLC d/b/a Stanley Brothers Brand Company was extended for a period of one year, expiring July 31, 2022. In addition, the Company executed a consulting agreement which extended the service arrangements of the seven Stanley Brothers for a period of one year, expiring July 31, 2022. Upon execution of the consulting agreement, the Company paid $2,081,250 to Leeland & Sig LLC d/b/a Stanley Brothers Brand Company, on behalf of the Stanley Brothers, as consideration for the consulting services to be provided to the Company over the term of the agreement and certain restrictive covenants.
On April 20, 2021, the Company announced that three of its proprietary hemp cultivars were approved for registration on Health Canada’s List of Approved Cultivars (“LOAC”) for outdoor cultivation in Canada. These are among the first hemp CBD cultivars on the LOAC that are early flowering and early maturing for outdoor cultivation and harvesting within the shorter Canadian growing season. The approved cultivars include the Company’s original “CW1AS1” U.S. patented genetics, which clears the way for Charlotte’s Web to cultivate its leading CBD wellness products in Canada in 2021. Currently, Charlotte’s Web Products are not easily available in Canada because laws do not allow for bulk importing of USA grown hemp CBD or related products into Canada. In addition to the Company’s CW1AS1 cultivar used for its leading Original Formula and other full-spectrum hemp extract products, Charlotte’s Web is bringing two early maturing hemp varieties to Canada – named “Duchess” and “Ambassador” - developed for cultivation in shorter northern climate growing seasons. Charlotte’s Web’s approved cultivars are three of 15 added to the 2021 LOAC.
On May 5, 2021, the Company filed a (final) short form base shelf prospectus with securities regulatory authorities in each of the Provinces and Territories of Canada, which will allow the Company to qualify the distribution by way of prospectus in Canada of up to C$350,000,000 of Common Shares, preferred shares, warrants, subscription receipts, units, or any combination thereof, during the 25-month period that the base shelf prospectus is effective. The specific terms of any offering under the base shelf prospectus will be established in a prospectus supplement, which will be filed with the applicable Canadian securities regulatory authorities in connection with any such offering. Any such offering must also comply with applicable U.S. securities laws. On May 6, 2021, the Company received a receipt for the (final) short form base shelf prospectus from the Ontario Securities Commission on behalf of all applicable regulatory authorities.
On May 5, 2021, the Company announced it has teamed up with United States women’s soccer icon and leader Carli Lloyd. Lloyd partnered with CBDMedic™ after beginning to use its topical CBD products following a knee injury and surgery last year. In doing so, Lloyd has become an advocate for the use of hemp-derived CBD to help athletes and people suffering with pain to find all-natural relief. Lloyd attributes her use of CBDMedic™ as a key factor in her recovery. During her recovery, Lloyd began using CBDMedic™ topical products, including Active Sport™ Pain Relief Ointment and Active Sport Pain Relief Stick, which she applies to sore muscles. She also applies CBDMedic™ Arthritis Aches and Pain Relief Cream when she is experiencing joint pain and stiffness. All CBDMedic™ products are THC-free. The Company's relationship with Lloyd expired in February 2023.
On June 3, 2021, the Company announced the collaboration of its CW Labs division on a preclinical sleep and anxiety study with the University of Colorado-Boulder’s REACH (Research and Education Addressing Cannabis and Health) Center. The scientific investigation uses the Company’s full spectrum hemp formulations with CBN and CBD and levels of THC below 0.3% to examine the potential impact on anxiety and sleep quality.
On June 4, 2021, the Company filed a prospectus supplement to establish an at-the-market equity program (the “ATM Program”). The Company may distribute up to C$60,000,000 of Common Shares of the Company (the “Offered Shares”) under the ATM Program. Distributions of the Offered Shares through the ATM Program are made pursuant to the terms of an equity distribution agreement with Canaccord Genuity Corp. and BMO Nesbitt Burns Inc. (together, the “Agents”). The Offered Shares may be issued by the Company to the public from time to time, through the Agents, at the Company’s discretion. The Offered Shares sold under the ATM Program are sold at the prevailing market price at the time of sale under the ATM Program, and for the year ended December 31, 2021, the Company issued 4,740,300 Offered Shares at an average price of $1.85 per share for gross proceeds of $8,714,202. For the year ended December 31, 2021, share issuance costs were $596,403 for net proceeds to the Company of $8,117,799. The Company became an SEC reporting entity beginning on January 4, 2022. As of that
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date, the ATM Program ceased to be available to the Company. Thereafter, the manner in which the Company raises capital will likely require that the Company file registration statements with the SEC related to such activities, which will likely increase the time and expense associated with such activities.
Following the Company’s annual general Shareholders’ meeting on June 9, 2021, the elected Board of Directors were Adrienne Elsner (Chief Executive Officer), John Held, Jacques Tortoroli, Jean Birch, and Susan Vogt.
On June 29, 2021, the Company and Life Time Group Holdings, Inc. (“Life Time”), a premier healthy lifestyle brand with athletic lifestyle resorts and athletic events across the U.S., unveiled a new multi-year exclusive agreement. Charlotte’s Web™ and CBDMedic™ branded hemp CBD products will be available for purchase in more than 140 Lifecares destinations located with Life Time’s athletic resorts and on its online health store at shop.lifetime.life. Additionally, as the exclusive hemp botanical wellness product partner of Life Time, Charlotte’s Web products will also be featured on in-club signage, as well as in the award-winning Experience Life magazine and online digital content. Charlotte’s Web hemp-derived topicals and ingestible dietary supplements will be featured at several of Life Time’s iconic athletic events, including the Verizon New York City Triathlon, the Leadville Race Series and the Life Time Miami Marathon.
The Company entered into an agreement to sublease the office building at 1600 Pearl St, Boulder, Colorado, commencing July 1, 2021.
The Company’s LOFT production and distribution facility in Louisville, CO was added to NSF International GMP registration as of July 6, 2021.
As of July 30, 2021, the Company’s CW Labs science division and Colorado State University’s College of Agricultural Sciences (“CSU”) have completed the first of three collaborative metabolomic hemp studies researching the complex chemical profile of full spectrum hemp extracts made from the Company’s U.S. patented hemp cultivars. The collaboration examines cannabinoid profiles in hemp extracts under varying cultivars and conditions. Long term, the study data discovered as a result of this academic research is anticipated to provide a deeper understanding of the range of constituents in full spectrum hemp extract, and an understanding of what factors can affect that profile. The information is intended to guide optimizing phytochemical fingerprints and will help to improve agricultural and extraction methods, and further standardize the process, procedures, test methods and controls for consistency and reproducibility.
On September 21, 2021, the Company announced the addition of three new gummy products: Daily Wellness, THC Free and Immunity.
On September 24, 2021, the Company appointed Stephen D. Rogers as its General Counsel and Corporate Secretary.
On October 7, 2021, the Company announced the expansion of its retail distribution in California following passage on October 6, 2021 of Assembly Bill 45, which permits retail sale of products containing hemp-derived CBD, including dietary supplements, topicals, over-the-counter and pet products.
On October 12, 2021, the Company announced that it earned United States Department of Agriculture ("USDA") organic certification, with 12 Charlotte's Web products carrying the USDA organic seal on the label. In compliance with federal regulations for certified organic practices and with the Company’s own strict quality and safety standards, these products are produced without genetically modified organisms (GMOs) and made from hemp grown on U.S. hemp farms with no synthetic pesticides or herbicides. Charlotte’s Web farmers use cover crops and crop rotation to build healthy soils. The Company maintained USDA certified organic practices on its farm over a three-year transition period with on-farm inspections by a USDA accredited organic certification agency before being formally approved as “USDA Certified Organic”.
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On November 3, 2021, all outstanding Proportionate Voting Shares of the Company were converted by way of mandatory conversion in accordance with the Company’s Articles and at the discretion of the Company into 13,026,454 Common Shares. Following this conversion, the Company had 142,335,464 Common Shares outstanding and nil Proportionate Voting Shares outstanding on November 3, 2021.
On November 11, 2021, the Company announced the completion of the harvest of its first ever international crop, in Canada. The Canadian harvest included the Company’s flagship “CW1AS1” U.S. patented cultivar used for its leading full spectrum hemp extract, “Original Formula.”
On December 16, 2021, the Company announced that Adrienne Elsner had resigned from her position as Chief Executive Officer ("CEO"). Also on such date, Ms. Elsner stepped down from the Board of Directors and the Board appointed Jacques Tortoroli as CEO of the Company, expanded Wessel Booysen’s role to Chief Financial and Operating Officer and expanded Jared Stanley’s role to Chief Cultivation and Innovation Officer. With respect to his roles on the Board, Jacques Tortoroli resigned from his committee positions, but continues to serve on the Board. On December 16, 2021, Tim Saunders was appointed Chair of the Audit Committee and Susan Vogt was appointed to serve on the Compensation Committee.
On December 16, 2021, the completed ValidCare study was published in Cannabis and Cannabinoid Research. A total of 28,121 individuals were invited to participate in this study, 1475 enrolled, and 839 (female: 65.3%, male: 34.7%) completed the study. The prevalence of alanine transaminase (ALT) and aspartate aminotransferase (AST) elevations were not significantly different from known adult general population prevalence. There was no significant association between CBD dosage and Liver Test (LT) values. The study concluded Self-medication of CBD in a population of individuals at doses consumed in this study was not associated with clinical liver disease. The Company was one of 12 companies who provided product and certificate of product authenticity to support the study.
Financial year ended December 31, 2022
On January 4, 2022, the Company’s Board designated Jared Stanley, the Company’s Chief Cultivation and Innovation Officer, as an executive officer of the Company.
On January 5, 2022, the Chief Customer Officer position was eliminated, effective January 31, 2022.
On January 12, 2022, the Company announced the completion of a reorganization of the corporate structure and a movement to a horizontal organizational structure to empower employees with increased decision making and accountability.
On January 18, 2022, the Company announced a national distribution agreement with GNC, a specialty retailer of nutritional products, to distribute varieties of Charlotte’s Web gummies at GNC retail locations across 24 states.
On January 27, 2022 the Company named Jade Proudman, the Chief Executive Officer of Savage Cabbage Ltd., one of the oldest and most trusted CBD companies in the UK, as a Global Brand Ambassador for Charlotte's Web. Further, on March 9, 2022, the Company expanded the distribution agreement with Savage Cabbage and appointed Savage Cabbage the Exclusive Distributor for the United Kingdom.
On February 1, 2022, the Company's Board appointed Andrés de Gortari as Chief Accounting Officer of the Company. Mr. de Gortari joined the Company in July 2021 as the Company’s Vice President of Finance and Accounting.
On March 9, 2022, the Company announced that the Charlotte's Web line of CBD Gummies has been named Product of the Year for 2022. Product of the Year is the largest consumer-voted award for product innovation, determined by 40,000 American shoppers through a national survey conducted by Kantar, a global leader in consumer research. The Charlotte's Web Gummies line of products has been awarded the top honor as the most innovative product in the CBD gummy category.
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On March 21, 2022, the Company announced that it signed an exclusive product distribution agreement in the United Kingdom with Savage Cabbage Ltd.
On April 25, 2022, the Company announced the departure of Wes Booysen as its Chief Financial & Operating Officer and the appointments of Lindsey Jensen as the Chief Financial officer and Jared Stanley as the Chief Operating officer.
On June 2, 2022, the Company and Jared Stanley, Chief Operating Officer of the Company, entered into an offer letter memorializing the terms of Mr. Stanley’s service as Chief Operating Officer on an at-will basis.
On June 20, 2022, the Company announced the appointment of Gregory A. Gould, as the Company’s Executive Vice President – Chief Financial Officer, Chief Administration Officer, and principal accounting officer, replacing former Chief Financial Officer, Lindsey Jensen, who notified the Company of her intended resignation from the Company, effective July 8, 2022.
Following the Company's annual general Shareholders' meeting on June 22, 2022, the elected Board of Directors were Jacques Tortoroli (Chief Executive Officer), John Held, Jean Birch, Tim Saunders, and Susan Vogt.
On July 27, 2022, the Company entered into a payoff letter with J.P. Morgan to voluntarily terminate all commitments and obligations under the Company's credit agreement with J.P. Morgan (the "Credit Agreement"), with termination effective as of July 27, 2022. In connection with the execution of the payoff letter, the Company paid J.P. Morgan approximately $20,000 in commitment fees and legal fees and expenses. There were no outstanding borrowings under the Credit Agreement at the time the Company entered into the payoff letter or at the time of termination.
Effective as of July 31, 2022, the Company entered into an Extension and Second Amending Agreement to Name and Likeness and License Agreement (the “First Extension Agreement”) with Leeland & Sig LLC d/b/a Stanley Brothers Brand Company, a Colorado limited liability company (“Licensor”). Pursuant to the First Extension Agreement, the term of the Name and Likeness and License Agreement dated August 1, 2018 between the Company and Licensor, as amended by the Amending Agreement to Name and Likeness Agreement effective April 16, 2021, was extended from July 31, 2022 to August 31, 2022.
Effective August 2, 2022, the Company entered into an amendment (the “Amendment”) to the offer of employment, dated December 16, 2021, with Jacques Tortoroli, President, Chief Executive Officer, and Director of the Company. Pursuant to the Amendment, Mr. Tortoroli’s annual base salary and grants under the Company’s 2018 Long-Term Incentive Plan were adjusted to better align with those of the shareholders of the Company.
Effective August 10, 2022, the board of directors of the Company, appointed Tom Lardieri to the Company’s board of directors. Mr. Lardieri’s appointment to the Company’s board of directors was effective immediately.
Effective as of August 31, 2022, the Company entered into an Extension and Third Amending Agreement to Name and Likeness and License Agreement (the “Second Extension Agreement”) with Leeland & Sig LLC d/b/a Stanley Brothers Brand Company, a Colorado limited liability company (“Licensor”). Pursuant to the Second Extension Agreement, the term of the Name and Likeness and License Agreement dated August 1, 2018 between the Company and Licensor, as amended by the Amending Agreement to Name and Likeness Agreement effective April 16, 2021, was extended from August 31, 2022 to September 30, 2022.
On September 1, 2022, the Company moved its corporate headquarters from 1801 California Street, Suite 4800, Denver, Colorado 80202 to its existing office space located at 700 Tech Court, Louisville, Colorado 80027.
Effective as of September 30, 2022, the Company entered into an Extension and Fourth Amending Agreement to Name and Likeness and License Agreement (the “Third Extension Agreement”) with Leeland & Sig LLC d/b/a Stanley Brothers Brand Company, a Colorado limited liability company (“Licensor”). Pursuant to the Third Extension Agreement, the term of the Name and Likeness and License Agreement dated August 1, 2018 between the
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Company and Licensor, as amended by the Amending Agreement to Name and Likeness Agreement effective April 16, 2021 (as amended, the “Name and Likeness Agreement”), was extended from September 30, 2022 to December 31, 2022. Additionally, the Name and Likeness Agreement was also amended to provide the payment of a Company event fee of $1,500 per diem for each Stanley brother that, at the request of the Company’s chief executive officer, participates in any of the following events: (i) customer meetings; (ii) strategic partner meetings; (iii) speaking engagements; (iv) presentations; (v) social media postings; (vi) podcasts; (vi) public relations events; (vii) media interviews; (viii) trade show appearances; and (ix) events substantively similar to any of the foregoing.
On October 11, 2022, Charlotte’s Web Holdings, Inc. (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 an exclusive strategic partnership with MLB to promote the Company’s new NSF-Certified for Sport® product line. In consideration for the MLB Promotional Rights Agreement, which expires on December 31, 2025, the Company shall pay MLB over the term of the MLB Promotional Rights Agreement, an aggregate rights fee of $30.5 million and a 10% royalty on the Company’s gross revenue from MLB branded products of the Company sold after prior sales of all such branded products exceed $18.0 million. The Company also entered into a subscription agreement (the “Subscription Agreement”) pursuant to which the Company issued to MLB Common Shares equal to four percent (4%) of the Company’s fully diluted outstanding Common Shares (such Common Shares, the “MLB Shares”). The total number of MLB Shares issued to MLB was 6,119,121 common shares of the Company, issued pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 of Regulation D promulgated under the Securities Act. The Company did not receive any proceeds in respect of the MLB Shares.
Effective as of November 1, 2022, the Company entered into a Manufacturing and Sales License Agreement with Aphria, Inc., an Ontario corporation and an affiliate of Tilray Brands, Inc. (“Tilray”), providing for a strategic alliance between the Company and Tilray, pursuant to which Tilray has the rights to licensing, manufacturing, quality, marketing and distribution of Charlotte’s WebTM CBD hemp extract products in Canada.
Effective as of November 14, 2022, the Company entered into a subscription agreement with BT DE Investments, Inc. a wholly-owned subsidiary of BAT Group (LSE: BATS and NYSE: BTI), providing for the issuance of an approximately US$56.8 million (C$75.3 million) convertible debenture that is convertible into 19.9% ownership of Common Shares at a conversion price of C$2.00 per Common Share of the Company on the Toronto Stock Exchange (TSX).
Effective December 6, 2022, the board of directors of the Company, appointed Alicia Morga to the Company’s board of directors. Ms. Morga’s appointment to the Company’s board of directors was effective immediately following the departure of Jean Birch, who notified the Company and the board of directors of her retirement from the board of directors, which the Company’s board of directors accepted.
On December 19, 2022, the Company announced the departure of Greg Gould as the Chief Financial Officer and the subsequent appointment of Ms. Jessica Saxton to the position of Chief Financial Officer and Principal Accounting Officer effective January 1, 2023.
Effective as of February 22, 2023, the Company entered into an Extension and Fifth Amending Agreement to Name and Likeness and License Agreement (the “Fourth Extension Agreement”) with Leeland & Sig LLC d/b/a Stanley Brothers Brand Company, a Colorado limited liability company (“Licensor”). Pursuant to the Fourth Extension Agreement, the term of the Name and Likeness and License Agreement dated August 1, 2018 between the Company and Licensor, as amended by the Amending Agreement to Name and Likeness Agreement effective April 16, 2021, was extended to June 30, 2023.
Effective March 14, 2023, Jonathan Atwood was appointed as the designee to the board of directors by BT DE Investments Inc., pursuant to the Investor Rights Agreement between the Company and BT DE Investments Inc., dated November 14, 2022. The Investor Rights Agreement was entered into by the Company and BT DE
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Investments Inc. in connection with the Company’s issuance of the $56.8 million debenture to BT DE Investments Inc. on the terms of the subscription agreement, dated November 14, 2022 by and among the Company and BT DE Investments Inc.
Business of the Company
Business Objectives and Strategy
The Company is a market leader in the production and distribution of innovative hemp-derived wellness products. Through its substantially vertically integrated business model, the Company strives to improve customers’ lives and meet their demands for stringent product quality and consistency.
Charlotte’s Web’s mission is to unleash the healing power of botanicals with compassion and science benefiting the planet and all who live upon it. The Company does this by responsibly growing its proprietary non-GMO hemp genetics on family farms that are made into premium, full-spectrum phytocannabinoid health and wellness products. Charlotte’s Web is manufactured in a third-party certified FDA-registered facility.
The above statements capture the essence of the Company’s business strategy and pioneering vision of its founders. The Company strives to realize significant growth by expanding further into the health and wellness sector, while capitalizing on the Company’s unique differentiators to create sustainable value. Lastly, in accordance with the Company’s social responsibility goals, Charlotte’s Web supports several non-profit organizations that utilize its products or that further consumer education, advocacy, and research in the hemp and CBD marketplaces.
Industry Overview
The Company’s primary products are made from high quality and proprietary strains of whole-plant hemp extracts containing a full spectrum of phytocannabinoids, including naturally occurring CBD. Full Spectrum Hemp Extracts ("FSHE") are produced from Hemp. The Company does not produce or sell medicinal or recreational marijuana or products derived from high-THC marijuana plants.
Historically, the health and wellness benefits of hemp-based products focused on protein and nutritional oil content. Hemp seeds are known to provide both protein and valuable omega fatty acids. However, beginning with the publication of United States Patent No. 6,630,507 (cannabinoids as antioxidants and neuro-protectants) issued to the United States Department of Health and Human Services on October 7, 2003, consumer interest surrounding the health and wellness benefits of cannabinoids grew significantly. This interest continued until the passage of 2014 Farm Bill, which created a path for institutions of higher education and state departments of agriculture to cultivate hemp for research purposes under certain conditions.
Hemp extracts contain an assortment of naturally-occurring substances, including phytocannabinoids, terpenes, flavonoids and other hemp compounds. The Company believes the presence of various phytocannabinoids, terpenes and flavonoids work synergistically to heighten the effects of the products, making them superior and distinctly different to single-compound CBD isolates. This assortment of hemp compounds is the basis for the theory known as the “entourage effect” as introduced by Israeli chemists, Shimon Ben-Shabat and Raphael Mechoulam, in 1998.
Although research regarding the potential therapeutic uses of CBD and FSHE are still in their infancy, industry reports suggest consumers are using CBD for various applications including assistance with sleep, daily stress, anxiety, pain relief, cognitive function and immune health, among other applications.
In addition to the industry and consumer reported uses of FSHE containing natural occurring levels of CBD, significant research is currently being conducted on the potential therapeutic use of FSHE as it relates to the following, among other topics: epilepsy, post-traumatic stress disorder, cancer, autism, neuroprotection, anti-inflammatory effects, anti-tumor effects, and anti-psychotic effects.
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Product Overview
Product Portfolio
The Company offers a mix of products that have been strategically developed to fit with its objective of delivering a full suite of best-in-class FSHE wellness products that meet its customers’ demands for stringent quality and consistency. The Company currently markets its products under the “Charlotte’s Web”, “CBD CLINIC”, “CBDMEDIC” and “Harmony Hemp” trade names. The Company’s current product categories include human ingestible products (tinctures, capsules, gummies and sprays), topicals, pet products, and NSF Certified for Sports broad spectrum tincture products. The acquired brands of Abacus include CBD CLINIC, CBDMEDIC, and Harmony Hemp. The acquisition of these brands substantially expanded the Company’s topical offerings and presence in both the key food and mass and health practitioner markets.
Tinctures
A human ingestible liquid product is a combination of oil and full spectrum hemp extracts containing naturally occurring CBD. Ingestible liquid products are delivered in either coconut-based medium chain triglyceride (“MCT”) oil or olive oil, in some cases with flavor. Liquid products are meant to be consumed by direct ingestion.
Capsules
Ingestible capsule products have standardized amounts of FSHE. Original capsule products were in the form of a dry powder, inside a hard-capsule shell. In 2019, CW innovated its capsule offering, introducing liquid capsules. Ingredients in liquid capsules include carrier oil (extra-virgin organic olive oil) and FSHE. The capsules are constructed with hydroxypropyl methylcellulose, which reduces oxidation to naturally extend shelf life and maintain the integrity of the high-quality ingredients. The liquid capsules are non-GMO, gluten-free, kosher, 100% vegan and allergen free. Capsule products are meant to be consumed by direct ingestion.
Gummies
The Company’s FSHE gummies are made from whole-plant hemp extract and nutraceutical blends and are flavored with natural juices. The product is meant to be consumed by direct ingestion.
Topicals
The Company’s topical products are delivered in cream, balm, gel, roll-on, ointment, other cosmetic type forms. These products are combinations of Hemp, plant-based oils, herbal extracts and other ingredients. Topical products are meant to be applied externally and by topical application.
Pet
The Company pet products are currently for canine use. Ingestible pet products are delivered in liquid (drops) and solid (chew) forms. Ingredients are a combination of oil and FSHE. The pet line was developed in adherence with the strict quality standards of the National Animal Supplement Council (“NASC”), which has a quality seal audit program and the mission of which is to promote the health and well-being of companion animals and horses that are given animal health supplements by their owners, and to protect and enhance the animal health supplement industry. Liquid canine products are delivered in coconut-based MCT oil with or without flavor. The liquid and solid products are meant to be consumed by direct ingestion.
Key Competitive Advantages of Product Offering
Charlotte’s Web’s founders, the Stanley Brothers, have garnered substantial international media and legislative attention over the past several years, strengthening the Company's brand.
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In addition to Charlotte’s Web brand and substantial goodwill generated from the Company’s legislative efforts and media exposure, the Company's believes the following are also competitive advantages of the Company:
a.Cultivation Experience and Capacity — With years of experience in plant cultivation, the Company has selected prime farmland to grow its hemp with access to substantial additional farmland for future capacity. In addition to third-party cultivation in Canada, the Company is exploring additional international cultivation and distribution opportunities. The Company believes there is no other entity in the world with more experience bringing large-scale, hemp-based operations to the market while maintaining impeccable product quality.
b.Industry-leading Manufacturing Capability — CW leases a 136,610-square-foot industrial building located in Louisville, Colorado, which houses its primary production and R&D divisions. This facility is staffed with professional personnel responsible for production management, quality control/assurance, analytical chemistry, product development and process engineering to ensure product quality.
c.Control of Supply Chain — The Company is substantially vertically-integrated and maintains control over its proprietary genetics throughout the entire cultivation and extraction processes — from seed/clone to packaged products. The Company currently uses select contract manufacturers for gummies, sprays, topicals and capsules who manufacture products according to the Company’s specifications and standards. Some companies in the CBD industry produce their products from imported hemp pastes of unknown origin, quality, and purity.
d.Rigid Quality Management System — The Company has implemented a rigid quality management system that includes documented internal quality processes and both internal testing laboratories as well as independent third-party testing laboratories.
e.Proprietary Genetics — The Company has been granted U.S. and Canadian Utility Patents for its hemp genetics. The Company has earned a total of five U.S. Utility Patents and five Canadian Utility Patent covering hemp varieties as it advances the science of hemp horticulture. The Company believes that the positive media exposure surrounding its proprietary strains have made Charlotte’s Web one of the most sought-after brands in the emerging hemp and CBD markets. Furthermore, the Company developed and launched a fully integrated breeding program in 2017 to further its genetic IP portfolio.
f.Protection of Intangible Assets — The ownership and protection of the Company’s intellectual property is a significant aspect of the Company’s future success. Currently the Company protects its intangible assets through trade secrets, technical know-how, and proprietary information. The Company protects its intellectual property by seeking and obtaining registered protection (including patents and trademarks) where possible, developing and implementing standard operating procedures and entering into agreements with parties that have access to the Company’s inventions, trade secrets, technical know-how and proprietary information such as business partners, collaborators, employees, and consultants, to protect the Company’s confidentiality and ownership of its intellectual property. The Company also seeks to preserve the integrity and confidentiality of its inventions, trade secrets, trademarks, technical know-how, and proprietary information by maintaining physical security of the Company’s premises and physical and electronic security of the Company’s information technology systems.
The Company has sought trademark and patent protection in the United States, Canada and other countries. The Company’s patent portfolio (patents and patent applications) covers, among other things, the Company’s plant genetics, extraction and cannabinoid isolation, and conversion processes and designs. There can be no guarantee, however, that the Company’s efforts to secure trademark or patent protection will be successful. The duration of the protection afforded by the Company’s registered intellectual property varies by the nature of the registration, but the Company manages renewals and notices on an on-going basis to ensure that the Company’s intellectual property is protected to the full extent possible under applicable law. See [Item 1A - “Risk Factors – Risks Relating to the Company’s Business and Industry – The Company’s intellectual property may be difficult to protect.”]
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g.Confidentiality and Proprietary Rights — The Company requires employees and third parties to sign non-disclosure agreements prior to receiving any of the Company’s confidential information. Employees are also required to sign proprietary rights agreements regarding intellectual property they create for the Company. The Company uses standard precautions to protect confidentiality, including physical and electronic security measures.
Cultivation
The Company’s proven cultivation practices have been engineered for scalability to meet long-term sales demand projections. The Company has conducted extensive development over the past several years to demonstrate that it can scale its cultivation operations significantly without sacrificing quality and consistency.
The Company has established infrastructure across three states in order to diversify the seed supply and maintain hemp biomass consistency through standardized mechanization. If needed, the Company believes it will be able to continue to rapidly scale cultivation by: (i) expanding cultivation sites; (ii) diversifying cultivation geographies to extend growing seasons and mitigate crop risk; (iii) increase seed production capabilities; and (iv) further mechanizing cultivation processes to ensure that raw material demand is satisfied without sacrificing quality and consistency.
The Company cultivated 6 acres of irrigated farmland in Colorado for the 2021 growing season and harvested 26,000 lbs. In 2021, the Company’s focus in cultivation continued to be on international market entrance through cultivation and in R&D, plant breeding and regional plant variety trials. The Company executed on multiple research plots across three growing regions with proven success. This will allow the Company to create early maturing times for northern latitude variety specific cultivars and innovate cannabinoid developments for expanded product offerings.
The Company maintains title to its hemp plants throughout the growing process. The Company grows its hemp plants outdoors on farms and is therefore subject to seasonal weather patterns in North America. The seeds or propagation are typically planted in the May-June timeframe and have no CBD content until September. The plants are then typically completely harvested and processed by the end of November of each year.
Cultivation Overview
The Company currently grows its proprietary hemp plants in northeastern Colorado, Kentucky, Oregon, and Canada on owned and/or leased farmland operated by the Company or third-party farming operators. The Company is actively involved in all aspects of genetics development, propagation, seed production, cultivation, and harvesting. All hemp cultivation activities are done under the oversight of, and licensed by, each state’s Department of Agriculture, or Health Canada, each of which rigorously tests the Company’s crops to ensure compliance with each Department’s Hemp programs (including THC content of less than 0.3% on a dry weight basis). The Company and its third-party farming operators are in compliance with the regulations as outlined by each applicable Department of Agriculture and all hemp produced and sold by the Company constitutes hemp under the 2018 Farm Bill, as well as the laws of the states in which it produces and sells such hemp.
Cultivation Research & Development
Since its first crop production in 2014, the Company has taken a leadership position in advancing the technology surrounding all aspects of Hemp production. The Company’s R&D efforts are being driven both by the increasing demand for the Company’s products and its desire to create an expanded portfolio of products that serve the customers’ needs and creating improved varieties for cultivation success in northern latitude regions such as Canada and potentially Europe. The Company’s baseline varieties, were not proven to be successful in growing in regions outside of Colorado. For this reason, the Company launched its breeding division in 2017 for the purpose of hybrid development to allow successful expansion to other growing regions and international markets.
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Breeding Division
The breeding division's main purpose is to expand the Company’s proprietary hemp variety portfolio. This allows for successful cultivation expansion in both US and International markets, as well as creating innovative cannabinoid development for expanded product development. The breeding program has five variety patents, including two hemp hybrid varieties with proven disease resistance and increased yield which lowers cultivation costs of production. In addition to hybrid development, the division oversees the Company’s seed production and supply, import/export requirements, R&D hemp regulatory compliance, assists in State and Federal legislative efforts and supports cultivation operations.
Planting
The Company has successfully created a feminized seed protocol, which provides the scalability and standardization of specific plant genetics. Feminized seeds are seeds which have been bred to produce female plants. Prior to this innovation, the Company’s plant supply line was limited by both infrastructure and plant propagation (creating plants from mother plants). Although propagation was instrumental to the Company’s prior cultivation objectives, it was not a fully scalable process and did not address the Company’s objective to continuously lower production costs and remain a leader in the industry. The Company’s feminized seed protocol took three years to fully understand, optimize, and prove valid through the Company’s quality systems. The Company has built an adequate supply line of seed production to meet expanding future demand for the Company’s products. The Company expects all future production acres to be planted in feminized seeds, by a global positioning satellite driven tractor and a customized planter for optimal germination or seed transplant success. With this innovation, the Company’s proprietary hemp crops can be planted in the same manner as a conventional commercial farming crop.
Harvesting
Harvesting continues to be a significant challenge in the broader Hemp industry with current practices following the processes of the tobacco industry. Once the plants are harvested from the fields, they are hung upside down in outdoor dry structures. The dried plants are then further processed off the plant stalk for final storage. If processed at the correct moisture content, the shelf life of the harvested plants is proven to remain stable for at least four years. However, this method of drying creates scalability issues and can also cause potency loss in the raw material. With this harvesting process, there are limitations applicable to both available infrastructures and labor in agricultural regions. To mitigate these challenges, the Company has focused its Colorado, Kentucky, Oregon, and Canada cultivation teams on the development of new, more scalable processes to mechanize harvesting without sacrificing quality. The Company has successfully scaled the harvesting and drying process and believes it has enough capacity to meet the Company’s medium-term needs.
Manufacturing
The Company’s manufacturing operations are centered around the quality of its products and the efficiency of their production. The Company has proprietary extraction processes currently in use and is developing the next generation of processes and equipment to serve the Company’s expanding production requirements and product offerings. The Company operates its finished products manufacturing in accordance with cGMP to create high quality products in the market.
In 2020, the Company began operating from a new 136,610-square foot manufacturing and extraction, warehouse, and distribution facility. The LOFT has been constructed using state of the art processes and equipment to deliver superior products to the Company’s customers. The facility efficiently executes the Company’s core competencies in R&D, product development, quality control, tincture manufacturing and filling, and product delivery.
The Company believes it has sufficient capabilities to meet its core production requirements over the long term. The facility also has been designed to accommodate incremental manufacturing capacity as business needs require, including the strategic insourcing of contract manufactured products beyond tinctures.
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Arrangements with Suppliers and Manufacturers
The Company currently contracts key parts of supply chain management, including manufacturing, production, and packaging for non-proprietary aspects of its manufacturing process for certain of its products. These large-scale manufacturers reduce the reliance on internal manufacturing resources and allow for rapid scaling of production on an as needed basis.
Extraction and Product Formulation
The Company’s harvested hemp is delivered to the Company’s production facility in a coarse-ground form. At the facility, the extraction processes do not commence until the raw hemp material passes initial screenings for moisture content and toxic mold by-products (aflatoxins). Upon passing these screenings, the raw hemp material passes through one of two different extraction processes. The Company utilizes both Carbon Dioxide super critical fluid extraction (“SFE”) and Alcohol Extraction (“AE”) processes. These two processes and the resultant extracts have differing phytochemical profiles, which appeal to different customer bases. Years of R&D and process refinement associated with both of the Company’s extraction processes are proprietary.
After processing, both the SFE and AE extracts are rigorously batch tested both internally and by third-party laboratories for cannabinoid potency, residual solvents, heavy metals, and pesticides. After passing these quality control tests, both the SFE and AE extracts are released into finished products production, where they are diluted with carrier food oils, either medium chain triglycerides from coconut oil or olive oil, or otherwise added to the Company’s products, including the chews or topical products. Some of the SFE extract is dedicated to capsule production.
The Company’s topical, chews, and liquid products are currently blended, flavored, filled, labeled, and packaged into consumer cartons at either its production facility or at contract manufacturer facilities. The Company is continuously working to qualify additional third-party contract manufacturers to ensure adequate encapsulation, bottling, and packaging capabilities necessary to meet demand for the Company’s products.
Quality Management Systems
In 2020, the Company was the first hemp extract company to receive an NSF certification. NSF International’s dietary supplements certification is a globally recognized standard that establishes requirements for the ingredients in dietary and nutritional supplements and is considered the gold standard for products in the dietary supplement space. In October 2022, Charlotte’s Web SPORT – Daily Edge, became the first broad-spectrum hemp-derived tincture to be Certified for Sport® by NSF. NSF's Certified for Sport® program verifies that products do not contain unsafe levels of contaminants, prohibited substances or masking agents, and that what is on the label matches what is in the product. The Certified for Sport® certification is the only independent third-party certification program recognized by Major League Baseball.
Additionally in January 2022, the Company was the first hemp extract company to achieve International Organization for Standardization ("ISO") 17025 certification. This certifies that the Company meets the technical and quality benchmarks by ISO 17025 for analytical chemistry testing methods.
The Company employs cGMP at each stage of its production. cGMP refers to the current Good Manufacturing Practices regulations enforced by the FDA.1 Adherence to cGMP regulations assures the identity, strength, quality, purity, and composition of products by requiring that manufacturers adequately design, monitor, and control manufacturing operations. This includes establishing strong quality management systems, obtaining appropriate quality raw materials, establishing comprehensive standard operating procedures, detecting and investigating product quality deviations and maintaining reliable testing practices. This formal system of controls helps in preventing instances of contamination, deviations, failures, and errors. This ensures products manufactured under cGMP meet quality standards.
1 See 21 C.F.R. Part 111.
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The Company’s products meet regulatory guidelines for contaminants and are tested by independent third-party laboratories. Products are tested for, among other items: identity, potency, residual solvents, microbial contaminants, aflatoxin, heavy metals, and pesticides.
To create the highest quality products, the Company, when applicable, closely controls every step in the production process, including propagation, cultivation, harvesting, drying, manufacturing, and packaging. The control and visibility maintained through the Company’s substantial vertical integration allows for the continual monitoring and refinement of critical processes, resulting in high quality standardized products.
Sales and Distribution Strategy
The Company’s products are distributed through its e-commerce website (www.charlottesweb.com), third-party e-commerce websites, select distributors, health practitioners, and a variety of brick-and-mortar retailers.
The Company’s products are sold in chiropractic and doctors’ offices, gyms, massage therapy offices, salons, hotels, direct deliver services, animal clinics, and pet stores.
The Company distributes its products within the United States and, in select international markets through local or regional distribution partners. Retail distribution strategy is focused on gaining broad distribution within the natural channel and conventional food and mass market ("FDM") retailers.
The Company’s internal sales team has a two-pronged approach to building distribution: (i) focus on gaining distributors with access to key strategic verticals in the medical, FDM, and natural channels; and (ii) contracted broker teams that assist in driving brand representation in larger food accounts. Additionally, the Company’s internal sales team directly nurtures and maintains retail relationships. The Company believes this model is extremely effective in targeting accounts with the right message to build and capitalize on the Company’s brand momentum.
The Company believes broad brand recognition and increasing market demand in the adaptogenic supplements category (where CBD is typically positioned) results in strong brand sales, which helps promote increased category development and new account acquisition. The Company believes these accounts will enable it to achieve broader distribution, opening new consumer segments and driving growth by increasing awareness, consideration, and purchase. The Company believes it is leading the way in the category by opening conventional channels that have historically been resistant to place CBD items on their shelves. Key to this success has been the relationships and partnerships with key natural accounts.
The Company continues to sell its CBD CLINIC products into the practitioner market comprising of naturopathics, chiropractors, acupuncturists, physical and massage therapists, functional practitioners and continues to expand the total number of health care practitioners in the CBD CLINIC network. The market for the CBD CLINIC products is primarily served through national distributors. The Company believes that it can continue to capture and increase its market share in this market by increasing its sales and marketing efforts targeted at this market.
The Company’s sales are executed through customized strategies depending on the retail verticals. For example, in specialty food accounts, a combination of sales brokers and distributors are strategically located within geographical markets. This provides proximity along with hands-on support at the store level to ensure products are correctly labeled and merchandised. Depending on the size of the account, some locations are deemed to be “national accounts” that receive additional support from the Company’s internal retail sales team. This allows the Company’s brokers and distributors to manage multiple independent specialty food locations, while still achieving the same level of support that is expected in the Company’s larger chain retail customers.
The Company utilizes e-commerce to reach consumers and guide them through the hemp and CBD buying process. The Company believes consumers rely heavily on digital research. Key to this approach is the ability to access consumers organically who are searching the web for “CBD” or “Charlotte’s Web” both on the Company’s website as well as through linking from reliable providers of content and education. The Company’s website delivers on this
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through high levels of product purchase and engagement via opting into the Company’s email newsletter subscription. This indicates a higher level of interest in educational resources and product knowledge. The Company concentrates its activities in the digital space through:
•Search Engine Optimization — A collaborative, integrated effort with content and public relations teams optimizing search engine results in the category for those seeking both general education and availability to purchase
•Email — Growing the current subscriber list, building a new customer journey, and working to develop segmentation processes to deliver relevant and personalized content
•Social — Leveraging the passion of the Company and its founders through a dynamic website and branding strategy which will be used to maintain the Company’s relevance among consumers
•Referral — Utilizing third-party influencers during marketing campaigns to amplify brand and product awareness – significant care has been taken to find users organically (prior to approaching) to ensure authentic and real testimonials of their own use
•Display Advertising — Developing display advertising strategy and integrating into 360° campaign planning via media buying capabilities
•Drive direct to “.com” — Optimizing the customers’ web experience to convert browsers into buyers and driving repeat purchases via the elimination of consumer friction points
Currently, orders are fulfilled through a LOFT fulfillment center located in Louisville, Colorado, and the use of third-party logistics providers.
Marketing and Promotion
The Company benefits from an authentic origination story linked to its first consumer served, Charlotte Figi. The story of how Charlotte’s mom, Paige Figi, desperately reached out to the Stanley Brothers seeking an alternative solution for her daughter’s wellness was captured and broadcasted in a CNN documentary by Dr. Sanjay Gupta.
Data collection and customer analysis from e-commerce sales continues to be a significant component of the Company’s marketing strategy. Direct-to-consumer e-commerce sales give an unprecedented opportunity to gain meaningful insight into how to better support the customer based on data including buying habits, purchase frequency, and in many cases, why the product is being used.
Consumer segmentation is being used to transform the Company’s consumer activities through both valuable understanding of the customer base, as well as the ability to activate and differentially invest in core consumer segments that will assist in developing the strongest lifetime value proposition for customers. Key elements of the segmentation include:
•driving ability to use targeted messaging to more effectively motivate trial orders, improve overall product trial experience, promote repeat purchasing patterns and ensure retention;
•differentially investing in core segments to attract new users with a high likelihood of repeat conversion; and
•maximizing customization of email and other messaging channels to improve initial experiences and promote repeat buying.
The Company has a subscription program. Through its subscription program, the Company utilizes a discount structure to encourage enrollment with a similar structure to online “subscribe and save” models. This is expected to
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deliver upside demand and repeat purchases from existing customers by enabling scheduled reorders and improved continuity in consumption. Consumers are able to set their frequency for two-week, six-week or 1-3 monthly reorder patterns across the entire product line.
The Company continues to promote the awareness of its brands through investment in marketing programs, sponsorships and continued participation in events that offer wide exposure to both trade partners and consumer retail markets. For example, on October 11, 2022, the Company entered into the MLB Promotional Rights Agreement with MLB pursuant to which the Company entered into an exclusive strategic partnership with MLB to promote the Company’s new NSF-Certified for Sport® product line.
As a Certified B Corp, the Company is a socially conscious company, and is committed to using business as a force for good and a catalyst for innovation. The Company weighs sound business decisions with consideration for how its efforts affect its employees, customers, the environment, and the communities where its employees live and where it does business, while maximizing profits and strengthening its brands. This social awareness includes contributions to non-profits, which are made on an ad hoc basis, concentrating first on those entities that have historically supported the business through education of existing and potential customers. The Company also supports non-profits that it believes can utilize the wellness aspects of its products (i.e., military veterans, adaptive athletes, educational organizations, etc.). Management believes that any socially oriented actions it takes will ultimately have a positive impact on the Company, its employees, and its Shareholders. The Company has historically donated and plans to continue to donate to charitable organizations.
Growth from the Existing Product Portfolio Through Marketing Initiatives
The Company’s marketing mix strives to connect with audiences and the consumer journey through:
•paid, earned, and affiliate media to build awareness of the sector and the unique qualities of the Company’s brand equity and products
•search engine optimization ("SEO") and email marketing to drive consumer purchase and subscriptions on CW.com, the Company’s e-commerce platform
•partnerships and affiliates that reach expanded consumer segments
•public relations campaigns and events to amplify targeted social and media marketing communications
•trade marketing to increase visibility and differentiation of our products in customer stores
•word of mouth and referrals from health care practitioners, their colleagues, patients, and Brand Ambassadors
•event marketing and support of various social responsibility initiatives
Competition
The Company is substantially vertically integrated from seed to packaged product, which helps ensure product quality. Being substantially vertically integrated and focusing on quality and standardization creates an important competitive differentiator for the Company, as the majority of its competitors are not substantially vertically integrated. The Company’s knowledge of hemp cultivation, combined with its scientific and financial resources, allow it to maintain a leading market position amongst its competitors.
The Company’s principal competitors in the CBD wellness products space include companies such as CV Sciences (PlusCBD), cbdMD, Medterra, and Garden of Life.
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Information Systems
The Company’s primary enterprise resource planning (“ERP”) system is a cloud-based system well-known for manufacturing, shipping, and receiving, inventory control, supply chain management, sales, accounting, and finance. In addition to this centralized ERP system, supplemental peripheral software applications are used for specialized activities in finance, human resources, customer support, manufacturing, distribution, and marketing.
Intellectual Property
The Company’s intellectual property and proprietary rights are important to its business. In efforts to secure, maintain, and protect its intellectual and proprietary rights, the Company relies on a combination of patent, trademark, trade secret, trade dress and other rights in the United States and Canada. The Company also has confidentiality and/or license agreements with certain employees, contractors and other third parties, which limit access to and use of the Company’s proprietary intellectual property.
Pursuant to the “Name and Likeness Agreement” entered into between the Company and Leeland & Sig d/b/a Stanley Brothers Brand Company, a Colorado limited liability company owned by certain founders, including each of the Stanley Brothers (the “Stanley Brand Company”) effective August 1, 2018, and further amended on April 16, 2021, July 30, 2022, August 31, 2022, September 30, 2022, and February 17, 2023, Stanley Brand Company grants the Company a non-exclusive, worldwide right to use the name “Stanley Brothers” and the likeness of the seven Stanley Brothers until June 30, 2023, on a royalty-free basis. Each party to the Name and Likeness Agreement has the right to cause the other party to cease use of the name in certain circumstances such as misuse, bad acts, or a corporate acquisition. The initial term of the Name and Likeness Agreement was for a thirty-six (36) month period, with the Company agreeing to begin activities to cease all use of any intellectual property used under the Name and Likeness Agreement within thirty (30) days of expiration or termination thereof. In connection with the execution of the Name and Likeness Agreement, the Company executed employment agreements with each of the Stanley Brothers on September 1, 2018 providing for aggregate annual base salaries to the Stanley Brothers of $1,425,000. On April 16, 2021, pursuant to an amending agreement, the Name and Likeness and Agreement was extended for a period of one year, expiring July 31, 2022. In addition, the Company executed a consulting agreement which extended the service arrangements of the seven Stanley Brothers for a period of one year, expiring July 31, 2022. Upon execution of the consulting agreement, the Company paid $2,081,250 to Leeland & Sig LLC d/b/a Stanley Brothers Brand Company, on behalf of the Stanley Brothers, as consideration for the extended use of the “Stanley Brothers” name and the likeness of the seven Stanley Brothers, as well as consulting services to be provided to the Company over the term of the consulting agreement and certain restrictive covenants. Effective July 31, 2022, the Company executed an Extension and Second Amending Agreement to Name and Likeness and License Agreement, extending the term from July 31, 2022 to August 31, 2022. Effective August 31, 2022, the Company executed an Extension and Third Amending Agreement to Name and Likeness and License Agreement, extending the term from August 31, 2022 to September 30, 2022. Effective September 30, 2022, the Company executed an Extension and Fourth Amending Agreement to Name and Likeness and License Agreement (as amended, the “Name and Likeness Agreement”), extending the term from September 30, 2022 to December 31, 2022. Additionally, the Name and Likeness Agreement was also amended to provide the payment of a Company event fee of $1,500 per diem for each Stanley brother that, at the request of the Company’s chief executive officer, participates in any of the following events: (i) customer meetings; (ii) strategic partner meetings; (iii) speaking engagements; (iv) presentations; (v) social media postings; (vi) podcasts; (vi) public relations events; (vii) media interviews; (viii) trade show appearances; and (ix) events substantively similar to any of the foregoing. Effective February 22, 2023, the Company executed an Extension and Fifth Amending Agreement to Name and Likeness and License Agreement (as amended, the “Name and Likeness Agreement”), extending the term to June 30, 2023. See “Certain Relationships and Related Transactions, and Director Independence – Company Transactions with Related Parties.” The Name and Likeness Agreement does not affect the Company’s intellectual property rights in connection with its use of “Charlotte’s Web.” See “Risk Factors – Risks Relating to the Company’s Business and Industry – Reliance on the Stanley Brothers brand could have negative consequences.”
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Effective January 5, 2023, the Company entered into a Brand License and Option Agreement (“License Agreement”) with JMS Brands LLC, an entity owned by Jesse Stanley, one of the Company’s founders. Pursuant to the Brand License and Option Agreement, the Company licenses certain intellectual property from JMS Brands LLC, for an annual license fee of $500,000. Pursuant to the terms of the License Agreement, the Company has the option to purchase the intellectual property rights for two million dollars ($2,000,000).
The Company currently has a portfolio of pending U.S. plant, utility and design patent applications directed to CW’s most promising plant genetics, proprietary extraction technology, cannabinoid isolation methods and cannabinoid conversion processes and industrial designs. The Company also has pending U.S. and Canadian trademark applications.
The Company now has earned a total of five U.S. Utility Patents covering hemp varieties as it advances the science of hemp horticulture. The Company also five Canadian Utility Patents covering the 'CW1AS1',‘Lindorea’, ‘Kirsche’, ‘AF15B15-21', and ‘EM15B2A170’ hemp varieties.
For each of the Company’s material patents, the chart below identifies (i) the patent, (ii) the type of intellectual property (“IP”) subject to the patent, (iii) the jurisdiction where the patent is held, (iv) the title of the patent, (v) the inventor(s) and assignee(s), and (vi) the status of the patent. The patents listed below expire between 2039 and 2042, and cover novel hemp strains used or with potential use in Company products, or for other commercialization opportunities.
Patent / Publication Type of IP / Jurisdiction | Title / Inventor(s) / Assignee (s) | Status / Comments | ||||||
CA 3,101,952 2022-01-25 Utility - Canada | HEMP PLANT NAMED 'CW1AS1' Stanley, Joel Reel, Keri CHARLOTTE'S WEB, INC. | ISSUED Related Technologies: •Protection for 'CW1AS1' hemp line. | ||||||
US 10,653,085 2020-05-19 Utility - United States | HEMP PLANT NAMED 'CW1AS1' Stanley, Joel Reel, Keri CHARLOTTE'S WEB, INC. | ISSUED Related Technologies: •Protection for 'CW1AS1' hemp line. | ||||||
US 10,736,295 2020-08-11 Utility - United States | HEMP PLANT NAMED 'CW1AS1' Stanley, Joel Reel, Keri CHARLOTTE'S WEB, INC. | ISSUED Related Technologies: •Protection for 'CW1AS1' hemp line. | ||||||
US 10,888,059 2021-01-12 Utility- United States | HEMP PLANT NAMED 'LINDOREA' Reel, Keri CHARLOTTE’S WEB, INC. | ISSUED Related Technologies: •Protection for 'LINDOREA' hemp line. . | ||||||
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US 10,888,060 2021-01-12 Utility- United States | HEMP PLANT NAMED ‘KIRSCHE’ Reel, Keri CHARLOTTE’S WEB, INC. | ISSUED Related Technologies: •Protection for 'KIRSCHE' hemp line. | ||||||
US 11,503,787 2022-11-22 Utility- United States | HEMP PLANT NAMED ‘EM15B2A170’ Brian Campbell CHARLOTTE’S WEB, INC. | ISSUED Related Technologies: •Protection for 'EM15B2A170' hemp line. | ||||||
CA 3,169,404 2023-02-07 Utility- Canada | HEMP PLANT NAMED 'LINDOREA' Reel, Keri CHARLOTTE’S WEB, INC. | ISSUED Related Technologies: •Protection for 'LINDOREA' hemp line. . | ||||||
CA 3,169,446 2023-03-07 Utility- Canada | HEMP PLANT NAMED ‘KIRSCHE’ Reel, Keri CHARLOTTE’S WEB, INC. | ISSUED Related Technologies: •Protection for 'KIRSCHE' hemp line. | ||||||
CA 3,155,121 2023-01-31 Utility- Canada | HEMP PLANT NAMED ‘AF14B15-21’ Brian Campbell CHARLOTTE’S WEB, INC. | ISSUED Related Technologies: •Protection for 'AF14B15-21'' hemp line. | ||||||
CA 3,157,865 2023-02-07 Utility- Canada | HEMP PLANT NAMED ‘EM15B2A170’ Brian Campbell CHARLOTTE’S WEB, INC. | ISSUED Related Technologies: •Protection for 'EM15B2A170' hemp line. | ||||||
The Company is subject to certain risks related to its intellectual property. For more information, see “Risk Factors –Risks Relating to the Company’s Business and Industry – The Company’s intellectual property may be difficult to protect.”
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Employees and Human Capital
As of December 31, 2022, the Company had 170 full time employees. Of these employees, 85 were employed in manufacturing operations positions, 34 were employed in sales and marketing positions, 42 were employed in general, quality, and administrative positions, 5 were employed in cultivation positions, and the remaining 4 employees were engaged in R&D aspects of the business.
The Company believes it has an advantage in attracting employees with its purpose-based mission, B-Corp status, and its leadership position in the industry, and prides itself in attracting, retaining and developing individuals with complementary mix of professional experiences and industry knowledge. The Company values diversity in culture, race, and sexual differences and has established affinity groups led by leadership to ensure these differences are supported in the workplace, and that employees may realize their professional goals through development programs and mentoring. The Company believes in investing in each of its employees and devotes the necessary resources to ensure all employees are given the proper tools and resources to grow in their respective fields. The Company also believes in cultivating a collaborative working environment wherein everyone is valued for their contribution to the team and rewarded for their accomplishments.
The Company has assembled a management team with significant professional expertise in distribution, cultivation, sales, science, intellectual property, technology, finance, customer service, consumer packaged goods ("CPG"), marketing, business development, acquisitions, capital markets and market analysis. The Company’s management team includes executives with many years of experience in their respective fields. See “Risk Factors – Risks Relating to the Company’s Business and Industry – The Company depends on key personnel and its ability to attract and retain employees.”
Third-Party Suppliers, Service Providers and Distribution
Although the Company is substantially vertically integrated, the Company obtains certain input components, such as packaging components, flavors, and certain raw materials, from third-party suppliers. None of the third-party suppliers are considered to be material to the business on a standalone basis and all supply input components are readily available from other suppliers in the market.
If any given supplier or distributor is lost in a specific region, the Company believes these could be replaced without material disruption as it could contract with multiple alternative suppliers or distributors to provide the requisite service(s) and product(s). The Company is a substantially vertically integrated company that performs its own manufacturing for proprietary elements in the manufacturing process. The Company utilizes contract manufacturers for non-proprietary elements in its manufacturing process such as bottling and packaging.
The Company manages risks that are associated with third-party distributors, manufacturers and suppliers by identifying and qualifying alternative distributors, manufacturers and suppliers. The Company regularly assess its supply chain for threats to business continuity.
See “Risk Factors – Risks Relating to the Company’s Business and Industry – The Company relies on third-parties for the transportation of its hemp and hemp derived products, any delay or failure by these third-parties to meet the Company’s transport needs could impact the Company’s operations and financial performance; Supply chain issues, including significant price fluctuations or shortages of materials, and distribution challenges may increase the Company’s cost of goods sold and cause its results of operations and financial condition to suffer.”
Building Brand Awareness
Management believes the Charlotte’s Web brand is among the strongest in the hemp-derived CBD industry. Brand recognition will continue to be driven by several factors including: (i) earned media events similar to what has historically occurred with the Company with entities such as CNN, Today Show, the New York Times and Forbes; (ii) paid media and affiliate programming through targeted consumer campaigns on major platforms; (iii) email, social media and blogs; (iv) partnerships and influencer marketing such as Major League Baseball, and Angel City
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Football Club; (v) use of subject matter experts; (vi) legislative participation; (vii) public speaking engagements at key industry and cultural events; and (viii) B Corporation certification and social impact partnerships. In addition to these active outlets to build brand awareness, the Company supports word-of-mouth endorsements and testimonials from its customers who are advocates for its brands and products. Marketing activations and marketing-driven innovations are developed with the support of industry data through various insight partners.
International Expansion
The Company is exploring increased global distribution, including via e-commerce, in the future, with near-term expansion focused on the United Kingdom, European Union, Israel, and Canada. Expansion into additional jurisdictions will be done in compliance with applicable regulatory requirements in such jurisdictions and the cost and complexity of such compliance will form part of the strategic evaluation process for any proposed expansion. International penetration will be done primarily via local and regional sales & distribution partnerships.
On December 9, 2020, the Company announced that it signed the exclusive distribution agreement in Israel with Israel-based InterCure Ltd., which owns one of Israel’s largest and most established medical Cannabis producers, Canndoc. Its GMP-verified medical Cannabis products are sold in pharmacies in Israel, and it holds international cultivation and distribution agreements in the European Union. Selected Charlotte’s Web hemp extract wellness products are intended to be available to the Israeli public through AltCure, a subsidiary of InterCure Ltd.
Effective as of November 1, 2022, the Company entered into a Manufacturing and Sales License Agreement with Aphria, Inc., an Ontario corporation and an affiliate of Tilray Brands, Inc. (“Tilray”), providing for a strategic alliance between the Company and Tilray, pursuant to which Tilray has the rights to licensing, manufacturing, quality, marketing and distribution of Charlotte’s WebTM CBD hemp extract products in Canada.
Improved Distribution
At the end of 2022, the Company’s products were sold in retail locations and health care practitioners across the U.S., as well as over one million addressable consumers on e-commerce. The Company believes distribution gains in the U.S. are nevertheless achievable through:
•incremental retail locations with existing customers
•increased consumer purchases in existing retail customer
•penetrating new customer channels such as hospitality, sports, and travel
•increased traffic to and purchases via the Company’s e-commerce platform
Regulatory Framework
As a Cannabis-related business, the Company is subject to extensive regulation. The industry in which the Company operates is subject to regulation and control resulting from legislation enacted by the various levels of government. All applicable legislation is a matter of public record, and the Company is unable to predict what additional legislation or amendments governments may enact in the future. Changes to government regulation could impact the Company’s existing and planned operations or increase its operating expenses, which could have an adverse effect on the Company’s financial condition, results of operations and cash flows. For additional details on the regulatory risks facing the Company, see “Risk Factors – Risks Relating to the Regulatory Environment.”
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United States Regulatory Matters
General Overview
The following overview is subject to and qualified by the more detailed descriptions in the following sections entitled “United States Federal Regulation of Hemp”, “State Regulation of Hemp”, “FDA Regulation”, “Future Uncertainty of Legal Status” and “The Company’s Regulatory Compliance Activities in the United States”.
The Company does not produce or sell medicinal or recreational marijuana or products derived therefrom. It sells Hemp-based CBD products. While such products come from the same plant genus and species, Hemp and marijuana are legally distinct and are generally regulated, respectively, by three separate overarching bodies of law: the 2014 Farm Bill (which refers to section 7606 of the Agricultural Act of 2014), the 2018 Farm Bill (which refers to the Agricultural Act of 2018) and the CSA (which refers to the U.S. Controlled Substances Act, 21 USC § 801 et. seq.). Hemp, by legal definition, contains 0.3% THC or less on a dry weight basis, which is not considered to be a sufficient level to create an intoxicating effect like marijuana.
Consequently, the Company’s products are not sold pursuant to the rules and regulations governing the cultivation, transportation, and sale of medicinal or recreational marijuana. The Company cultivates, processes, transports, and sells its products pursuant to the 2018 Farm Bill and in accordance with applicable state and local laws. All Hemp produced and sold by the Company constitutes Hemp under the 2018 Farm Bill as well as under the laws of the states in which the Company cultivates, manufactures, and sells such Hemp-based products. If sold internationally, products are sold in accordance with the laws of the importing and exporting jurisdiction.
Where products are sold internationally, the Company takes appropriate steps to assess local laws and regulations with a view to compliance. Not all jurisdictions have mature or fully developed Cannabis or Hemp regulatory regimes and the Company continuously monitors regulatory risk when conducting activities in local jurisdictions. Moreover, the regulatory regimes of certain jurisdictions may not differentiate between Hemp and recreational or medical marijuana. In particular, the Company’s products may be categorized or labelled as marijuana, medical marijuana, or a similar category notwithstanding that the product is, by U.S. standards, a Hemp-based product.
The 2018 Farm Bill permanently removed hemp and its derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers from the purview of the CSA. Hemp is now deemed an agricultural commodity, and is no longer classified as a controlled substance, like marijuana. Furthermore, by defining Hemp to include its derivatives, extracts, and cannabinoids,2 Congress impliedly removed popular Hemp products, such as Hemp-derived CBD, from the purview of the CSA. Accordingly, the U.S. Drug Enforcement Agency ("DEA") no longer has regulatory authority to interfere with the interstate commerce of Hemp products, so long as the THC level is at or below 0.3% on a dry weight basis. The 2018 Farm Bill also provides that state and Native American tribal governments may impose separate restrictions or requirements on hemp growth and the sale of Hemp products. However, they cannot interfere with the interstate transportation or shipment of lawfully produced Hemp or Hemp products. As a result of the 2018 Farm Bill, federal law now provides that CBD derived from Hemp is not a controlled substance under the CSA; however, states take varying approaches to regulating the production and sale of Hemp and Hemp-derived CBD. Some states, including California, Florida, and Texas, explicitly authorize and regulate the production and sale of Hemp-derived CBD or otherwise provide legal protection for authorized individuals to engage in commercial Hemp activities provided the products comply with testing, labeling/packaging, registration, and/or other requirements. Hemp cultivation is now permitted in all 50 states,3 but several states, including Missouri and Illinois, do not expressly allow the sale of Hemp and Hemp-derived CBD. Additionally, a number of states prohibit the sale of ingestible CBD products based on the FDA’s position that, pursuant to the FD&C Act, it is unlawful to introduce food containing added CBD or THC into interstate commerce, or to market CBD or THC products as, or in, dietary supplements, regardless of whether the substances are Hemp-derived. Several states are also considering THC limits and age-related sales restrictions for Hemp-derived products that contain THC, such as full spectrum hemp extracts.
2 Agriculture Improvement Act of 2018 (section 10113) (defining hemp under the Agricultural Marketing Act of 1946, 7. U.S.C. 1621).
3 The District of Columbia does not currently permit hemp cultivation.
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The Company’s activities related to the production, marketing and sale of its products comply with the 2018 Farm Bill, as applicable to its operations. However, certain government agencies (such as the FDA) and certain federal officials have challenged the scope of permissible commercial activity. FDA representatives, for example, have stated they believe that producers of some CBD-based products, including the Company, produce and sell their products in violation of the FD&C Act. Similarly, the Company’s marketing activities fall within the FDA’s jurisdiction, and in 2017, the FDA issued a Warning Letter to the Company for FD&C Act non-compliance, which the Company has responded to, in part to comply with the Warning Letter and in part to challenge FDA’s assertions in the letter. The Company has not received a response from the FDA and the Warning Letter remains open. Over the past several years, FDA has issued numerous warning letters to companies marketing CBD products with disease or unlawful drug claims. The letters reiterate the agency’s position that CBD cannot be added to food and dietary supplements and targeted companies whose products violated the FD&C Act’s prohibition against: i) marketing CBD as or in a dietary supplement, human and animal food, or food additives; ii) marketing a dietary supplement, human and animal food, or cosmetic with disease or drug claims (i.e., claims suggesting that a product is intended to treat, cure, or prevent disease); iii) including a substance in human or animal food when that substance is not GRAS; and iv) selling products that are misbranded due to their failure to include “adequate directions for use by a layperson”. The FDA’s enforcement against the sale and marketing of CBD products has to date been limited to the issuance of warning letters, although enforcement could include civil and criminal penalties. The legal status of CBD in food and dietary supplements remains under active consideration by the FDA as of the date of this Form 10-K, as the agency continues to evaluate the regulatory framework that should apply to Cannabis-derived products intended for non-drug uses. In January 2023, the FDA issued a statement concluding that existing regulatory frameworks for dietary supplements and foods are not appropriate for CBD due to potential safety risks, and that it will work with Congress to develop an appropriate pathway for the regulation of CBD products. While the Company disagrees with the position of the FDA, there is risk that this agency could take enforcement or regulatory actions against the Company.
Legal barriers applicable to, and risks associated with, selling Hemp and Hemp-derived CBD products result from a number of factors, including the fact that Hemp and marijuana are both derived from the Cannabis sativa L. plant, the rapidly changing patchwork of state laws governing Hemp and Hemp-derived CBD, and the FDA’s position that it is unlawful to introduce food containing added CBD or THC into interstate commerce, or to market CBD or THC products as, or in, dietary supplements, i.e. the FDA’s position that CBD cannot be marketed in a dietary supplement on the basis that substantial clinical trials studying CBD as a new drug were made public prior to the marketing of any food or dietary supplement containing CBD, and therefore food or dietary supplements are precluded from containing this ingredient, referred to as the IND Preclusion. However, the removal of Hemp and its extracts, including CBD, from the CSA pursuant to the 2018 Farm Bill, and the establishment of multiple state regulatory frameworks that permit the sale of Hemp-derived CBD products are positive developments. Currently it is unclear whether Congress will move forward with legislation to allow CBD in dietary supplements in light of the FDA’s determination that a new regulatory pathway is needed. Timing for the FDA to develop a new pathway is also uncertain, but is likely to take several years. Stakeholders take different positions regarding the scope of legal activity in light of the interplay of federal and state law, and in light of recent developments, such as the 2018 Farm Bill, the September 30, 2017 decision of the World Anti-Doping Agency to drop CBD from its list of prohibited substances, and the World Health Organization Expert Committee on Drug Dependence review report finding that CBD is “generally well tolerated with a good safety profile” and low abuse potential.4
Should the Company determine to sell products containing greater than 0.3% THC, additional regulatory regimes, both in the U.S. and internationally, will apply. However, at this time no such product has been developed by the Company.
The foregoing is an abbreviated overview of the Company’s position on the legality of the Company’s operations in the United States. Additional background and a more thorough analysis of applicable U.S. and international regulatory regimes are set out in greater detail below.
4 World Health Organization Expert Committee on Drug Dependence, Cannabidiol (CBD) Pre-Review Report, November 10, 2017.
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United States Federal Regulation of Hemp
Development of Current Regulatory Framework
Summary
In addition to customary regulations applicable to any commercial business, the Company’s operations are subject to state and federal regulation in respect of the cultivation of Hemp and the production, distribution and sale of products intended for human ingestion or topical application and, with respect to certain products, by animals.
Hemp is an agricultural commodity cultivated for use in the production of a wide range of products globally. Among others, Hemp is used in the agriculture, textile, recycling, automotive, furniture, food and beverage, paper, construction materials and personal care industries.
Botanically, hemp is categorized as Cannabis sativa L., a subspecies of the Cannabis genus. Numerous unique, chemical compounds are extractable from hemp, including THC and CBD. These cannabinoids are responsible for a range of potential psychological and physiological effects. Hemp, as defined in the 2018 Farm Bill, is distinguishable from marijuana, which also comes from the Cannabis sativa L. subspecies, by its absence of more than trace amounts (0.3% or less) of the psychoactive compound THC. Although international standards vary, other countries, such as Canada, have used the same THC potency standards to define hemp. Hemp was widely grown in the U.S. as an agricultural commodity from the colonial period into the early 1900s and was commonly used in the manufacture of paper, fabrics, and other products. By 1970, however, the CSA explicitly prohibited the cultivation of any variety of Cannabis without a DEA permit.
Per the plain language of the CSA, only certain parts of the Cannabis plant (generally, what was historically considered to be the psychoactive portions of the plant) are controlled and defined as marijuana, while other parts of the Cannabis plant (now inclusive of hemp) are exempted from CSA control. Consumer goods containing hemp seeds or “hemp hearts,” for example, have long been lawfully imported into the U.S. and legally sold in commerce due to the fact that the sterilized seeds are clearly exempt from the definition of marijuana under the CSA and are not otherwise controlled substances. Nonetheless, from the enactment of the CSA until the passage of the 2014 Farm Bill, cultivating hemp for any purpose in the U.S. without a DEA registration was federally illegal. The 2014 Farm Bill loosened the federal prohibition on the domestic production of hemp, by allowing hemp to be cultivated within the context of an agricultural pilot program and where permitted by state law. On December 20, 2018, the 2018 Farm Bill became law, and, on December 31, 2021, the 2014 Farm Bill and hemp programs authorized under this legislation expired. Unlike the 2014 Farm Bill, which did not amend the CSA but only preempted from CSA control certain specified activities, the 2018 Farm Bill explicitly amended the CSA to exclude from the definition of marijuana all parts of the Cannabis plant (including its derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not) containing a delta-9 THC concentration of not more than 0.3% on a dry weight basis, and excluded from the CSA definition of “tetrahydrocannabinol” any material, compound, mixture, or preparation that falls within the definition of Hemp. As a result, Hemp is no longer classified as a controlled substance, like marijuana. By defining Hemp to include its derivatives, extracts, and cannabinoids, Congress impliedly removed popular Hemp products, such as Hemp-derived CBD, from the purview of the CSA. Accordingly, the DEA no longer has regulatory authority to interfere with the interstate commerce of Hemp products. The 2018 Farm Bill also allows farmers to access crop insurance and fully participate in USDA programs for certification and competitive grants. State and tribal governments may impose separate restrictions or requirements on Hemp production, but they cannot interfere with the interstate transport of lawfully produced Hemp or Hemp products.
The 2014 Farm Bill
In 2014, Congress enacted the 2014 Farm Bill. The 2014 Farm Bill, the provisions of which expired as of December 31, 2021, authorized institutions of higher education and state departments of agriculture (and their contractual designees) to cultivate hemp, notwithstanding the CSA or any other federal law, provided that certain conditions are
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met.5 The scope of the 2014 Farm Bill was limited to cultivation that was: (a) for research purposes (inclusive of market research, which multiple federal agencies have confirmed includes commercial sales with a research purpose); (b) part of an “agricultural pilot program” or other agricultural or academic research; and (c) permitted by state law. Many states that adopted pilot programs under the 2014 Farm Bill have since replaced them with approved programs under the 2018 Farm Bill, described below.6 The various state Hemp programs had different requirements regarding the registration of cultivators and processors, the involvement of institutions of higher education, and permissible commercialization.7 Activities determined to be compliant with the 2014 Farm Bill were protected from federal interference by successive Consolidated Appropriations Acts enacted during the years 2015 through 2021. The Consolidated Appropriations Acts generally prohibited the federal government’s use of funds in contravention of the 2014 Farm Bill and specifically prohibited such federal interference with regard to the “transportation, processing, sale, or use of . . . hemp, or seeds of such plant, that is grown or cultivated in accordance with the [2014 Farm Bill], within or outside the [s]tate in which the . . . hemp is grown or cultivated.” Rather than distinguishing between “hemp” and “marijuana” based on the part of the plant from which a product is derived, the 2014 Farm Bill definition included all parts of the Cannabis plant, and distinguished hemp from marijuana on the basis of the concentration of THC. Any plants that exceeded the 0.3% THC limitation were considered marijuana (a Schedule I controlled substance), and thus were not compliant with the 2014 Farm Bill. Activities determined to be outside the scope of the 2014 Farm Bill were not protected by the Appropriations Rider and were subject to federal enforcement action. Notwithstanding the passage of the 2018 Farm Bill and the publication of the interim final rule dated October 31, 2019 issued by the USDA in respect of commercial production of Hemp in the United States ("USDA IFR"), the hemp cultivation and research provisions contained in the 2014 Farm Bill remained in effect until December 31, 2021. Many states relied on their existing pilot program regimes—either in choosing to continue operating under the 2014 Farm Bill until its expiration or in submitting a 2018 Farm Bill plan to assume primary regulatory authority over Hemp production. Because the 2018 Farm Bill permits states and Native American tribes to regulate Hemp and Hemp-derived products more restrictively than the 2014 Farm Bill, variances in these jurisdictions’ laws and regulations on Hemp may to persist. Compliance with state law remains imperative under the 2018 Farm Bill.
FDA Approval of Epidiolex
On June 25, 2018, the FDA issued to GW Pharmaceuticals plc its approval for Epidiolex, the first Cannabis-derived prescription medicine to be available in the U.S. The active ingredient in Epidiolex is CBD isolate created from Marijuana-based plants.
The 2018 Farm Bill
The 2018 Farm Bill became law on December 20, 2018. Prior to this law, all non-exempt Cannabis plants grown in the United States were scheduled as a controlled substance under the CSA, and as a result, the cultivation of Hemp for any purpose in the United States without a Schedule I registration with the DEA was, unless exempted by the 2014 Farm Bill, illegal under federal law. The passage of the 2018 Farm Bill materially changed federal laws governing Hemp by removing hemp from the CSA and establishing a federal regulatory framework for Hemp cultivation. Specifically, the 2018 Farm Bill: (a) explicitly amended the CSA to exclude from the definition of marijuana all parts of the Cannabis plant (including its derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not) containing a THC concentration of not more than 0.3% on a dry weight basis; (b) allows the commercial production and sale of Hemp in interstate commerce; (c) establishes the USDA as the primary federal agency regulating the cultivation of Hemp in the United States, while allowing states to adopt their own plans to regulate the same; and (d) affords farmers the opportunity to obtain crop insurance and research grants. The 2018 Farm Bill also excluded from the CSA definition of “tetrahydrocannabinol” any material, compound, mixture, or preparation that falls within the definition of hemp. By defining Hemp to include its derivatives, extracts, and cannabinoids, popular Hemp products, such as Hemp-derived CBD, are no longer subject to DEA control. Accordingly, the DEA no longer has regulatory authority to interfere with the interstate commerce of Hemp products, so long as the THC level of such products is at or below 0.3%.
5 See http://www.ncsl.org/research/health/state-medical-marijuana-laws.aspx.
6 https://www.ams.usda.gov/rules-regulations/hemp/state-and-tribal-plan-review.
7 Id.
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Although the DEA no longer regulates Hemp, marijuana continues to be classified as a Schedule I controlled substance under the CSA. As a result, CBD and other cannabinoids, if derived from marijuana as defined by the CSA, also remain Schedule I controlled substances under U.S. federal law. Though chemically and genetically distinct, Hemp and marijuana appear similar to the naked eye. The active enforcement against illegal marijuana and marijuana- based products under current federal law may inadvertently result in enforcement actions taken against Hemp or Hemp-derived products.
The 2018 Farm Bill amends the Agricultural Marketing Act of 1946 to categorize hemp as an agricultural commodity under the regulatory purview of the USDA in coordination with state departments of agriculture. Although the USDA will be the primary federal regulatory agency overseeing hemp cultivation in the United States, states, U.S. territories, and Indian tribes desiring to obtain (or retain) primary regulatory authority over Hemp activities within their borders are allowed to do so after submitting a plan for regulation to the USDA, and receiving approval from the USDA for the same. Pursuant to the 2018 Farm Bill, states, U.S. territories, and tribal governments can adopt their own regulatory plans for hemp cultivation, even if more restrictive than federal regulations, so long as the plans meet minimum federal standards and are approved by the USDA. Hemp cultivation in states and tribal territories that do not choose to submit their own plans (and that do not prohibit hemp cultivation) will be governed by USDA regulation.
On January 19, 2021, the USDA released the USDA Final Rule (“USDA FR”), which governs the domestic production of Hemp under the 2018 Farm Bill. The USDA FR also specifies the provisions that a state or tribal Hemp plan must contain to be in compliance with the 2018 Farm Bill. Once USDA formally receives a plan, the agency will have 60 days to review and approve or disapprove the plan. To date, the USDA has approved over 90 state and tribal hemp production plans. The status of the USDA's review of plans, is available at https://www.ams.usda.gov/rules-regulations/hemp/state-and-tribal-plan-review.
As introduced above, state and tribal governments may impose separate restrictions or requirements on hemp cultivation and the sale of Hemp products; however, states may not interfere with the interstate transportation or shipment of lawfully produced Hemp or Hemp products. This was confirmed in a May 2019 memorandum released by the USDA’s Office of General Counsel. That memorandum reiterates that, due to enactment of the 2018 Farm Bill, states and Native American tribes may not prohibit the interstate transportation or shipment of hemp lawfully produced under the 2014 or 2018 Farm Bills.
It is important to note that the 2018 Farm Bill preserves the authority and jurisdiction of the FDA, under the FD&C Act, to regulate the manufacture, marketing, and sale of food, drugs, dietary supplements, and cosmetics, including products that contain Hemp extracts and derivatives, such as CBD. As a result, the FD&C Act will continue to apply to Hemp-derived food, drugs, dietary supplements, cosmetics, and devices introduced, or prepared for introduction, into interstate commerce. As a producer and marketer of Hemp-derived products, the Company must comply with the FDA regulations applicable to manufacturing and marketing of FDA-regulated products. See “FDA Regulation”, below.
Since the passage of the 2018 Farm Bill, FDA released multiple statements concerning its efforts to review the safety of CBD to help determine whether to allow the marketing of CBD as a dietary supplement and food. For example on March 5, 2020, former FDA Commissioner Dr. Stephen M. Hahn issued a statement on the FDA’s work to educate the public on CBD’s perceived safety risks and its steps to solicit additional public feedback, data, and research on the science, safety, and quality of CBD products.8 These new steps include re-opening the public docket so that FDA can obtain additional scientific data on CBD.
A congressional mandated report from FDA on CBD was submitted to Congress on March 5, 2020 and confirmed that the FDA was actively considering pathways to allow the marketing of CBD as a dietary supplement, such as through a notice and-comment rulemaking or interim risk-based enforcement policies. The report signaled the FDA’s continued interest in certain aspects of CBD, including effects from sustained use, effects from different
8 See https://www.fda.gov/news-events/press-announcements/fda-advances-work-related-cannabidiol-products-focus-protecting-public-health-providing-market.
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methods of exposure, and effects on the developing brain and on the unborn child and breastfed newborn, and its interest in developing an appropriate regulatory pathway for CBD products.At this time, former Commissioner Hahn also publicly stated that it would be a “fool’s game” for the FDA to pull CBD products from the market entirely, as their use is already widespread.9
In January 2021, the FDA issued an update entitled “Better Data for a Better Understanding of the Use and Safety Profile of Cannabidiol (CBD) Products.”10 In the statement, the FDA acknowledges the rapid increase and interest in the availability of CBD and other products derived from Cannabis, and called for “real-world data” on the use and safety of CBD. The call acknowledges the FDA’s current gaps in understanding of the safety profile of CBD, which may be addressed through obtaining real-world data and a robust evidentiary foundation to inform public health decisions regarding CBD. The FDA further noted that it is continuing to “evaluate the regulatory frameworks that apply to certain Cannabis-derived products that are intended for non-drug uses, including whether any new FDA regulations may be warranted.”
On March 22, 2021, the FDA issued a news release announcing the issuance of warning letters to two companies for selling OTC products labeled as containing CBD, alleging that the products are illegally marketed unapproved drugs and misbranded due to prominent featuring of CBD on the labeling. Similar warning letters were issued to other online CBD retailer in 2021 and 2022.
On October 16, 2021, the FDA published a “Cannabis-Derived Products Data Acceleration Plan,” a portfolio of pilot initiatives and partnerships designed to leverage novel data sources and advanced data analytics to identify current and emerging safety vulnerabilities in the cannabis-derived products market.11 Through the Data Acceleration Plan, FDA seeks to gather, in real time, information about potential safety problems or adverse events associated with cannabis-derived products, including CBD products, and information about general patterns of product use and emerging trends. According to FDA, “new approaches to detecting safety signals and other insights using diverse data sources and rigorous analytical methods can contribute significantly to FDA’s ability to respond to emerging and rapidly evolving product areas, like the [cannabis-derived products] market.” Sample pilot projects that are part of the Data Acceleration Plan take advantage of the information already available online, from certificates of analysis, to customer reviews and adverse event surveillance systems to detect safety signals and gaps in understanding needing to be filled by FDA- and industry-driven studies. FDA also plans to partner with other federal agencies, international regulatory bodies, and state-based regulatory organizations to gather additional data and develop its regulatory strategy. While the Data Acceleration Plan does not guarantee that the agency will create a pathway for it to approve CBD to be incorporated into food and dietary supplements, it indicates that the FDA is focused on modernizing and enhancing its ability to evaluate the CBD and other cannabinoid markets.
On May 4, 2022, the FDA issued warning letters to five companies for selling products labeled as containing delta-8 tetrahydrocannabinol (delta-8 THC) in ways that violate the Federal Food, Drug, and Cosmetic Act (FD&C Act). This action was the first time the FDA issued warning letters for products containing delta-8 THC. In addition to the violations related to FDA-regulated products containing delta-8 THC, several of the warning letters outlined additional violations of the FD&C Act, including marketing CBD products claiming to treat medical conditions in humans and animals, promoting CBD products as dietary supplements, and adding CBD to human and animal foods.
On November 21, 2022, the FDA posted warning letters to five companies selling products containing CBD, stating that these companies were selling CBD containing products that people may confuse for traditional foods or beverages which may result in unintentional consumption or overconsumption of CBD. The FDA stated that CBD-containing products in forms that are appealing to children, such as gummies, hard candies and cookies, are especially concerning.
9 See https://www.nutraingredients-usa.com/Article/2020/02/28/FDA-chief-Hahn-says-it-would-be-fool-s-game-to-try-to-shut-down-CBD-markets#.
10 See https://www.fda.gov/news-events/fda-voices/better-data-better-understanding-use-and-safety-profile-cannabidiol-cbd-products.
11 FDA, Cannabis Derived Products Data Acceleration Plan, October 2021, available at https://www.fda.gov/media/153183/download.
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On January 26, 2023, the FDA issued a statement denying three citizen petitions that had asked the agency to conduct rule making to allow the marketing of CBD products as dietary supplements, and further stated that a new regulatory pathway would benefit consumers by providing safeguards and oversight to manage and minimize risks related to CBD products. The agency suggested that Congress create a new regulatory pathway that balances individuals' access to CBD products with the necessary oversight to manage risks, adding it is prepared to work with Congress on this matter.
In addition, on December 17, 2020, the Federal Trade Commission ("FTC") announced enforcement proceedings against six companies making deceptive marketing claims related to CBD products. The companies allegedly made a range of scientifically unsupported claims about the products’ ability to treat serious health conditions, such as cancer, heart disease, and Alzheimer’s disease. On March 5, 2021, the FTC approved consent orders against the six companies that prohibit future deceptive conduct, with monetary penalties imposed on five of the six the companies. On July 6, 2021, the FTC announced the approval of a seventh administrative consent order against a CBD company, also for unsupported health claims. On December 20, 2022 the FTC released a new Health Products Compliance Guidance. The document replaces and expands upon previous guidance focused on substantiating health-related claims for dietary supplements, clarifying that the scope will cover all health-related product advertising.12 The guidance describes in detail the amount and type of evidence needed to substantiate health-related claims, with more emphasis on the fact that the FTC, as a general rule, expects high quality randomized, placebo-controlled human clinical trials. This may signal the FTC is preparing to more closely scrutinize and potentially demand a higher level of substantiation to support health-related claims than in previous years.
DEA IFR
On August 21, 2020, the DEA issued an interim final rule (the “DEA IFR”) concerning implementation of the 2018 Farm Bill. Even though the 2018 Farm Bill removed Hemp from scheduling under the CSA, the DEA IFR purports to clarify that material that exceeds 0.3% delta-9 THC remains controlled in Schedule I of the CSA. Additionally, the DEA IFR states that the 2018 Farm Bill does not impact the control status of synthetically derived THCs, for which the DEA claims that the amount of delta-9 THC is not a determining factor in whether the material is a controlled substance.
The DEA IFR has caused consternation throughout the Hemp industry because of concerns that it confuses the legality of in-process Hemp extract material that may temporarily and unintentionally exceed 0.3% delta-9 (before returning to or below 0.3% delta-9 THC in finished form). However, DEA spokesperson Sean Mitchell has indicated that the DEA is aware of the Hemp industry’s policy concerns and “has higher enforcement priorities, such as opioids and methamphetamine.” Moreover, more than 3,300 public comments were submitted in response to the interim rule, so it is possible that the DEA IFR will be modified and improved before becoming a final rule. Many of the comments, which were submitted by stakeholders and industry groups make clear that the DEA IFR is inconsistent with the 2018 Farm Bill and would create serious challenges for the hemp products industry. Further, in the Consolidated Appropriations Act, 2021, Congress included report language that directed the USDA to develop regulations to protect the transportation, sale, and storage of in-process Hemp extract. There is also a chance that the DEA IFR will be invalidated in its entirety. It is currently the subject of at least one federal lawsuit, which could result in the DEA IFR being struck down. In the Company’s opinion, the DEA IFR is improper and unconstitutional, and the Company’s products enjoy all of the protections of the 2018 Farm Bill and are not impacted by the DEA IFR.
On February 8, 2022, Representative Congresswoman Chellie Pingree (D-Maine) introduced the Hemp Advancement Act of 2022 to improve the 2018 Farm Bill’s hemp provisions and provide greater clarity and flexibility to hemp growers and processors.13 Specifically, the bill would: (1) raise the allowable THC threshold for hemp and in-process hemp extract to make the rules more workable for growers and processors, while ensuring that final hemp products sold to consumers are not intoxicating through a 0.3% limits of total THCs in products, and (2) remove th
12 FTC, Health Product Compliance Guidance, https://www.ftc.gov/system/files/ftc_gov/pdf/Health-Products-Compliance-Guidance.pdf.
13 See https://pingree.house.gov/news/documentsingle.aspx?DocumentID=3970.
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e requirement that hemp testing occur in DEA-registered laboratories, among other updates to aimed at providing protections for the hemp industry. The bill is expected to be re-introduced in spring 2023, and may also include language aimed at addressing intoxicating hemp-derived cannabinoids.
117th Congress
On February 4, 2021, Rep. Kurt Schrader (D-OR-5) and Rep. Morgan Griffith (R-VA-9) introduced H.R. 841 for the second time. It would ensure that Hemp-derived CBD, and other non-intoxicating Hemp-derived compounds, could be lawfully marketed as dietary supplements. The bill would require CBD and Hemp extract product manufacturers to comply with the existing regulatory framework for dietary supplements, to help assure that such products are safe, properly labeled, and manufactured in accordance with current Good Manufacturing Practices and other health and safety provisions of the FD&C Act. Passage would also help stabilize the Hemp markets, open up a promising economic opportunity for U.S. agriculture, and fulfill the commitments made to Hemp farmers pursuant to the 2018 Farm Bill. H.R. 841 was referred to the House Committee on Energy and Commerce. However, the bill failed to win passage prior to the congressional session ending (117th Congress convened on January 3, 2021, and concluded on January 3, 2023). It is expected that H.R. 841 will be reintroduced in the 118th Congress.
On May 19, 2021, Senators Ron Wyden (D-OR), Rand Paul (R-KY) and Jeff Merkley (D-OR) introduced S. 1698, the Hemp Access and Consumer Safety Act. The bill would allow the use of CBD and other hemp-derived ingredients in both dietary supplements and food and beverage products. It also provides FDA with the authority to establish labeling and packaging requirements for supplements and foods that contain hemp, hemp-derived CBD, or other hemp ingredients, and would permit FDA to take additional enforcement action against supplements that do not meet the FD&C Act’s definition of “dietary supplement.” S. 1698 was referred to the Senate Committee on Health, Education, Labor, and Pensions. However, the bill failed to win passage prior to the congressional session ending. This legislation is also expected to be reintroduced in the 118th Congress.
In addition, on July 21, 2021, Senator Cory Booker (D-NJ) introduced S.4591 the “Cannabis Administration and Opportunity Act” (CAOA). The bill removes marijuana from Schedule I of the Controlled Substances Act and established a federal regulatory framework for adult-use Cannabis products. “Hemp” as defined by the 2018 Farm Bill would be excluded from the bill’s definition of “cannabis.” However, the CAOA also contains provisions to regulate hemp-derived CBD as a dietary supplement, provided certain requirements are met. Among other things, the language would: require submission of NDI notifications for supplements that contain CBD; authorize FDA to set a recommended daily serving limit for CBD and labeling/packaging requirements for CBD-containing supplements, both of which may be established through an interim final rule instead of traditional notice-and-comment procedures. The legislation also provides FDA with additional enforcement authority for dietary supplements, which the agency believes is necessary to address issues such as synthetic CBD. S.4591 was referred to the Senate Committee on Finance; however, the bill failed to win passage prior to the congressional session ending.
On November 15, 2021, Congresswoman Nancy Mace (R-SC) introduced the H.R. 5977, the “States Reform Act,” another comprehensive cannabis reform bill seeking to legalize and regulate marijuana at the federal level. The States Reform Act would deem cannabis and industrial hemp as having been marketed in the United States as dietary ingredients before October 15, 1994, and would also deem them generally recognized as safe based on common use in food prior to January 1, 1958. Thus, under the States Reform Act, FDA would be prohibited from applying the dietary supplement and food additive preclusions to cannabis and industrial hemp. H.R. 5977 was referred to the House Subcommittee on Crime, Terrorism, and Homeland Security; however, the bill failed to win passage prior to the congressional session ending.
On December 2, 2021, Representative Kathleen Rice (D-NY), plus cosponsors Representatives Morgan Griffith (R-VA), Angie Craig (D-MN), and Dan Crenshaw (R-TX) introduced H.R. 6134, the “CBD Product Safety and Standardization Act of 2021.” This proposal pertains specifically to food and beverages containing CBD, and would allow FDA to regulate CBD in food as it would any other food ingredient. It would also require FDA to establish regulations specifying the maximum amount of hemp-derived CBD a food or beverage may have per serving;
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labeling and packaging requirements; and conditions of intended use for the product. H.R. 6134’s was referred to the House Subcommittee on Health; however, the bill failed to win passage prior to the congressional session ending.
Currently, it is unclear whether the CAOA, H.R. 5977, and H.R. 6134 will be reintroduced in the 118th Congress. In addition, timing for legislation that may include a new potential regulatory pathway developed by the FDA is uncertain. While authorizing legislation could be introduced in 2023, the FDA’s development and implementation of a new pathway would likely take several years. As such, it is possible Congress may move forward to with a legislation similar to H.R. 841 that would authorize a pathway for Hemp-derived CBD in a more efficient manner, and could permit the use of CBD in dietary supplements.
State Regulation of Hemp in the United States
At present, the Company sources its Hemp only from proprietary operations and contract suppliers located in Colorado, Kentucky and Oregon that are in compliance with state and federal regulations. However, the Company is aware of variations in certain states’ definition of Hemp as compared with the definition of Hemp in the 2018 Farm Bill, although the majority of states have aligned their definition of Hemp with the federal definition. All Hemp produced and sold by the Company constitutes Hemp under the 2018 Farm Bill and under the laws of the states in which it produces and sells such Hemp.
Under the 2018 Farm Bill, states retain significant discretion and authority to adopt their own regulatory regimes governing hemp production. As a result, regulation of Hemp and the products derived therefrom will likely continue to vary on a state-by-state basis even though the 2018 Farm Bill has been fully implemented. In addition, states take varying approaches to regulating the production and sale of hemp-derived CBD. While some states explicitly authorize and regulate the sale of hemp-derived CBD products, or otherwise provide legal protection for authorized individuals to engage in commercial hemp activities, other states maintain outdated drug laws that do not distinguish between marijuana, hemp and/or hemp-derived CBD, resulting in hemp being classified as a controlled substance under state law (Idaho and District of Columbia). Additionally, a number of states prohibit the sale of ingestible CBD products based on FDA’s position that, pursuant to the FD&C Act, it is unlawful to introduce food containing added CBD or THC into interstate commerce, or to market CBD or THC products as, or in, dietary supplements, regardless of whether the substances are hemp-derived. Since the Company’s products are specifically excepted from the CSA by the 2018 Farm Bill’s definition of Hemp, it is the Company’s position that such state laws would specifically except them as well.
The treatment of the legality of Hemp-derived CBD products by state and local law enforcement authorities is broadly disparate. These products have been sold at retail and online in all fifty states for many years, and law enforcement actions have been limited and, in some cases, discontinued after initial enforcement actions.
Accordingly, the sale of CBD at the retail level in some U.S. states remains a gray and evolving area of the law. An increasing number of states – including California, Hawaii, Florida, Kentucky, Iowa, Texas, Utah, Virginia, and West Virginia – have passed legislation that explicitly permit the sale of CBD. Several of these states also place additional requirements on the sale of CBD products such as specific testing, labeling, or registration of products. Recently, states including Minnesota, Oregon, and Virginia have enacted milligram limits on the amount of THC in Hemp-derived products and have prohibited the sale of products containing THC to those under 21. Several states are currently considering legislation imposing similar restrictions. The Company has chosen to sell its products in all fifty states, understanding that there is a risk of state or local law enforcement or regulatory action, and that state-specific requirements may vary significantly. Moreover, the Company has limited access to information regarding or control over which states its products may transit through between production and sale.
Colorado is the only jurisdiction in which the Company directly cultivates Hemp. The Company has obtained the following licenses issued by the Colorado Department of Agriculture: (i) Hemp Registration issued April 1, 2022 for 3,000 sq. ft.of indoor space; and (ii) Hemp Registration issued March 23, 2022 for 10 acres of outdoor cultivation. The foregoing licenses are in respect of cultivation only as a license from the state of Colorado is not required for the subsequent sale of its products.
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The Company’s cultivation division has increased its focus on research, while continuing operations in Colorado, Oregon and Kentucky, to further its competitive advantage in optimizing regional genetics and developing the Company’s scalable drying and harvesting systems.
The varying regulations with respect to the treatment of Hemp from state to state continue to evolve. The regulations of the particular states most impactful to the Company’s business are described below.
Colorado
The bulk of the Company’s operations are based in Colorado as a result of the state’s legalization of Hemp and mature regulatory program.
Passed in 2012, Amendment 64 to the Colorado Constitution directed the General Assembly to enact legislation governing the cultivation, processing and sale of Hemp by July 1, 2014.14 In 2013, responsibility for establishing regulations pertaining to the cultivation of Hemp, including registration and inspection, was delegated to the Colorado Department of Agriculture ("CDA").15 The CDA adopted rules and regulations that set forth requirements for registration, inspection, and testing.16 Registration requirements include but are not limited to: disclosing the name and address of the entity that will hold the registration, and the name of each officer, director, member, partner or owner of at least 10% of the entity and any other person who has managing or controlling authority over the entity; providing the CDA with GPS coordinates and a map of the land area where the Hemp will be cultivated; listing the intended use of harvested Hemp materials; and payment of a non-refundable fee17. All registrants are subject to routine inspection and sampling by the CDA to verify that the THC concentration of the plants being cultivated does not exceed 0.3% on a dry weight basis, and to ensure registrants are complying with applicable reporting requirements.18 Reporting requirements include a pre-planting report detailing the varieties to be planted, a planting report specifying the exact land areas where planting occurred, and a harvest report documenting the size of the harvest and the anticipated harvest date.19
After the passage of the 2014 Farm Bill, the Colorado legislature passed the Colorado Industrial Hemp Regulatory Program Act establishing the Colorado Industrial Hemp Regulatory Program.20 The Colorado Industrial Hemp Regulatory Program Act expressly authorizes two distinct categories of hemp cultivation registration to be issued and administered by the CDA: (i) R&D; and (ii) commercial. “Research and Development” is defined as the “cultivation of Hemp by an institution of higher education or other entity approved by the [CDA] for purposes of agricultural or academic research in the development of growing Hemp.”21 In comparison, “Commercial” is defined as “the growth of Hemp, for any purpose including engaging in commerce, market development and market research, by any person or legal entity other than an institution of higher education or under the pilot program administered by the [CDA] for purposes of agricultural or academic research in the development of growing Hemp.”22
The Company believes that cultivation registrations for R&D purposes that operate in compliance with CDA rules and regulations comply with the conditions of the 2014 Farm Bill and the 2018 Farm Bill, and cultivation registrations for commercial purposes operating in compliance with CDA rules and regulations comply with the 2014 Farm Bill and the 2018 Farm Bill.
14 Colo. Const. art. XVIII, § 16.
15 8 CCR 1203-23.
16 Id.
17 Id.
18 Id.
19 Id.
20 See C.R.S. §§35-61-101, et seq.
21 8 CCR §1203-23(1.28).
22 8 CCR §1203-23(1.5).
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Finally, on May 30, 2018, the governor of Colorado signed House Bill 18-1295 into law. This legislation modified the Colorado Food and Drug Act to establish that food, cosmetics, drugs, and devices, as those terms are defined in the act, are not adulterated or misbranded by virtue of containing Hemp. This law codified a policy established in 2017 by the Colorado Department of Public Health and Environment ("CDPHE") that allowed for the production and sale of food products containing Hemp, so long as certain express conditions were satisfied. Under applicable legislation, food products containing Hemp must be produced by a wholesale food manufacturing facility that has registered with the CDPHE, and the finished product must contain a delta-9 THC concentration of no more than three-tenths of one percent (0.3%).
Following the implementation of the 2018 Farm Bill through the USDA FR, Colorado continued to operate its 2014 Farm Bill pilot program in 2021. On August 10, 2021, the USDA approved CDA’s State Hemp Management Plan, which became effective January 1, 2022. In addition, in February 2021 CDPHE adopted revised regulations concerning Hemp products, effective April 14, 2021, that establish new manufacturing, testing, and labeling requirements for Hemp products.
In 2022, Colorado governor signed into law SB22-05, which authorized the promulgation of rules to prohibit the sale of Hemp-derived products containing chemically modified, converted, or synthetically-derived intoxicating THC isomers, and created a task force to study intoxicating Hemp and make legislative and rule recommendations. On January 3, 2023, the SB 22-205 Task Force issued a Final Report that includes the following key recommendations: (1) creating categories of non-intoxicating cannabinoids, potentially intoxicating compounds, and potentially intoxicating cannabinoids; (2) initial hemp product limits of no more than 2.5 mg THC per serving and a ratio of CBD to THC of 15:1 (no container limits), which do not apply to a products that comply with the proposed definition of “broad spectrum” (under 0.01% THC), and/or exclusively contain one or more non-intoxicating compounds (e.g., CBD, CBG, or CBN isolate); (3) CBN limit of no more than 25 mg/serving; (4) an approval process and labeling to identify synthetic or synthesized cannabinoids; and (5) a manufacturing “safe harbor” for finished hemp products that are prohibited in Colorado but may legally be sold in another state.23 It is unclear when a bill incorporating these recommendations will be introduced. To allow time for businesses to comply, the Task Force recommends that any THC limits and approval processes have an effective date of January 1, 2024, and requirements imposed via rulemaking have an effective date of July 1, 2024.
Kentucky
Kentucky established a robust agricultural pilot program in 2013,24 which it expanded in 2017. Program participants may grow, cultivate, handle, process or market Hemp and Hemp products. The Kentucky Department of Agriculture has promulgated regulations25 and issued a policy guide for the program, both of which have served as models for newer Hemp regimes in other states.
Kentucky adopts the definition of “Hemp”26 set forth under the 2018 Farm Bill. Kentucky’s definition of marijuana27 excludes lawful Hemp and Hemp products.
Kentucky’s definition of marijuana specifically exempts Hemp products that do not contain any living plants, viable seeds, leaf materials or floral materials, as well as CBD products derived from hemp.28
Following the implementation of the 2018 Farm Bill through the USDA FR, Kentucky continued to operate its 2014 Farm Bill pilot program in 2021. Kentucky’s State Plan was submitted to FDA on September 15, 2021. The State Plan has been approved by USDA and became effective January 1, 2022.
23 SB22-205 Task Force, https://sbg.colorado.gov/med/205-Task-Force.
24 Ky. Rev. Stat. §§ 260.850-.869.
25 302 Ky. Admin. Regs. 50:010-080.
26 Ky. Rev. Stat. § 260.850(5)
27 Ky. Rev. Stat. § 218A.010(28)
28 Ky. Rev. Stat. § 218A.010(28)(b), (e)-(g).
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While the Company itself is not a program participant, it does take steps to ensure that the Kentucky-based suppliers with which it contracts are participants in the Kentucky agricultural pilot program, including requiring suppliers to represent and warrant their compliance with Kentucky law in writing and obtaining a copy of the applicable License issued to such supplier.
Oregon
Oregon’s Hemp laws are also evolving. Hemp extracts and CBD are referred to or defined in Oregon’s Hemp statutes and the state’s hemp regulations,29 pursuant to which an “industrial hemp commodities or product” includes CBD and other compounds derived from hemp.30 Further, all cannabinoid products from hemp must be tested for their THC and CBD content and microbiological contaminants.31 Only a grower registered with Oregon Department of Agriculture (the “ODA”) may produce Hemp, and only a handler registered with the ODA may process Hemp. A separate registration is required to handle Hemp seed. There are further restrictions on who a Hemp registrant can sell to32 and the Company’s packaged goods must comply with Oregon’s THC, CBD and microbiological testing requirements. In addition, Oregon restricts the sale of Hemp products with 0.5 milligrams or more total THC per package to those age 21 and older.
Following the implementation of the 2018 Farm Bill through the USDA FR, Oregon continued to operate its 2014 Farm Bill pilot program in 2021. On October 1, 2021, the ODA submitted a draft hemp plan to USDA for approval, and the plan was approved on January 6, 2022.
While the Company itself is not registered in Oregon, it does take steps to ensure the Oregon-based suppliers with which it contracts are appropriately registered with the ODA, including requiring suppliers to represent and warrant such compliance in writing and obtaining a copy of the applicable License issued to such supplier.
FDA Regulation
The governing food and drug law in the United States is the FD&C Act. One purpose of the FD&C Act is to forbid the movement in interstate commerce of adulterated and misbranded food, drugs, devices and cosmetics.33 The FDA is responsible for protecting the public health by ensuring the safety, efficacy, and security of human and veterinary drugs, biological products, and medical devices; and by ensuring the safety of the nation's food supply, cosmetics, and products that emit radiation.34 The FD&C Act prohibits the use in a food or dietary supplement of an ingredient that has already been approved as a new drug, or an article authorized for investigation as a new drug for which substantial clinical investigations have been instituted and made public. To date, the FDA has approved one product containing CBD as a drug, and continues to take the position that CBD cannot be marketed as a dietary supplement or added to food because a product containing CBD was approved as a drug and substantial clinical trials studying CBD as a new drug were made public prior to the marketing of any food or dietary supplements containing CBD, and therefore dietary supplements or food are precluded from containing this ingredient. While the Company disagrees with the FDA's position, this creates additional barriers to selling certain CBD and CBD-based products in the U.S.
Notably, the FDA does not impose the same restrictions on the use of CBD in cosmetic products. The agency states on its website that “[c]ertain cosmetic ingredients are prohibited or restricted by regulation, but currently that is not
29 See Oregon Revised Statutes § 571.260 et seq.; Oregon Administrative Rules § 603-048-0010 et seq.
30 OAR § 603-048-0010 (24)(a).
31 Id. at § 603-048-2320, 603-048-2340.
32 OAR § 603-048-0100(4).
33 https://www.fda.gov/about-fda/fda-basics/how-did-federal-food-drug-and-cosmetic-act-come-about.
34 U.S. Food and Drug Administration, Mission Statement: https://www.fda.gov/about-fda/what-we-do.
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the case for any cannabis or cannabis-derived ingredients.”35 However the FDA further notes that such products must comply with all applicable legal requirements including the adulteration and misbranding provisions of the FD&C Act specific to cosmetic products.
The Dietary Supplement Health and Education Act (the “DSHEA”), an amendment to the federal FD&C Act, established a framework governing the composition, safety, labeling, manufacturing, and marketing of dietary supplements in the United States. Generally, under DSHEA, dietary ingredients marketed in the United States prior to October 15, 1994 may be used in dietary supplements without notifying the FDA. “New” dietary ingredients (i.e. dietary ingredients “not marketed in the United States before October 15, 1994”) must be the subject of a new dietary ingredient notification submitted to the FDA unless the ingredient has been “present in the food supply as an article used for food” and is not “chemically altered.” Any NDI notification must provide the FDA with evidence of a “history of use or other evidence of safety” establishing that use of the dietary ingredient” will reasonably be expected to be safe.”36
As noted above, the FDA has taken the position that CBD cannot be marketed as a dietary supplement because it has been the subject of investigation as a new drug (referred to as “IND Preclusion”). According to the FDA, the submission of the IND for Epidiolex and Sativex by Greenwich Biosciences, the U.S. subsidiary of London-based GW Pharmaceuticals, preceded the sales and marketing of CBD as a dietary supplement. Excluded from the DSHEA definition of a dietary supplement is: “an article authorized for investigation as a new drug, antibiotic, or biological for which substantial clinical investigations have been instituted and for which the existence of such investigations has been made public, which was not before such approval, certification, licensing, or authorization marketed as a dietary supplement or as a food unless the Secretary, in the Secretary’s discretion, has issued a regulation, after notice and comment, finding that the article would be lawful under this Act.”37 It is the FDA’s interpretation of the IND Preclusion that the preclusion date is the date in which it authorized the drug for investigation; however, the Company believes there are significant arguments against this position in that all conditions of the statute must be met before the IND Preclusion applies, including (1) authorization for investigation as a new drug; (2) substantial clinical investigations must be instituted; (3) such substantial investigations must be made public; and (4) all of the above must occur prior to the marketing of the article as a food or dietary supplement.
On July 23, 2021 the Company was advised by the FDA of its objection to a New Dietary Ingredient Notification (“NDIN”) submitted by the Company earlier in 2021. The FD&C Act requires that manufacturers who wish to market dietary supplements that contain NDIs notify the FDA with their basis for concluding that a dietary supplement containing the NDI will reasonably be expected to be safe. The Company’s submission was objected to on the basis that its CBD containing a full spectrum hemp extract does not meet the definition of a dietary supplement due to the IND Preclusion and insufficient safety data. The Company does not agree with a number of conclusions reached by the FDA, in particular with respect to their analysis of safety data provided. While the objection has not impacted the Company’s existing business, the Company will continue to engage with the FDA and lawmakers with the objective of securing a favorable ruling and/or facilitating the promulgation of definitive legislation establishing an appropriate regulatory environment to protect consumers and to establish guidance for manufacturers.
The CBD CLINIC, CBDMEDIC, and HARMONY HEMP brands include products that are OTC drug products regulated by the FDA. To legally market an OTC drug product, the FD&C Act and FDA regulations promulgated under its authority require FDA approval of a New Drug Application (“NDA”) that includes substantial evidence of effectiveness based on adequate and well-controlled studies, or an Abbreviated New Drug Application (“ANDA”). Alternatively, an OTC drug product may be marketed without an FDA approved NDA or ANDA if the drug product is manufactured in compliance with an OTC drug regulation, referred to as a monograph, which has been established for that therapeutic class of drug. The OTC drug monographs identify permissible active ingredients, labeling, and
35 U.S. Food and Drug Administration, “FDA Regulation of Cannabis and Cannabis-Derived Products, Including Cannabidiol (CBD), Questions and Answers,” https://www.fda.gov/news-events/public-health-focus/fda-regulation-cannabis-and-cannabis-derived-products-including-cannabidiol-cbd#qandas.
36 21 U.S. Code § 350b(a)(2).
37 21 U.S. Code § 321(ff)(3)(B).
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claims. OTC monographs generally do not specify inactive ingredients that may be used in the manufacture of OTC drugs. OTC drugs marketed in compliance with a final monograph are generally recognized and safe and effective, and are exempt from premarket approval requirements.
The FDA has also issued “tentative final monographs,” which are proposed rules or administrative orders that, when finalized, will become final monographs. The FDA allows drugs that comply with the tentative final monograph to be marketed under its enforcement discretion policy. Once the monograph is finalized for that therapeutic class of drug, marketing must then conform to the final monograph, or the OTC drug products will be considered adulterated or misbranded under the FD&C Act and marketing will be prohibited.
The active ingredients in the Company’s products offered under CBD CLINIC, CBDMEDIC, and HARMONY HEMP brands (lidocaine, menthol and camphor) are currently covered by an OTC tentative final monograph for external analgesic drug products, which was published in the Federal Register on February 8, 1983 (48 FR 5852). The tentative final monograph does not specify what inactive ingredients may be used in the manufacture of such analgesics. This tentative final monograph is part of the FDA’s ongoing review of OTC drug products.
Inactive ingredients do not require individual approval by the FDA. The FDA evaluates an inactive ingredient within the context of an NDA. After approval of the NDA, the FDA will list the inactive ingredients in the approved drug product in the FDA’s Inactive Ingredient Database. Based on the listings in this Database, the FDA has not approved an NDA for a new drug containing CBD as an inactive ingredient. FDA does not list OTC inactive ingredients in the Inactive Ingredient Database for OTC drug products manufactured and marketed in accordance with an OTC monograph. It is the drug manufacturer’s responsibility to ensure the suitability and safety of the inactive ingredients in its OTC monographed drug products.
There is inherent risk in marketing an OTC product containing CBD as an active or inactive ingredient, or a dietary supplement containing CBD due to IND Preclusion based on the drug approval awarded to Epidiolex and the FDA’s existing guidance on the introduction of CBD in the food supply and marketing hemp as a dietary supplement. FDA policies and regulations may change from time to time, requiring formulation, packaging, or labeling changes or requiring the submission of an NDA for a drug product containing any amount of CBD. Although some states have passed laws that permit certain CBD products despite contrary federal laws, such state laws may also change. The Company cannot predict whether new federal or state regulations or legislation affecting the use of CBD in OTC drug products or any of the activities of the Company will be enacted or what effect any regulation or legislation would have on the Company’s business.
On March 22, 2021, the FDA issued a news release announcing the issuance of warning letters to two companies for selling OTC products labeled as containing CBD, alleging that the products are illegally marketed unapproved drugs.38 Similar warning letters were issued to CBD companies in 2021 and 2022. The letters explain that, because CBD has known pharmacological effects on humans, with demonstrated risks, it cannot be legally marketed as an inactive ingredient in OTC drug products that are not reviewed and approved by the FDA. In the letters, the FDA also alleged the products are misbranded due to the prominent featuring of CBD on the labeling, which the Agency stated is misleading because it presents the CBD inactive ingredients “in a manner that creates an impression of value greater than their true functional role in the formulation.” 39
The CBD CLINIC and CBDMEDIC products are manufactured by a third-party manufacturer, Aidance, in an FDA-registered facility which complies with cGMP requirements. The CBD CLINIC and CBDMEDIC products are manufactured under the Aidance Manufacturing and Services Agreement and are marketed in compliance with an OTC tentative final monograph for external analgesic drug products as described above. As such, the Company takes the position that these products are exempt from the requirements for an NDA or ANDA pre-market approval. Aidance, as the manufacturer, has registered its facility as a drug establishment and Aidance and Company have
38 U.S. Food and Drug Administration, “FDA Warns Companies Illegally Selling Over-the-Counter CBD Products for Pain Relief,” https://www.fda.gov/news-events/press-announcements/fda-warns-companies-illegally-selling-over-counter-cbd-products-pain-relief.
39 See 21 CFR 201.10(c)(4), Drugs; statement of ingredients.
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submitted to FDA for National Drug Code (“NDC”) numbers for the OTC drug products. There is no assurance that the position taken by the Company that its products are exempt from the requirements for an NDA or ANDA pre-market approval will not, in the future, be challenged by the FDA, which could result in material adverse effects to the Company and its business.
The FD&C Act provides that a substance added to food is unsafe unless the substance is GRAS ("Generally Recognized as Safe"). The FDA has not recognized CBD as GRAS for human consumption, although certain hemp seed derivatives may be considered GRAS.40 41 Further research is needed to determine if other cannabinoids would be considered GRAS or what steps would be necessary for them to be recognized as GRAS. In the meantime, stakeholders including the Company are collecting data to pursue a GRAS determination for CBD, as the FDA has indicated it cannot conclude that CBD is GRAS due to the current lack of information to support this determination. As discussed below on March 6, 2020, the Company achieved self-affirmed GRAS status for its hemp extract, adding to the current body of scientific literature on the safe use of CBD. Enforcement of this prohibition on the use of CBD in food has been generally limited to products making unlawful drug or disease claims, with the FDA also asserting its position that CBD is not a permissible food or dietary supplement ingredient. The Company’s products containing CBD derived from Hemp are not marketed or sold using claims that the products are intended to diagnose, mitigate, treat, cure, or prevent disease in violation of the FD&C Act.
Since the passage of the 2018 Farm Bill, FDA released multiple statements concerning its efforts to review the safety of CBD to help determine whether to allow the marketing of CBD as a dietary supplement. For example on March 5, 2020, former FDA Commissioner Dr. Stephen M. Hahn issued a statement on the FDA’s work related to CBD products. The statement described the FDA's steps to solicit additional public feedback, data, and research on the science, safety, and quality of CBD products, including opening the public docket so that FDA can obtain additional scientific data on CBD.
Based on FDA’s prior guidance and statements, topical cosmetic products are not currently subject to the same regulatory scrutiny as ingestible products that contain CBD. For instance, while FDA notes that topical products must comply with all applicable legal requirements including the adulteration and misbranding provisions of the FD&C Act specific to cosmetic products, FDA’s website states that “[c]ertain cosmetic ingredients are prohibited or restricted by regulation, but currently that is not the case for any cannabis or cannabis-derived ingredients.” Additionally, former Commissioner Hahn had positively suggested that the effects of CBD may differ depending on the route of administration.
A congressionally mandated report from FDA on CBD was also submitted to Congress on March 5, 2020. On the issue of topical products, the report states that “[c]osmetic ingredients do not generally require premarket approval (with the exception that most color additives do require premarket approval)” and that “it is possible that some individual products containing CBD fall outside of FDA’s jurisdiction.” In addition, the report confirmed that the FDA was actively considering pathways to allow the marketing of CBD as a dietary supplement, such as through a notice-and-comment rulemaking or interim risk-based enforcement policies. The report signaled the FDA’s continued interest in certain aspects of CBD, including effects from sustained use, effects from different methods of exposure, and effects on the developing brain and on the unborn child and breastfed newborn ,
and its interest in developing an appropriate regulatory pathway for CBD products. The report also acknowledges that the FDA is receiving inquiries about whether “full spectrum” and “broad spectrum” Hemp products can currently be marketed and sold as dietary supplements, but the FDA has not yet answered the question conclusively. At the time, former Commissioner Hahn had publicly stated that it would be a “fool’s game” for the FDA to pull CBD products from the market entirely, as their use is already widespread.
40 21 USC § 348(a)(3). DEA has allowed 3 GRAS notifications for hemp seed: https://www.fda.gov/food/cfsan-constituent-updates/fda-responds-three-gras-notices-hemp-seed-derived-ingredients-use-human-food.
41 21 CFR § 1308.35 (a)(2). The DEA’s final rule on legal hemp materials and products specifically excludes materials used for human consumption.
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In January 2021, the FDA issued an update entitled “Better Data for a Better Understanding of the Use and Safety Profile of Cannabidiol (CBD) Products.” In the statement, the FDA acknowledged the rapid increase and interest in the availability of CBD and other products derived from Cannabis, and called for “real-world data” on the use and safety of CBD. The call acknowledged the FDA’s current gaps in understanding of the safety profile of CBD, which may be addressed through obtaining real-world data and a robust evidentiary foundation to inform public health decisions regarding CBD. The FDA further noted that it is continuing to “evaluate the regulatory frameworks that apply to certain Cannabis-derived products that are intended for non-drug uses, including whether any new FDA regulations may be warranted.” On October 16, 2021, the FDA published a “Cannabis-Derived Products Data Acceleration Plan,” a portfolio of pilot initiatives and partnerships seeking to gather real time information from novel data sources about potential safety problems or adverse events associated with cannabis-derived products, including CBD products, and information about general patterns of product use and emerging trends.
On January 26, 2023, the FDA issued a statement denying three citizen petitions that had asked the agency to conduct rulemaking to allow the marketing of CBD products as dietary supplements, and further stated that a new regulatory pathway would benefit consumers by providing safeguards and oversight to manage and minimize risks related to CBD products. The agency suggested that Congress create a new regulatory pathway that balances individuals' access to CBD products with the necessary oversight to manage risks, adding it is prepared to work with Congress on this matter. FDA also noted that it “will continue to take action against CBD and other cannabis-derived products to protect the public, in coordination with state regulatory partners, when appropriate” and “will remain diligent in monitoring the marketplace, identifying products that pose risks and acting within our authorities.” Based on this statement, a significant shift in the enforcement landscape is not expected.
Despite the position taken by the FDA that there is no evidence of CBD being marketed as a food or dietary supplement prior to drug trials being commenced and made public, the Company believes there is substantial uncertainty and different interpretations among state and federal regulatory agencies, legislators, academics and businesses as to whether cannabinoids including CBD were present in the food supply and marketed prior to October 15, 1994 or whether such inclusion of cannabinoids is otherwise permitted by the FDA as dietary ingredients. As a result, the Company believes the federal legality regarding the distribution and sale of hemp-based products intended for human consumption must be considered on a case-by-case basis and that the uncertainties cannot be resolved without further federal legislation, regulation or a definitive judicial interpretation of existing legislation and rules. However, if the FDA were to enforce the IND Preclusion based on its interpretation of the legislation, this would have a materially adverse effect upon the Company and its business. Currently it is unclear whether Congress will move forward with legislation to permit the use of CBD in dietary supplements, given FDA’s January 2023 determination that existing regulatory frameworks are not appropriate for CBD. Continued delays in the development of a regulatory pathway for CBD may have a materially adverse effect upon the Company and its business.
Future Uncertainty of Legal Status
There remain a number of considerations and uncertainties regarding the cultivation, sourcing, production and distribution of Hemp and products containing hemp derivatives. Applicable laws and regulations remain subject to change as there are different interpretations among federal, state and local regulatory agencies, legislators, academics and businesses with respect to the treatment of the importation of derivatives from exempted portions of the Cannabis plant and the scope of operation of 2018 Farm Bill-compliant hemp programs. These different federal, state and local agency interpretations, as discussed above, touch on the regulation of cannabinoids by the FDA and the extent to which imported derivatives, and/or 2018 Farm Bill-compliant cultivators and processors may engage in interstate commerce, whether under federal and/or state law. The uncertainties likely cannot be resolved without further federal and state legislation, regulation or a definitive judicial interpretation of existing legislation and rules.
Materially all of the Company’s assets, liabilities and operations are exposed to U.S. Hemp-related activities.
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The Company's Regulatory Compliance Activities in the United States
The Company’s senior management team regularly monitors the development of applicable U.S. laws and the Company engages U.S. legal counsel to facilitate compliance with applicable laws and permits. These compliance-related activities include efforts affecting the following objectives, when and as applicable:
•ensuring all raw materials are sourced in compliance with the 2018 Farm Bill and applicable state and local laws;
•evaluating supply chain partners for quality standards;
•setting and maintaining quality standards through raw material specifications;
•employing qualified quality assurance personnel; and
•ensuring processing activities performed in Colorado comply with CDPHE Guidance, the Colorado Food and Drug Act, and the Colorado Industrial Hemp Regulatory Program Act.
On March 6, 2020, the Company completed its assessment for self-affirmed GRAS status for its hemp extract. The Company made this determination based on composite safety information and an expert panel review as permitted under the FDA’s GRAS regulation. 42 According to the GRAS definition, 43 experts can generally recognize a substance as safe through either (1) scientific procedures, or (2) experience based on common use before January 1, 1958. The FDA’s GRAS regulation provides a voluntary notification process under which a company may notify the FDA of a conclusion that a substance is GRAS under the conditions of its intended use, or make an independent conclusion of GRAS (“self-affirmed GRAS”), where the conclusion of GRAS status remains with the firm or company rather than being submitted to the Agency for review. The criteria and eligibility for self-affirmed GRAS must fully satisfy the criteria for eligibility of GRAS as if it were being submitted through the notification process. In addition, a company may make a self-affirmation for any ingredient that would also be eligible to go through the GRAS notification process (with some exceptions). The Company achieved this recognition of safety through scientific procedures (i.e., safety and toxicology studies), a comprehensive literature review of CBD, and by publishing the results of its safety studies in accordance with FDA guidelines for GRAS.
Environmental Regulation
The Company’s hemp extract wellness products and cultivation operations are subject to federal, state and local environmental regulations and permitting requirements regarding air emissions, water discharges and the handling and disposal of hazardous wastes, among other matters. Compliance with such regulations and requirements have not had, nor are they expected to have, any direct material effect on the Company’s capital expenditures, earnings or competitive position. However, such factors could indirectly affect the Company and its business, operations, vendors or suppliers, or could impact those with whom the Company serves or is served by in the supply chain for the Company’s products. While the Company has no reason to believe the operation of its facilities violates any such regulations or requirements, if such a violation were to occur, or if environmental regulations were to become more stringent in the future, the Company could be adversely affected.
International Regulatory Matters
The Company is currently exploring partnerships for local production, manufacturing and/or distribution in select international markets. Legislative approaches to the regulation of CBD-related products vary country by country, including local regulations with respect to THC content, and continue to evolve. For example, to comply with more restrictive THC content specifications in Europe, products cultivated therein must contain no more than 0.2% THC. In some cases, there may be a disconnect between a foreign country’s import requirements and the United States’
42 21 C.F.R. 170.30.
43 21 C.F.R. 170.30(e)(i).
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export requirements with respect to Hemp. The Company makes decisions as to international expansion upon completion of a regulatory review and assessment of risk.
International sales activities may require compliance with the THC content limits of the applicable international jurisdictions in which the Company sells its U.S.-manufactured products, as well as applicable local regulations regarding the import and sale in such jurisdictions. The Company periodically reviews changes in applicable U.S. export laws, regulations and departmental practices as well as applicable international laws and adjusts its sales practices accordingly, including the temporary suspension of sales, if necessary. In addition to its regulatory review regarding potential international production, manufacturing and distribution activities, the Company periodically reviews the current compliance procedures implemented by its mail-order/online distributors. International sales only take place in a country once the applicable review of current regulatory regimes and a risk assessment is complete and appropriate compliance procedures have been implemented or updated.
The Company has sold its products in United Kingdom, Canada, and to other jurisdictions through third-party distributors who take delivery in bulk and manage individual orders. Each of these countries regulates the import of Cannabis-derived products and requires some form of importation license, permit or other documentation for products. The exact nature of the importation documentation varies from country to country, and is affected by various factors, including the level of THC content and the intended use of the product. For example, in certain international jurisdictions, CBD products may be regulated as a dietary supplement and subject to local packaging and labelling requirements, whereas in certain jurisdictions a prescription from a licensed medical practitioner is required.
In the event it is determined that sales or distributions were conducted in contravention of a local law or regulation, the Company may be subject to penalties imposed by the applicable jurisdiction. To the knowledge of the Company, it has not breached any substantive foreign law. However, were there such a breach, the Company does not believe such non-compliance would have a material adverse effect on the Company given the limited amount of sales, the fact that all sales were conducted by recognized local distributors for whom the Company’s products typically represented a small portion of total sales of hemp-products in the jurisdiction and the lack of notice of regulatory non-compliance to date. See “Risk Factors – Risks Relating to the Regulatory Environment – The Company is subject to regulations that could impact its ability to sell its product internationally.”
Canada
Canada’s legal cannabis framework falls under the Cannabis Act (“Cannabis Act”) and associated regulations. Under the Cannabis Act, Health Canada is the body which ultimately oversees the regulation of cannabis, for both recreational and medical use. In addition to setting the rules for the licensed producers around cultivation, processing, sale, packaging, advertising and on, the Cannabis Act and its regulations also set the baseline for individuals rights and restrictions with respect to Cannabis. The Industrial Hemp Regulations (the “Regulations”) fall under the Cannabis Act and govern industrial hemp, meaning a cannabis plant, or any part thereof, in which the concentration of THC is 0.3% water weight or less in the flowering heads and leaves. Under the Regulations, licensed holders may conduct activities such as the sale, import or export of seed or grain, cultivate, possess for leaning or processing or obtain by growing, industrial hemp, as licensed. Licensed holders must also hold an import and export permit for each shipment that is imported and may not import or export in bulk.
The Company has sought and obtained registration on Health Canada’s List of Approved Cultivars (“LOAC”) for two of its early maturing hemp varieties – named “Duchess” and “Ambassador.” These strains were developed for cultivation in shorter northern climate growing seasons, and are among the first cultivars on the LOAC that are early flowering and early maturing for outdoor cultivation and harvesting within the shorter Canadian growing season. Once on the LOAC, a license holder may cultivate the approved cultivars for commercial cultivation for that growing season. The approved cultivars include the Company’s original “CW1AS1” U.S. patented genetics, which allows licensors to cultivate Charlotte’s Web’s leading CBD wellness cultivars in Canada.
Effective as of November 1, 2022, the Company entered into a Manufacturing and Sales License Agreement with Aphria, Inc., an Ontario corporation and an affiliate of Tilray Brands, Inc. (“Tilray”), providing for a strategic
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alliance between the Company and Tilray, pursuant to which Tilray has the rights to licensing, manufacturing, quality, marketing and distribution of Charlotte’s WebTM CBD hemp extract products in Canada.
Additional Information
The Company’s head office is located at 700 Tech Court, Lousiville, Colorado, United States 80027 and its registered and records office is located at 2800 Park Place, 666 Burrard Street, Vancouver, British Columbia, Canada V6C 2Z7. The Company’s website address is www.charlottesweb.com. The information provided on the Charlotte’s Web website is not part of this or any other report we file with or furnish to the SEC.
Item 1A. Risk Factors
We are subject to a number of risks potentially impacting our business, prospects, financial condition, results of operations, and cash flows, many of which are beyond our control. The risks and uncertainties described in this Form 10-K are those we currently believe to be material, but they are not the only ones we face. If any of the following risks, or any other risks and uncertainties that we have not identified or that we currently consider not to be material, actually occur or become material risks, our business, prospects, financial condition, results of operations and cash flows, and consequently the price of the Common Shares could be materially and adversely affected. In all these cases, the trading price of our securities could decline, and investors could lose all or part of their investment.
Investors should carefully consider the risk factors set out below and consider all other information contained herein and in the Company’s other public filings when evaluating an investment decision.
Risks Relating to the Regulatory Environment
The regulatory environment surrounding Hemp is uncertain, varies among jurisdictions, and is subject to change.
The 2018 Farm Bill provides that states and Native American tribes may assume primary regulatory authority over the production of Hemp in their jurisdictions through a Hemp plan approved by the USDA. As of the date hereof, the USDA has approved over 90 state and tribal Hemp production plans submitted after the USDA FR became effective. If a state does not elect to devise a Hemp regulatory program, the USDA’s program will govern licensees in such states. Continued development of the Hemp industry will depend on continued legislative authorization of Hemp at the state level, and further amendment or supplementation of legislation at the federal level. Any number of events or occurrences could slow or halt progress all together in this space. While there appears to be ample public support for favorable legislative action at the state and federal levels, numerous factors may impact or negatively affect the legislative process(es) within the various states the Company has business interests in. Any one of these factors could slow or halt use of Hemp or hemp cannabinoids such as CBD, which would negatively impact the Company’s business or growth, including possibly causing the Company to discontinue operations as a whole.
Legislative and regulatory uncertainties, along with difficulties concerning potential enforcement activities by U.S. federal, state and local governments (or discretion exercised thereby), also represent significant risks to the Company’s business activities. Possible risks include, but are not limited to:
•positions asserted by the FDA concerning products containing derivatives from Hemp;
•uncertainty surrounding the characterization of cannabinoids as a dietary ingredient by the FDA; and
•enforcement activities by state and/or local law enforcement and regulatory authorities under the auspice of individual state law, regardless of any potential conflict thereby with federal law.
If the Company’s operations are found to be in violation of any of such laws or any other governmental regulations, or if applicable laws or regulations change or the enforcement of applicable laws or regulations changes, the
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Company may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, the curtailment or restructuring of the Company’s operations or asset seizures, any of which could adversely affect the Company’s business and financial results.
The future of Hemp regulation at the Federal level is unclear.
Federal regulations under the 2018 Farm Bill were promulgated in the USDA FR on January 19, 2021. The USDA FR governs the domestic production of Hemp under the 2018 Farm Bill and also specifies the provisions that a state or tribal Hemp plan must contain to be in compliance with the 2018 Farm Bill. DEA’s interpretation of the 2018 Farm Bill has been promulgated in the DEA IFR, published on August 21, 2020. The DEA IFR remains subject to change. FDA regulations have not been issued and it is not clear at this time how FDA will treat Hemp products. Additional unfavorable requirements from DEA or FDA may have a material adverse impact on Company’s business, financial condition and results of operations.
The Company’s products are subject to numerous and diverse regulatory requirements which may restrict the Company’s ability to sell its product, and regulatory compliance costs may affect the Company’s business and financial results.
The production, labeling and distribution of the Company’s products are regulated by various federal, state and local agencies. These governmental authorities may commence regulatory or legal proceedings, which could restrict the permissible scope of the Company’s product claims or the ability to sell its products in the future. The FDA regulates the Company’s products to ensure that the products are not adulterated or misbranded.
The Company is subject to regulation by various agencies as a result of the manufacture and sale of its Hemp-based wellness products. The shifting compliance environment and the need to build and maintain robust systems to comply with different regulations in multiple jurisdictions increases the possibility that the Company may violate one or more of the requirements. If the Company’s operations are found to be in violation of any of such laws or any other governmental regulations, or perceived to be in violation thereof, the Company may be subject to penalties or other negative effects, including, without limitation, civil and criminal penalties, damages, fines, the curtailment or restructuring of the Company’s operations or asset seizures and the denial of regulatory applications (including those regulatory regimes outside of the scope of FDA jurisdiction, but which may rely on the positions of the FDA in the application of its regulatory regime), any of which could adversely affect the Company’s business and financial results. In addition, the FDA is expected to make determinations as to how certain CBD products will be regulated and is expected to, in the long term, consider modernization in its regulation of dietary supplements generally. The FDA and/or Congress may also develop a new regulatory pathway or pursue legislation that imposes requirements beyond those currently applicable to dietary supplements. There can no assurance that any such new or additional regulations would not have a material adverse effect on the Company's business, financial condition and results of operations.
Failure to comply with FDA requirements may result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines and criminal prosecutions. The Company’s advertising is subject to regulation by the Federal Trade Commission (“FTC”) under the Federal Trade Commission Act (“FTC Act”) as well as subject to regulation by the FDA under the DSHEA. In recent years, the FTC has initiated numerous investigations of dietary and nutritional supplement products and companies based on allegedly deceptive or misleading claims, and also released new guidance aimed at strengthening its substantiation requirements for health-related claims. At any point, enforcement strategies of a given agency can change as a result of other litigation in the space or changes in political landscapes, and could result in increased enforcement efforts, which could materially impact the Company’s business. Additionally, some states also permit advertising and labeling laws to be enforced by state attorneys general, who may seek relief for consumers, class action certifications, class wide damages and product recalls of products sold by the Company. Private litigants may also seek relief for consumers, class action certifications, class wide damages and product recalls of products sold by the Company. Any actions against the Company by governmental authorities or private litigants could have a material adverse effect on the Company’s business, financial condition and results of operations.
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Compliance with changes in legal, regulatory and industry standards may adversely affect the Company’s business.
The formulation, manufacturing, packaging, labelling, handling, distribution, importation, exportation, licensing, sale and storage of the Company’s products are affected by extensive laws, governmental regulations, administrative determinations, court decisions and similar constraints. Such laws, regulations and other constraints may exist at the federal, state, provincial or local levels. There is currently no uniform regulation applicable to natural health products worldwide. There can be no assurance that the Company is in compliance with all of these laws, regulations and other constraints, and changes to such laws, regulations and other constraints may have a material adverse effect on the Company’s operations.
There is substantial uncertainty and different interpretations among federal, state and local regulatory agencies, legislators, academics and businesses as to the importation of derivatives from exempted portions of the Cannabis plant and the emerging regulation of cannabinoids. These different opinions include, but are not limited to, the regulation of cannabinoids by the FDA and the extent to which manufacturers of products containing imported raw materials and/or 2018 Farm Bill compliant cultivators and processors may engage in interstate commerce. The uncertainties cannot be resolved without further federal, and potentially state-level, legislation, regulation or a definitive judicial interpretation of existing legislation and rules. If these uncertainties continue, they may have an adverse effect upon the introduction of the Company's products in different markets.
The Company is subject to regulations that could impact its ability to sell its product internationally.
The Company has conducted sales in various international jurisdictions and the Company intends to expand internationally. As a result, it is and will become further subject to the laws and regulations of (as well as international treaties among) the foreign jurisdictions in which it operates or imports or exports products or materials. In addition, the Company may avail itself of proposed legislative changes in certain jurisdictions to expand its product portfolio, which expansion may include business and regulatory compliance risks as yet undetermined. Failure by the Company to comply with the current or evolving regulatory framework in any jurisdiction could have a material adverse effect on the Company’s business, financial condition and results of operations. There is the possibility that any such international jurisdiction could determine that the Company was not or is not compliant with applicable local regulations. If the Company’s historical or current sales or operations were found to be in violation of such international regulations, the Company may be subject to enforcement actions in such jurisdictions including, but not limited to civil and criminal penalties, damages, fines, the curtailment or restructuring of the Company’s operations or asset seizures and the denial of regulatory applications.
Cannabis-related financial transactions are subject to a variety of laws that vary by jurisdiction, many of which are unsettled and still developing. While the interpretations of these laws are unclear, in some jurisdictions, financial benefit, directly or indirectly, arising from conduct that would be considered unlawful in such jurisdiction may be viewed to be within the purview of such laws, and persons receiving any such benefit, including investors in an applicable jurisdiction, may be subject to liability. Each prospective investor should contact his, her or its own legal advisor.
There has been an increasing movement in certain markets to increase the regulation of natural health products, which will impose additional restrictions or requirements. In addition, there has been increased regulatory scrutiny of nutritional supplements and marketing claims under existing and new regulations. Such anticipated regulatory and standards changes may introduce some risk and harm the Company’s operations if its products or advertising activities are found to violate existing or new regulations or if the Company is not able to affect necessary changes to its products in a timely and efficient manner to respond to new regulations.
Entry into international markets diverts management attention and requires financial resources that could be spent elsewhere and poses increased costs due to numerous banking, compliance, financial, legal, market, and reputational issues.
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The Company’s entry into new international markets requires management attention and financial resources that would otherwise be spent on other parts of its business. The Company’s international sales could expose it to risks and expenses inherent in operating or selling products in foreign jurisdictions, and developing and emerging markets in particular where the risks may be heightened. These risks and expenses include:
•adverse currency exchange rate fluctuations;
•risks associated with complying with laws and regulations in the countries in which the Company’s products are sold, such as requirements to apply for and obtain licenses, permits or other approvals for the Company’s products, and the delays associated with obtaining such licenses, permits or other approvals;
•the costs of adapting products for sale in foreign countries, including changes to formulations, formats, labelling or packaging;
•multiple, changing, and often inconsistent enforcement of laws, rules and regulations, including regulations and standards relating to consumer health products;
•risks associated with the reliance on the Company’s international distributors, including the possible failure of its international distributors to appropriately understand, represent and effectively market and sell the Company’s products;
•damage to the Company’s reputation or brand if counterfeit versions of the Company’s products are introduced into its international markets;
•damage to the Company’s brand or reputation, or consumer confusion, if CBD products are categorized according to local regulation as marijuana, medical marijuana or a similar category;
•the imposition of additional foreign governmental controls or regulations, new or enhanced trade restrictions or non-tariff barriers to trade, or restrictions on the activities of foreign agents, representatives, employees and distributors;
•increases in taxes, tariffs, customs and duties, or costs associated with compliance with import and export licensing and other compliance requirements;
•downward pricing pressure on the Company’s products in international markets, due to competitive factors or otherwise;
•laws and business practices favoring local companies;
•political, social or economic unrest or instability, including, without limitation, disruptions due to armed conflicts, such as the conflict between Ukraine and Russia;
•greater risk on credit terms, longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;
•difficulties in enforcing or defending intellectual property rights; and
•the effect of disruptions caused by severe weather, natural disasters, outbreak of disease or other events that make travel to a particular region less attractive or more difficult.
The Company’s international efforts may not produce desired levels of sales. Furthermore, its experience with selling products in its current international markets may not be relevant or may not necessarily translate into favorable results if the Company sells in other international markets. If and when the Company enters into new markets in the future, it may experience different competitive conditions, less familiarity with the Company’s brands
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and/or different consumer tastes and discretionary spending patterns. As a result, the Company may be less successful than expected in expanding its sales in its current and targeted international markets. Sales into new international markets may take longer to ramp up and reach expected sales and profit levels, or may never do so, thereby affecting its overall growth and profitability. To build brand awareness in new markets, the Company may need to make greater investments in advertising and promotional activity than originally planned, which could negatively impact the profitability of its sales in those markets. These, or one or more of the factors listed above, may harm the Company’s business, results of operations or financial condition. Any material decrease in the Company’s international sales or profitability could also adversely impact the Company’s business, results of operations or financial condition.
Additionally, the Company may expand its product offerings and/or expand into new international markets, each of which will require management attention and financial resources that would otherwise be spent on other parts of its business. Such expansion would expose the Company to risks and expenses inherent in selling new products and offering products in new foreign jurisdictions, which could increase the Company’s operational, regulatory, compliance, reputational and foreign exchange rate risks. The failure of the Company’s operating infrastructure to support such expansion could result in operational failures and regulatory fines or sanctions. Future product, market or international expansion could require the Company to incur a number of up-front expenses, including those associated with obtaining regulatory clearance or approvals, as well as additional ongoing expenses, including those associated with infrastructure, staff and regulatory compliance. Any expansion efforts will be subject to various laws, regulations and guidelines that are subject to change over time, and result in increased costs and risk associated with regulatory compliance. In addition, product and market expansion could impact the Company’s current product offerings, brand, and reputation, any of which could have a material adverse effect on the Company’s business, financial condition and results of operations.
The designation of cannabinoids as a New Dietary Ingredient (NDI) or as an impermissible adulterant are uncertain.
The FD&C Act requires that manufacturers who wish to market dietary supplements that contain "new dietary ingredients" ("NDI") to notify the FDA with their basis for concluding that a dietary supplement containing such dietary ingredient will reasonably be expected to be safe. There is substantial uncertainty and different interpretations among state and federal regulatory agencies, legislators, academics and businesses as to whether cannabinoids were present in the food supply and marketed prior to October 15, 1994, or whether such inclusion of cannabinoids are permissible dietary ingredients under the FD&C Act. The uncertainties cannot be resolved without further federal legislation, regulation, or a definitive judicial interpretation of existing legislation, regulation and rules. For instance, on July 23, 2021 the Company was advised by the FDA of its objection to a New Dietary Ingredient Notification (“NDIN”) submitted by the Company earlier in 2021. The Company's submission was objected to on the basis that a full spectrum hemp extract does not meet the definition of a dietary supplement because FDA has taken the position that CBD was not marketed as a dietary supplement or conventional food prior to its authorization for investigation as a new drug. The Company disagrees with the FDA’s position that CBD was not marketed as dietary supplement or food prior to the investigation of CBD as a new drug, and believes there are arguments against this position. There is no guarantee that federal legislation, regulation, or judicial action will override FDA’s position and permit the use of CBD as an NDI, or as a dietary ingredient generally. If FDA’s position is not modified, this would have a materially adverse effect upon the Company and its business.
The FDA Interpretation of IND Preclusion could be disruptive to the Company’s ability to sell its products.
The FDA has taken the position that CBD cannot be added to food or marketed as a dietary supplement because it was the subject of investigation as a new drug (i.e., IND Preclusion). The FDA has asserted its IND Preclusion position in a Warning Letter to the Company. The Company responded to the Warning Letter with its position that CBD was marketed in a dietary supplement or food prior to substantial clinical investigations being instituted and being made public. Any attempt by the FDA to enforce the IND Preclusion could adversely impact the Company’s business and management focus as the Company would need to take appropriate actions to defend its position.
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FDA enforcement against the sale and marketing of CBD products under the FD&C Act could target the Company and adversely impact the Company’s business and financial position.
The FDA continues to enforce against violations of the FD&C Act by issuing warning letters to companies marketing and selling hemp derived CBD products. Over the past several years, the FDA has issued warning letters to companies marketing and selling unapproved hemp derived CBD products. The letters reiterate the agency’s position that CBD cannot be added to food and dietary supplements and targeted companies whose products violated the FD&C Act’s prohibition against: i) marketing CBD as or in a dietary supplement, human and animal food, or food additives; ii) marketing a dietary supplement, human and animal food, or cosmetic with disease or drug claims (i.e., claims suggesting that a product is intended to treat, cure, or prevent disease); iii) including a substance in human or animal food when that substance is not GRAS; and iv) selling products that are misbranded due to their failure to include “adequate directions for use by a layperson”. The FDA also issued a consumer update reaffirming its position that CBD cannot lawfully be added to a food or marketed as a dietary supplement due to existing provisions of the FD&C Act, and outlining the data and potential safety issues it is considering as part of its ongoing evaluation of potential regulatory frameworks for CBD. Notably, the FDA states that it could not conclude based on available data that CBD is “generally recognized as safe” for use in human or animal food. While this is broad and may not be applicable in all instances, it nevertheless could materially and adversely impact the Company’s business and financial condition. Further, the FDA has recently stated that it will continue to police the market and enforce against CBD products, and on March 22, 2021, the agency issued warning letters to two companies for selling OTC products labeled as containing CBD, alleging the products were illegally marketed unapproved drugs and misbranded due to prominent featuring of CBD on the labeling, followed by additional warning letters issued in 2021 and 2022. The FDA’s enforcement against the unlawful sale and marketing of CBD products has to date been limited to the issuance of warning letters, but other enforcement means are available to the FDA, including civil and criminal penalties. The FDA’s current prohibition on certain hemp-derived products and the unknowns and associated risks of potential future regulations governing hemp-derived CBD products create risk for the Company’s business.
On January 26, 2023, the FDA announced its conclusion that existing regulatory pathways are not appropriate for CBD and that a new regulatory pathway would benefit consumers by providing safeguards and oversight to manage and minimize risks related to CBD products. The agency also stated it is prepared to work with Congress on this matter and that it “will continue to take action against CBD and other cannabis-derived products to protect the public, in coordination with state regulatory partners, when appropriate” by “monitoring the marketplace, identifying products that pose risks and acting within our authorities.” If the FDA does not work expeditiously with Congress to develop a new pathway, or if Congress does not proceed with its own legislative initiatives to advance a regulatory framework for CBD products, this could delay the development of a regulatory regime for CBD and have an adverse effect on the business of the Company. In addition, it is possible a new framework could impose additional regulatory requirements for the marketing of CBD products, which may have an adverse effect on the business of the Company.
The FTC may take enforcement actions against companies selling CBD products, including the Company.
FTC and FDA often coordinate enforcement efforts where the agencies have overlapping jurisdiction, including with respect to the advertising, labeling, and promotion of food, cosmetics, medical devices, and OTC drugs. In the CBD product marketplace, FTC has joined FDA in the issuance of a number of warning letters to companies warning that the company’s advertisements were not supported by competent and reliable scientific evidence and thus violate the FTC Act, 15 U.S.C. § 41 et. seq. FTC has also issued independent warning letters to companies selling CBD products. These warning letters allege the companies make exaggerated or false and misleading claims about their CBD products without rigorous scientific evidence to substantiate the claims. While historically, FTC enforcement actions related to CBD have been limited to warning letters, in December 2020, the FTC initiated its first law enforcement administrative action against six companies selling CBD products. These companies were alleged to have violated the FTC Act by allegedly making unsupported health claims. FTC entered into settlement agreements with these companies, which required, among other things, that the companies stop making such unsupported health claims and pay a monetary judgment to the FTC. The FTC’s enforcement was publicized by the agency as part of its ongoing effort to protect consumers from false, deceptive, and misleading health claims made in advertisements on
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websites and through social media companies such as Twitter. An additional enforcement action against a CBD company was announced in May 2021. Further, on December 20, 2022 the FTC released a new Health Products Compliance Guidance that covers all health-related product advertising and to substantiate health-related claims that emphasizes the need to support health-related claims with high quality randomized, placebo-controlled human clinical trials, which may signal the FTC is preparing to more closely scrutinize such claims compared to previous years. The unknowns and associated risks of potential future FTC enforcement actions create risk for the Company’s business.
The DEA Interpretation of the 2018 Farm Bill could cause the DEA to take enforcement action against the Company’s intermediate Hemp products.
Through the DEA IFR, the DEA takes the position that material that exceeds 0.3% delta-9 THC remains controlled in Schedule I of the CSA, regardless of its status as in-process material that may only temporarily have a THC content over 0.3%. The DEA IFR may create risk for the Company’s business. Enforcement of the DEA IFR, or any Final Rule that carries forward the rulemaking in the DEA Rule, may result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines, and criminal prosecutions. Additionally, enforcement of the DEA IFR could jeopardize the legality of the Company’s intermediate Hemp products, such as in-process Hemp extract that is incorporated in the Company’s finished products. Such enforcement would not only disrupt the Company’s operations, but it would also constrict the Company’s supply chains.
Any inability to obtain required regulatory approval and permits could limit the Company’s ability to conduct its business.
The Company may be required to obtain and maintain certain permits, licenses and approvals in the jurisdictions where its products are sold. There can be no assurance that the Company will be able to obtain or maintain any necessary licenses, permits or approvals. Any material delay or inability to receive these items is likely to delay and/or inhibit the Company’s ability to conduct its business, and would have an adverse effect on its business, financial condition and results of operations.
The Company is subject to environmental, health and safety laws, compliance with such laws may be costly, and any failure to comply with such laws could negatively impact the Company’s results of operations or financial position.
The Company is subject to environmental, health and safety laws and regulations in each jurisdiction in which the Company operates. Such regulations govern, among other things, emissions of pollutants into the air, wastewater discharges, waste disposal, the investigation and remediation of soil and groundwater contamination, and the health and safety of the Company’s employees. For example, the Company’s products and the raw materials used in its production processes are subject to numerous environmental laws and regulations. The Company may be required to obtain environmental permits from governmental authorities for certain of its current or proposed operations. The Company may not have been, nor may it be able to be at all times, in full compliance with such laws, regulations and permits. If the Company violates or fails to comply with these laws, regulations or permits, the Company could be fined or otherwise sanctioned by regulators.
As with other companies engaged in similar activities or that own or operate real property, the Company faces inherent risks of environmental liability at its current and historical production sites. Certain environmental laws impose strict and, in certain circumstances, joint and several liability on current or previous owners or operators of real property for the cost of the investigation, removal or remediation of hazardous substances as well as liability for related damages to natural resources. In addition, the Company may discover new facts or conditions that may change its expectations or be faced with changes in environmental laws or their enforcement that would increase its liabilities.
The Company’s costs of complying with current and future environmental and health and safety laws, liabilities arising from past or future releases of, or exposure to, regulated materials, or more vigorous enforcement of
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environmental and employee health and safety laws, may have a material adverse effect on the Company’s business, financial condition and results of operations.
Regulatory uncertainty with respect to anti-money laundering laws and regulations impact on the CBD and marijuana-related businesses, if revised or resolved unfavorably to the Company’s interests, may have an adverse effect on the Company’s business.
The Company is subject to a variety of laws and regulations in Canada and the United States and elsewhere that involve money laundering, financial recordkeeping and proceeds of crime, including the U.S. Currency and Foreign Transactions Reporting Act of 1970 (commonly known as the “Bank Secrecy Act”), as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA Patriot Act”), the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), the Criminal Code ("Canada"), as amended and the rules and regulations thereunder, and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the United States and Canada.
In February 2014, the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of the Treasury issued a memorandum providing instructions to banks seeking to provide services to marijuana related businesses (the “FinCEN Memo”). The FinCEN Memo states that in some circumstances, it may not be appropriate to prosecute banks that provide services to marijuana-related businesses for violations of federal money laundering laws. It refers to supplementary guidance that Deputy Attorney General Cole issued to federal prosecutors relating to the prosecution of money laundering offenses predicated on Cannabis-related violations of the CSA. It is unclear at this time whether the current administration will follow the guidelines of the FinCEN Memo. Under U.S. federal law, banks or other financial institutions that provide a Cannabis-related business with a checking account, debit or credit card, small business loan, or any other service could be found guilty of money laundering, aiding and abetting, or conspiracy.
On December 3, 2019, the Federal Reserve Board, Federal Deposit Insurance Corporation, FinCEN, and Office of the Comptroller of the Currency in consultation with the Conference of State Bank Supervisors, issued a statement to provide clarity regarding the legal status of commercial growth and production of hemp and relevant requirements for banks under the Bank Secrecy Act. The statement emphasized that banks were no longer required to file suspicious activity reports for customers solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations. On June 29, 2020, FinCEN issued a guidance document explaining how financial institutions can conduct due diligence for hemp-related businesses. Regulatory uncertainty in respect of the laws, rules, regulations and directives facing banks which provide services to CBD and Cannabis industry participants, if revised or resolved unfavorably to the Company’s interest, may materially and adversely affect the business of the Company.
If any of the Company’s investments, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such investments in the United States or Canada were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the ability of the Company to declare or pay dividends, effect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while the Company has no current intention to declare or pay dividends on its Common Shares in the foreseeable future, the Company may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.
The Company could be adversely affected by violations of the Corruption of Foreign Public Officials Act (Canada), the U.S. Foreign Corrupt Practices Act and other similar anti-bribery laws.
Our business is subject to the Corruption of Foreign Public Officials Act (Canada) and the U.S. Foreign Corrupt Practices Act (“FCPA”) and other similar laws which generally prohibit companies and employees from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. In addition, we are or will be subject to the anti-bribery laws of any other countries in which we conduct business now
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or in the future. Our employees or other agents may, without our knowledge and despite our efforts, engage in conduct prohibited under our policies and procedures and under anti-bribery laws, for which we may be held responsible. Our policies mandate compliance with these anti-corruption and anti-bribery laws. However, there can be no assurance that our internal control policies and procedures will always protect us from recklessness, fraudulent behavior, dishonesty or other inappropriate acts committed by our affiliates, employees, contractors or agents. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.
As a marijuana/Cannabis related business, the Company may have difficulty accessing banking services due to the illegality of marijuana under federal law.
Since the production and possession of Cannabis is currently illegal under U.S. federal law and the Company relies on exemptions promulgated pursuant to the 2018 Farm Bill, it is possible that banks may refuse to open bank accounts for the deposit of funds from businesses involved with the Cannabis industry. The inability to open bank accounts with certain institutions could materially and adversely affect the business of the Company.
On December 3, 2019, the Federal Reserve Board, Federal Deposit Insurance Corporation, FinCEN, and Office of the Comptroller of the Currency in consultation with the Conference of State Bank Supervisors, issued a statement to provide clarity regarding the legal status of commercial growth and production of hemp and relevant requirements for banks under the Bank Secrecy Act. The statement emphasized that banks were no longer required to file suspicious activity reports for customers solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations. Regulatory uncertainty in respect of the laws, rules, regulations and directives facing banks which provide services to CBD and Cannabis industry participants, if revised or resolved unfavorably to the Company’s interest, may materially and adversely affect the business of the Company.
The Company may have difficulty accessing public and private capital and banking services, which could negatively impact its ability to finance its operations.
The Company anticipates that funding sources may be available pursuant to private and public offerings of equity and/or debt and bank lending. However, if equity and/or debt financing was not available in the public capital markets, then the Company expects that it would have access to raise equity and/or debt financing through private placement including possible strategic partnerships. Commercial banks, private equity firms and venture capital firms have approached the Cannabis industry cautiously to date. Although there has been an increase in the amount of financing available to companies in the Cannabis industry over the last several years, there is neither a broad nor deep pool of institutional capital that is available to Cannabis industry participants. There can be no assurance that additional financing, if raised privately or publicly, will be available to the Company when needed or on terms which are acceptable. The Company’s inability to raise financing to fund capital expenditures or acquisitions could limit its growth and may have a material adverse effect upon future profitability. If the Company cannot achieve profitability, it may be forced to cease operations and you may suffer a total loss of your investment.
The Company could be liable for fraudulent or illegal activity by its employees, contractors and consultants resulting in significant financial losses to claims against the Company.
The Company is exposed to the risk that its employees, independent contractors and consultants may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to the Company that violates: (i) government regulations; (ii) manufacturing standards; (iii) U.S. federal fraud and abuse laws and regulations; or (iv) laws that require the true, complete and accurate reporting of financial information or data. It is not always possible for the Company to identify and deter misconduct by its employees and other third parties, and the precautions taken by the Company to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting the Company from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against the Company, and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on its business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual
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damages, reputational harm, diminished profits and future earnings, the curtailment of the Company’s operations or asset seizures, any of which could have a material adverse effect on the Company’s business, financial condition and results of operations.
Risks Relating to the Company’s Business and Industry
The Company faces security risks related to its physical facilities.
The Company may be an attractive target for criminals seeking to steal products, cash, or property, or to vandalize or destroy property or even cause physical harm to others. In particular, would-be criminals may confuse the Company’s products for marijuana, a controlled substance with an underground market, or take interest in the expensive equipment or technology used by the Company or its contract manufacturers. Accordingly, the Company’s operations may raise its profile and increase the probability of break-ins, thefts, or vandalism, and there can be no assurance that the measures employed by the Company to prevent theft, vandalism, attacks, or other criminal behavior will be successful. The Company may not be able to secure insurance coverage for losses incurred in connection with such activities on commercially reasonable terms, or at all. Any criminal activities could have a negative impact on the Company and its businesses, and the inability or failure to obtain adequate insurance coverage would worsen the impact.
The Company depends on the success of the Company’s products, and the Company’s products may not achieve market acceptance.
If the products the Company sells are not perceived to have the effects intended by the end user, its business may suffer. Many of the Company’s products contain innovative ingredients or combinations of ingredients. There is little long-term data with respect to potential therapeutic use or safety in humans or animals. As a result, the Company’s products could have certain side effects if not taken as directed or if taken by an end user that has certain known or unknown medical conditions.
There is no assurance that the Company’s cash flows, and debt or other financing will be sufficient to fund the Company’s operations.
As of December 31, 2022 and 2021, the Company had total current liabilities of $21,427,000 and $20,170,000 respectively, and cash and cash equivalents of $66,963,000 and $19,494,000, respectively, to meet its current obligations. The Company’s ability to fund operating expenses and capital expenditures will depend on its future operating performance and there are no assurances that the Company will be able to access its available debt financing or access additional debt or other financing. If the Company is unable to achieve targeted operating performance or are unable to access existing debt financing or raise additional capital or debt financing on favorable terms, if at all, the Company may be forced to decelerate or curtail certain of our operations until such time as additional debt or capital financing becomes available.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity
and Capital Resources” for additional discussion regarding its liquidity position.
The Company’s products have a limited shelf life and product inventory may reach its expiration prior to sale.
The Company holds goods in inventory and its products have a limited shelf life. Its inventory may reach its expiration date and not be sold. Although the Company manages its inventory, it may be required to write-down the value of any inventory that has reached its expiration date, which could have a material adverse effect on the Company’s business, financial condition, and results of operations.
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The Company’s quality control systems may not prove successful.
The quality of the Company’s products is critical to the success of its business and operations. As such, it is imperative that the Company’s (and its service provider’s) quality control systems operate effectively and successfully. Quality control systems can be negatively impacted by the design of the quality control systems, the quality training program, and adherence by employees to quality control guidelines. Although the Company strives to ensure that all of its service providers have implemented and adhere to high caliber quality control systems, any significant failure or deterioration of such quality control systems could have a material adverse effect on the Company’s business and operating results.
Reliance on the Stanley Brothers brand could have negative consequences.
The Company’s brands, particularly Charlotte’s Web, is closely associated with the Stanley Brothers. Any act, omission or occurrence which negatively effects the reputation of or goodwill associated with the Stanley Brothers may have a commensurate impact on the Company. The Company has limited influence upon the Stanley Brothers and may lack effective means of mitigating such risks. In addition, and pursuant to the Name and Likeness Agreement, as amended, the Stanley Brothers may cause the Company to cease using the Stanley Brothers brand and certain design marks, in certain circumstances. Moreover, the license pursuant to which Charlotte's Web is permitted to use the Stanley Brothers name and associated logos expires on June 30, 2023.
The Company depends on various third parties for the supply, manufacture, and testing of the Company’s products. No assurance can be given that these relationships will continue on favorable terms, or at all.
The Company intends to maintain a full supply chain for the material portions of the production and distribution process of its products. The Company’s suppliers, service providers and distributors may elect, at any time, to breach or otherwise cease to participate in supply, service or distribution agreements, or other relationships, on which the Company’s operations rely. Loss of its suppliers, service providers or distributors would have a material adverse effect on the Company’s business and operational results.
The Company currently relies on certain third-party manufacturers. Disruption of operations at any of these facilities could adversely affect inventory supplies and the Company’s ability to meet product delivery deadlines.
The Company currently relies on a single manufacturer, Aidance, to manufacture its CBD CLINIC and CBDMEDIC products. Accordingly, the Company is highly dependent on the uninterrupted and efficient operation of Aidance’s manufacturing facility. Aidance may not continue to maintain its FDA registration or continue or be willing or able to produce the products at reasonable prices or at all. If for any reason Aidance discontinues production of the CBD CLINIC or CBDMEDIC products, it would likely result in significant delays in production of products and interruption of the Company’s sales as it seeks to establish a relationship and commence production with another manufacturer. The Company may be unable to make satisfactory production arrangements with another manufacturer on a timely basis or at all. If operations at Aidance’s manufacturing plant were to be disrupted as a result of equipment failures, natural disasters, fires, accidents, work stoppages, power outages or other reasons, the Company’s business, financial condition and/or results of operations could be materially adversely affected.
In addition, the Company depends on third parties to obtain certain raw materials, including CBD necessary to develop and produce its products. Global supply chains have been under increased pressure due to lingering effects of the COVID-19 pandemic, and the Company is not immune to such challenges. The raw materials required to produce the Company’s products may not be available to the Company on favorable pricing terms in the future or at all when they are needed. If the Company is no longer able to obtain raw materials from one or more of its suppliers on terms reasonable to the Company, or at all, the Company’s revenues, business, financial condition, and operations would be negatively affected. This could also have a significant impact on the Company’s capacity to complete certain of its current or projected R&D projects and, accordingly, would negatively affect its projected commercial and financial growth. Any significant increase in the price of raw materials that cannot be passed on to the Company’s customers could have a material adverse effect on the Company’s results of operations or financial condition. While potential alternative suppliers of raw materials may be identified, they must first pass intensive
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validation tests to ensure their compliance with product specifications. No assurance can be given regarding the successful outcomes of such tests or the Company’s ability to secure alternate sources of supply at competitive pricing and upon fair and reasonable contractual terms and conditions.
Part of the Company’s strategy is to enter into and maintain arrangements with third parties related to the development, testing, marketing, manufacture, distribution and commercialization of its products. The Company’s revenues are dependent on the successful efforts of these third parties, including the efforts of the Company’s distribution partners. Entering into strategic relationships can be a complex process and the interests of the Company’s distribution partners may not be or remain aligned with the Company’s interests. Some of the Company’s current and future distribution partners may decide to compete with the Company, refuse or be unable to fulfill or honor their contractual obligations to the Company, or change their plans to reduce their commitment to, or even abandon, their relationships with the Company. There can be no assurance that the Company’s distribution partners will market the Company’s products successfully or that any such third-party collaboration will be on favorable terms.
The profit margins of the Company and the timely delivery of its products are dependent upon the ability of its outside suppliers and manufacturers to supply it with products in a timely and cost-efficient manner. The Company’s ability to develop its business and enter new markets and sustain satisfactory levels of sales in each market depends upon the ability of its outside suppliers and manufacturers to produce the ingredients and products and to comply with all applicable regulations. The failure of the Company’s primary suppliers or manufacturers to supply ingredients or produce its products could adversely affect its business operations.
The Company’s manufacturers and suppliers must meet cGMP requirements and failure on their part to do so could have adverse consequences for the Company.
All manufacturers and suppliers must comply with applicable cGMP regulations for the manufacture of the Company’s products, which are enforced by the FDA through its facilities inspection program. The FDA may conduct inspections of the Company’s manufacturing facility or third-party manufacturers to assure they are in compliance with such regulations. These cGMP requirements include quality control, quality assurance and the maintenance of records and documentation, among other items. The Company’s manufacturing facility or third-party manufacturers may be unable to comply with these cGMP requirements and with other regulatory requirements. A failure to comply with these requirements may result in fines, product recalls or seizures and related publicity requirements, injunctions, total or partial suspension of production, civil penalties, warning or untitled letters, Form 483s, import or export bans or restrictions, and criminal prosecution and penalties. Any of these penalties could delay or prevent the promotion, marketing or sale of certain of the Company’s products. If the safety of any products supplied to the Company is compromised due to a third-party manufacturer’s failure to adhere to applicable laws or for other reasons, the Company may not be able to successfully sell its products. The Company cannot assure you that its third-party manufacturers will continue to reliably supply products to the Company at the levels of quality, or the quantities, the Company requires, and in compliance with applicable laws and regulations, including cGMP requirements.
The Company’s manufacturers and suppliers must remain in compliance with the Hemp production and manufacturing laws of the states in which they operate.
State laws governing the production and manufacturing of hemp are different from state to state. The companies the Company contracts with as suppliers and manufacturers of its products are subject to the Hemp-related laws and regulations of their state, as well as USDA regulations. Failure of any of the Company’s production or manufacturing partners to stay in compliance with the laws and regulations of their state may threaten their operations and the Company’s supply and manufacturing expectations. If any of the Company’s production or manufacturing partners must cease operations temporarily or permanently due to a regulatory violation or failure to maintain their permits and licenses in good standing, it could adversely affect the Company’s business operations.
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If product liability claims are brought against the Company, it could incur substantial liabilities.
The Company’s products will be produced for sale directly to end consumers, and therefore there is an inherent risk of exposure to product liability claims, regulatory action and litigation if the products are alleged to have caused loss or injury. In addition, the production and sale of the Company’s products involves the risk of injury to end users due to tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting from human or animal consumption of the Company’s products alone or in combination with other medications or substances could occur. The Company may be subject to various product liability claims, including, among others, that its products caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances. A product liability claim or regulatory action against the Company could result in increased costs, could adversely affect the Company’s reputation, and could have a material adverse effect on its business and operational results.
The Company's operations and industry may be subject to reputational risk.
Public opinion and perception on the use of CBD is inconsistent and may be negatively influenced by future clinical research or media reports that may be unfavorable to CBD, which may have an adverse effect on public opinion and the demand for the Company’s products. The Company believes that the CBD industry (and the Cannabis industry in general) is highly dependent upon consumer perception regarding the safety, efficacy and quality of the products. Consumer perception can be significantly influenced by scientific research or findings, regulatory proceedings, litigation, media attention and other publicity regarding the consumption of CBD or Cannabis products. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favorable to the CBD or Cannabis markets or any particular product, or consistent with currently held views. Future research reports, findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favorable than, or that question, earlier research reports, findings or publicity could have a material adverse effect on the Cannabis industry and demand for its products and services, which could affect the Company’s business, financial condition and results of operations and cash flows. The Company’s dependence upon consumer perception means that adverse scientific research reports, findings, regulatory proceedings, litigation, media attention or other publicity, whether or not accurate or with merit, could have a material adverse effect on the Company, its business, financial condition, results of operations and cash flows.
Further, adverse publicity, reports or other media attention regarding the safety, potential therapeutic use, and quality of CBD or Cannabis in general, or the Company’s products specifically, or associating the consumption of CBD or Cannabis with illness or other negative effects or events, could have a material adverse effect. Such adverse publicity reports or other media attention could arise even if the adverse effects associated with such products resulted from consumers’ failure to consume such products legally, appropriately, or as directed.
Certain international jurisdictions in which the Company may sell products may not differentiate between Hemp and recreational or medical marijuana. In particular, the Company's products may be categorized and labelled as marijuana, medical marijuana or a similar category notwithstanding that the product is, by U.S. regulatory standards, an industrial hemp-based product. This may cause confusion among customers, industry partners such as financial institutions, institutional investors, retailers and distributors as well as other parties upon whom the Company's business relies.
The Company is dependent upon agricultural production of hemp for the Company’s operations, which are subject to seasonal and weather-related risks.
The Company’s business can be affected by unusual weather patterns. The production of some of the Company’s products relies on the availability and use of live plant material, which is grown in Colorado, Kentucky and Oregon, and may be grown in Canada. Growing periods can be impacted by weather patterns and these unpredictable weather patterns may impact the Company's ability to harvest its industrial hemp and produce products. In addition, severe weather, including drought, fire, hail and freezing temperatures, can destroy a crop, which could result in the Company having no or limited Hemp to process. If the Company is unable to harvest Hemp through its proprietary
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operations or contract farming arrangements, its ability to meet customer demand, generate sales, and maintain operations could be impacted. Given the proprietary nature of the Company’s crops, it may not be practicable for the Company to source adequate, or any, replacement Hemp to produce its downstream products.
The Company’s business is dependent on the outdoor growth and production of Hemp, an agricultural product. As such, the risks inherent in engaging in agricultural businesses apply. Potential risks include the risk that crops may become diseased or victim to insects, fungus or other pests or contaminants; subject to extreme weather conditions such as excess rainfall, hail, freezing temperature or drought; wild and domestic animal conflicts; and crop-raiding, sabotage or vandalism—all of which could result in low crop yields, decreased availability of industrial hemp, inadequate inventory levels for future expected growth, and higher acquisition prices. Climate change may increase the frequency or intensity of extreme weather such as storms, floods, heat waves, droughts and other events that could affect the quality, volume and cost of seed produced for sale as well as demand and product mix. Climate change may also affect the availability and suitability of arable land and contribute to unpredictable shifts in the average growing season and types of crops produced. The Company may also encounter difficulties with the importation of agro-inputs and securing a supply of spares and maintenance items. In the event of a delay in the delivery from suppliers of agro-inputs and machinery, the Company may be unable to achieve its production targets. There can be no guarantee that an agricultural event will not adversely affect the business and operating results.
There may be adverse consequences to the Company's end users should they test positive for trace amounts of THC attributed to use of the Company's products.
The Company's products are made from Cannabis, which contains THC. As a result, certain of the Company's products contain low levels of THC. THC is considered a banned substance in many jurisdictions. Moreover, regulatory framework for legal amounts of consumed THC is evolving. Whether or not ingestion of THC (at low levels or otherwise) is permitted in a particular jurisdiction, there may be adverse consequences to end users who test positive for trace amounts of THC attributed to use of the Company's products. In addition, certain metabolic processes in the body may cause certain molecules to convert to other molecules which may negatively affect the results of drug tests. Positive tests may adversely affect the end user's reputation, ability to obtain or retain employment and participation in certain athletic or other activities. A claim or regulatory action against the Company based on such positive test results could adversely affect the Company's reputation and could have a material adverse effect on its business and operational results.
The Company may be unable to obtain adequate crop insurance.
The Company may not be able to obtain crop insurance at economically feasible rates, on acceptable terms or at all. As a result, the Company may have limited or no recourse in the event of a failed crop or other event that standard crop insurance would typically insure against. Such inability may adversely affect the Company’s business and operating results.
The Company may be unable to obtain or maintain high quality farmland sufficient for its hemp cultivation needs.
The Company may not be able to maintain or obtain high quality farmland in sufficient acreage to support production levels or sustained accelerated growth. Moreover, where farmland is available in sufficient acreage, it may not be available at rental rates or otherwise on acceptable economic terms. Inability to obtain sufficient farmland for operations (with or without significant product demand growth) could negatively affect the Company’s operations and financial condition.
The agricultural landscape continues to evolve as a result of factors including farm and industry consolidation, agricultural productivity and development and climate change. Farm consolidation in the United States and other developed markets has been ongoing for decades and is expected to continue as grower demographics shift and advancements in innovative technology and equipment enables farmers to manage larger operations to create economies of scale in a lower-margin, more capital-intensive environment. Increased consolidation in the crop nutrient industry has resulted in greater resources dedicated to expansion, R&D opportunities, leading to increased
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competition in advanced product offerings and innovative technologies. Some of these competitors have greater total resources or are state-supported, which make them less vulnerable to industry downturns and better positioned to pursue new expansion and development opportunities.
The advancement and adoption of technology and digital innovations in agriculture and across the value chain has increased and is expected to further accelerate as grower demographics shift and pressures from consumer preferences, governments and climate change initiatives evolve. The development of seeds that require less crop nutrients, development of full or partial substitutes for the Company’s products or developments in the application of crop nutrients such as improved nutrient use or efficiency through use of precision agriculture could also emerge, all of which have the potential to adversely affect the demand for the Company’s products and results of operations.
Climate change could exacerbate certain of the risks inherent in the Company’s agricultural operations.
Climate change could result in increasing frequency and severity of weather-related events, fires, resource shortages, changes in rainfall and storm patterns and intensities, water shortages and changing temperatures, any of which can damage or destroy crops, resulting in the Company having no or limited hemp to process. If the Company is unable to harvest hemp through its proprietary operations or contract farming arrangements, its ability to meet customer demand, generate sales, and maintain operations will be impacted. Furthermore, severe weather-related events may result in substantial costs to the Company, including costs to respond during the event, to recover from the event, and to possibly modify existing or future infrastructure requirements to prevent recurrence. Climate changes could also disrupt the Company’s operations by impacting the availability and costs of materials needed for production and could increase insurance and other operating costs.
A number of governments or governmental bodies have introduced or are introducing regulatory changes in response to concerns about the potential impact of climate change. The Company faces the risk that its operations could be subject to government initiatives aimed at countering climate change, which could impose constraints on the Company’s operations, for example due to increased costs for fossil fuels, electricity and transportation and costs associated with monitoring and reporting.
Hemp is subject to specific agricultural risks, which could negatively impact the Company’s cultivation efforts.
Hemp plants can be vulnerable to various pathogens including bacteria, fungi, viruses and other miscellaneous pathogens. Such instances often lead to reduced crop quality, stunted growth and/or death of the plant. Moreover, hemp is phytoremediative meaning that it may extract toxins or other undesirable chemicals or compounds from the ground in which it is planted. Furthermore, hemp is cultivated in agricultural growing regions across the US which plant heavily in seed, row and vegetable crops. While the Company uses certified organic practices, conventional neighbors may use harmful chemicals that can cause drift or water contamination risk of unwanted contaminants in the companies harvested hemp biomass. Various regulatory agencies have established maximum limits for pathogens, toxins, chemicals and other compounds that may be present in agricultural materials. If the Company’s hemp is found to have levels of pathogens, toxins, chemicals or other undesirable compounds that exceed established limits, the Company may have to destroy the applicable portions of its hemp crop. Furthermore, if the Company’s crops in any state in which it operates are tested by a regulator and found to contain more than 0.3% THC on a dry weight basis, significant portions of the crops may be ordered to be destroyed. Should the Company’s crops be lost due to pathogens, toxins, chemicals, other undesirable compounds, or regulatory enforcement, it may have a material adverse effect on its business and financial condition.
The Company relies on third-parties for the transportation of its hemp and hemp derived products, any delay or failure by these third-parties to meet the Company’s transport needs could impact the Company’s operations and financial performance.
In order for customers of the Company to receive their product, the Company relies on third-party transportation services. This can cause logistical problems with, and delays in, end users obtaining their orders which the Company cannot control. Any delay by third-party transportation services may adversely affect the Company’s financial performance.
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The Company faces risks related to the transportation of hemp and hemp-derived products and its reliance on third-party transportation services. These risks include but are not limited to, risks resulting from the continually evolving federal and state regulatory environment governing hemp production, THC testing, and transportation.
Moreover, transportation to and from the Company’s facilities is critical. A breach of security during transport could have material adverse effects on the Company’s business, financials and prospects. Any such breach could impact the Company’s operations and financial performance.
The Company faces intense competition.
The number of competitors in the Company’s market segment has expanded and may continue to increase, which could negatively impact the Company’s market share and demand for products. The markets for businesses in the CBD and hemp extracts industries are competitive and evolving. In particular, the Company faces strong competition from both existing and emerging companies that offer similar but not full spectrum products. Some of the Company’s current and potential competitors may have longer operating histories, greater financial, marketing and other resources and larger customer bases.
Given the rapid changes affecting the global, national, and regional economies generally and the hemp industry, in particular, the Company may not be able to create and maintain a competitive advantage in the marketplace. The Company faces competition from companies outside the CBD and hemp oil industry from legitimate companies with more experience and financial resources than the Company has and by unlicensed and unregulated participants. In addition, the broader market for Hemp-based products may soften, contract or remain stable, any of which may result in increased competition among market participants, including the Company. The Company’s success will depend on its ability to keep pace with any changes in the markets in which it operates, especially in light of legal and regulatory changes and shifting consumer behavior. The Company’s success will also depend on its ability to respond to, among other things, changes in the economy, market conditions, and regulatory and competitive pressures. Any failure by the Company to anticipate or respond adequately to such changes could have a material adverse effect on its financial condition, operating results, liquidity, cash flow and operational performance.
The introduction of a recreational model for marijuana production and distribution in various jurisdictions may cause producers in those jurisdictions to expand beyond the medical marijuana market and compete with the Company’s products. The impact of this potential development may be negative for the Company and could result in increased levels of competition in its existing market and/or the entry of new competitors in the overall Hemp market in which the Company operates.
There is potential that the Company will face intense competition from other companies, some of which can be expected to have longer operating histories and more financial resources and manufacturing and marketing experience than the Company. Increased competition by larger and better financed competitors could materially and adversely affect the business, financial condition and results of operations of the Company.
The Company also faces competition from producers who may not comply with applicable regulations. As a result, such producers may have lower operating costs, make impermissible claims and utilize other competitive advantages based on circumvention of regulatory requirements. To remain competitive, the Company will require continued significant investment in R&D, marketing, sales, and customer support. The Company may not have sufficient resources to maintain R&D, marketing, sales, and customer support efforts on a competitive basis which could materially and adversely affect the business, financial condition and results of operations of the Company.
The legal landscape for the Company’s products is changing internationally. More countries have passed laws that allow for the production and distribution of Cannabis in some form or another. Increased international competition might lower the demand for the Company’s products on a global scale.
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The business interests of the Stanley Brothers may conflict with that of the Company.
The Stanley Brothers and certain affiliates and parties associated with the Stanley Brothers currently, and may in the future, conduct business which conflicts with the business of the Company. The mechanisms available to the Company to effectively deal with such conflicts (which may include competition) may be limited. The Company relies on the name, likeness and assistance of the Stanley Brothers. Should the Stanley Brothers take action which separates or otherwise distances their name, likeness or brand from, or association with, the Company, it could result in marketplace confusion, loss of goodwill and/or similar negative consequences. Should any of such scenarios arise, it could have a material adverse impact on the Company’s business and financial condition.
Changing consumer preferences could impact the Company’s ability to attract and retain customers.
As a result of changing consumer preferences, many dietary supplements and other innovative products attain financial success for a limited period of time. Even if the Company’s products find retail success, there can be no assurance that any of its products will continue to see extended financial success. The Company’s success will be dependent upon its ability to price, develop new, and improve product lines. Even if the Company is successful in introducing new products or further developing current products, a failure to properly price or update products with compelling content could cause a decline in its products’ popularity that could reduce revenues and harm the Company’s business, operating results and financial condition. Failure to introduce new features and product lines and to achieve and sustain market acceptance could result in the Company being unable to meet consumer preferences and generate revenue which would have a material adverse effect on its profitability and financial results from operations.
The Company’s success depends on its ability to attract and retain customers. There are many factors which could impact the Company’s ability to attract and retain customers, including but not limited to the Company’s ability to continually produce desirable product, the successful implementation of the Company’s customer acquisition plan and the continued growth in the aggregate number of people selecting CBD wellness products. The Company’s failure to acquire and retain customers could have a material adverse effect on the Company’s business, operating results and financial position.
The Company’s customers may not adequately support its products or its relationships with such retailers may deteriorate.
The Company places a significant degree of reliance on retailers to display, present and sell its products to consumers in their brick-and-mortar stores and through their online e-commerce sites. The Company’s retailers stock and display its products, and, in certain health food and other specialty stores, explain its product attributes and health benefits. The Company’s relationships with these retailers and with e-commerce platforms are important for maintaining and building consumer trust in its brands and for executing the advertising and educational programs the Company continues to deploy. The Company’s failure to maintain these relationships with its retailers and platforms or difficulties experienced by these groups could harm the Company’s business.
The Company does not receive long-term purchase commitments from its retailers, and confirmed orders received from retail partners may be difficult to enforce. In some instances, it is obliged to accept returned inventory. Furthermore, there can be no assurance that the Company will be able, in the future, to continue to sell its products to its retail customers on favorable trading terms or at all. The Company may be obligated to stop shipments to its retail customers or such customers may refuse shipments from the Company in the course of negotiating the resolution of trading issues with such customers. Factors that could affect the Company’s ability to maintain or expand its sales to these retailers include: (i) failure to accurately identify the needs of the Company’s customers; (ii) lack of customer acceptance of new products or product expansions; (iii) unwillingness of the Company’s retailers to attribute premium value to the Company’s existing and new products relative to competing products; (iv) failure to obtain shelf space from retailers; and (v) new, well-received product introductions by competitors. The Company’s sales depend, in part, on retailers effectively displaying its products, including providing attractive space in their stores, including online e-commerce platforms, and, in certain channels, having knowledgeable employees that can explain the Company’s products and their benefits. If the Company loses any of its key retailers, or if any key
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retailer reduces their purchases of the Company’s existing or new products, reduces their number of stores or operations, promotes products of competitors over the Company, or suffers financial difficulty or insolvency, the Company may experience reduced sales of its products, resulting in lower revenue and gross profit margin, which would harm the Company’s profitability and financial condition.
The Company depends on the popularity and acceptance of its brand portfolio.
Management believes that maintaining and promoting the Company’s brand is critical to expanding its customer base. Maintaining and promoting the Company’s brand will depend largely on its ability to continue to provide quality, reliable and innovative products, which it may not do successfully. The Company may introduce new products that customers do not like, which may negatively affect the brands and reputation. Maintaining and enhancing the Company’s brands may require it to make substantial investments, and these investments may not achieve the desired goals. If the Company fails to successfully promote and maintain its brand or if there are excessive expenses in this effort, its business and financial results from operations could be materially adversely affected.
Supply chain issues, including significant price fluctuations or shortages of materials, and distribution challenges may increase the Company’s cost of goods sold and cause its results of operations and financial condition to suffer.
If the Company is unable to secure materials at a reasonable price, it may have to alter or discontinue selling some of its products or attempt to pass along the cost to its customers, any of which could adversely affect its results of operations and financial condition. In recent months, lingering impacts of the COVID- 19 pandemic have plagued markets and caused global supply chain disruptions, shortages of raw goods, and a reduced workforce available to keep supply chains moving, causing disruptions in many industries and sectors.
Additionally, any significant interruption in, or increasing costs of, labor, freight and energy could increase the Company’s and its suppliers’ cost of goods and have a material impact on the Company’s financial condition and results from operations. If the Company’s suppliers are affected by increases in their costs of labor, freight and energy, they may attempt to pass these cost increases on to the Company. If the Company pays such increases, it may not be able to offset them through increases in its pricing. The direct and indirect impacts of Company’s ability to secure materials and move products could adversely affect its results of operations and financial condition.
The Company may not be able to successfully implement its growth strategy on a timely basis or at all.
The Company’s future success depends, in part, on its ability to implement its growth strategy, including (i) brand product innovations within existing categories and growth into adjacent categories and continued growth of existing products in existing categories; (ii) further penetration into new products and channels; (iii) expansion into select international markets; and (iv) in support of its profitability targets, improvements in the Company’s operating income, gross profit and Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) margins. The Company’s ability to implement this growth strategy depends, among other things, on its ability to:
•selectively innovate with new products, product line extensions and formats that appeal to consumers and will be supported by retailers and distributors;
•increase consumer traffic to the Company's e-commerce sales portal through paid and earned media, SEO, and expanded consumer experiences;
•maintain and expand brand loyalty and brand recognition by effectively implementing its marketing strategy and advertising initiatives;
•maintain and improve its competitive position with the Company’s brands in the channels in which it competes through growth of availability and customer facing initiatives;
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•identify and successfully enter and market the Company’s products in new consumer channels, geographic markets and market segments and categories; enter into successful distribution arrangements with new distributors and retailers of its products;
•selectively develop and expand in new and existing international markets in an efficient and cost-effective manner with supportive distribution partners;
•maintain and, to the extent necessary, improve the Company’s high standards for product quality, safety and integrity;
•simplify, rationalize and maximize the Company's existing product portfolio;
•successfully and efficiently scale up operations in the Company’s manufacturing and distribution processes to buoy improvements in the Company’s operating income, gross profit and Adjusted EBITDA margins; and
•maintain sources for the required supply of quality raw ingredients to meet the Company’s growing demand.
•the Company may not be able to successfully implement the Company’s growth strategy and reach the Company’s revenue and profitability improvement targets.
The market for the Company’s products and industry is difficult to forecast due to limited and unreliable market data.
The Company will need to rely largely on its own market research to forecast industry trends and statistics as detailed forecasts are, with certain exceptions, not generally available from other sources at this early stage of the Cannabis industry. A failure in the demand for the Company’s products to materialize as a result of competition, technological change, change in the regulatory or legal landscape or other factors could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company depends on key personnel and its ability to attract and retain employees.
The Company’s success and future growth will depend, to a significant degree, on the continued efforts of the Company’s directors and officers to develop the business and manage operations, and on their ability to attract and retain key technical, scientific, sales, and marketing staff or consultants. The loss of any key person or the inability to attract and retain new key personnel could have a material adverse effect on the business and financial results from operations. The U.S. hemp and Cannabis industries may have more stringent requirements for personnel, including but not limited to, requirements that they complete criminal background checks, submit financial information, and demonstrate proof of residency, which may make it more challenging for the Company to hire and retain employees. Competition for qualified technical, scientific, sales, and marketing staff, as well as officers and directors can be intense, and no assurance can be provided that the Company will be able to attract or retain key personnel in the future. From time to time, share-based compensation may comprise a significant component of the Company’s compensation for key personnel, and if the price of the Common Shares declines, it may be difficult to recruit and retain such individuals.
In addition, COVID-19 poses a risk to all of the Company’s activities, including the potential that a member of management may contract the virus and the Company’s ability to continue to rely on its key personnel throughout the pandemic. The Company is diligently monitoring developments relating to COVID-19 and its impact on the Company’s personnel, and make operational adjustments as necessary. Any of the foregoing risks or actions could disrupt the Company’s operations and have a materials adverse effect on the Company’s results from operations and financial condition.
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The Company has experienced significant changes in its management team in 2022, particularly in Finance. Executive and other management transitions can be inherently difficult to manage, may cause significant and costly disruption to our business, might lead to additional departures of existing personnel, and could have a material adverse effect on our business, operating results, financial condition and internal controls over financial reporting.
From time to time, the Company may rely on debt financing for some of its business activities and there can be no assurance the Company will be able to continue to access such credit, or that it will be able to comply with the terms of such credit.
From time to time, the Company may rely on debt financing for a portion of its business activities, including capital and operating expenditures. There are no assurances that the Company will be able to comply at all times with the covenants applicable under its debt arrangements; nor are there assurances that the Company will be able to secure new financing that may be necessary to finance its operations and capital growth program. Any failure of the Company to secure financing or refinancing, to obtain new financing or to comply with applicable covenants under its borrowings could have a material adverse effect on the Company’s financial results. Further, any inability of the Company to obtain new financing may limit its ability to support future growth.
The Company may have difficulty obtaining insurance to cover its operational risks.
Due to the Company’s involvement in the hemp industry, it may have difficulty obtaining the various insurances that are desired to operate its business, which may expose the Company to additional risk and financial liability. Insurance that is otherwise readily available, such as general liability, and directors’ and officers’ insurance, may be more difficult to find, and more expensive, because of the regulatory regime applicable to the industry. There are no guarantees that the Company will be able to find such insurance coverage in the future, or that the cost will be affordable. If the Company is unable to obtain insurance coverage on acceptable terms, it may prevent it from entering into certain business sectors, may inhibit growth, and may expose the Company to additional risk and financial liabilities.
The Company may be subject to growth-related risks, including capacity constraints and pressure on its internal systems and controls.
The ability of the Company to manage growth effectively will require it to continue to implement and improve its operational and financial systems and to expand, train and manage its employee base. The inability of the Company to deal with this growth may have a material adverse effect on the Company’s business, financial condition, results of operations and prospects. In addition, there are specific risks inherent in growth of the Company’s business-to-business distribution and direct-to-consumer sales, including, among others, increased competition and risks related to the use of the Company’s information systems.
The Company may acquire other companies which could divert management’s attention, result in additional dilution to the Company’s Shareholders and otherwise disrupt the Company’s and harm its operating results.
The Company may acquire, partner or otherwise transact with other companies in the future and there are risks inherent in any such activities. Specifically, there could be unknown or undisclosed risks or liabilities of such companies for which the Company is not sufficiently indemnified. Any such unknown or undisclosed risks or liabilities could materially and adversely affect the Company’s financial performance and results of operations. The Company could encounter additional transaction and integration related costs or experience an impact to its operations or results of operation as a result of the failure to realize all of the anticipated benefits from such acquisitions or partnerships, or an inability to successfully integrate an acquisition as anticipated. All of these factors could cause dilution to the Company’s earnings per Common Share or decrease or delay the anticipated accretive effect of the acquisition or partnership and cause a decrease in the market price of the Company’s securities, or have a material adverse effect on the Company’s operations or results from operations. The Company may not be able to successfully integrate and combine the operations, personnel and technology infrastructure of any such acquired company with its existing operations. As a result of integration efforts, the Company may experience interruptions in its business activities, deterioration in its employee and customer relationships, increased costs of integration and
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harm to its reputation, all of which could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company may experience difficulties in combining corporate cultures, maintaining employee morale and retaining key employees. The integration of any such acquired companies may also impose substantial demands on management of the Company. There is no assurance that these acquisitions will be successfully integrated in a timely manner or without additional expenses incurred. In addition, the Company may be responsible for any legacy liabilities of businesses its acquire or be subject to additional liability in connection with other strategic transactions. The existence or amount of these liabilities may not be known at the time of acquisition, or other strategic transaction, and may have a material adverse effect on our business.
In respect of potential future acquisitions or partnerships, there can be no assurance that the Company will be able to identify acquisition or partnership opportunities that meet its strategic objectives, or to the extent such opportunities are identified, that it will be able to negotiate acceptable terms.
The Company’s intellectual property may be difficult to protect.
The Company’s success is heavily dependent upon its intangible property and technology. The Company relies upon copyrights, patents, trade secrets, unpatented proprietary know-how and continuing innovation to protect the intangible property, technology and information that is considered important to the development of the business. The Company relies on various methods to protect its proprietary rights, including confidentiality agreements with consultants, service providers and management that contain terms and conditions prohibiting unauthorized use and disclosure of confidential information. However, despite efforts to protect intangible property rights, unauthorized parties may attempt to copy or replicate intangible property, technology or processes. There can be no assurances that the steps taken by the Company to protect its intangible property, technology and information will be adequate to prevent misappropriation or independent third-party development of the Company’s intangible property, technology or processes. It is likely that other companies can duplicate a production process similar to the Company’s. Other companies may also be able to materially duplicate the Company’s proprietary plant strains. To the extent that any of the above would occur, revenue could be negatively affected, and in the future, the Company may have to litigate to enforce its intangible property rights, which could result in substantial costs and divert management’s attention and Company resources.
The Company’s ability to successfully implement its business plan depends in part on its ability to obtain, maintain and build brand recognition using its trademarks, service marks, trade dress, domain names and other intellectual property rights, including the Company’s names and logos. If the Company’s efforts to protect its intellectual property are unsuccessful or inadequate, or if any third party misappropriates or infringes on its intellectual property, the value of its brands may be harmed, which could have a material adverse effect on the Company’s business and might prevent its brands from achieving or maintaining market acceptance.
The Company may be unable to obtain registrations for its intellectual property rights for various reasons, including refusal by regulatory authorities to register trademarks or other intellectual property protections, prior registrations of which it is not aware, or it may encounter claims from prior users of similar intellectual property in areas where it operates or intends to conduct operations. This could harm its image, brand or competitive position and cause the Company to incur significant penalties and costs.
The United States has enacted and implemented wide-ranging patent reform legislation. The U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on actions by the U.S. Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce patents that we have licensed or that we might obtain in the future. Similarly, changes in patent law and regulations in other countries or jurisdictions or changes in the governmental bodies that enforce them or changes in how the relevant governmental authority enforces patent laws or regulations may weaken our ability to obtain new patents or to enforce patents that we have licensed or that we may obtain in the future. For example, the complexity and uncertainty of European patent laws have also increased in recent years.
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In Europe, a new unitary patent system will likely be introduced by the end of 2023, which would significantly impact European patents, including those granted before the introduction of such a system. Under the unitary patent system, European applications will soon have the option, upon grant of a patent, of becoming a Unitary Patent which will be subject to the jurisdiction of the Unitary Patent Court (UPC). As the UPC is a new court system, there is no precedent for the court, increasing the uncertainty of any litigation. Patents granted before the implementation of the UPC will have the option of opting out of the jurisdiction of the UPC and remaining as national patents in the UPC countries. Patents that remain under the jurisdiction of the UPC will be potentially vulnerable to a single UPC-based revocation challenge that, if successful, could invalidate the patent in all countries who are signatories to the UPC. We cannot predict with certainty the long-term effects of any potential changes.
Companies in the retail and wholesale consumer packaged goods industries frequently own trademarks and trade secrets and often enter into litigation based on allegations of infringement or other violations of intangible property rights. The Company may be subject to intangible property rights claims in the future and its products may not be able to withstand any third-party claims or rights against their use. Any intangible property claims, with or without merit, could be time consuming, expensive to litigate or settle and could divert management resources and attention. An adverse determination also could prevent the Company from offering its products to others and may require that the Company procure substitute products or services for these members.
With respect to any intangible property rights claim, the Company may have to pay damages or stop using intangible property found to be in violation of a third party’s rights. The Company may have to seek a license for the intangible property, which may not be available on reasonable terms and may significantly increase operating expenses. The technology also may not be available for license at all. As a result, the Company may also be required to pursue alternative options, which could require significant effort and expense. If the Company cannot license or obtain an alternative for the infringing aspects of its business, it may be forced to limit product offerings and may be unable to compete effectively. Any of these results could harm the Company’s brand and prevent it from generating sufficient revenue or achieving profitability.
The Company is involved in litigation, including a class action litigation matters, and there may be additional litigation in the future in which it will be involved.
The Company is currently involved in litigation. An adverse decision in the litigation could have a material adverse effect on the Company’s business, financial condition or results of operations. The Company may become party to litigation from time to time in the ordinary course of business which could adversely affect the Company’s business. Should any litigation in which the Company becomes involved be determined against it, such a decision could materially adversely affect the Company’s ability to continue operating and the market price for the Common Shares and could use significant resources.
Furthermore, as a manufacturer, processor and distributor of products designed to be ingested by humans, the Company faces an inherent risk of exposure to product liability claims, regulatory action and litigation if its products are alleged to have caused significant loss or injury. In addition, the manufacture and sale of the Company’s products involves the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting from human consumption of the Company’s products alone or in combination with other medications or substances could occur. Although the Company will have quality control procedures in place, it may be subject to various product liability claims, including, among others, that the products produced by the Company, or the products that will be purchased by the Company from third-party licensed producers, caused injury, illness or death, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances. A product liability claim or regulatory action against the Company could result in increased costs, could adversely affect the Company’s reputation with its customers and consumers generally and could have a material adverse effect on the Company’s business, results of operations and financial condition. There can be no assurances that the Company will be able to obtain or maintain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms, or at all. The inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of the Company’s potential products.
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Monitoring and defending against legal actions, whether or not meritorious, is time-consuming for management and detracts from management’s ability to fully focus internal resources on business activities. In addition, legal fees and costs incurred in connection with such activities may be significant and the Company could, in the future, be subject to judgments or enter into settlements of claims for significant monetary damages. A decision adverse to the interests of the Company could result in the payment of substantial damages and could have a material adverse effect on cash flow, results of operations and financial position. With respect to any litigation, the Company’s insurance may not reimburse or may not be sufficient to reimburse the Company for the expenses or losses it may suffer in contesting and concluding such litigation. Even if successful, substantial litigation costs may adversely impact the Company’s business, operating results or financial condition.
Trade Secrets may be difficult to protect.
The Company’s success depends upon the skills, knowledge and experience of its scientific and technical personnel, consultants, and advisors, as well as contractors. Because the Company operates in a highly competitive industry, it relies in part on trade secrets to protect its proprietary products and processes. However, trade secrets are difficult to protect. The Company enters into confidentiality or non-disclosure agreements with its corporate partners, employees, consultants, outside scientific collaborators, developers, and other advisors. These agreements generally require that the receiving party keep confidential, and not disclose to third parties, confidential information developed by the receiving party or made known to the receiving party by the Company during the course of the receiving party’s relationship with the Company. These agreements also generally provide that inventions conceived by the receiving party in the course of rendering services to the Company will be its exclusive property, and the Company enters into assignment agreements to perfect its rights.
These confidentiality, inventions and assignment agreements, where in place, may be breached and may not effectively assign intellectual property rights to the Company. The Company’s trade secrets could also be independently discovered by competitors, in which case the Company would not be able to prevent the use of such trade secrets by its competitors. The enforcement of a claim alleging that a party illegally obtained and was using the Company’s trade secrets could be difficult, expensive and time consuming and the outcome could be unpredictable. Failure to obtain or maintain effective trade secret protection could adversely affect the Company’s competitive position.
The Company’s status as a public benefit company and a Certified B Corp may not result in the benefits that the Company anticipates.
The Company has elected to be classified as a “Benefit Company” under the BCBCA, in connection with which it will pursue the public benefits identified in its Articles. There is no assurance, however, that the expected positive impact from being a benefit company will be realized.
As a benefit company, the Company is required to disclose to Shareholders an annual benefit report outlining how the Company conducts its business in a responsible and sustainable manner and how it promotes its public benefit. In addition, the Company’s directors and officers are required to act honestly and in good faith with a view to conducting business in a responsible and sustainable manner and promoting the company’s public benefits, which must be balanced with their duty under the BCBCA to act honestly and in good faith with a view to the best interests of the Company. If the Company is unable to provide this report in a timely manner, or if the report is not viewed favorably by the parties with which the Company does business, its regulators, or others reviewing its credentials, its reputation and status as a benefit company may be harmed.
In addition to being a benefit company, the Company has been certified by B Lab as a “Certified B Corp.”, which refers to companies that are certified as meeting certain levels of social and environmental performance, accountability and transparency. The standards for Certified B Corporation certification are set by B Lab, and may change over time, and the Company’s continued certification is at the sole discretion of B Lab. To maintain certification, the Company is required to update its assessment and verify its updated score with B Lab every three years. The Company was first certified in August 2020. There is no guarantee that the Company will be recertified. The Company’s reputation could be harmed if it loses its status as a Certified B Corp, whether by its choice or by its
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failure to continue to meet the certification requirements. Likewise, the Company’s reputation could be harmed if its publicly reported Certified B Corp score declines.
As a public benefit company, the Company has a duty to balance a variety of interests that may result in actions that do not maximize Shareholder value.
As a benefit company, the Company is required to balance the financial interests of its Shareholders with the best interests of those stakeholders materially affected by its conduct, including particularly those affected by the specific benefit purposes set forth in the Company’s Articles. Accordingly, being a benefit company and complying with the related obligations could negatively impact the Company’s ability to provide the highest possible return to its Shareholders.
As a benefit company under British Columbia law, the Company’s directors and officers are required to act honestly and in good faith with a view to conducting business in a responsible and sustainable manner and promoting the company’s public benefits, which must be balanced with their duty under the BCBCA to act honestly and in good faith with a view to the best interests of the Company. While the Company believes its public benefit designation and obligation will benefit Shareholders, in balancing these interests the Board of Directors may take actions that do not maximize Shareholder value. Any benefits to Shareholders resulting from the Company’s public benefit purposes may not materialize within the expected timeframe, or at all, and may have negative effects. For example:
•the Company may choose to revise its policies in ways that it believes will be beneficial to its stakeholders, including but not limited to, the Company’s Shareholders, employees, suppliers, creditors and consumers, as well as the government and the environment and the community and society in which the Company operates, even though the changes may be costly;
•the Company may take actions, such as making contributions to non-profit organizations and charities, which are made on an ad hoc basis, concentrating first on those entities that have historically supported the business through education of existing and potential customers. The Company also supports non-profits that it believes can utilize the wellness aspects of its products (i.e., military veterans, adaptive athletes, educational organizations, etc.). By doing so, the Company believes that socially oriented action will ultimately have a positive impact on the Company, even though these actions may be more costly than other alternatives;
•the Company may be influenced to pursue programs and services to demonstrate its commitment to the communities it serves even though there is no immediate return to its Shareholders; or
•in responding to a possible proposal to acquire the Company, the Board of Directors may be influenced by the interests of the Company’s stakeholders, including its employees, customers, the environment, and the communities where its employees live and where it does business, whose interests may be different from the interests of the Company’s Shareholders.
The Company may be unable or slow to realize the benefits it expects from actions taken to benefit its stakeholders, including farmers, suppliers, crew members and local communities, which could adversely affect the Company’s business, financial condition and results of operations, which in turn could cause the Company’s share price to decline. In the event of a conflict or dispute regarding the Company’s Board of Directors’ balancing of interests and the duty to act in a responsible and sustainable manner, there is uncertainty as to how such a conflict may be resolved as British Columbia courts have not yet developed as substantive a body of law on this topic as with traditional director duties.
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As a public benefit company, the Company may be subject to increased legal proceedings concerning its duty to balance Shareholder and public benefit interests, the occurrence of which may have an adverse impact on the Company’s financial condition and results of operations.
As a British Columbia benefit company, the Company’s Shareholders (if they, individually or collectively, own at least 2% of the Company’s outstanding capital stock or shares having at least C$2 million in market value (whichever is less)) are entitled to commence a legal proceeding claiming that the Company’s directors failed to balance Shareholder and public benefit interests, although the BCBCA clarifies that despite any rule of law to the contrary, a court may not order monetary damages in relation to any breach by the Company’s directors of these additional duties. This potential liability does not exist for traditional corporations. As a new class of corporate entity, there is uncertainty over how British Columbia courts would view a board’s balancing of interests as little jurisprudence exists to offer insights or guidance. Therefore, the Company may be subject to the possibility of increased legal proceedings, which would require the attention of management and, as a result, may adversely impact management’s ability to effectively execute the Company’s strategy. Any such derivative litigation may be costly and have an adverse impact on the Company’s financial condition and results of operations.
The Company contracts with certain third parties for portions of its operations; should a third party be subject to insolvency or otherwise be unable or unwilling to perform their obligations to the Company, it could negatively impact the Company's operations.
The Company's business relies on full compliance under applicable laws and regulations relating to the sale of its products across the United States and internationally. The regulation of third-party suppliers may have a significant impact upon the Company's business. Any enforcement activity or any additional uncertainties which may arise in the future could cause substantial interruption or cessation of the Company's business, including adverse impacts to the Company's supply chain and distribution channels, and other civil and/or criminal penalties at the federal level.
The Company is party to business relationships, transactions and contracts with various third parties, pursuant to which such third parties have performance, payment and other obligations to the Company. If any of these third parties were to become subject to bankruptcy, receivership or similar proceedings, the Company's rights and benefits in relation to its business relationships, contracts and transactions with such third parties could be terminated, modified in a manner adverse to the Company, or otherwise impaired. The Company cannot make any assurances that it would be able to arrange for alternate or replacement business relationships, transactions or contracts on terms as favorable as existing business relationships, transactions or contracts if at all. Any inability on the Company's part to do so could have a material adverse effect on its business and results of operations.
While discussing potential business relationships or other transactions with third parties, the Company may disclose confidential information relating to the business, operations or affairs of the Company. Although confidentiality agreements are to be signed by third parties prior to the disclosure of any confidential information, a breach of such confidentiality agreement could put the Company at competitive risk and may cause significant damage to its business. The harm to the Company's business from a breach of confidentiality cannot presently be quantified but may be material and may not be compensable in damages. There can be no assurance that, in the event of a breach of confidentiality, the Company will be able to obtain equitable remedies, such as injunctive relief from a court of competent jurisdiction in a timely manner, if at all, in order to prevent or mitigate any damage to its business that such a breach of confidentiality may cause.
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Risks Relating to the Company’s Securities
The Company has a history of losses and may continue to incur losses in the future.
The Company has incurred both operating and net losses in each of its last fiscal years, has incurred losses through the first part of the current fiscal year, and may continue to incur losses in the future as it continues to build its brand and invest in its products. This lack of profitability limits the resources available to the Company to fund its operations and to invest in new products and services and otherwise improve its business operations. The Company cannot assure you that it will be able to operate profitably or generate positive cash flows. If the Company cannot achieve profitability, it may be forced to cease operations and you may suffer a total loss of your investment.
Debt and Convertible Debenture Agreement that the Company has in Place may limit other future potential strategic investor interests.
Effective as of November 14, 2022, the Company entered into the Subscription Agreement with BT DE Investments, Inc. a wholly-owned subsidiary of BAT Group (LSE: BATS and NYSE: BTI), providing for the issuance of an approximately $56.8 million (C$75.3 million) debenture 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 Toronto Stock Exchange (TSX). The debenture will accrue interest at an annualized rate of 5% until such time that there is federal regulation permitting the use of cannabidiol, a phytocannabinoid derived from CBD as an ingredient in food products and dietary supplements in the United States. Following federal regulation of CBD, the annualized rate of interest shall reduce to 1.5%. The maturity date for the debenture is November 2029.
The material investment by BT DE Investments, Inc. and the resulting significant ownership interest in the Company may have the effect of delaying or preventing change of control transactions, including transactions that some or all of our shareholders might consider to be desirable.
The Company has required, and in the future may require additional financing to operate its business and it may face difficulties acquiring additional financing on terms acceptable to the Company or at all.
Given its lack of profitability, the Company has required, and in the future may require, additional capital to continue operations at its cultivation and production facilities, expansion of its product lines, development of its intellectual property base, increasing production capabilities and expanding its operations in states where it currently operates and states where it currently does not have operations. The Company may not be able to obtain additional financing on terms acceptable to it, or at all. If the Company fails to raise additional capital, as needed, its ability to implement its business model and strategy could be compromised.
The capital needs of the Company will depend on numerous factors including: (i) profitability; (ii) the release of competitive products by competitors; (iii) the level of investment in R&D; (iv) operating expenses and (v) the amount of the Company’s capital expenditures, including acquisitions. There can be no assurance that the Company will be able to obtain capital in the future to meet its needs.
The Company is continually assessing a range of public and private financing options, including secured and unsecured debt, equity,and convertible debt. Although the Company has accessed private financing in the past, there is neither a broad nor deep pool of institutional capital that is available to companies in the U.S. hemp industry. There can be no assurance that additional financing, if raised privately, will be available to the Company when needed or on terms which are acceptable.
The Company has discretion in the use of proceeds from its securities issuances.
Generally, when the Company issues securities, management of the Company will have broad discretion with respect to the application of net proceeds received by the Company from the sale of the securities and may spend such proceeds in ways that do not improve the Company’s results of operations or enhance the value of the securities issued and outstanding from time to time. Any failure by management to apply these funds effectively
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could result in financial losses that could have a material adverse effect on the Company’s business or cause the price of the securities of the Company issued and outstanding from time to time to decline.
There is a limited market for the Company’s Common Shares and warrants.
The Common Shares are listed on the TSX under the symbol “CWEB”. The 2019 Warrants are listed on the TSX under the symbol “CWEB.WT”. The 2020 Warrants are listed on the TSX under the symbol “CWEB.WR”. The Replacement Warrants are listed on the TSX under the symbol “CWEB.WS”. However, there can be no assurance that an active and liquid market for the Common Shares or warrants will be maintained and an investor may find it difficult to resell any securities of the Company.
The market price of the Company’s Common Shares and other listed securities may be volatile.
The market price of the Common Shares, 2019 Warrants, Replacement Warrants and 2020 Warrants may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond the Company’s control. This volatility may affect the ability of holders of the Common Shares, 2019 Warrants, Replacement Warrants and 2020 Warrants to sell their securities at an advantageous price. Such volatility could be subject to significant fluctuations in response to numerous factors including:
•the public’s reaction to the Company’s press releases, announcements and filings with regulatory authorities and those of its competitors;
•fluctuations in broader stock market prices and volumes or adverse changes in general market conditions or economic trends or as a result of the COVID-19 pandemic and/or social unrest generally;
•changes in market valuations of similar companies;
•investor perception of the Company, its prospects or the industry in general;
•additions or departures of key personnel;
•commencement of or involvement in litigation;
•changes in the regulatory landscape applicable to the Company, the dietary supplement and/or the hemp industry;
•media reports, publications or public statements relating to, or public perceptions of, the regulatory landscape applicable to the Company, the dietary supplement and/or the hemp industry, whether correct or not;
•announcements by the Company or its competitors of strategic alliances, significant contracts, new technologies, acquisitions, dispositions, commercial relationships, joint ventures or capital commitments;
•variations in the Company’s quarterly results of operations or cash flows or those of other comparable companies;
•revenues and operating results failing to meet the expectations of securities analysts or investors in a particular quarter;
•downward revision in securities analysts’ estimates;
•changes in the Company’s pricing policies or the pricing policies of its competitors;
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•future issuances and sales of Common Shares or other securities of the Company, including as a result of the conversion of Proportionate Voting Shares and sale of Common Shares issuable thereafter;
•sales of Common Shares by insiders of the Company;
•third party disclosure of significant short positions;
•demand for and trading volume of Common Shares and other listed securities of the Company;
•changes in securities analysts’ recommendations and their estimates of the Company’s financial performance;
•short-term fluctuation in share price caused by changes in general conditions in the domestic and worldwide economies or financial markets;
•consequences of government action in response to COVID-19;
•changes in global financial markets and global economics and general market conditions, such as interest rates and product price volatility, and including those caused by COVID-19; and
•the other risk factors described in this Form 10-K.
The realization of any of these risks and other factors beyond the Company’s control could cause the market price of the Common Shares to decline significantly.
In addition, broad market and societal factors, as well as political, social and economic instability globally or in the markets we serve may harm the market price of the Common Shares and other listed securities of the Company. Hence, the price of the Common Shares and such other securities could fluctuate based upon factors that have little or nothing to do with the Company, and these fluctuations could materially reduce the price of the Common Shares or such other securities regardless of the Company’s operating performance. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue, the Company’s operations could be adversely impacted, and the trading price of the Common Shares or other listed securities of the Company may be materially adversely affected.
In the past, following a significant decline in the market price of a company’s securities, there have been instances of securities class action litigation having been instituted against that company. If the Company were involved in any similar litigation, it could incur substantial costs, management’s attention and resources could be diverted and it could harm the Company’s business, operating results and financial condition.
The Company does not intend to pay dividends on its Common Shares and, consequently, the ability of investors to achieve a return on their investment will depend entirely on appreciation in the price of the Company’s Common Shares.
The Company does not anticipate paying cash dividends on the Common Shares in the foreseeable future. The Company currently intends to retain all future earnings to fund the development and growth of its business. Any payment of future dividends will be at the discretion of the directors and will depend on, among other things, the Company’s earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends, and other considerations that the directors deem relevant. Investors must rely on sales of their Common Shares after price appreciation, which may never occur, as the only way to realize a return on their investment.
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The Company is a holding company and its earnings depend on the earnings and distributions of its subsidiaries.
The Company is a holding company and substantially all of its assets consist of shares of Charlotte’s Web, Inc. and Abacus (including the subsidiaries of Abacus). As a result, investors are subject to the risks attributable to Charlotte’s Web, Inc. and any and all future affiliates. The Company does not have any significant assets and conducts substantially all of its business through its subsidiaries, which generate all or substantially all of the Company’s revenues. The ability of the Company’s subsidiaries to distribute funds to the Company will depend on their operating results, tax considerations (both domestic and cross-border) and will be subject to applicable laws and regulations which require that solvency and capital standards be maintained by these subsidiaries and contractual restrictions contained in the instruments governing their debt, existing or if incurred. In the event of a bankruptcy, liquidation or reorganization of one or more of the Company’s subsidiaries, or any other future subsidiary, holders of indebtedness and trade creditors will generally be entitled to payment of their claims from the assets of those subsidiaries before any assets are made available for distribution to the Company.
Future sales of Common Shares by Shareholders, directors or officers could create volatility in the Company’s share price.
Subject to compliance with applicable securities laws and the terms of any applicable lock-up arrangements, the Company’s officers, directors, promoters and their affiliates may sell some or all of their Common Shares in the future. No prediction can be made as to the effect, if any, such future sales of Common Shares will have on the market price of the Common Shares prevailing from time to time. However, the future sale of a substantial number of Common Shares by the Company’s officers and directors, promoters and their affiliates, or the perception that such sales could occur, could materially adversely affect prevailing market prices for the Common Shares of the Company and other listed securities of the Company.
All of the currently outstanding Common Shares are, subject to applicable securities laws, generally immediately available for resale in the public markets. Additional Common Shares issuable upon the exercise of stock options may also become available for sale in the public market, which may also cause the market price of the Common Shares to fall. Accordingly, if substantial amounts of Common Shares are sold in the public market, the market price could fall.
A small number of Shareholders may exercise significant influence on matters submitted to Shareholders for approval.
The Company has a small number of Shareholders who own, in the aggregate, approximately a 2.3% equity interest in the Company. In addition, a portion of the consideration under the MLB promotional rights agreement, the Company issued 4% of its fully diluted outstanding Common Shares. As a result, although such Shareholders may not have an agreement to act in concert, such Shareholders have the ability to exercise significant influence over matters submitted to Shareholders for approval, whether subject to approval by a majority of the Shareholders or special resolution.
The Company may issue an unlimited number of shares, and additional issuances could dilute a Shareholder’s holdings.
The Company may issue additional Common Shares in the future which may dilute a Shareholder’s holdings in the Company. The Articles permit the issuance of an unlimited number of Common Shares, and an unlimited number of Preferred Shares issuable in series, and Shareholders have no pre-emptive rights in connection with any further issuances. The directors of the Company have the discretion to determine the provisions attaching to the Common Shares and the price and the terms of issue of further Common Shares.
Additional equity financing, including pursuant to an at-the-market offering, may be dilutive to Shareholders and could contain rights and preferences superior to those of the Common Shares. Debt financing may involve restrictions on the Company’s financing and operating activities. Debt financing may be convertible into other securities of the Company which may result in immediate or resulting dilution. In either case, additional financing
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may not be available to the Company on acceptable terms or at all. If the Company is unable to raise additional funds as needed, the scope of its operations or growth may be reduced and, as a result, the Company may be unable to fulfil its long-term goals. In this case, investors may lose all or part of their investment. Any default under such debt instruments could have a material adverse effect on the Company, its business, or the results of operations.
Purchasers of the Company’s Common Shares may experience immediate and substantial dilution of their investment.
The offering price of Common Shares may significantly exceed the net tangible book value per share of the Common Shares. Accordingly, a purchaser of Common Shares may incur immediate and substantial dilution of his, her or its investment. If outstanding options and warrants to purchase Common Shares are exercised or securities convertible into Common Shares are converted, additional dilution will occur. The Company has disclosed the dilutive effect of the BAT convertible debenture within the notes of the financial statements. The Company may sell additional Common Shares or other securities that are convertible or exchangeable into Common Shares in future offerings or may issue additional Common Shares or other securities to finance future acquisitions.
The Company cannot predict the size or nature of future sales or issuances of securities or the effect, if any, that such future sales and issuances will have on the market price of the Common Shares. Sales or issuances of substantial numbers of Common Shares or other securities that are convertible or exchangeable into Common Shares, or the perception that such sales or issuances could occur, may adversely affect prevailing market prices of the Common Shares. With any additional sale or issuance of Common Shares or other securities that are convertible or exchangeable into Common Shares, investors will suffer dilution to their voting power and economic interest in the Company. Furthermore, to the extent holders of the Company’s stock options or other convertible securities convert or exercise their securities and sell the Common Shares they receive, the trading price of the Common Shares on the TSX may decrease due to the additional amount of Common Shares available in the market.
The elimination of monetary liability against the Company’s directors, officers, and employees under British Columbia law and the existence of indemnification rights for the Company’s obligations to its directors, officers, and employees may result in substantial expenditures by the Company and may discourage lawsuits against its directors, officers, and employees.
The Company’s Articles contain a provision permitting the Company to eliminate the personal liability of its directors to the Company and its Shareholders for damages incurred as a director or officer to the extent provided by British Columbia law. The Company also has contractual indemnification obligations under employment agreements with certain of its officers and agreements entered into with its directors. The foregoing indemnification obligations could result in the Company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which the Company may be unable to recoup. These provisions and the resulting costs may also discourage the Company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by the Company’s Shareholders against the Company’s directors and officers even though such actions, if successful, might otherwise benefit the Company and its Shareholders.
There may be difficulty in enforcing judgments and effecting service of process on directors and officers that are not citizens of the United States.
Certain of the Company’s directors and officers reside outside of the United States and some or all of the assets of such persons are located outside of the United States. Therefore, it may not be possible for Shareholders to collect or to enforce judgments or liabilities against them under U.S. securities laws. Moreover, it may not be possible for Shareholders to effect service of process upon such persons. Generally, original actions to enforce liabilities under U.S. federal securities laws may not be brought in a Canadian or other court. Such actions must be brought in a court in the United States with applicable jurisdiction. Persons obtaining judgments against the Company in United States courts, including judgments obtained under U.S. federal securities laws, will then be required to bring an application in a Canadian court to enforce such judgments in Canada.
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The Company’s Articles provide that the Supreme Court of British Columbia, Canada and the Court of Appeal of British Columbia, Canada shall, to the fullest extent permitted by law, be the sole and exclusive forum for derivative actions, actions relating to breaches of fiduciary duty, and other matters, creating a conflict with U.S. federal securities laws, which may limit the ability to obtain a favorable judicial forum for disputes with the Company.
The Company’s Articles contain a forum selection provision, which, among other things, identifies British Columbia courts as the exclusive forum for certain litigation. Given that, under United States law, investors cannot waive compliance by the Company with U.S. federal securities laws, it is uncertain whether the forum selection provision applies to actions arising under U.S. federal securities laws, and if it does, whether British Columbia Courts would enforce such provision. It is also uncertain whether a breach of U.S. securities law in and of itself would give rise to a direct cause of action in British Columbia Courts, although indirect causes of action may arise thereunder as a result of, without limitation, breach or misrepresentation. In the event it was determined that the forum selection provision applies to actions arising under U.S. federal securities laws or, if British Columbia Courts refused to enforce such provisions, if a breach of U.S. securities law did not give rise to a cause of action in British Columbia Courts, there is a risk that the Company would be required to litigate any such breach in a jurisdiction which is less favorable to the Company which could result in additional costs and financial losses that could have a material adverse effect on the Company’s business. These provisions may limit the Company’s shareholders’ ability to bring a claim in a judicial forum they find favorable for disputes with the Company or its directors, officers, or other employees, which may discourage lawsuits against the Company and its directors, officers, and other employees. See “Description of Registrant’s Securities to be Registered – Forum Selection”.
The Company is subject to U.S. and other income tax and is treated as a U.S. domestic company for U.S. federal income tax purposes
The Company takes the position that the Company is treated as a U.S. domestic Company for U.S. federal income tax purposes under section 7874 of the Internal Revenue Code of 1986 and this treatment is expected to continue indefinitely. As a result, the Company is, and anticipates that it will continue to be, subject to U.S. income tax on its worldwide income.
Furthermore, the Company is subject to Canadian and Israel income tax. Consequently, the Company is, and anticipates that it will continue to be, liable for U.S., Canadian and Israel income tax, which could have a material adverse effect on its financial condition and results of operations.
General Risk Factors
Investment in the Company’s Common Shares is speculative, involves risk, and there is no guarantee of a return.
There is no guarantee that the Common Shares will earn any positive return in the short term or long term. A holding of Common Shares is speculative and involves a high degree of risk and should be undertaken only by holders whose financial resources are sufficient to enable them to assume such risks and who have no need for immediate liquidity in their investment. A holding of Common Shares is appropriate only for holders who have the capacity to absorb a loss of some or all of their holdings.
Product recalls and returns could adversely affect the Company’s operating results and financial condition.
Manufacturers and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labeling disclosure. If any of the Company’s products are recalled, the Company could incur the unexpected expense relating to the recall and any legal proceedings that might arise in connection with the recall. The Company may lose revenue due to loss of sales and may not be able to compensate for or replace that revenue.
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In addition, a product recall may require significant management attention. Recall of products could lead to adverse publicity, decreased demand for the Company’s products and could have significant reputational and brand damage. Although the Company has detailed procedures in place for testing its products, there can be no assurance that any quality, potency or contamination problems will be detected in time to avoid unforeseen product recalls, regulatory action or lawsuits. A recall for any product could lead to adverse publicity, decreased demand for the Company’s products and could have a material adverse effect on the results of operations and financial condition of the Company. Additionally, product recalls may lead to increased scrutiny of the Company’s operations by regulatory agencies, requiring further management attention and potential legal fees and other expenses.
In addition, product returns are a customary part of the Company's business. Products may be returned for various reasons, including expiration dates or lack of sufficient sales volume. Any increase in product returns could negatively impact the Company's results of operations.
The Company may be subject to impairment of intangible and long-lived assets, which could adversely impact the Company’s financial results.
Intangible and long-lived assets are reviewed for impairment when events or changes in circumstances indicate that fair value has been reduced to less than its carrying value. Determining the fair value is judgmental and requires the use of significant estimates and assumptions, including revenue growth rates, strategic plans, and future market conditions, among others. There can be no assurance that the Company’s estimates and assumptions made for purposes of the impairment will prove to be accurate predictions of the future. Adverse market conditions, including a decrease in the Company’s market capitalization, adverse impacts of the COVID-19 pandemic, temporary or permanent loss of key customers and distribution channels, among other factors, could have a material adverse effect on the Company's business, financial condition and results of operations and could result in impairment of the Company's intangible and long-lived assets.
Certain employees or directors of the Company may have interests that conflict with those of the Company.
Certain of the employees and directors of the Company may also be directors, officers, consultants or stakeholders of other companies or enterprises, some of which may be in similar sectors, and conflicts of interest may arise between their duties to the Company and their duties to or interests in such other companies or enterprises. Certain of such conflicts may be required to be disclosed in accordance with, and subject to, such procedures and remedies as applicable under the BCBCA and applicable securities laws, however, such procedures and remedies may not fully protect the Company.
The future growth of the Company depends on the effectiveness and efficiency of its advertising and promotional expenditures to attract and retain customers.
The Company’s future growth and profitability will depend on the effectiveness and efficiency of advertising and promotional expenditures, including its ability to: (i) create greater awareness of its products; (ii) determine the appropriate creative message and media mix for future advertising expenditures; and (iii) effectively manage advertising and promotional costs in order to maintain acceptable operating margins. There can be no assurance that advertising and promotional expenditures will result in revenues in the future or will generate awareness of the Company’s technologies, products or services. Specifically, ineffective marketing could reduce e-commerce traffic, which will reduce new consumer acquisition place overreliance on existing consumers. In addition, no assurance can be given that the Company will be able to manage its advertising and promotional expenditures on a cost-effective basis.
In addition, periodic changes to search engine algorithms, which retrieve data from search indices and deliver ranked search results, produce changes in search engine results pages. Any changes to these algorithms or in how these algorithms are applied, and therefore search engine results pages, could reduce visibility of, and traffic on, the Company’s e-commerce website and negatively impact the Company’s financial position and results of operations.
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Additionally, the significant and continuing impact of COVID-19 in dominating news cycles in North America may have caused or could cause a reduction in search traffic for CBD or the Company’s website or products. Any impact or reduction on ultimate traffic to the Company’s e-commerce website could have a material adverse effect on the Company’s direct-to-consumer sales, the Company's business, financial condition and results of operations.
The use of customer information and other personal and confidential information creates compliance risks.
The Company collects, processes, maintains and uses data, including sensitive information on individuals, available to the Company through online activities and other customer interactions with its business. The Company’s current and future marketing programs may depend on its ability to collect, maintain and use this information, and its ability to do so is subject to evolving international, U.S. and Canadian laws and enforcement trends. The Company strives to comply with all applicable laws and other legal obligations relating to privacy, data protection and customer protection, including those relating to the use of data for marketing purposes. It is possible, however, that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another, conflict with other rules, conflict with the Company’s practices or fail to be observed by its employees or business partners. If so, the Company may suffer damage to its reputation and be subject to proceedings or actions against it by governmental entities or others. Any such proceeding or action could hurt the Company’s reputation, force it to spend significant amounts to defend its practices, distract its management or otherwise have an adverse effect on its business.
Certain of the Company’s marketing practices rely upon e-mail, social media and other means of digital communication to communicate with consumers on its behalf. The Company may face risk if its use of e-mail, social media or other means of digital communication is found to violate applicable laws. The Company posts its privacy policy and practices concerning the use and disclosure of user data on its websites. Any failure by the Company to comply with its posted privacy policy or other privacy-related laws and regulations could result in proceedings which could potentially harm its business. In addition, as data privacy and marketing laws change, the Company may incur additional costs to ensure it remains in compliance. If applicable data privacy and marketing laws become more restrictive at the international, federal, provincial or state levels, the Company’s compliance costs may increase, its ability to effectively engage customers via personalized marketing may decrease, its investment in its e-commerce platform may not be fully realized, its opportunities for growth may be curtailed by its compliance burden and its potential reputational harm or liability for security breaches may increase.
The Company faces risks related to its information technology systems and potential cyber-attacks and security and privacy breaches.
The Company’s operations depend, in part, on how well it and its third-party service providers protect networks, equipment, information technology (“IT”) systems and software against damage from a number of threats, including, but not limited to, cable cuts, natural disasters, intentional damage and destruction, fire, power loss, hacking, computer viruses, vandalism and theft. The Company’s operations also depend on the timely maintenance, upgrade and replacement of networks, equipment, IT systems and software, as well as pre-emptive expenses to mitigate the risks of failures. Any of these and other events could result in information system failures, delays and/or increase in capital expenses. The failure of information systems or a component of information systems could, depending on the nature of any such failure, adversely impact the Company’s reputation and results of operations.
The Company or its third-party service providers collect, process, maintain and use sensitive personal information relating to its customers and employees, including customer financial data (e.g., credit card information) and their personally identifiable information, and rely on third parties in connection with the operation of its e-commerce site and for the various social media tools and websites it uses as part of its marketing strategy. Any perceived, attempted or actual unauthorized disclosure of customer financial data (e.g., credit card information) or personally identifiable information regarding the Company’s employees, customers or website visitors could harm its reputation and credibility, reduce its e-commerce sales, impair its ability to attract website visitors, reduce its ability to attract and retain customers and could result in litigation against the Company or the imposition of significant fines or penalties.
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Recently, data security breaches suffered by well-known companies and institutions have attracted a substantial amount of media attention, prompting new foreign, federal, provincial and state laws and legislative proposals addressing data privacy and security. As a result, the Company may become subject to more extensive requirements to protect the customer information that it processes in connection with the purchase of its products, resulting in increased compliance costs.
The Company’s information technology systems and on-line activities, including its e-commerce websites, also may be subject to denial of service, malware or other forms of cyber-attacks. While the Company has taken measures to protect against those types of attacks, those measures may not adequately protect its on-line activities from such attacks. If a denial-of-service attack or other cyber event were to affect the Company’s e-commerce sites or other information technology systems, its business could be disrupted, it may lose sales or valuable data, and its reputation may be adversely affected. The Company’s risk and exposure to these matters cannot be fully mitigated because of, among other things, the evolving nature of these threats. As a result, cyber security and the continued development and enhancement of controls, processes and practices designed to protect systems, computers, software, data and networks from attack, damage or unauthorized access is a priority. As cyber threats continue to evolve, the Company may be required to expend additional resources to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities.
Demand for the Company’s products and services are influenced by general economic and consumer trends beyond the Company’s control.
There can be no assurance that the Company’s business and corresponding financial performance will not be adversely affected by general economic or consumer trends. In particular, global economic conditions remain constrained, and if such conditions continue, recur or worsen, this may have a material adverse effect on the Company’s business, financial condition and results of operations. Additionally, the recent trends towards rising inflation may also materially adversely our business and corresponding financial position and cash flows.
Furthermore, such economic conditions have produced downward pressure on share prices and on the availability of credit for financial institutions and corporations. If current levels of market disruption and volatility continue, the Company might experience reductions in business activity, increased funding costs and funding pressures, as applicable, a decrease in the market price of the Common Shares, a decrease in asset values, additional write-downs and impairment charges and lower profitability.
In addition, the outbreak of COVID-19 has resulted in governments worldwide enacting measures to combat the spread of the virus, including in the U.S. These measures, which include the implementation of travel restriction, self-isolation measures, physical distancing and in some instances, the suspension of non-essential business, have caused material disruption to businesses globally, resulting in an economic slowdown. The duration and impact of the COVID- 19 outbreak is unknown at this time, as is the efficacy of the response measures. It is impossible to forecast the duration and full scope of the economic impact of COVID-19 and other consequential changes it will have on the Company’s business, operations and prospects, both in the short term and in the long term. Future crises may be precipitated by any number of causes, including natural disasters, public health crises, geopolitical instability, or sovereign defaults. These factors may impact the Company’s operations and the ability of the Company to obtain equity or debt financing in the future and, if obtained, on terms favorable to the Company. Increased levels of volatility and market turmoil can adversely impact the Company’s operations and share price.
The costs of being a public company are high and may strain the Company’s resources.
The Company incurs significant legal, accounting, insurance and other expenses as a result of being a public company, which may negatively impact its performance and could cause its results of operations and financial condition to suffer. Compliance with applicable securities laws in Canada and the United States and the rules of the TSX and the U.S. Securities and Exchange Commission ("SEC") constitutes a significant expense, including legal and accounting costs, and makes some activities more time-consuming and costly. Reporting obligations as a public company and the Company’s anticipated growth may place a strain on the Company’s financial and management systems, processes and controls, as well as on personnel.
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The Company’s internal controls over financial reporting may not be effective, and the Company’s independent auditors may may be unwilling or unable to provide us, when required, with an attestation report on the effectiveness of internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act.
The Company is subject to reporting and other obligations under applicable Canadian securities laws and rules of any stock exchange on which the Common Shares are listed, including National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings of the Canadian Securities Administrators, and upon effectiveness of this Registration Statement, will be subject to U.S. securities reporting and regulatory requirements. These reporting and other obligations place significant demands on the Company’s management, administrative, operational and accounting resources. If the Company is unable to accomplish any such necessary objectives in a timely and effective manner, the Company’s ability to comply with its financial reporting obligations and other rules applicable to reporting issuers could be impaired. Moreover, any failure to maintain effective internal controls could cause the Company to fail to satisfy its reporting obligations or result in material misstatements in its financial statements. If the Company cannot provide reliable financial reports or prevent fraud, its reputation and operating results could be materially adversely affected which could also cause investors to lose confidence in the Company’s reported financial information, which could result in a reduction in the trading price of the Common Shares.
The Company does not expect that its disclosure controls and procedures and internal controls over financial reporting will prevent all error or fraud. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within an organization are detected. The inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by individual acts of certain persons, by collusion of two or more people or by management override of the controls. Due to the inherent limitations in a control system, misstatements due to error or fraud may occur and may not be detected in a timely manner or at all.
The Company may have to amend prior financial reporting.
The Company's auditors (former and current) are subject to standard review by the Canadian Public Accountability Board, the Public Company Accounting Oversight Board and similar oversight bodies and regulatory authorities. Such reviews could result in the Company being required to amend prior financial reporting, which could divert Company resources to such process.
If securities or industry analysts do not publish or cease publishing research or reports or publish misleading, inaccurate or unfavorable research about the Company, its business or its market, its share price and trading volume could decline.
The trading market for Common Shares could be influenced by the research and reports that industry and/or securities analysts may publish about the Company, its business, the market or competitors. If any of the analysts who may cover the Company’s business change their recommendation regarding the Common Shares adversely, or provide more favorable relative recommendations about its competitors, the Company's share price would likely decline. If any analyst who may cover the Company’s business were to cease coverage or fail to regularly publish reports on the Company, it could lose visibility in the financial markets, which in turn could cause the share price or trading volume to decline.
Changes in tax laws could require the Company to pay additional tax amounts, decreasing the amount of capital available to the Company.
New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to the Company. These enactments and events could require the Company to pay additional tax amounts on a prospective or retroactive basis, thereby substantially increasing the amount of taxes the Company is liable to pay in the relevant tax jurisdictions. Accordingly, these events could decrease the capital that the Company has available to operate its business. Any or all of these events could harm the business and financial performance of the Company.
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Recent macroeconomic trends, including inflation, a recession or slowed economic growth, may adversely affect our business, financial condition and results of operations.
During 2002, inflation in the United States has accelerated and is currently expected to continue at an elevated level for the near-term. Rising inflation could have an adverse impact on expenses, as these costs could increase at a higher rate than revenues. Our costs are subject to fluctuations, particularly due to changes in the prices of raw product and packaging materials and the costs of labor, transportation and energy. Inflation pressures could also result in increases in these input costs. Therefore, our business results depend, in part, on our continued ability to manage these fluctuations through pricing actions, cost saving projects and sourcing decisions, while maintaining and improving margins and market share. Failure to manage these fluctuations could adversely impact our results of operations or cash flows. In addition, unfavorable macroeconomic conditions, such as a recession or continued slowed economic growth, could negatively affect consumer demand for cannabis products, which consequently, may negatively affect the results of operations. Under difficult economic conditions, consumers may seek to reduce discretionary spending by forgoing purchases of cannabis products, negatively impacting our net sales and margins. Softer consumer demand for cannabis products could reduce our profitability and could negatively affect our overall financial performance.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The following table sets forth the Company’s principal physical properties used in its single operating and reportable segment.
Material Properties | ||||||||
| Type | Location | Leased / Owned | ||||||
Manufacturing, Production, Research and Development | 700 Tech Court, Louisville, Colorado | Leased | ||||||
| Office | 1801 California Street, Denver, Colorado | Sublease | ||||||
| Office | 1600 Pearl Street, Boulder, Colorado* | Sublease | ||||||
*As of June 1, 2021, the Company executed a sublease agreement to cover its obligations concerning the 1600 Pearl Street property.
Facilities Overview
As at the date hereof, the Company operates several Colorado-based facilities to house administrative work, processing, R&D, distribution, horticulture, breeding and greenhouse space. In 2019, the Company leased a 136,610-square-foot industrial building located at 700 Tech Court in the Colorado Technology Center in Louisville, Colorado. This new cGMP facility, the LOFT, enables the Company for production, distribution, quality control and R&D expansion. This facility was used for supply chain activities commencing in the second quarter of 2020 and manufacturing and operations commencing in the third quarter of 2020.
Through its subsidiaries, the Company has entered into material lease agreements related to its operations. Those agreements are discussed below.
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700 Tech Court
On May 7, 2019, EJ 700 Tech Court LLC entered into a lease agreement with Charlotte’s Web, Inc. for a period of 126 months commencing on September 1, 2019 for the premises located at the LOFT at 700 Tech Court, Louisville, Colorado (the “Tech Court Lease Agreement”), a cGMP facility. Following a lease abatement period for the first six months of no monthly rent payments, the monthly base rent for the remainder of the term of the lease is an average of $143,732 per month. The foregoing description is qualified in its entirety by reference to the Tech Court Lease Agreement
1801 California Street
On May 11, 2021, Molson Coors Beverage Company (“Molson Coors”), as tenant and sublandlord, and Charlotte’s Web, Inc., as subtenant, entered in a sublease agreement covering and describing the premises known as the entire 47th floor of a building located at 1801 California Street in Denver, Colorado comprising 22,389 rentable square feet (the “1801 California Sublease”), leased by Molson Coors from BOP 1801 California Street II LLC and BPREP 1801 California Street JV, LLC (collectively, as the landlord), in that certain Lease of Office Space agreement dated November 26, 2014, as amended from time-to-time. Pursuant to the terms of the 1801 California Sublease, the term of the sublease was to begin on July 1, 2021 and end on March 31, 2027. The 1801 California Sublease contained a lease abatement provision for the first seven months with no rent due, and a monthly base rent for the remainder of the first 12 months of the lease term of $37,315.00. The foregoing description is qualified in its entirety by reference to the 1801 California Sublease.
On June 15, 2021, Molson Coors and the Company entered into that certain First Amendment to Sublease Agreement (the “First Amendment to the 1801 California Sublease”), whereby the Company agreed to sublease the 48th floor of 1801 California Street given that the 47th floor as contemplated in the 1801 California Sublease was unavailable to the Company. The First Amendment to the 1801 California Sublease contained same rent abatement term for the first seven months of the lease term, and thereafter includes a monthly installment for the term of the lease of approximately $39,269. The foregoing description is qualified in its entirety by reference to the First Amendment to the1801 California Sublease.
1600 Pearl Street
On May 12, 2021, Charlotte’s Web, Inc. and Outside Interactive, Inc. (“Outside Interactive”) entered into a sublease agreement whereby Charlotte’s Web, Inc. agreed to sublease to Outside Interactive, as subtenant, the entirety of the 42,191 of rentable square feet (consisting of Suite 300, Suite 100, and the Basement/Garden Level) under the 1600 Pearl Street Sublease Agreement commencing on June 1, 2021 and expiring on August 31, 2025 (the “Outside Interactive Sublease Agreement”). The Outside Interactive Sublease Agreement included a rent abatement period during the first seven months of the lease providing for $0 monthly rent. The average monthly installment for the term of the lease after the rent abatement period is $90,695. Upon receiving the landlord’s consent to the sublease, Outside Interactive delivered to Charlotte’s Web, Inc. an unconditional, irrevocable, and transferrable letter of credit in the amount of $500,000 to secure Outside Interactive’s full performance of its obligations under the Outside Interactive Sublease Agreement, naming Charlotte’s Web, Inc. as beneficiary. The foregoing description is qualified in its entirety by reference to the Outside Interactive Sublease Agreement.
Item 3. Legal Proceedings
From time to time, the Company may be involved in various regulatory issues, claims and lawsuits arising in the ordinary course of business, none of which, in the opinion of management, is expected to have a material adverse effect on the Company’s results of operations or financial condition.
At present, the Company is not a party to any material pending legal proceedings, other than ordinary routine litigation incidental to the business. Nor is the Company or its property the subject of any legal proceedings, known or contemplated, that involve a claim for damages exclusive of interest and costs that meet or exceed 10% of its current assets.
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Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Information
The Common Shares of the Company are traded on the TSX under the symbol “CWEB.” The following table sets forth trading information for the Common Shares for the periods indicated, as quoted on the TSX.
| Period | Low Trading Price (C$) | High Trading Price (C$) | ||||||||||||
| Year Ending December 31, 2023 | ||||||||||||||
| First Quarter (through March 20, 2023) | C$ | 0.41 | C$ | 0.84 | ||||||||||
| Year Ended December 31, 2022 | ||||||||||||||
| Fourth Quarter (December 31, 2022) | C$ | 0.53 | C$ | 1.15 | ||||||||||
| Third Quarter (September 30, 2022) | C$ | 0.49 | C$ | 1.10 | ||||||||||
| Second Quarter (June 30, 2022) | C$ | 0.50 | C$ | 1.49 | ||||||||||
| First Quarter (March 31, 2022) | C$ | 1.02 | C$ | 2.01 | ||||||||||
The Common Shares of the Company are also traded on the OTCQX Market under the symbol “CWBHF.” But there is otherwise no established public trading market for the Common Shares in the U.S. The following table sets forth trading information for the Common Shares for the periods indicated, as quoted on the OTCQX. The OTCQX market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
| Period | Low Trading Price ($) | High Trading Price ($) | ||||||||||||
| Year Ending December 31, 2023 | ||||||||||||||
| First Quarter (through March 20, 2023) | $ | 0.29 | $ | 0.62 | ||||||||||
| Year Ended December 31, 2022 | ||||||||||||||
| Fourth Quarter (December 31, 2022) | $ | 0.36 | $ | 0.85 | ||||||||||
| Third Quarter (September 30, 2022) | $ | 0.36 | $ | 0.85 | ||||||||||
| Second Quarter (June 30, 2022) | $ | 0.38 | $ | 1.19 | ||||||||||
| First Quarter (March 31, 2022) | $ | 0.79 | $ | 1.60 | ||||||||||
Holders
As of March 20, 2023, there were 107 holders of record of the Company’s Common Shares. The actual number of holders of our Common Shares is greater than the number of record holders, and includes holders who are beneficial owners, but whose securities are held in “nominee” or “street name” by brokers and other nominees.
Dividends
Other than the requirements of the BCBCA, there are no restrictions in the Company’s Articles on its ability to pay dividends. However, (i) the Company has never paid a dividend nor made a distribution on any of its securities, (ii) the Company has no history of income or sources of funds from which to pay dividends, and (iii) the Company does not anticipate paying dividends in the near future.
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The payment of future dividends, if any, by the Company will be at the sole discretion of the Board. In this regard, the Company expects it will retain any earnings to finance further growth of the Company.
Performance Graph
Not required for smaller reporting companies.
Recent Sales of Unregistered Securities
The Company did not sell securities during the year ended December 31, 2022 which were not registered under the U.S. Securities Act of 1933, as amended ("U.S. Securities Act") or were not previously reported on a Current Report on Form 8-K.
Use of Proceeds from Registered Offerings
None.
Repurchases
None.
Item 6. [Reserved]
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with, and is qualified in its entirety by, the audited consolidated financial statements and the accompanying notes. Except for historical information, the discussion in this section contains forward-looking statements that involve risks and uncertainties. Future results could differ materially from those discussed below for many reasons, including the risks described in Item 1A—“Risk Factors.”
MD&A 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 Wellness, Inc. and CBD Pharmaceuticals Ltd. This management’s discussion and analysis of financial condition and results of operations (“MD&A”) is provided as of March 23, 2023 and should be read together with the Company’s audited consolidated financial statements and the accompanying notes for the years ended December 31, 2022 and December 31, 2021. 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, that does 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™, CBD Clinic™, and Harmony Hemp™. Charlotte’s Web branded premium quality products start with proprietary hemp genetics that are 100% North American farm grown and manufactured into hemp extracts containing naturally occurring phytocannabinoids including CBD, cannabichromene ("CBC"), cannabigerol ("CBG"), terpenes, flavonoids and other beneficial hemp compounds. The Company moved into its new cGMP facility in Louisville, Colorado during the second quarter of 2020 at which the Company conducts its production of tinctures, distribution, and quality control activities, and has
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expanded its research and development ("R&D"). Charlotte’s Web product categories include full spectrum hemp extract oil tinctures (liquid products), gummies (sleep, calm, immunity, exercise recovery), capsules, CBD topical creams and lotions, as well as products for pets. As of October 2022, the Company produces NSF Certified for Sports broad spectrum tincture 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 Charlotte’s Web website is not part of this MD&A.
The business of the Company consists of the farming, manufacturing, sales, and marketing of products of hemp-derived CBD wellness products. As of December 31, 2022, the Company operated in a single operating and reportable segment, hemp-derived CBD wellness products, as its 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 high quality and 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 the plant 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 produce or sell medicinal or recreational marijuana or products derived from high-THC Cannabis plants. On March 2, 2021, Charlotte’s Web executed the SBH Purchase Option pursuant to which the Company has the option to acquire Stanley Brothers USA, a Cannabis wellness incubator. Until the SBH Purchase Option is exercised, both Charlotte’s Web and Stanley Brothers USA will continue to operate as standalone entities in the US. Outside the US, the companies are able to explore opportunities where Cannabis is federally permissible. At this time, however, the Company does not have any plans to expand into high-THC products in the near future.
On October 12, 2022, the Company announced the launch of Charlotte’s WebTM SPORT – Daily Edge, the first broad-spectrum hemp-derived tincture to be Certified for Sport® by NSF, the highly respected global third-party organization that establishes standards for safety, quality, sustainability, and performance as well as certifies manufacturers and products against them. NSF's Certified for Sport® program verifies that products do not contain unsafe levels of contaminants, prohibited substances or masking agents, and that what is on the label matches what is in the product. The Certified for Sport® certification is the only independent third-party certification program recognized by Major League Baseball.
In the US, the Company holds the number one market share position in the CBD market relative to retail dollars, this is based on market share data from leading third-party analysts such as Nielsen Company (US), LLC (“Nielsen”), SPINS, LLC (“Spins”) and Brightfield Group (“Brightfield”), respectively.
The Company grows its proprietary hemp domestically in the United States on farms leased in northeastern Colorado and sources high quality Hemp through contract farming operations in Kentucky, Oregon, and Canada. The Hemp grown in Canada is utilized exclusively in the Canadian market and not in products sold in the United States.
Effective November 1, 2022, the Company entered into a Manufacturing and Sales License Agreement with Aphria, Inc., an Ontario corporation, an affiliate of Tilray, pursuant to which the parties entered into a strategic alliance by which Tilray will have the rights to licensing, manufacturing, marketing and distribution of Charlotte’s WebTM CBD hemp extract products in Canada.
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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 national and international 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.
In furtherance of the Company’s R&D efforts, in February 2020, 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 cGMP production and distribution facility.
Selected Financial Information
Year Ended December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
Total revenues | $ | 74,139 | $ | 96,092 | ||||||||||
Cost of goods sold | 54,728 | 47,507 | ||||||||||||
Gross profit | $ | 19,411 | $ | 48,585 | ||||||||||
Selling, general, and administrative expenses | 70,060 | 97,641 | ||||||||||||
| Goodwill and asset impairments | 1,837 | 98,003 | ||||||||||||
| Operating loss | $ | (52,486) | $ | (147,059) | ||||||||||
Other income (expense), net | 744 | 51 | ||||||||||||
| Change in fair value of financial instruments and other | (7,480) | 9,429 | ||||||||||||
| Income tax expense | (91) | (143) | ||||||||||||
Net loss | $ | (59,313) | $ | (137,722) | ||||||||||
| Total assets | $ | 187,642 | $ | 171,513 | ||||||||||
| Long-term liabilities | $ | 88,710 | $ | 20,897 | ||||||||||
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, distributors, and retail B2B customers.
| Year Ended | ||||||||||||||||||||||||||||||||||||||
| December 31, | % Increase (Decrease) | |||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||||||||||||||
| Direct-to-consumer ("DTC") revenue | $ | 50,700 | $ | 62,334 | (18.7) | % | ||||||||||||||||||||||||||||||||
| Business-to-business ("B2B") revenue | 23,439 | 33,758 | (30.6) | % | ||||||||||||||||||||||||||||||||||
| Total revenue | $ | 74,139 | $ | 96,092 | (22.8) | % | ||||||||||||||||||||||||||||||||
Total revenue for the year ended December 31, 2022 was $74,139, a decrease of (22.8)% compared to the year ended December 31, 2021.
DTC e-commerce revenue decreased (18.7)% compared to the year ended December 31, 2021. The decrease was primarily due to lower traffic at our online store due to lower organic search, less paid media and less effective earned and affiliate traffic generation, resulting in approximately $11,000 decrease year over year. Additional drivers include an increase in price promotions for gummies and topicals. The decrease was partially offset by higher customer subscription orders through its loyalty program and a more favorable product mix compared to prior year.
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B2B revenue decreased (30.6)% compared to the year ended December 31, 2021. The decrease was due to the Food Drug Mass retail and Natural channels reducing CBD products shelf space resulting in a decrease of approximately $12,000 year over year. Additional drivers include higher depth and frequency of price promotions. The decrease was partially offset by new retail distribution following the passing of Assembly Bill 45 in California in late 2021.
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:
| Year Ended | ||||||||||||||||||||||||||||||||||||||
| December 31, | % Increase (Decrease) | |||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||||||||||||||
| Inventory expensed to cost of goods sold | 23,161 | 28,620 | (19.1) | % | ||||||||||||||||||||||||||||||||||
| Inventory provision, net | 23,394 | 9,729 | 140.5 | % | ||||||||||||||||||||||||||||||||||
| Other production costs | 4,768 | 6,180 | (22.8) | % | ||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 3,405 | 2,978 | 14.3 | % | ||||||||||||||||||||||||||||||||||
| Cost of goods sold | $ | 54,728 | $ | 47,507 | 15.2 | % | ||||||||||||||||||||||||||||||||
Cost of goods sold increased 15.2% for the year ended December 31, 2022 compared to the same period in 2021, primarily due to $13,665 or 140.5% increase in the inventory provision. The inventory provision is estimated by management 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. Additionally, inventory obsolescence is impacted by changes or prospective probable changes in the regulatory environments. The inventory provision increase was primarily due to an increase in the reserve for Hemp inventory of $20,349, based on management's determination during the fourth quarter that this inventory would no longer be used in product formulations as a result of Colorado's anticipated regulatory changes based on Senate Bill 22-205, as well as aged finished goods.
The increase was partially offset by a decrease of 19.1% in inventory expensed to cost of goods sold for the year ended December 31, 2022 compared to December 31, 2021. The decrease was primarily due to lower unit volume sold and mix, as lower cost gummies volume decreased 13% compared to higher cost tinctures which decreased 41% year over year.
Depreciation and amortization expense for the year ended December 31, 2022 and 2021 was $8,968 and $11,025, respectively, of which $3,405 and $2,978, respectively, was expensed to cost of goods sold. The remaining depreciation and amortization expenses of $5,563 and $8,047, 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, mix of revenue between DTC e-commerce and B2B, mix of products sold, promotional and sales discount rate, manufacturing spend, transportation costs, and changes in inventory provisions.
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Gross profit for the years ended December 31, 2022 and 2021 is as follows:
| Year Ended | ||||||||||||||||||||||||||||||||||||||
| December 31, | % Increase (Decrease) | |||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||||||||||||||
| Gross profit | $ | 19,411 | $ | 48,585 | (60.0) | % | ||||||||||||||||||||||||||||||||
| Gross margin | 26.2 | % | 50.6 | % | (48.2) | % | ||||||||||||||||||||||||||||||||
Gross profit decreased 60.0% for the year ended December 31, 2022 compared to 2021. The decrease is primarily related to lower revenue in both the DTC and B2B channels which was discussed above, and an increase in inventory provisions. The decrease is partially offset by lower inventory expenses. Gross profit before the inventory provision was $42.8 million and $58.3 million, respectively, and gross margin before inventory provision was 58% and 61% for the year ended December 31, 2022 and 2021, respectively.
Selling, General, and Administrative Expenses
Total Selling, general, and administrative expenses are as follows:
| Year Ended | ||||||||||||||||||||||||||||||||||||||
| December 31, | % Increase (Decrease) | |||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||||||||||||||
| Selling, general, and administrative expenses | $ | 70,060 | $ | 97,641 | (28.2) | % | ||||||||||||||||||||||||||||||||
Total Selling, general, and administrative expenses for the year ended December 31, 2022 and 2021 were $70,060 and $97,641, respectively. The 28.2% decrease was primarily attributable to activities during the year which lowered personnel costs by $10,569, an Employee Retention Credit ("ERC") tax benefit of $4,106, a decrease in media marketing spend of $5,154, along with lower depreciation and amortization. Depreciation and amortization expensed to Selling, general, and administrative expenses for the year ended December 31, 2022 and 2021 were $5,563 and $8,047.
Total research and development expenses for the year ended December 31, 2022 and 2021 were $3,435 and $5,502, respectively, expensed to Selling, general, and administrative expense. Research and development expenses primarily include personnel costs related to our R&D science division as well as R&D related projects advancing Hemp cannabinoid science through research programs that provide a better understanding of the therapeutic uses of cannabinoids.
Goodwill and asset impairments
For the year ended December 31, 2022, the Company recorded an impairment of $1,837 related to operating leases. During the year, the Company made the decision to cease utilizing the Denver office space and plans to sublease the office space at current market rents. Based on an analysis of the estimated undiscounted cash flows relative to a potential sublease arrangement, the Company evaluated the recoverability of the assets associated with the subleased space, including, the right-of-use asset and concluded the asset was impaired. This analysis resulted in a full impairment charge totaling $1,822 included in Goodwill and asset impairments charges on the consolidated statements of operations for the year ended December 31, 2022.
For the year ended December 31, 2021, the Company fully impaired the goodwill and intangible assets related to customer relationships and trade names recorded from the acquisition of Abacus during the year ended totaling $76,039. The Company determined the sustained decrease in our share price in the fourth quarter of 2021, along with a significant decline to the equity value of the Company's peers and overall U.S. stock market, represented a goodwill impairment triggering event. The Company performed a quantitative analysis as of December 31, 2021 to
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determine if impairment to our goodwill existed for the one reporting unit. We used a blended approach in calculating fair value of our one reporting unit including the income approach, market approach, and market capitalization approach. This analysis resulted in full impairment of our goodwill balance totaling $76,039 included in Goodwill and asset impairments charges on the consolidated statements of operations for the year ended December 31, 2021. The goodwill impairment was measured as the amount by which the carrying value of the reporting unit, including goodwill, exceeded its fair value.
The factors listed above representing a goodwill triggering event also indicated a triggering event for the Company's acquired customer relationships and trade name intangible assets. The Company performed a quantitative analysis as of December 31, 2021 to determine if impairment existed by comparing the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate over their remaining lives. This analysis resulted in full impairment of the of customer relationships and trade name intangible assets acquired and total an impairment loss of $19,750 was recorded for the year ended December 31, 2021.
Total Change in Fair Value of Financial Instruments and Other
Total change in fair value of financial instruments and other is as follows:
| Year Ended | |||||||||||||||||||||||||||||
| December 31, | % Increase (Decrease) | ||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||
| Change in fair value of financial instruments and other | $ | (7,480) | $ | 9,429 | (179.3) | % | |||||||||||||||||||||||
Total change in fair value of financial instruments and other for the year ended December 31, 2022 and December 31, 2021 was a loss of $7,480 and a gain of $9,429, respectively. For the year ended December 31, 2022, there was a loss in the fair value of the Company's SBH Purchase Option of $10,700 compared to a gain of $5,000 as of December 31, 2021. The fair value of the Company's SBH Purchase option is revalued at each reporting date with changes primarily based on financial projections of Stanley Brothers USA and the probability and timing of exercise. Additionally, for the year ended December 31, 2022, the change in fair value of financial instruments and other was partially offset by the revaluation of the fair value of the Company's debt interest rate conversion feature and debt conversion option resulting in a gain of $138 and $3,082, respectively. For the year ended December 31, 2021, the change in fair value of financial instruments and other was driven by the revaluation of the fair value of the Company's warrant liabilities resulting in a gain of $4,304. As of December 31, 2022, all outstanding warrants have expired. The fair value of the Company's financial derivative instruments and SBH purchase option are revalued at each reporting date.
Provision for Income Taxes
| Year Ended | |||||||||||||||||||||||||||||||||||||||||
| December 31, | % Increase (Decrease) | ||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit | $ | (91) | $ | (143) | (36.4) | % | |||||||||||||||||||||||||||||||||||
| Effective tax rate | (0.1) | % | (0.1) | % | |||||||||||||||||||||||||||||||||||||
The Company’s effective tax rate during the year ended December 31, 2022 and December 31, 2021 was (0.1)% and (0.1)%, respectively. The effective tax rate for the year ended December 31, 2022 is (0.1)% as the Company continues to believe its deferred tax assets are not more-likely-than-not to be realized and a full valuation allowance remains recorded against net deferred taxes as of December 31, 2022 and December 31, 2021. The effective rate for the year ended December 31, 2022 is consistent with the year ended December 31, 2021, as the Company has been in a full valuation allowance for both year ends.
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Liquidity and Capital Resources
As of December 31, 2022 and December 31, 2021, the Company had total current liabilities of $21,427 and $20,170, respectively, and cash and cash equivalents of $66,963 and $19,494, respectively, to meet its current obligations. Despite lower revenues than 2021, the Company has taken actions to reduce operating costs by approximately $30,000 by eliminating positions and lowering employee costs, simplifying the business by rationalizing the number of products produced and sold, reducing the number of third-party co-manufacturers, and lowering spend on non-employee related SG&A costs. For the year ended December 31, 2022, the Company collected the outstanding IRS receivable of approximately $10,841, partially offset by cultivation payments of $3,049.
Effective as of November 14, 2022, the Company entered into a subscription agreement with BT DE Investments, Inc. a wholly-owned subsidiary of BAT Group (LSE: BATS and NYSE: BTI), providing for the issuance of an approximately $56.8 million convertible debenture (the “debenture”). 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 Toronto Stock Exchange (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 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%. Interest is accrued annually and payable on the maturity date or date of earlier conversion. The maturity date for the debenture is November 2029. The Subscription Agreement contains customary representations, warranties and covenants. The funds from this debenture can be used for operating purposes to fund the Company, as approved by the board of directors or in accordance with the Company’s board-approved budget.
The Company expects its selling, general and administrative expenses in 2023 to be slightly higher than 2022 reflecting the incremental costs of the MLB Promotional Rights Agreement and related marketing activations. The investments in paid license and media rights as well as the launch of the new NSF Certified for Sports brand products are intended to combat the decline in revenues in the current year.
The Company’s primary sources of liquidity are its net cash on hand from operations and sales of its securities from time to time. The Company’s ability to fund its operations for the next twelve months and thereafter will depend on its future operating performance, particularly revenue growth, which can be affected by general economic conditions, industry regulatory changes, and other factors beyond the Company’s control.
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 bank line of credits and the issuance of capital shares.
The Company filed a final short form base shelf prospectus on May 5, 2021 with Canadian regulators, with a term of 25-months, which allowed the Company to qualify the distribution by way of prospectus in Canada of up to C$350,000 of common shares, preferred shares, warrants, subscription receipts, units, or any combination thereof. The final short form base prospectus was set to expire on June 6, 2023. The Company filed a prospectus supplement to distribute up to C$60,000 of common shares of the Company (the "Offered Shares") under the ATM Program. As of January 4, 2022, the ATM Program ceased to be available to the Company. Thereafter, the manner in which the Company raises capital will likely require that the Company file registration statements with the SEC related to such activities, which will likely increase the time and expense associated with such activities.
The Company expects to meet our long-term liquidity requirements through various sources of capital, including cash provided by operations. 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
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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.
Cash Flows
Cash Flow from Operating Activities
Net cash used in operating activities for the year ended December 31, 2022 and December 31, 2021 were as follows:
| (in thousands) | Year Ended December 31, | |||||||||||||
| 2022 | 2021 | |||||||||||||
| Net cash used in operating activities | $ | (5,315) | $ | (29,559) | ||||||||||
For the year ended December 31, 2022, the decrease in cash used in operations is primarily related to lower operating expenses, collection of the $10,841 from income tax refunds and its related interest, partially offset by lower revenues and cultivation payments.
Cash Flow from Investing Activities
Net cash provided by (used in) investing activities for the year ended December 31, 2022 and December 31, 2021 were as follows:
| (in thousands) | Year Ended December 31, | |||||||||||||
| 2022 | 2021 | |||||||||||||
| Net cash provided by (used in) investing activities | $ | 395 | $ | (11,789) | ||||||||||
For the year ended December 31, 2022, the decrease in cash used in investing activities was driven by lower capital expenditures, and partially offset by proceeds from the sale of assets. For the year ended December 31, 2021 the outflow was related to the SBH Purchase Option executed for total consideration of $8,000 and the purchase of $4,918 in capital expenditures, partially offset by other investing activities.
Cash Flow from Financing Activities
Net cash provided by financing activities for the year ended December 31, 2022 and December 31, 2021 were as follows:
| (in thousands) | Year Ended December 31, | |||||||||||||
| 2022 | 2021 | |||||||||||||
| Net cash provided by financing activities | $ | 52,389 | $ | 8,039 | ||||||||||
For the year ended December 31, 2022, the increase in cash provided by financing activities was primarily due to proceeds from the issuance of $56.8 million convertible debenture, partially offset by debt issuance costs, share issuance costs, and employee equity vestings. For the year ended December 31, 2021, the net cash provided by financing activities during the period was primarily from ATM Program proceeds of $8,257.
Outstanding Share Data
The Company’s authorized share capital consists of (i) an unlimited number of common shares; (ii) an unlimited number of proportionate voting shares (each proportionate voting share is equal to 400 common shares in terms of voting and economic rights); and (iii) an unlimited number of preferred shares, issuable in series. On November 3,
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2021, all outstanding proportionate voting shares of the Company were converted by way of mandatory conversion in accordance with the Company’s Articles and at the discretion of the Company, into common shares. Following this conversion, and as of the close of business on November 3, 2021, 142,335,464 common shares were issued and outstanding, nil proportionate voting shares were issued and outstanding and nil preferred shares were issued and outstanding. Pursuant to the Company’s Articles, the Company is no longer authorized to issue additional proportionate voting shares.
As of March 20, 2023, 152,422,498 common shares were issued and outstanding and nil preferred shares were issued and outstanding. As of March 20, 2023, potential dilutive securities include (i) stock options exercisable to purchase 985,012 common shares pursuant to the Company’s 2015 legacy option plan with a weighted average exercise price of $0.5600; (ii) stock options exercisable to purchase 3,380,129 common shares pursuant to the Company’s 2018 option plan, as amended, with a weighted average exercise price of $1.28; (iii) 2,270,605 restricted share units ("RSUs"); (iv) 28,937,417 convertible shares related to convertible debenture. Each option, restricted share award, and convertible share entitles the holder to purchase one common share.
Off-Balance Sheet Arrangements
As of December 31, 2022, 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
Aidance Scientific, Inc. (“Aidance”) is the manufacturer of nearly all Abacus products. The former Chief Executive Officer of Abacus Health ("Abacus"), and a former officer of the Company through March 2022, also serves on Aidance’s Board of Directors. For the years ended December 31, 2022 and 2021, the Company made purchases of $3,293 and $3,570, respectively from Aidance. Payment terms on purchases are due 30 days after receipt. As of December 31, 2022 and 2021, the Company had a liability of $36 and $119, respectively, due to Aidance presented in accounts payable in the consolidated balance sheets.
Effective November 2020, the Company entered into a note receivable with certain founders of the Company to negotiate a future binding transaction in good faith. This agreement included a secured promissory note, where $1,000 was loaned to one of the founders. The note receivable was secured by equity instruments with certain founders of the Company, and 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. On March 22, 2022, the founders requested an extension of the maturity date, as allowed under the terms of the promissory note, resulting in an extension of the maturity date to November 13, 2023. According to the terms of the agreement, no additional interest will accrue through the payment date. As of December 31, 2021, the note receivable of $1,037 consisted of principal and interest. As of December 31, 2022, the Company has fully reserved the collectability of the note receivable and expensed the outstanding balance of $1,037 due to the declining value in the collateral in the fourth quarter.
Effective January 5, 2023, the Company entered into a Brand License and Option Agreement with JMS Brands LLC, an entity owned by one of the Company’s founders. Pursuant to the Brand License and Option Agreement, the Company licenses certain intellectual property from JMS Brands LLC, for an annual license fee of $500. Pursuant to the terms of the agreement, the Company has the option to purchase the intellectual property rights for $2,000.
On March 2, 2021, the Company entered into the SBH Purchase Option with Stanley Brothers USA as discussed above (note "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.
Pursuant to an amendment to the Name and Likeness and License Agreement between the Company and Leeland & Sig LLC d/b/a Stanley Brothers Brand Company, the agreement was extended to June 30, 2023. The agreement includes the payment of a nominal per diem fee for specifically requested activities as brand ambassadors for the
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Company. In addition, on April 16, 2021, the Company executed a separate consulting agreement which extended the services agreements of the Stanley brothers for a period of one year, expiring July 31, 2022. Upon execution of the consulting agreement, the Company paid $2,081 to Leeland & Sig LLC d/b/a Stanley Brothers Brand Company, on behalf of the Stanley Brothers, as consideration for the consulting services to be provided to the Company over the term of the agreement and certain restrictive covenants. For the year ended December 31, 2022 and 2021, the Company recognized $1,025 and $1,056, respectively, of sales and marketing expenses in the condensed consolidated statements of operations related to this agreement. As of December 31, 2022, there is no remaining balance.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which aims to reduce complexity in accounting standards by improving certain areas of U.S. GAAP without compromising information provided to users of financial statements. ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For all other entities, the standard is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. There was an immaterial impact upon adoption on the condensed consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for convertible instruments by removing the separation models for convertible debt instruments and convertible preferred stock with (1) cash conversion features, and (2) beneficial conversion features. In addition, ASU 2020-06 enhances information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share guidance and amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 is effective for emerging growth companies for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company evaluated the impact of the pronouncement, see further discussion within the note "Summary of Significant Accounting Policies and use of Estimates".
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, which addresses that Current GAAP has no specific authoritative guidance on the accounting for, or the disclosure of, government assistance received by business entities. The pronouncement and subsequent amendments require the following annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy: 1) Information about the nature of the transactions and the related accounting policy used to account for the transactions; 2) The line items on the balance sheet and income statement that are affected by the transactions, and the amounts applicable to each financial statement line item, 3) Significant terms and conditions of the transactions, including commitments and contingencies. ASU 2021-10 is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company evaluated the impact of the pronouncement, see further discussion within the note "Income and Other Taxes".
Critical Accounting Estimates
Listed below are the accounting policies 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 "Summary of Significant Accounting Policies and Use of Estimates" of our notes to consolidated financial statements for a discussion on recently adopted and issued accounting pronouncements.
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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 consolidated balance sheets and is remeasured at fair value at each reporting date, with changes to fair value recognized in the 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.
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 the cultivation of botanical raw material. Because of the duration of the cultivation process, a portion of the inventory will not be sold within one year. Consistent with the practice in other industries that cultivate botanical raw materials, all inventory is classified as a current asset.
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 consolidated statements of operations. There was $1,837 and $21,964 of impairment losses recognized related to long-lived assets for the year ended December 31, 2022 and December 31, 2021, respectively. Additionally, the Company determined that there was $76,039 of impairment of its goodwill for the year ended December 31, 2021.
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
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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 is 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 reliability of forecasting. 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 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 December 31, 2022 and December 31, 2021. The Company’s policy is to recognize interest and penalties on taxes, if any, within the statement of operations as income tax expense.
The Company qualified for federal government assistance through employee retention credit (“ERC”) provisions of the Consolidated Appropriations Act of 2021. As there is no authoritative guidance under U.S. GAAP on accounting for government assistance to for-profit business entities, we account for grants provided by the government, including accounting for certain refundable tax credits, by analogy to International Accounting Standard ("IAS") 20, Accounting for Government Grants and Disclosure of Government Assistance. In accordance with IAS 20, management determined it has reasonable assurance for receipt of the ERC and recorded the ERC benefit as of December 31, 2022 within the statement of operations as a payroll tax expense.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customer (“ASC 606”). The Company elected to early adopt ASC 606 as of January 1, 2018, as permitted by the standard. The Company performs the following five steps: (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
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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 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 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 doesn’t 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 7A. Quantitative and Qualitative Disclosures About Market Risk
Fair Value
The Company’s financial assets include cash and cash equivalents, accounts receivables, notes receivable, and SBH purchase option, and other derivative assets. Financial liabilities include accounts payable and accrued and other current liabilities, cultivation liabilities, notes payable, lease obligations, convertible debenture, and derivative liability. The carrying amounts of current assets and liabilities approximate their fair value due to their short period to maturity. The derivative financial assets and liabilities are measured at fair value through profit or loss ("FVTPL"). The fair value measurement of the Company’s financial and non-financial assets and liabilities utilizes market observable inputs and data as far as possible. Inputs used in determining fair value measurements are categorized into different levels based on how observable the inputs used in the valuation technique utilized are (the 'fair value hierarchy'):
- Level 1: Quoted prices in active markets for identical items (unadjusted);
- Level 2: Observable direct or indirect inputs other than Level 1 inputs; and
- Level 3: Unobservable inputs (i.e. not derived from market data).
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The classification of an item into the above levels is based on the lowest level of the inputs used that has a significant effect on the fair value measurement of the item. Transfers of items between levels are recognized in the period they occur. The Company's cash and cash equivalents are subject to a level 1 valuation. The Company’s derivative liabilities are subject to a level 2 valuation. The Company’s SBH purchase option, other derivative assets, and convertible debenture are subject to a level 3 valuation. The basis of the valuation of the derivative financial assets and liabilities are fair value. Refer to the "fair value" note for additional analysis of fair value instruments.
Market Risk
Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates, will affect the Company’s income or the value of it holding financial instruments. The Company conducts sales transactions with foreign entities. The transactions are primarily denominated in USD, the functional currency. In November 11, 2022, the Company entered into a subscription agreement with BAT Group for $56.8 million convertible debenture. The debenture was denominated in Canadian Dollars ("CAD" or "C$") C$75.3 million per the subscription agreement and translated to USD on the transaction date. The Company remeasures the debenture and the derivatives associated with the debenture at each balance sheet date using the CAD to USD exchange rate as of that balance sheet date. The Company recognizes the resulting foreign currency gain or loss within the statement of operation during the period. See additional discussion of foreign currency translation related to the convertible debenture within note "Debt".
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to change in market interest rates. The Company’s accounts receivable and accounts payable are non-interest bearing. Financial assets and financial liabilities with variable interest rates expose the Company to cash flow interest rate risk. The Company does not have any debt instruments outstanding with variable interest rates at December 31, 2022 and December 31, 2021(see note "Debt"). Changes in market interest rates cause the fair value of long-term debt with fixed interest rates to fluctuate but does not impact net income as the Company records debt at amortized cost and the carrying value does not change as interest rates change.
Credit Risk
Credit risk refers to the risk that a counterparty will default on its contractual obligation, resulting in financial loss to the Company. Such risks arise primarily from certain financial assets held by the Company consisting of accounts receivable, note receivables, and deposits. The Company applies the current expected credit loss (CECL) standard to estimate its allowance for credit losses on all receivables. The loss allowance provision is based on the Company’s historical collection and loss experience as well as forward-looking factors, where appropriate.
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its obligations as they become due. The Company manages liquidity risk by evaluating working capital and forecasting long-term financial liabilities as well as forecast cash inflows and outflows from business operations. The Company’s cash and cash equivalents balances at December 31, 2022 and December 31, 2021 were $66,963 and $19,494, respectively. Net working capital at December 31, 2022 and December 31, 2021 was $82,334 and $75,637, respectively.
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Item 8. Financial Statements and Supplementary Data
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page | |||||
Report of Independent Registered Public Accounting Firm (PCAOB ID: | |||||
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Charlotte’s Web Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Charlotte’s Web Holdings, Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2019.
March 23, 2023
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CHARLOTTE’S WEB HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, net | |||||||||||
Inventories, net | |||||||||||
Prepaid expenses and other current assets | |||||||||||
Income taxes receivable | |||||||||||
Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| License and media rights | |||||||||||
| Operating lease right-of-use assets, net | |||||||||||
| Intangible assets, net | |||||||||||
| SBH purchase option and other derivative assets | |||||||||||
| Notes receivable - noncurrent | |||||||||||
| Other long-term assets | |||||||||||
Total assets | $ | $ | |||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | $ | |||||||||
Accrued and other current liabilities | |||||||||||
Cultivation liabilities – current | |||||||||||
Lease obligations – current | |||||||||||
| License and media rights payable - current | |||||||||||
Total current liabilities | |||||||||||
Cultivation liabilities – noncurrent | |||||||||||
Lease obligations – noncurrent | |||||||||||
Derivative and other long-term liabilities | |||||||||||
| License and media rights payable - noncurrent | |||||||||||
| Convertible debenture | |||||||||||
Total liabilities | |||||||||||
Commitments and contingencies (note 9) | |||||||||||
Shareholders’ equity: | |||||||||||
Common shares, nil par value; unlimited shares authorized as of December 31, 2022 and 2021, respectively; | |||||||||||
Additional paid-in capital | |||||||||||
Accumulated deficit | ( | ( | |||||||||
| Total shareholders’ equity | |||||||||||
Total liabilities and shareholders’ equity | $ | $ | |||||||||
See Notes to Consolidated Financial Statements
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CHARLOTTE’S WEB HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenue | $ | $ | |||||||||
| Cost of goods sold | |||||||||||
| Gross profit | |||||||||||
| Selling, general and administrative expenses | |||||||||||
| Goodwill and asset impairments | |||||||||||
Operating loss | ( | ( | |||||||||
Other income, net | |||||||||||
Change in fair value of financial instruments and other | ( | ||||||||||
Loss before provision for income taxes | $ | ( | $ | ( | |||||||
Income tax expense | ( | ( | |||||||||
Net loss | $ | ( | $ | ( | |||||||
Net loss per common share, basic and diluted | $ | ( | $ | ( | |||||||
Weighted-average shares used in computing net loss per share, basic and diluted | |||||||||||
See Notes to Consolidated Financial Statements
100
CHARLOTTE’S WEB HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except share amounts)
| Proportionate Voting Shares | Common Shares | Additional Paid-in Capital | Accumulated Deficit | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Shares | Amount | |||||||||||||||||||||||||||||||||
Balance—December 31, 2020 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||
| Conversion to common shares | ( | — | — | — | — | ||||||||||||||||||||||||||||||
| Exercise of warrants | — | — | — | ||||||||||||||||||||||||||||||||
| Withholding of common shares upon vesting of restricted share units | — | — | ( | — | ( | ||||||||||||||||||||||||||||||
| Harmony Hemp contingent equity compensation | — | — | — | ||||||||||||||||||||||||||||||||
| ATM Program, net of share issuance costs | — | — | — | ||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
Balance—December 31, 2021 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
| Common shares issued upon vesting of restricted share units, net of withholdings | — | — | ( | — | ( | ||||||||||||||||||||||||||||||
| Harmony Hemp contingent equity compensation | — | — | — | ||||||||||||||||||||||||||||||||
| Common share issuance license and media agreement | — | — | |||||||||||||||||||||||||||||||||
| ATM Program, net of share issuance costs | — | — | ( | — | ( | ||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
Balance—December 31, 2022 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
See Notes to Consolidated Financial Statements
101
CHARLOTTE’S WEB HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
Cash flows from operating activities: | |||||||||||
Net loss | $ | ( | $ | ( | |||||||
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
Depreciation and amortization | |||||||||||
| Goodwill and asset impairments | |||||||||||
Change in fair value of financial instruments | ( | ||||||||||
Allowance for credit losses | |||||||||||
Inventory provision | |||||||||||
Share-based compensation | |||||||||||
| Changes in right-of-use assets | |||||||||||
Loss (gain) on disposal of assets | ( | ||||||||||
| Other | |||||||||||
Changes in operating assets and liabilities: | |||||||||||
Accounts receivable, net | ( | ||||||||||
Inventories, net | |||||||||||
Prepaid expenses and other current assets | |||||||||||
Operating lease obligations | ( | ( | |||||||||
Accounts payable, accrued and other liabilities | ( | ( | |||||||||
| License and media rights | ( | ||||||||||
Income tax receivable | |||||||||||
Cultivation liabilities | ( | ( | |||||||||
Other operating assets and liabilities, net | ( | ( | |||||||||
Net cash used in operating activities | ( | ( | |||||||||
Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment and intangible assets | ( | ( | |||||||||
| Proceeds from sale of assets | |||||||||||
| Issuance of notes receivable, net of collections | |||||||||||
| Investment in Stanley Brothers USA Holdings purchase option | ( | ||||||||||
| Other investing activities | |||||||||||
Net cash provided by (used in) investing activities | ( | ||||||||||
Cash flows from financing activities: | |||||||||||
| Proceeds from public offerings, net of issuance costs | ( | ||||||||||
| Proceeds from stock option exercises | |||||||||||
| Proceeds from convertible debenture | |||||||||||
| Other financing activities | ( | ( | |||||||||
Net cash provided by financing activities | |||||||||||
Net increase (decrease) in cash and cash equivalents | ( | ||||||||||
Cash and cash equivalents —beginning of year | |||||||||||
Cash and cash equivalents —end of year | $ | $ | |||||||||
Non-cash activities: | |||||||||||
| Non-cash purchase of license and media rights assets | ( | ||||||||||
| Non-cash share issuance for license and media rights agreement | ( | ||||||||||
Non-cash purchases of property and equipment | ( | ||||||||||
Reduction to cultivation liabilities for inventory provision | ( | ||||||||||
See Notes to Consolidated Financial Statements
102
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
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”), 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’s current product categories include human ingestible products: tinctures (liquid product), capsules, gummies, sprays, topicals, 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 does not currently produce or sell medicinal or recreational marijuana or products derived from high-THC Cannabis plants. On March 2, 2021, Charlotte’s Web executed an Option Purchase Agreement pursuant to which the Company has the option to acquire Stanley Brothers USA Holdings, Inc. (“Stanley Brothers USA”), a Cannabis wellness incubator. Until the Stanley Brothers USA Holdings Purchase Option ("SBH Purchase Option") is exercised, both Charlotte’s Web and Stanley Brothers USA will continue to operate as standalone entities in the US. Internationally, the companies are able to explore opportunities where Cannabis is federally permissible. 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 Kentucky, Oregon, and Canada. The Hemp grown in Canada is utilized exclusively in the Canadian market and not in products sold in the United States.
In furtherance of the Company’s R&D efforts, in 2020, the Company established CW Labs, an internal division for R&D, to substantially 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.
Emerging Growth Company Status
The Company is an emerging growth company ("EGC"), as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use the extended transition period for complying with new or revised accounting standards, and as a result of this election, the consolidated financial statements may not be comparable to companies that comply with public company FASB standards’ effective dates. The Company can elect to early adopt, if permitted by the accounting standard. The Company may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of an offering or such earlier time that it is no longer an EGC.
103
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
Smaller Reporting Company Status
The Company is a “smaller reporting company” as defined in Exchange Act of 1934, as amended ("Exchange Act") Rule 12b-2. As a result, the Company is eligible to take advantage of certain reduced disclosure and other requirements that are otherwise applicable to public companies including, but not limited to, not being subject to the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002. The Company will remain a smaller reporting company until the last day of the fiscal year in which (1) the aggregate worldwide market value of its common shares held by non-affiliates equaled or exceeded $250 million as of the prior June 30th, or (2) its annual revenues equaled or exceeded $100 million during such completed fiscal year and the aggregate worldwide market value of its common shares held by non-affiliates equaled or exceeded $700 million as of the prior June 30th.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND USE OF ESTIMATES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Unless otherwise indicated, comparisons are to comparable prior periods, and 2022 and 2021 refer to the 12 months ended December 31, 2022, and December 31, 2021, respectively.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make informed estimates, judgments and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses during the reporting period and the disclosures in the accompanying notes. On an ongoing basis, management evaluates such estimates and assumptions for continued reasonableness. In particular, management makes estimates with respect to any (i) inventory provision, (ii) underlying assumptions that affect the potential impairment of goodwill and long-lived assets, (iii) ability to realize income tax benefits associated with deferred tax assets, and, (iv) underlying assumptions that affect the fair value of the SBH purchase option and other derivative instruments. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation. Management’s estimates are based on historical information available at the date of the consolidated financial statements and various other assumptions management believes are reasonable based on the circumstances. Actual results could differ materially from those estimates.
Reclassifications and prior period presentations
Certain amounts presented in prior periods have been reclassified to conform with the current period presentation.
Basic and Diluted Net Loss per Share
Basic net loss per common share is computed by dividing the allocated net loss and by the weighted-average number of common shares outstanding during the period. Diluted loss per common share is computed by dividing the allocated 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. Since the Company was in a loss position for the periods presented, basic net loss per share is the same as diluted net loss per share since the effects of potentially dilutive securities are antidilutive.
104
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
Segments
Operating segments are defined as components of an entity for which discrete financial information is available that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources and in assessing performance. As such, the Company has one operating segment, which is the business of hemp-based CBD wellness products. Substantially all long-lived assets are located in the United States and substantially all revenue is attributed to customers based in the United States.
Concentration of Credit Risk
The Company's financial instruments that are potentially exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The cash amounts in deposit accounts held in excess of federally-insured limits were $66,713 and $19,244 as of December 31, 2022 and 2021, respectively.
The Company provides credit to its customers in the normal course of business and has established credit evaluation and monitoring processes to mitigate credit risk, but has limited risk, as the majority of its sales are transacted with cash.
As of December 31, 2022 and 2021, no single customer accounted for more than 10% of the Company’s consolidated revenue. The Company had one customer whose accounts receivable balance individually represented 21 % and 34 % of accounts receivable as of December 31, 2022 and 2021, respectively.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable is stated as the amount billed, net of an estimated allowance for credit losses (“ACL”). The Company’s ACL is adjusted periodically and is based on management’s consideration of the age and nature of the past due accounts as well as specific payment issues. The Company considers as past due any receivable balance not collected within its contractual terms. Changes in the Company’s estimate to the ACL is recorded through bad debt expense and individual accounts are charged against the allowance when all reasonable collection efforts are exhausted.
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. 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, including State and Federal regulatory considerations. The Company’s raw materials inventories of harvested hemp are recorded at cost to 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 the cultivation of botanical raw material. Because of the duration of the cultivation process, a portion of the inventory will not be sold within one year. Consistent with
105
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets were comprised of the following amounts (in thousands):
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Prepaid expenses | $ | $ | |||||||||
| License and media rights | |||||||||||
| Deposits | |||||||||||
| Other miscellaneous receivables | |||||||||||
Total prepaid expenses and other current assets | $ | $ | |||||||||
Property and Equipment, Net
Property and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:
| Building | |||||
| Machinery and equipment | |||||
| Furniture and fixtures | |||||
| Leasehold improvements | Shorter of useful life or term of lease ( | ||||
Construction-in-process assets are capitalized during construction and depreciation commences when the asset is placed into service. Significant improvements that extend the useful life of an asset are capitalized. Repairs and maintenance which do not extend the useful lives of assets are expensed as incurred. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gains or losses are recognized.
Intangible Assets, Net
Finite Lived Intangible Assets
Finite lived intangible assets consist of software, patents, and licenses. These intangible assets were determined to have finite lives and are amortized over their useful lives. Software is stated at cost less accumulated amortization. The costs of obtaining a patent are capitalized and amortized over its useful life.
Amortization is calculated on the straight-line basis over the following estimated useful lives of the assets:
Software | |||||
Patents | |||||
106
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
Goodwill
Goodwill represents the excess of acquisition costs over the fair value of tangible assets and identifiable intangible assets of the businesses acquired. Goodwill is not amortized. Goodwill is subject to impairment testing annually as of October 1, or any time changes in circumstances indicate that the carrying amount may not be fully recoverable. The Company performs its annual impairment test to determine if any events or circumstances exist, such as an adverse change in business climate or a decline in overall industry demand, that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill.
Cultivation Liabilities
Cultivation liabilities consist of amounts owed to third-party farming operators for the hemp harvests cultivated between 2022 and 2019. There were no cultivation liabilities incurred for the hemp harvest cultivated in 2021 or 2020 as there was minimal hemp grown with third-party farming operators due to sufficient quantities on hand of harvested hemp inventories and the resulting minimal crops did not trigger additional liabilities per the terms of the agreements. The terms of the agreements with third-party farming operators are fixed and determined based on the potency and yield of the hemp crops after harvests are completed. As stated in the agreements with the third-party farming operators, amounts are paid over four or eight quarters depending on the quantity of acres planted. The Company can reduce the settlement amount of cultivation liabilities for harvested hemp outside of quality specifications, as stated in the agreements. The cultivation liabilities are initially measured at the present value of
107
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
Leases
The Company elected to early adopt ASU 2016-02, Leases (Topic 842) as of January 1, 2019, as permitted by the standard. After the adoption of this standard, the Company determined if an arrangement contains a lease at inception based on whether there is an identified asset and whether the Company controls the use of the identified asset throughout the period of use. The Company classifies leases as either finance or operating. The Company does not have any finance leases. Right-of-use (“ROU”) assets are recognized at the lease commencement date and represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease liabilities are recognized at the lease commencement date based on the present value of future lease payments over the remaining lease term.
Present value of lease payments are discounted based on the more readily determinable of (i) the rate implicit in the lease or (ii) the Company’s incremental borrowing rate. Because the Company’s operating leases generally do not provide an implicit rate, the Company estimates its incremental borrowing rate based on the information available at lease commencement date for collateralized borrowings with a similar term, an amount equal to the lease payments and in a similar economic environment where the leased asset is located. The collateralized borrowings were based on the Company’s credit rating corroborated with market credit metrics like debt level and interest coverage.
The Company’s operating lease ROU assets are measured based on the corresponding operating lease liability adjusted for (i) payments made to the lessor at or before the commencement date, (ii) initial direct costs incurred and (iii) lease incentives under the lease. Options to renew or terminate the lease are recognized as part of the Company’s ROU assets and lease liabilities when it is reasonably certain the options will be exercised. ROU assets are also assessed for impairments consistent with the Company’s long-lived asset policy. See note "Leases" for further discussion.
Operating lease expense for fixed lease payments is recognized on a straight-line basis over the lease term. Variable lease payments for real estate taxes, insurance, maintenance, and utilities, which are generally based on the Company’s pro rata share of the total property, are not included in the measurement of the ROU assets or lease liabilities and are expensed as incurred.
Operating leases are presented separately as operating lease right-of-use assets, net and lease obligations, current and non-current, in the accompanying consolidated balance sheets.
We have elected the short-term lease recognition exemption for all applicable classes of underlying assets. Short-term disclosures include only those leases with a term greater than one month and 12 months or less, and expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less, that do not include an option to purchase the underlying asset that we are reasonably certain to exercise, are not recorded on the balance sheet.
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
108
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customer (“ASC 606”). The Company elected to early adopt ASC 606 as of January 1, 2018, as permitted by the standard. The Company performs the following five steps: (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 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 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 ecommerce 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 doesn’t 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. 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.
109
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
The majority of the Company’s revenue is derived from sales of branded products to consumers via the Company's direct-to-consumer ecommerce website, and distributors, retail, wholesale business-to-business customers, and health practitioners. The following table sets forth the disaggregation of the Company’s revenue:
Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Direct-to-consumer | $ | $ | |||||||||
| Business-to-business | |||||||||||
Total | $ | $ | |||||||||
Substantially all of the Company’s revenue is earned in the United States.
Cost of Goods Sold
Cost of goods sold primarily consists of the inventory and production costs for the Company’s products sold during the period, and also includes amortization and depreciation, as well as allocated expenses. For the year ended December 31, 2022 and 2021, cost of goods sold includes $23,394 and $9,729 in inventory provision, respectively. Refer to note "Inventories" for further discussion.
Share-based Compensation
The Company accounts for compensation expense for share-based option awards to employees, non-employee directors, and other non-employees based on the estimated grant date fair value of the options on a straight-line basis over the requisite service period, which is the vesting period for stock options. The fair value of stock options are estimated using the Black-Scholes-Merton (“Black-Scholes”) valuation model, which requires assumptions and judgments regarding stock price, volatility, risk-free interest rates, dividend yields and expected option terms. The Company uses the historical volatility and grant date closing price of its publicly traded shares to estimate the grant-date fair value of its stock options. Due to the lack of historical exercise history, the expected term of the Company’s stock options for employees has been determined utilizing the “simplified” method for awards. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is zero based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable
110
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
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. We assess 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 reliability of forecasting. 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.
Recently Issued Accounting Pronouncements
Other than described below, no new accounting pronouncements adopted or issued by the Financial Accounting Standards Board (“FASB”) had or may have a material impact on the Company’s consolidated financial statements.
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This standard provides optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this standard apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on rollforward information, which is effective for fiscal years beginning after
111
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
December 15, 2023. Early adoption is permitted. The Company is currently evaluating the impact, if any, that the updated standard will have on the condensed consolidated financial statements.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which aims to reduce complexity in accounting standards by improving certain areas of U.S. GAAP without compromising information provided to users of financial statements. ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For all other entities, the standard is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted, and the Company elected to adopt for the fiscal year beginning January 1, 2022. There was an immaterial impact upon adoption on the condensed consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for convertible instruments by removing the separation models for convertible debt instruments and convertible preferred stock with (1) cash conversion features, and (2) beneficial conversion features. In addition, ASU 2020-06 enhances information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share guidance and amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 is effective for emerging growth companies for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted, and the Company elected to adopt for the fiscal year beginning January 1, 2022. The Company evaluated the impact of the pronouncement and accounted for the convertible debenture in accordance with ASU 2020-06. See further discussion within the note "Debt".
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, which addresses that Current GAAP has no specific authoritative guidance on the accounting for, or the disclosure of, government assistance received by business entities. The pronouncement and subsequent amendments require the following annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy: 1) Information about the nature of the transactions and the related accounting policy used to account for the transactions; 2) The line items on the balance sheet and income statement that are affected by the transactions, and the amounts applicable to each financial statement line item, 3) Significant terms and conditions of the transactions, including commitments and contingencies. ASU 2021-10 is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company adopted for the fiscal year beginning January 1, 2022. The Company evaluated the impact of the pronouncement, see further discussion within the note "Income and Other Taxes".
3. FAIR VALUE MEASUREMENT
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The guidance describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value.
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date
112
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities; unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities
Level 3—Unobservable inputs that are supported by little or no market data for the related assets or liabilities
The categorization of a financial instrument within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s financial instruments include cash and cash equivalents, accounts receivable and other receivables, notes receivable and payable, SBH purchase option and asset derivatives, accounts payable and accrued liabilities, cultivation liabilities, convertible debenture, liability derivatives, and other current assets and liabilities. At December 31, 2022 and 2021, the carrying amounts of cash and cash equivalents, accounts receivable and other receivables, accounts payable and other current assets and liabilities approximated at their fair values because of their short-term nature. The carrying value of the notes receivable and cultivation liability approximates the fair value as the stated interest rate approximates market rates currently available to the Company. The carrying value of the convertible debenture approximates the fair value after adjustments for the bifurcated embedded derivatives and other discounts, refer to the "Debt" note for fair value discussion.
The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis at December 31, 2022 and 2021, by level within the fair value hierarchy:
| December 31, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
Financial assets: | |||||||||||||||||||||||
| Stanley Brothers USA Holdings purchase option | $ | $ | $ | $ | |||||||||||||||||||
| Debt interest rate conversion feature | |||||||||||||||||||||||
| Total Financial Assets | $ | $ | $ | $ | |||||||||||||||||||
Financial Liabilities: | |||||||||||||||||||||||
| Debt conversion option | $ | $ | $ | $ | |||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
Financial assets: | |||||||||||||||||||||||
| Stanley Brothers USA Holdings Purchase Option | $ | $ | $ | $ | |||||||||||||||||||
Financial Liabilities: | |||||||||||||||||||||||
| Warrants | $ | $ | $ | $ | |||||||||||||||||||
There were no transfers between levels of the hierarchy during the years ended December 31, 2022 and December 31, 2021.
113
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
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 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 Toronto Stock Exchange (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. (“CBD”) 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 Company determined that the debenture did not meet the definition of a freestanding derivative under ASC 815 "Fair Value Measurement for financial statement", and required the bifurcation of two embedded derivatives, the debt interest rate conversion feature and the debt conversion option.
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 consolidated statements of operations as changes in fair value of financial instruments and other 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 year ended December 31, 2022, a $138 gain related to the debt interest rate conversion feature was recognized as change in fair value of financial instruments and other in the statements of operations. As of December 31, 2022, the debt interest rate conversion feature represents a financial asset of $1,320 within in the consolidated balance sheets.
To determine the value of the option, 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:
| Year Ended December 31, | |||||||||||
| 2022 | |||||||||||
| Stated interest rate | |||||||||||
| Adjusted interest rate | |||||||||||
| Implied debt yield | |||||||||||
| Federal regulation probability | |||||||||||
| Year of event | 2025 | ||||||||||
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
114
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
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. 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 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 year ended December 31, 2022, a $3,082 gain related to the debt conversion option was recognized as change in fair value of financial instruments and other in the statements of operations. As of December 31, 2022, the debt conversion option represents a financial liability of $12,995 within derivative and other long-term liabilities in the consolidated balance sheets.
The following table provides the assumption regarding Level 2 fair value measurements inputs at their measurement dates:
| Year Ended December 31, | |||||||||||
| 2022 | |||||||||||
Expected volatility | |||||||||||
Expected term (years) | |||||||||||
Risk-free interest rate | |||||||||||
Expected dividend yield | |||||||||||
Value of underlying share | $ | ||||||||||
| Exercise price | $ | ||||||||||
Stanley Brothers USA Holdings Purchase Option
On March 2, 2021, the Company entered into an option purchase agreement with Stanley Brothers USA, a privately held Delaware company, and the shareholders of Stanley Brothers USA. The SBH Purchase Option was purchased for total consideration of $8,000 and has a five-year term (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 on the earlier of February 26, 2025 and federal legalization of cannabis in the United States, or such earlier time as Stanley Brothers USA and the Company agree, 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 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 and is remeasured at fair value at each reporting date, with changes to fair value recognized in the 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),
115
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
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 (Stanley Brothers USA financial results or projections of future financial results). Changes in fair value measurements, if significant, may affect performance of cash flows. For the year ended December 31, 2022 and December 31, 2021, a $10,700 loss and a $5,000 gain, respectively, related to the SBH Purchase Option was recognized as change in fair value of financial instruments and other in the statements of operations. As of December 31, 2022 and December 31, 2021, the SBH Purchase Option represents a financial asset of $2,300 and $13,000 within SBH purchase option and other derivative assets in the consolidated balance sheets.
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 model:
| Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
Expected volatility | |||||||||||
Expected term (years) | |||||||||||
Risk-free interest rate | |||||||||||
Weighted average cost of capital | |||||||||||
Warrant Liabilities
In 2020, the Company closed its underwritten public share offering (“2020 Share Offering”) of 10,000,000 units ("Offered Units"). Each Offered Unit consisted of one common share of the Company and one-half of one common share purchase warrant of the Company (each whole common share purchase warrant, a "2020 Share Offering Warrant"). The 2020 Share Offering Warrants do not meet all of the criteria for equity classification as the warrants are denominated in Canadian dollars ("CAD"), which differs from the Company's functional currency. As a result, the 2020 Share Offering Warrants are initially measured at fair value and are 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 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 warrants 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 life of the warrants.
For the years ended December 31, 2022 and December 31, 2021, no gain and $4,304 gain, respectively, was recognized related the warrant liabilities as change in fair value of financial instruments and other in the consolidated statements of operations. As of December 31, 2021, the Company's warrant liabilities' fair value is zero due to some warrants expiring in December 2021, a shorter expected term for the remaining outstanding warrants, and a significant decline in the Company's stock price. As of December 31, 2022, there are no outstanding warrants.
116
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
The following table provides quantitative information regarding Level 2 fair value measurements inputs at their measurement dates:
| Year Ended December 31, | |||||||||||
| 2021 | |||||||||||
Expected volatility | |||||||||||
Expected term (years) | |||||||||||
Risk-free interest rate | |||||||||||
Expected dividend yield | |||||||||||
Value of underlying share | $ | ||||||||||
4. INVENTORIES
Inventories consist of the following:
December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
Harvested hemp and seeds | $ | $ | |||||||||
Raw materials | |||||||||||
Finished goods | |||||||||||
Less: inventory provision | ( | ( | |||||||||
Total | $ | $ | |||||||||
Inventory Provision
117
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
5. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
Building | $ | $ | |||||||||
Machinery and equipment | |||||||||||
Furniture and fixtures | |||||||||||
Leasehold improvements | |||||||||||
| $ | $ | ||||||||||
Accumulated depreciation | ( | ( | |||||||||
Construction-in-process | |||||||||||
Total property and equipment, net | $ | $ | |||||||||
Depreciation expense for the years ended December 31, 2022 and December 31, 2021, was $6,213 and $7,481 , respectively, of which $3,181 and $4,503 , respectively, was recorded in in the consolidated statements of operations. For the years ended December 31, 2022 and December 31, 2021, depreciation expense of $3,032 and $2,978 , respectively, was recorded in Cost of goods sold in the consolidated statements of operations.
During the year ended December 31, 2021, an impairment loss of $1,921 was recorded related to property and equipment. The impairment resulted from the Company's decision to exit a third-party farming operator relationship.
6. GOODWILL AND INTANGIBLE ASSETS
Goodwill
As of December 31, 2022 and December 31, 2021, the Company has no one reporting unit. A blended approach in calculating fair value of the one reporting unit included the income approach and market approach. This analysis resulted in full impairment of the Company's goodwill balance totaling $76,039 included in goodwill and asset impairments charges on the consolidated statements of operations for the year ended
118
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
December 31, 2021. The goodwill impairment was measured as the amount by which the carrying value of the reporting unit, including goodwill, exceeded its fair value.
Intangible Assets
Details of the Company’s intangible assets subject to amortization and indefinite-lived intangible assets and their respective carrying amounts are as follows:
| As of December 31, 2022 | |||||||||||||||||||||||
Weighted-Average Remaining Useful Life (in years) | Gross | Accumulated Amortization | Net | ||||||||||||||||||||
| Definite-lived intangible assets: | $ | $ | ( | $ | |||||||||||||||||||
| Indefinite-lived intangible assets: | — | ||||||||||||||||||||||
| Total | $ | $ | ( | $ | |||||||||||||||||||
| As of December 31, 2021 | |||||||||||||||||||||||
Weighted-Average Remaining Useful Life (in years) | Gross | Accumulated Amortization | Net | ||||||||||||||||||||
Definite-lived intangibles assets(1) : | $ | $ | ( | $ | |||||||||||||||||||
| Indefinite lived intangible assets: | — | — | |||||||||||||||||||||
| Total | $ | $ | ( | $ | |||||||||||||||||||
(1) The factors listed above representing a goodwill triggering event also indicated a triggering event for the Company's customer relationships and trade name intangible assets acquired with the acquisition of Abacus. The Company performed a quantitative analysis as of December 31, 2021 to determine if impairment existed by comparing the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate over their remaining lives. This analysis resulted in full impairment of the customer relationships and trade name intangible assets acquired and total an impairment loss of $19,750 was recorded in goodwill and asset impairments charges on the consolidated statements of operations for the year ended December 31, 2021.
For the years ended December 31, 2022 and December 31, 2021, amortization expense of intangible assets of $1,228 and $3,544 , respectively, was recorded in Selling, general, and administrative expense in the consolidated statements of operations.
119
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
As of December 31, 2022, expected amortization of intangible assets is as follows:
Year Ending December 31: | |||||
| 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
Thereafter | |||||
Total future amortization | $ | ||||
7. 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 an strategic partnership with MLB to promote the Company’s new NSF-Certified for Sport® product line.
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. The consideration is as follows: 4 % of the Company’s fully diluted outstanding common shares; $30.5 million in cash consideration from 2022 through 2025, paid in accordance with the payment schedule below; 10 % royalty on the Company’s gross revenue from the sale of MLB branded products, after cumulative gross sales of all such branded products exceed $18.0 million.
As of October 11, 2022, the Company measured the assets acquired under the MLB promotional rights agreement based on the pro-rated fair value of i) the equity grant, ii) the committed cash payments, and iii) the revenue royalty payment for the acquired assets of 1) licensed properties and 2) prepaid media rights. The Company issued the MLB 6,119,121 common shares, the fair value of equity grant was $3,060 . The fair value of the $30.5 million committed cash consideration was $28,339 , based on the discounted future payments through the term of the agreement using a risk free interest rate of 4.31 %. The fair value of the contingent 10 % revenue royalty payment was $0 as the payment of the royalty fee is not considered probable.
As of December 31, 2022, the fair value of the total licensed properties was $23,399 recorded as a license and media rights asset, and the fair value of the media rights was $7,482 recorded as a $2,500 prepaid asset and a $4,982 license and media rights asset within the consolidated balance sheets. For the year ended December 31, 2022, the Company paid the MLB $500 as part of the committed cash payments, and recognized $1,516 in amortization expense related to the licensed properties, and $518 in media expense related to the media rights.
120
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
Maturities of the MLB license and media rights payable as of December 31, 2022 are as follows:
Year Ending December 31: | |||||
| 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
Total payments | $ | ||||
Less: Imputed interest | ( | ||||
Total license and media rights payable | $ | ||||
Less: Current license liabilities | ( | ||||
Total non-current license and media rights payable | $ | ||||
As of December 31, 2022, expected amortization of licensed properties is as follows:
Year Ending December 31: | |||||
| 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
Total future amortization | $ | ||||
8. DEBT
Convertible Debenture
Effective as of November 14, 2022, the Company entered into the Subscription Agreement with BT DE Investments, Inc., providing for the issuance of $56.8 million (C$75.3 million) convertible debenture. The debenture was denominated in Canadian Dollars ("CAD" or "C$"). 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. 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 2029.
The following is a summary of the Company's convertible debenture as of December 31, 2022:
| As of December 31, 2022 | |||||||||||
| Principal Amount | Unamortized Debt Discount and Costs | Net Carrying Amount | |||||||||
| Convertible Debenture | |||||||||||
| Convertible debenture due November 2029 | $ | $ | ( | $ | |||||||
The debenture was C$75.3 million per the subscription agreement and translated to USD on the transaction date. The Company remeasures the debenture at each balance sheet date using the CAD to USD exchange rate as of that balance sheet date. The Company recognizes the resulting foreign currency gain or loss within the statement of
121
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
operations during the period. For the year ended December 31, 2022, the Company recognized a foreign currency gain of $727 related to the net carrying value of the debenture.
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 December 31, 2022, the principal amount of the debenture includes $163 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 as of December 31, 2022:
| For the Year Ended December 31, | ||||||||
| Interest and Amortization Expense | 2022 | |||||||
| Interest expense | $ | |||||||
| Amortization of debt discounts and costs | $ | |||||||
| Total | $ | |||||||
Line of Credit
The Company terminated the asset backed line of credit ("ABL") of $10,000 with J.P. Morgan on July 27, 2022. Borrowings under the ABL bore interest at a variable rate based on (A) CB Floating Rate defined as Prime Rate plus 1.0 % or (B) monthly LIBOR rate plus 2.50 %. Borrowings under the ABL were secured by all of the assets of the Company and guaranteed by other subsidiaries of the Company. The line of credit agreement required compliance by the Company with certain debt covenants. As of the termination date and December 31, 2021, the Company was not in compliance with the debt covenants and had not drawn on the line of credit.
9. COMMITMENTS AND CONTINGENCIES
10. 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 0.2 years to 12.2 years, some of which include options to extend the leases for up to 5 years. Generally, the lease agreements do not include options to terminate the lease.
The weighted average remaining lease term was 10.0 years for operating leases as of December 31, 2022. The weighted average discount rate was 5.5 % for operating leases as of December 31, 2022.
122
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
The components of lease cost, including variable lease costs primarily consisting of common area maintenance charges and real estate taxes, for the years ended December 31, 2022 and 2021 are as follows:
Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
Operating Lease Cost: | |||||||||||
Fixed lease cost | $ | $ | |||||||||
Variable lease cost | |||||||||||
Total lease cost | $ | $ | |||||||||
Sublease income | |||||||||||
Other information related to leases was as follows:
Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
Supplemental Cash Flow Information: | |||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
Operating cash flows for operating leases | $ | $ | |||||||||
Right-of-use assets obtained in exchange of lease obligations: | |||||||||||
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | $ | |||||||||
Maturities of operating lease liabilities as of December 31, 2022 are as follows:
| Operating Leases | |||||
Year Ending December 31: | |||||
| 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
Thereafter | |||||
Total lease obligation | $ | ||||
Less: Imputed interest | ( | ||||
Total lease liabilities | $ | ||||
Less: Current lease liabilities | |||||
Total non-current lease liabilities | $ | ||||
123
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
During the year ended December 31, 2022, the Company made the decision to cease utilizing the Denver office space and plans to sublease the office space at current market rents. Based on an analysis of the estimated undiscounted cash flows relative to a potential sublease arrangement, the Company evaluated the recoverability of the assets associated with the subleased space, including, the right-of-use asset and concluded the asset was impaired.
The Company recorded an impairment charge of $1,837 within goodwill and asset impairments in the consolidated statements of operations as of December 31, 2022. There were no such impairments for the year ended December 31, 2021.
11. CULTIVATION LIABILITIES
In conjunction with the contract terms, the Company can reduce the settlement amount for harvested hemp outside of quality specifications. For the years ended December 31, 2022 and 2021, the Company recognized $582 and $855 , respectively, of settlement reductions.
Future payments due under contract obligations are as follows:
| Short-term | Long-term | Total | ||||||||||||||||||
| December 31, 2020 | $ | $ | $ | |||||||||||||||||
| Payments | ( | ( | ||||||||||||||||||
| Settlement reductions | ( | ( | ||||||||||||||||||
| Interest | ||||||||||||||||||||
| Conversion to short-term borrowings | ( | |||||||||||||||||||
| December 31, 2021 | $ | $ | $ | |||||||||||||||||
| Payments | ( | ( | ||||||||||||||||||
| Settlement reductions | ( | ( | ||||||||||||||||||
| 2022 Crop | ||||||||||||||||||||
| Interest | ||||||||||||||||||||
| Conversion to short-term borrowings | ( | |||||||||||||||||||
| December 31, 2022 | $ | $ | $ | |||||||||||||||||
Scheduled maturities of amounts owed as of December 31, 2022 are as follows:
Year Ending December 31: | |||||
| 2023 | $ | ||||
| 2024 | |||||
Total future payments | $ | ||||
Less: Imputed interest | ( | ||||
Total cultivation liabilities | $ | ||||
Less: Current portion of cultivation liabilities | ( | ||||
Total non-current cultivation liabilities | $ | ||||
124
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
12. SHAREHOLDERS’ EQUITY
As of December 31, 2022 and December 31, 2021, 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 shares of preferred shares have been issued or are outstanding.
Common Shares
As of December 31, 2022 and December 31, 2021, the Company was authorized to issue an unlimited number of common shares, which have no par value.
Dividend Rights – Holders of common shares are entitled to receive dividends out of the assets available for the payment of dividends at such times and in such amount and form as the Board of Directors may determine from time to time. The Company is permitted to pay dividends unless there are reasonable grounds for believing that the Company is insolvent or the payment of the dividend would render the Company insolvent.
Voting Rights – Holders of common shares are entitled to receive notice of and to attend and vote at all meetings of shareholders of the Company except a meeting at which only the holders of another class or series of shares is entitled to vote. Each common share shall entitle the holder thereof to one vote at each such meeting.
Liquidation Rights – Holders of common shares will be entitled to receive all of the Company's assets remaining after payment of all debts and other liabilities, subject to any preferential rights of the holders of any outstanding preferred shares.
Proportionate Voting Shares
On November 3, 2021, all outstanding proportionate voting shares ("PVS") of the Company were converted by way of mandatory conversion in accordance with the Company’s Articles and at the discretion of the Company, into common shares. Following this conversion, and as of the close of business on November 3, 2021, 142,335,464 nil nil no
Share Offering Warrants – Liability Classified
The Company accounted for warrants as liability-classified instruments as they did not meet all the criteria for equity classification. The warrants were required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. Any change in fair value of the warrants is recognized in change in fair value of financial instruments and other within the statements of operations.
125
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
As of December 31, 2022, there are no outstanding warrants. On May 8, 2022, warrants related to prior acquisition, totaling 1,233,140 , with a weighted average exercise price per warrant of $15.29 expired. In addition, on June 18, 2022, the 2020 Share Offering Warrants, totaling 5,750,000 common shares, with a weighted average exercise price per warrant of $6.27 expired. The following summarizes the number of warrants outstanding as of December 31, 2022 and December 31, 2021:
| Number of Warrants | Weighted-Average Exercise Price per Warrant | ||||||||||
| Outstanding as of December 31, 2021 | $ | ||||||||||
Exercised | |||||||||||
Expired | ( | ||||||||||
| Outstanding as of December 31, 2022 | $ | ||||||||||
On June 4, 2021, the Company filed a prospectus supplement to establish an at-the-market equity program (the “ATM Program”). The Company may distribute up to C$60,000,000 of Common Shares of the Company (the “Offered Shares”) under the ATM Program. Distributions of the Offered Shares through the ATM Program are made pursuant to the terms of an equity distribution agreement with Canaccord Genuity Corp. and BMO Nesbitt Burns Inc. (together, the “Agents”). The Offered Shares may be issued by the Company to the public from time to time, through the Agents, at the Company’s discretion. The Offered Shares sold under the ATM Program are sold at the prevailing market price at the time of sale under the ATM Program, and for the year ended December 31, 2021, the Company issued 4,740,300 Offered Shares at an average price of $1.85 per share for gross proceeds of $8,714 . For the year ended December 31, 2021, share issuance costs were $596 for net proceeds to the Company of $8,118 . For the year ended December 31, 2022, share issuance costs were $64 recognized in the consolidated statements of shareholders’ equity. The Company became an SEC reporting entity beginning on January 4, 2022. As of that date, the ATM Program ceased to be available to the Company. Thereafter, the manner in which the Company raises capital will likely require that the Company file registration statements with the SEC related to such activities, which will likely increase the time and expense associated with such activities.
13. LOSS PER SHARE
126
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Weighted-average number of common shares - basic | |||||||||||
| Dilutive effect of stock options and awards | |||||||||||
Weighted-average number of common shares - diluted | |||||||||||
| Loss per common share – basic and diluted | $ | ( | $ | ( | |||||||
As of December 31, 2022 and December 31, 2021, potentially dilutive securities include stock options, restricted share units, broker warrants, common share warrants, and conversion of the convertible debenture. When the Company recognizes a net loss from continuing operations, all potentially dilutive shares are anti-dilutive and are consequently excluded from the calculation of diluted net loss per share. The potentially dilutive awards outstanding for each year are presented in the table below:
Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Outstanding options | |||||||||||
| Outstanding restricted share units | |||||||||||
| Outstanding common share warrants | |||||||||||
| Convertible debenture conversion | |||||||||||
Total | |||||||||||
Convertible debenture conversion
For the year ended December 31, 2022, the debenture has no impact on the weighted-average number of common shares outstanding for the Basic EPS calculation prior to conversion as there are no shares issued and outstanding on issuance of the debenture. Conversely, income available to common stockholders will be impacted by interest expense of $379 and amortization of debt issuance costs of $163 related to the debenture.
Additionally, the Company evaluated the calculation for diluted EPS for the non-contingent conversion feature. Non-contingent features are considered at the option of the Lender at any time before maturity. The Company noted that only the non-contingent conversion feature requires further analysis for diluted EPS as there are no contingencies under the Subscription Agreement and common shares will be issued on conversion. The Company evaluated that the potential adjustments to the income available to common stockholders will include the after-tax amount of interest and other consequential changes in income or expense that would result from the assumed conversion, if any. The potential adjustment to the weighted-average number of common shares outstanding is based on the additional common shares resulting from the assumed conversion. The Company will consider the conversion feature only if it will have dilutive impact, not anti-dilutive. See reconciliation of basic and diluted EPS computations within note "Loss Per Share".
127
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
14. SHARE-BASED COMPENSATION
Share Incentive Plans
2015 Plan
On December 31, 2015, the Company adopted the Stanley Brothers, Inc. 2015 Stock Option Plan (the “2015 Plan”), which provides for grants of incentive stock options and nonqualified stock options to employees (including officers), consultants and directors. The 2015 Plan, and grants made under the 2015 Plan, are designed to align shareholder and participant interests. The Company’s board of directors establishes the terms and conditions of any grants under the 2015 Plan. Incentive stock options may be granted only to employees.
2018 Plan
On August 31, 2018, the Company adopted the Charlotte’s Web Holdings, Inc. 2018 Long-Term Incentive Plan (the “2018 Plan”), which provides for grants of stock options, stock appreciation rights, share awards, share units, performance shares, performance units, and other share-based awards (collectively the “Awards”) to eligible individuals on the terms and subject to conditions set forth in the 2018 Plan. The 2018 Plan is designed to attract and retain key personnel and service providers. The Company’s board of directors, or appointed administrators, establish the terms and conditions of any grants under the 2018 Plan.
The aggregate number of common shares of the Company as to which share incentive awards may be granted from time to time under both the 2015 Plan and 2018 Plan shall not exceed 13,500,000 shares. The maximum exercise period of any option grant shall not exceed ten years from the date of grant. The share incentive awards vest over a time-based service period, generally a period of to four years , and are settled in equity. The number of available awards at December 31, 2022, was 8,009,248 .
Stock options
Stock options vest over a prescribed service period and are approved by the 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.
The fair values of options granted during the period were determined using a Black-Scholes model. The following principal inputs were used in the valuation of awards issued for the years ended December 31, 2022 and 2021:
| Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
Expected volatility | |||||||||||
Expected term (years) | |||||||||||
Risk-free interest rate | |||||||||||
Expected dividend yield | |||||||||||
Value of underlying share | $ | $ | |||||||||
128
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
Detail of the number of stock options outstanding for the years ended December 31, 2022 and 2021 under the 2015 and 2018 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, 2021 | $ | $ | |||||||||||||||||||||
Granted | |||||||||||||||||||||||
Exercised | |||||||||||||||||||||||
Forfeited (and expired) | ( | ||||||||||||||||||||||
| Outstanding as of December 31, 2022 | $ | $ | |||||||||||||||||||||
| Exercisable/vested as of December 31, 2022 | $ | $ | |||||||||||||||||||||
For the options outstanding at December 31, 2022, the weighted average remaining contractual life is 8.37 years. The weighted average grant-date fair value of options granted during the year ended December 31, 2022 was $1.11 .
For the options outstanding at December 31, 2021, weighted average remaining contractual life is 7.54 years. The weighted average grant-date fair value of options granted during the year ended December 31, 2021 was $3.56 .
The weighted average share price at the date of exercise of options exercised during the years ending December 31, 2022 and 2021 was $— and $4.85 , respectively.
Vesting of awards under these plans were generally time based over a period of to four years . For the 458,102 option awards vested during the year ended December 31, 2022, the weighted average grant date fair value was $1.60 . For the 720,261 option awards vested during the year ended December 31, 2021, the weighted average grant date fair value was $5.93 .
Of the 3,957,027 options outstanding at December 31, 2022, 985,012 options have an exercise price of $0.56 , and the remaining 2,972,015 options have an exercise price ranging between $0.44 and $21.10 .
Restricted share units
The Company has issued time-based restricted share units to certain employees as permitted under the 2018 Plan. The restricted share units granted vest in accordance with the board-approved agreement, typically over equal installments over to four years . Upon vesting, one share of the Company’s common shares is issued for each restricted share 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 year ended December 31, 2022 and 2021was $1,462 and $751 , respectively.
129
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
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, 2021 | $ | ||||||||||
Granted | |||||||||||
Forfeited | ( | ||||||||||
Vested | ( | ||||||||||
| Outstanding as of December 31, 2022 | $ | ||||||||||
Share-based Compensation Expense
Share-based compensation expense for all equity arrangements for the years ended December 31, 2022 and 2021 was $3,567 and $5,483 , respectively, included in selling, general and administrative expense in the consolidated statements of operations.
As of December 31, 2022, and 2021, there was approximately $3,239 and $4,638 of total unrecognized share-based compensation expense, related to unvested options granted to employees under the Company’s share option plan that is expected to be recognized over a weighted average period of 2.27
15. INCOME AND OTHER TAXES
Income Taxes
Loss before provision for income taxes for the years ended December 31, 2022 and December 31, 2021 consists of the following:
| Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
U.S. loss | $ | ( | $ | ( | |||||||
| Foreign income (loss) | ( | ||||||||||
| Total current | $ | ( | $ | ( | |||||||
130
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
The major components of income tax (expense) benefit attributable to loss from operations consists of:
| Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
Current: | |||||||||||
Federal | $ | $ | |||||||||
State | ( | ( | |||||||||
Foreign | ( | ( | |||||||||
| Total current | $ | ( | $ | ( | |||||||
Deferred: | |||||||||||
Federal | |||||||||||
State | |||||||||||
Foreign | |||||||||||
| Total deferred | |||||||||||
Total income tax expense | $ | ( | $ | ( | |||||||
Income tax (expense) benefit attributable to loss from continuing operations for the years ended December 31, 2022 and 2021 differed from the amounts computed by applying the U.S. federal income tax rates of 21.0 %, as a result of the following:
Year Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| U.S. federal statutory tax rate | |||||||||||
| State taxes, net of federal benefit | |||||||||||
| Share based compensation | ( | ( | |||||||||
| Change in fair value of financial instruments and other | ( | ||||||||||
Goodwill impairment(1) | ( | ||||||||||
Change in valuation allowance(2) | ( | ( | |||||||||
| R&D credit | |||||||||||
| Prior year true up | |||||||||||
| Other, net | ( | ( | |||||||||
Effective tax rate | ( | ( | |||||||||
(1)During the year ended December 31, 2021, the Company impaired its goodwill associated with the acquisition of Abacus. A portion of this impairment charge is permanently disallowed for tax purposes.
(2)During the year ended December 31, 2022 and 2021, the Company maintained a full valuation allowance on its deferred tax assets.
131
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
The Coronavirus Aid, Relief and Economic Security ("CARES") Act and miscellaneous other income taxes receivable result in total income taxes receivable as of December 31, 2021 of $10,764 . During the year ended December 31, 2022, the Company received $10,841 from the Internal Revenue Service ("IRS") which was the remaining amount of the income taxes receivable and interest.
The components of deferred tax assets and liabilities are as follows:
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
Deferred tax assets: | |||||||||||
Net operating loss and other carryforwards | $ | $ | |||||||||
Inventory provision and UNICAP 263A | |||||||||||
| Lease liability | |||||||||||
| Section 174 capitalized costs | |||||||||||
Share-based compensation | |||||||||||
Other | |||||||||||
Total deferred tax assets | $ | $ | |||||||||
Valuation allowance | ( | ( | |||||||||
Total deferred tax assets, net | $ | $ | |||||||||
Deferred tax liabilities: | |||||||||||
| Right of use assets | ( | ( | |||||||||
| Warrants | ( | ( | |||||||||
Total deferred tax liabilities | $ | ( | $ | ( | |||||||
| Net deferred taxes | $ | $ | |||||||||
The realization of deferred income tax assets may be dependent on the Company’s ability to generate sufficient income in future years in the associated jurisdiction to which the deferred tax assets relate. The Company considers all available positive and negative evidence, including scheduled reversals of deferred income tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Based on the review of all positive and negative evidence, including a three-year cumulative pre-tax loss, the Company continues to believe its deferred tax assets are not more-likely-than-not to be realized and, as such, a full valuation allowance is recorded against net deferred taxes. For the years ended December 31, 2022 and 2021, the Company’s valuation allowance increased by $14,694 and $17,203 , respectively, primarily related to the incremental net operating losses and an increase to the inventory provision.
As of December 31, 2022, the Company has US federal, US state, and Canadian net operating losses of approximately $195,381 , $159,964 , and $8,654 respectively. The entire US federal NOLs are post-2017 NOL and therefore can be carried forward indefinitely and the US state NOLs will begin to expire in, 2029. The Canada NOLs will begin to expire in 2038. For the year ended December 31, 2022 and 2021, the Company also has a research and development credit carryforward of $2,205 and $1,788 , respectively, which begin to expire in 2039.
132
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
Tax laws impose restrictions on the utilization of net operating loss carryforwards and research and development credit carryforwards in the event of a change in ownership of the Company as defined by Internal Revenue Code Section 382 and 383. The Company may have experienced ownership changes in the past that impact the availability of its net operating losses and tax credits. Should there be additional ownership changes in the future, the Company's ability to utilize existing carryforwards could be substantially restricted.
Uncertain tax position
A reconciliation of the beginning and ending amount of uncertain tax positions as of December 31, 2022 and 2021 is as follows:
| Balance at December 31, 2021 | $ | ||||
| Additions for current year tax positions | |||||
| Additions for prior year tax positions | |||||
| Reductions for prior year tax positions | |||||
| Reductions as a result of settlement with tax authority | |||||
| Balance at December 31, 2022 | $ | ||||
| Balance at December 31, 2020 | $ | ||||
| Additions for current year tax positions | |||||
| Additions for prior year tax positions | |||||
| Reductions for prior year tax positions | ( | ||||
| Reductions as a result of settlement with tax authority | |||||
| Balance at December 31, 2021 | $ | ||||
The Company recognizes the tax benefit from an uncertain tax position only if it is probable that the tax position will be sustained based on its technical merits. The Company measures and records the tax benefits from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company’s estimated liabilities related to these matters are adjusted in the period in which the uncertain tax position is effectively settled, the statute of limitations for examination expires or when additional information becomes available. The Company’s liability for unrecognized tax benefits requires the use of assumptions and significant judgment to estimate the exposures associated with the Company's various filing positions. Although the Company believes that the judgments and estimates made are reasonable, actual results could differ and resulting adjustments could materially affect the Company's effective income tax rate and income tax provision. The Company’s policy is to recognize interest and penalties on taxes, if any, as income tax expense.
If recognized, no ne of the uncertain tax positions would affect the effective tax rate. The Company does not anticipate any significant changes to the uncertain tax positions in the next twelve months.
The Company files income tax returns in the U.S. federal, various state jurisdictions, Canada, and Israel. In the normal course of business, it is subject to examination by taxing authorities throughout the world. The Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities in years before 2019.
133
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
The Inflation Reduction Act (“IRA”) was enacted on August 16, 2022. The IRA introduced new provisions including a 15% corporate alternative minimum tax for certain large corporations that have at least an average of $1 billion adjusted financial statement income over a consecutive three-tax-year period and a 1% excise tax surcharge on stock repurchases. The IRA is applicable for tax years beginning after December 31, 2022 and had no benefit to our consolidated financial statements for any of the periods presented, and we do not expect it to have a direct material impact on our future results of operations, financial condition, or cash flows.
Other Taxes
Employee Retention Credit
The Company qualified for federal government assistance through employee retention credit (“ERC”) provisions of the Consolidated Appropriations Act of 2021. As there is no authoritative guidance under U.S. GAAP on accounting for government assistance to for-profit business entities, we account for grants provided by the government, including accounting for certain refundable tax credits, by analogy to International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance. In accordance with IAS 20, management determined it has reasonable assurance for receipt of the ERC and recorded the ERC benefit of $4,106 for the year ended December 31, 2022 as an offset to Selling, general and administrative expenses expense. Due to the expected timing of receipt of the ERC, a corresponding receivable was recognized within other long-term assets as of December 31, 2022.
16. RELATED PARTY TRANSACTIONS
Aidance Scientific, Inc. (“Aidance”) is the manufacturer of nearly all Abacus Health products. The former Chief Executive Officer of Abacus Health ("Abacus"), and a former officer of the Company through June 2022, also serves on Aidance’s Board of Directors. For the years ended December 31, 2022 and 2021, the Company made purchases of $3,293 and $3,570 , respectively from Aidance. Payment terms on purchases are due 30 days after receipt. As of December 31, 2022 and 2021, the Company had a liability of $36 and $119 , respectively, due to Aidance presented in accounts payable in the consolidated balance sheets.
Effective November 2020, the Company entered into a note receivable with certain founders of the Company to negotiate a future binding transaction in good faith. This agreement included a secured promissory note, where $1,000 was loaned to one of the founders. The note receivable was secured by equity instruments with certain founders of the Company, and 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. On March 22, 2022, the founders requested an extension of the maturity date, as allowed under the terms of the promissory note, resulting in an extension of the maturity date to November 13, 2023. According to the terms of the agreement, no additional interest will accrue through the payment date. As of December 31, 2021, the note receivable of $1,037 consisted of principal and interest. As of December 31, 2022, the Company established a reserve against the note receivable due to decline in collateral and risk associated with collectability and therefore, expensed the outstanding balance of $1,037 .
Effective January 5, 2023, the Company entered into a Brand License and Option Agreement with JMS Brands LLC, an entity owned by one of the Company’s founders. Pursuant to the Brand License and Option Agreement, the Company licenses certain intellectual property from JMS Brands LLC, for an annual license fee of $500 . Pursuant to the terms of the agreement, the Company has the option to purchase the intellectual property rights for $2,000 .
On March 2, 2021, the Company entered into the SBH Purchase Option with Stanley Brothers USA as discussed above (note "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.
134
CHARLOTTE’S WEB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share, per share, per unit, and number of years)
17. SUBSEQUENT EVENTS
Effective January 5, 2023, the Company entered into a Brand License and Option Agreement with JMS Brands LLC, an entity owned by one of the Company’s founders. Pursuant to the Brand License and Option Agreement, the Company licenses certain intellectual property from JMS Brands LLC, for an annual license fee of $500 . Pursuant to the terms of the agreement, the Company has the option to purchase the intellectual property rights for $2,000 .
Effective as of February 22, 2023, the Company entered into an Extension and Fifth Amending Agreement to Name and Likeness and License Agreement (the “Extension Agreement”) with Leeland & Sig LLC d/b/a Stanley Brothers Brand Company. Pursuant to the Extension Agreement, the term of the Name and Likeness and License Agreement dated August 1, 2018 between the Company and Licensor, as amended by the Amending Agreement to Name and Likeness Agreement effective April 16, 2021 was extended to June 30, 2023.
135
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were effective for the period ending December 31, 2022.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2022.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm due to the Company being considered an emerging growth company.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ending December 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
136
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information relating to this item will be included in an amendment to this Annual Report on Form 10-K or in the proxy statement for our 2022 annual stockholders' meeting and is incorporated by reference in this Annual Report on Form 10-K. Certain information concerning our executive officers is included in Item 1 of Part I of this Annual Report on Form 10-K and is hereby incorporated by reference.
Item 11. Executive Compensation
Information relating to this item will be included in an amendment to this Annual Report on Form 10-K or in the proxy statement for our 2023 annual stockholders' meeting and is hereby incorporated by reference in this Annual Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Information relating to this item will be included in an amendment to this Annual Report on Form 10-K or in the proxy statement for our 2023 annual stockholders' meeting and is hereby incorporated by reference in this Annual Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information relating to this item will be included in an amendment to this Annual Report on Form 10-K or in the proxy statement for our 2023 annual stockholders' meeting and is hereby incorporated by reference in this Annual Report on Form 10-K.
Item 14. Principal Accountant Fees and Services
Information relating to this item will be included in an amendment to this Annual Report on Form 10-K or in the proxy statement for our 2023 annual stockholders' meeting and is hereby incorporated by reference in this Annual Report on Form 10-K.
137
PART IV
Item 15. Exhibit and Financial Statement Schedules
Documents filed as part of this report
(1) All Financial Statements
Our consolidated financial statements are listed in the “Index to Consolidated Financial Statements” under Part II, Item 8 of this Annual Report on Form 10-K.
(2) Financial Statement Schedules
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements and notes thereto included in this Form 10-K.
(3) Exhibits Required by Item 601 of Regulation S-K
| Exhibit No. | Description | Location | ||||||||||||
| 2.1∔ | Arrangement Agreement Between Abacus Health Products, Inc. and Charlotte’s Web Holdings, Inc. dated March 22, 2020. | Exhibit 2.2 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on November 5, 2021 is incorporated herein by reference. | ||||||||||||
| 3.1 | Articles | Exhibit 3.1 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on November 5, 2021 is incorporated herein by reference. | ||||||||||||
| 3.2 | Notice of Articles | Exhibit 3.2 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on November 5, 2021 is incorporated herein by reference. | ||||||||||||
| 4.1∔ | Supplemental Warrant Indenture between Charlotte’s Web Holdings, Inc. and Abacus Health Products, Inc. Odyssey Trust Company dated as of June 11, 2020. | Exhibit 4.2 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on November 5, 2021 is incorporated herein by reference. | ||||||||||||
| 4.2∔ | Warrant Indenture between Charlotte’s Web Holdings, Inc. and Odyssey Trust Company dated as of June 18, 2020. | Exhibit 4.3 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on November 5, 2021 is incorporated herein by reference. | ||||||||||||
| 4.3 | Filed herewith. | |||||||||||||
| 10.1 | Name and Likeness and License Agreement by and between Leeland & Sig LLC d/b/a Stanley Brothers Brand Company and CWB Holdings, Inc. and Charlotte's Web Holdings Inc. dated August 1, 2018. | Exhibit 10.1 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on November 5, 2021 is incorporated herein by reference. | ||||||||||||
138
| 10.2 | Amending Agreement dated April 16, 2021 to the Name and Likeness and License Agreement by and between Leeland & Sig LLC d/b/a Stanley Brothers Brand Company and CWB Holdings, Inc. and Charlotte's Web Holdings Inc. dated August 1, 2018. | Exhibit 10.2 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on November 5, 2021 is incorporated herein by reference. | ||||||||||||
| 10.3∔ | Extension and Second Amending Agreement to Name and Likeness and License Agreement, effective as of July 31, 2022, by and between Leeland & Sig LLC d/b/a Stanley Brothers Brand Company, a Colorado limited liability company, Charlotte’s Web, Inc., and Charlotte’s Web Holdings, Inc. | Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-56364) filed with the U.S. Securities and Exchange Commission on August 4, 2022. | ||||||||||||
| 10.4∔ | Extension and Third Amending Agreement to Name and Likeness and License Agreement, effective as of August 31, 2022, by and between Leeland & Sig LLC d/b/a Stanley Brothers Brand Company, a Colorado limited liability company, Charlotte’s Web, Inc., and Charlotte’s Web Holdings, Inc. | Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-56364) filed with the U.S. Securities and Exchange Commission on September 2, 2022. | ||||||||||||
| 10.5∔ | Option Purchase Agreement Among Charlotte’s Web Holdings, Inc. and Stanley Brothers USA Holdings, Inc. dated March 2, 2021. | Exhibit 10.3 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on November 5, 2021 is incorporated herein by reference. | ||||||||||||
| 10.6 | Extension and Fourth Amending Agreement to Name and Likeness and License Agreement, effective as of September 30, 2022, by and between Leeland & Sig LLC d/b/a Stanley Brothers Brand Company, a Colorado limited liability company, Charlotte's Web, Inc., and Charlotte's Web Holdings, Inc. | Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-56364) filed with the SEC on October 4, 2022 is incorporated herein by reference. | ||||||||||||
| 10.7 | Lease of Space made as of May 7, 2019 between EJ 700 Tech Court LLC and Charlotte’s Web, Inc. | Exhibit 10.7 to Amendment No. 1 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on December 22, 2021 is incorporated herein by reference. | ||||||||||||
| 10.8∔ | Sublease made as of May 31, 2019 between Boulder Brands USA, Inc. and Charlotte’s Web, Inc. | Exhibit 10.8 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on November 5, 2021 is incorporated herein by reference. | ||||||||||||
| 10.9 | First Amendment to Sublease dated as of August 30, 2019 between Boulder Brands USA, Inc. and Charlotte’s Web, Inc. | Exhibit 10.9 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on November 5, 2021 is incorporated herein by reference. | ||||||||||||
| 10.10 | Sublease made as of May 12, 2021 by and among Charlotte’s Web, Inc. and Outside Interactive, Inc. | Exhibit 10.10 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on November 5, 2021 is incorporated herein by reference. | ||||||||||||
139
| 10.11 | Sublease Agreement made as of May 11, 2021 by and between Molson Coors Beverage Company and Charlotte’s Web, Inc. | Exhibit 10.11 to Amendment No. 1 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on December 22, 2021 is incorporated herein by reference. | ||||||||||||
| 10.12 | First Amendment to Sublease Agreement made as of June 15, 2021 by and between Molson Coors Beverage Company and Charlotte’s Web, Inc. | Exhibit 10.12 to Amendment No. 1 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on December 22, 2021 is incorporated herein by reference. | ||||||||||||
| 10.13† | CWB Holdings, Inc. 2015 Stock Option Plan dated as February 2, 2016. | Exhibit 10.13 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on November 5, 2021 is incorporated herein by reference. | ||||||||||||
| 10.14† | CWB Holdings, Inc. Amendment No. 1 to 2015 Stock Option Plan. | Exhibit 99.2 to the Registration Statement on Form S-8 (File No. 333-262006) filed with the SEC on January 5, 2022 is incorporated herein by reference. | ||||||||||||
| 10.15† | Charlotte's Web Holdings, Inc. 2018 Long-Term Incentive Plan dated August 23, 2018. | Exhibit 10.14 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on November 5, 2021 is incorporated herein by reference. | ||||||||||||
| 10.16† | Charlotte's Web Holdings, Inc. Amended 2018 Long-Term Incentive Plan dated April 29, 2021. | Exhibit 10.15 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on November 5, 2021 is incorporated herein by reference. | ||||||||||||
| 10.17† | Form of Restricted Stock Award Agreement for Employees to the 2018 Long Term Incentive Plan. | Exhibit 10.16 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on November 5, 2021 is incorporated herein by reference. | ||||||||||||
| 10.18† | Form of Restricted Stock Award Agreement for Employees to the 2018 Long-Term Incentive Plan (2021 amendment) | Exhibit 10.16.1 to Amendment No. 1 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on December 22, 2021 is incorporated herein by reference. | ||||||||||||
| 10.19† | Form of Restricted Stock Award Agreement for Directors to the 2018 Long Term Incentive Plan. | Exhibit 10.17 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on November 5, 2021 is incorporated herein by reference. | ||||||||||||
| 10.20† | Form of Restricted Stock Award Agreement for Directors to the 2018 Long Term Incentive Plan (2021 amendment). | Exhibit 10.17.1 to Amendment No. 2 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on January 25, 2022 is incorporated herein by reference. | ||||||||||||
| 10.21† | Form of Nonqualified Stock Option Award to the 2018 Long-Term Incentive Plan. | Exhibit 10.18 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on November 5, 2021 is incorporated herein by reference. | ||||||||||||
| 10.22† | Form of Nonqualified Stock Option Award to the 2018 Long-Term Incentive Plan (2021 amendment). | Exhibit 10.18.1 to Amendment No. 1 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on December 22, 2021 is incorporated herein by reference. | ||||||||||||
140
| 10.23† | Form of Director’s Service Agreement, with Form of Director’s Indemnification Agreement. | Exhibit 10.28 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on November 5, 2021 is incorporated herein by reference. | ||||||||||||
| 10.24∔ | Consulting Agreement dated April 16, 2021, by and between Leeland & Sig, LLC d/b/a Stanley Brothers Brand Company, the Stanley Brothers, and Charlotte's Web Inc. | Exhibit 10.29 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on November 5, 2021 is incorporated herein by reference. | ||||||||||||
10.25∔, ++ | Filed herewith. | |||||||||||||
| 10.26†∔ | Offer Letter from Charlotte’s Web Holdings, Inc. to Jacques Tortoroli, dated December 16, 2021 | Exhibit 10.34 to Amendment No. 2 to the Registration Statement on Form 10 (File No. 000-56364) filed with the SEC on January 25, 2022 is incorporated herein by reference. | ||||||||||||
| 10.27†∔ | Letter dated as of August 2, 2022 to Jacques Tortoroli re: Amendment to Offer of Employment with Charlotte’s Web Holdings, Inc. | Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 000-56364) filed with the U.S. Securities and Exchange Commission on August 4, 2022. | ||||||||||||
| 10.28†∔ | Offer Letter from Charlotte’s Web Holdings, Inc. to Jared Stanley, dated June 1 2022 (and accepted as of June 2, 2022). | Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-56364) filed with the U.S. Securities and Exchange Commission on June 6, 2022. | ||||||||||||
| 10.29++ | Manufacturing and Sales License Agreement, effective November 1, 2022 by and among Aphria, Inc. and Charlotte’s Web, Inc. | Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-56364) filed with the U.S. Securities and Exchange Commission on November 4, 2022. | ||||||||||||
| 10.30∔, ++ | Filed herewith | |||||||||||||
| 10.31++ | Filed herewith | |||||||||||||
| 10.32∔, ++ | Subscription Agreement, dated as of November 14, 2022, by and among BT DE Investments, Inc. and Charlotte’s Web Holdings, Inc. | Exhibit 10.1 to Amendment No. 1 to the Current Report on Form 8-K/A (File No. 000-56364) filed with the U.S. Securities and Exchange Commission on November 14, 2022. | ||||||||||||
| 10.33∔, ++ | Convertible Debenture, dated as of November 14, 2022, by and among BT DE Investments, Inc. and Charlotte’s Web Holdings, Inc. | Exhibit 10.2 to Amendment No. 1 to the Current Report on Form 8-K/A (File No. 000-56364) filed with the U.S. Securities and Exchange Commission on November 14, 2022. | ||||||||||||
| 10.34∔, ++ | Investor Rights Agreement, dated November 14, 2022, by and between Charlotte’s Web Holdings, Inc. and BT DE Investments, Inc. a wholly-owned subsidiary of BAT Group. | Exhibit 10.3 to Amendment No. 1 to the Current Report on Form 8-K/A (File No. 000-56364) filed with the U.S. Securities and Exchange Commission on November 14, 2022. | ||||||||||||
141
| 21.1 | Filed herewith | |||||||||||||
| 23.1 | Filed herewith | |||||||||||||
31.1 | Filed herewith | |||||||||||||
31.2 | Filed herewith | |||||||||||||
32.1* | Filed herewith | |||||||||||||
32.2* | Filed 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. | |||||||||||||
| ∔ | Certain identified information has been excluded from the exhibit pursuant to Item 601(a)(6) and/or Item 601(b)(10)(iv) of Regulation S-K. | |||||||||||||
142
| ++ | Exhibits, schedules and annexes have been omitted pursuant to Item 601(a)(5) of Regulation S-K and will be supplementally provided to the SEC upon request. | |||||||||||||
| * | Document has been furnished, is not deemed filed and is not to be incorporated by reference into any of the Company’s filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language contained in any such filing. | |||||||||||||
Item 16. Form 10-K Summary
None.
143
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. | ||||||||
| March 23, 2023 | By: | /s/ Jessica Saxton | ||||||
| (Date) | Jessica Saxton | |||||||
| (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/ Jacques Tortoroli | Chief Executive Officer (Principal Executive Officer) | March 23, 2023 | ||||||||||||
| Jacques Tortoroli | ||||||||||||||
| /s/ Jessica Saxton | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | March 23, 2023 | ||||||||||||
| Jessica Saxton | ||||||||||||||
| /s/ John Held | Director | March 23, 2023 | ||||||||||||
| John Held | ||||||||||||||
| /s/ Tom Lardieri | Director | March 23, 2023 | ||||||||||||
| Tom Lardieri | ||||||||||||||
| /s/ Alicia Morga | Director | March 23, 2023 | ||||||||||||
| Alicia Morga | ||||||||||||||
| /s/ Susan Vogt | Director | March 23, 2023 | ||||||||||||
| Susan Vogt | ||||||||||||||
/s/ Jonathan Atwood | Director | March 23, 2023 | ||||||||||||
| Jonathan Atwood | ||||||||||||||
144
Exhibit 4.3
DESCRIPTION OF CAPITAL STOCK
The following is a description of the common shares of Charlotte’s Web Holdings, Inc. (the “Company”, “we” “our” or “us”) based on the terms and provisions of the Company’s notice of articles and articles, as amended (the “Articles”), which are included as Exhibits 3.1 and 3.2 to our most recent Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (this “Form 10-K”). The following description may not be complete and is subject to, and qualified in its entirety by reference to, the terms and provisions of the Articles. We encourage you to read our Articles and applicable provisions of Canadian law for additional information. Capitalized terms used, but not otherwise defined in this exhibit, have the meanings ascribed to them in the Form 10-K to clarify.
General
The Company is authorized to issue an unlimited number of Common Shares, of which there are 152,422,498 Common Shares outstanding as of March 20, 2023. The Company’s authorized share capital consists of the Common Shares, as well as an unlimited number of Proportionate Voting Shares, none of which were issued and outstanding as of December 31, 2022, and an unlimited number of preferred shares, issuable in series, none of which were issued and outstanding as of December 31, 2022. Holders of Proportionate Voting Shares are entitled to 400 votes per Proportionate Voting Share and holders of Common Shares are entitled to one vote per Common Share on all matters upon which holders of shares are entitled to vote. On November 3, 2021, all Proportionate Voting Shares converted into Common Shares by way of mandatory conversion in accordance with the Articles. Following the conversion of all Proportionate Voting Shares into Common Shares, no further Proportionate Voting Shares may be issued by the Company.
Each holder of a Common Share is entitled to: (i) one vote at all meetings of Shareholders; (ii) a pro rata share of any dividends or other distributions declared payable by the Board; and (iii) a pro rata share of any distribution of the Issuer’s assets on any winding up or dissolution of the Issuer. Other than as disclosed herein, there are no pre-emptive rights; conversion or exchange rights; redemption, retraction, purchase for cancellation or surrender provisions; sinking or purchase fund provisions; provisions permitting or restricting the issuance of additional securities; or any other material restrictions or provisions requiring a security holder to contribute additional capital, which are applicable to the Company’s Common Shares.
Effective as of 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), providing for the issuance of an approximately $56.8 million ("Canadian Dollar" C$75.3 million) convertible debenture (the “debenture”) 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 Toronto Stock Exchange (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. (“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 2029. Concurrently with the issuance of the debenture, the Company and BT DE Investments, Inc. entered into an investor rights agreement.
Stock Transfer Agent and Registrar
The transfer agent and registrar of the Company’s Common Shares is Odyssey Trust Company located at 350 - 409 Granville Street, Vancouver, BC V6C 1T2, Canada.
Voting Rights
All holders of Common Shares will be entitled to receive notice of any meeting of Shareholders of the Company, and to attend, vote and speak at such meetings, except those meetings at which only holders of a specific
class of shares, other than the Common Shares, are entitled to vote separately as a class under the BCBCA. A quorum for the transaction of business at a meeting of Shareholders is present if two Shareholders who, together, hold not fewer than 25% of the votes attaching to the outstanding voting shares entitled to vote at the meeting, are present in person or represented by proxy.
On all matters upon which holders of Common Shares are entitled to vote, each Common Share is entitled to one vote per Common Share.
Our director, Mr. Jonathan Atwood, was appointed as the designee to the board of directors by BT DE Investments Inc., pursuant to the investor rights agreement between the Company and BT DE Investments Inc., dated November 14, 2022. The investor rights agreement was entered into by the Company and BT DE Investments Inc. in connection with the Company’s issuance of the $56.8 million debenture to BT DE Investments Inc. on the terms of the subscription agreement, dated November 14, 2022 by and among the Company and BT DE Investments Inc. The investor rights agreement provides BT DE Investments, Inc. with certain rights, including the right to nominate 20% of the members of the Company’s board of directors for so long as BT DE Investments, Inc. and its affiliates’ partially diluted ownership of the Company’s common shares is at least 15% (with a stepdown in its nomination rights to 10% of the members of the board of directors). BT DE Investments, Inc. nomination rights terminate upon its and its affiliates’ partially diluted ownership of the Company’s common shares declining below 10% for, subject to certain exceptions in the investor rights agreement, a 30 day period.
Dividend Rights
Holders of Common Shares are entitled to receive dividends out of the assets available for the payment or distribution of dividends at such times and in such amount and form as the Company’s Board may from time to time determine, subject to any preferential rights of the holders of any outstanding preferred shares. The Company is permitted to pay dividends unless there are reasonable grounds for believing that: (i) the Company is insolvent; or (ii) the payment of the dividend would render the Company insolvent.
Liquidation Rights
In the event of the liquidation, dissolution or winding-up of the Company or any other distribution of its assets among its Shareholders for the purpose of winding-up its affairs, whether voluntarily or involuntarily, the holders of Common Shares will be entitled to receive all of the Company’s assets remaining after payment of all debts and other liabilities, subject to any preferential rights of the holders of any outstanding preferred shares.
Pre-emptive and Redemption Rights
Holders of Common Shares will not have any pre-emptive or redemption rights.
Certain Amendments
In addition to any other voting right or power to which the holders of Common Shares shall be entitled by law or regulation or other provisions of the Articles from time to time in effect, but subject to the provisions of the Articles, holders of Common Shares shall each be entitled to vote separately as a class, in addition to any other vote of Shareholders that may be required, in respect of any alteration, repeal or amendment of the Company’s Articles which would adversely affect the rights or special rights of the holders of Common Shares.
The rights, privileges, conditions and restrictions attaching to the Common Shares may be modified if the amendment is authorized by not less than 66 2/3% of the votes cast at a meeting of holders of Common Shares duly held for that purpose.
Forum Selection
The Company’s Articles include a forum selection provision that provides that, unless the Company consents in writing to the selection of an alternative forum, British Columbia courts shall, to the fullest extent permitted by law, be the sole and exclusive forum for:
•any derivative action or proceeding brought by any person on behalf of the Company;
•any action or proceeding asserting a claim of breach of a fiduciary duty owed to the Company by any director, officer or other employee of the Company;
•any action or proceeding asserting a claim arising pursuant to any provision of the Business Corporations Act or the Company’s Articles (as either may be amended from time to time); and
•Any action or proceeding asserting a claim otherwise related to the relationships among the Company, its affiliates and their respective shareholders, directors, officers or any of them, but excluding claims relating to the business carried on by the Company or such affiliates.
As written, the forum selection provision is intended to apply to any of above classes of actions. The forum selection provision also provides that shareholders are deemed to have consented to personal jurisdiction in the Province of British Columbia and to service of process on their counsel in any foreign action initiated in violation of the foregoing provisions.
The forum selection provision may impose additional litigation costs on shareholders in pursuing any such claims. It is uncertain whether such provision would apply to actions arising under U.S. federal securities laws, and if it does, whether British Columbia courts would enforce such provision given that neither the Company nor its investors can waive compliance with U.S. federal securities laws. It also remains uncertain as to whether a breach of U.S. securities law in and of itself would give rise to a direct cause of action in British Columbia courts, although indirect causes of action may arise thereunder as a result of, without limitation, breach or misrepresentation. The forum selection provision is not explicitly intended to apply to, nor is it specifically directed at, actions arising under U.S. federal securities laws. However, the provision does not explicitly state that actions arising under U.S. federal securities laws are excluded from the application of the provision. In the event it was determined that the forum selection provision applies to actions arising under U.S. federal securities laws, or if British Columbia courts refused to enforce such provisions, or if a breach of U.S. securities law did not give rise to a cause of action in British Columbia courts, there is a risk that the Company would be required to litigate any such breach in a jurisdiction which is less favorable to the Company, which could result in additional costs and financial losses that could have a material adverse effect on the Company’s business.
These provisions may limit the Company’s shareholders’ ability to bring a claim in a judicial forum they find favorable for disputes with the Company or its directors, officers, or other employees, which may discourage lawsuits against the Company and its directors, officers, and other employees. Alternatively, if a court were to find the choice of forum provision contained in the Company’s Articles to be inapplicable or unenforceable in an action, the Company may incur additional costs associated with resolving such action in other jurisdictions, which could harm its business, operating results and financial condition.
Public Benefit Company Status
In August 2019, at the annual general and special meeting of the Shareholders of the Company's voting shares, the Company’s Shareholders approved an amendment to the Company’s Notice of Articles and Articles to allow the Company to become a benefit company under the BCBCA, as a demonstration of its long-term commitment to conducting its business in a responsible and sustainable manner and promoting one or more public benefits. The Company became a benefit company under the BCBCA on July 24, 2020.
Benefit companies are a relatively new class of corporations in British Columbia that are formally and legally empowered to conduct their business in a responsible and sustainable manner and promote one or more public benefits. Under British Columbia law, benefit companies are required to identify in their Articles the public benefit or benefits they will promote. Their directors have a duty to act honestly and in good faith with a view to conducting business in a responsible and sustainable manner and to promote the company’s public benefits and must
balance this duty with their general fiduciary duties under section 142(1)(a) of the BCBCA to act honestly and in good faith with a view to the best interests of the company. As a benefit company, the Company must balance a variety of interests that may result in actions that do not maximize shareholder value as the Board must balance the interests of shareholders and stakeholders in working to achieve the Company’s public benefits.
In practice, the Board of Directors of the Company takes an expanded view of decision making to balance their fiduciary duties and their duty to act honestly and in good faith with a view to conducting business in a responsible and sustainable manner and to promote the Company’s public benefits, including weighing potential conflicts of interest and ultimately making decisions that the Board believes most appropriately address all of the Board’s duties. British Columbia courts have generally been deferential to the business decisions of directors, as directors are in the best position to take into account the diverse interests of a company and its stakeholders (including what weight to give to shareholder interests), as long as the business decision lies within the range of reasonable alternatives. However, as a new type of corporate entity, there is uncertainty as to how British Columbia courts would view the balancing of these interests and the weighing of shareholder and stakeholder concerns.
As a British Columbia benefit company, the Company’s Shareholders (if they, individually or collectively, own at least 2% of the Company’s outstanding capital stock or shares having at least C$2 million in market value (whichever is less)) are entitled to commence a legal proceeding claiming that the Company’s directors failed to balance Shareholder and public benefit interests, although the BCBCA clarifies that despite any rule of law to the contrary, a court may not order monetary damages in relation to any breach by the Company’s directors of these additional duties. This potential liability does not exist for traditional corporations. As a new class of corporate entity, there is uncertainty over how British Columbia courts would view a board’s balancing of interests as little jurisprudence exists to offer insights or guidance.
Benefit companies also are required under the BCBCA to publish on their websites and provide to their shareholders an annual benefit report that assesses, against a selected third-party standard, their performance, in carrying out the commitments set out in the benefit company’s benefit provisions. The Company’s annual benefit report discloses, in relation to the most recently completed fiscal year, (a) a fair and accurate description of the ways it demonstrated commitment to conducting its business in a responsible and sustainable manner, and to promoting the public benefits specified in its Articles; (b) a record of assessment based on a third-party standard; and (c) the circumstances, if any, that hindered the Company’s endeavors to carry out the commitments set out in the Company’s benefit provision. For so long as the Company is a benefit company under the BCBCA, the Company will include an annual benefit report as part of its annual proxy materials sent to its Shareholders and post the report to its website.
For the Company’s benefit report relating to the year ended December 31, 2021, the Company selected B Lab as the third-party standard against which to measure its performance. B Lab conducted a B Impact Assessment of the Company. The B Impact Assessment is an assessment of a company’s governance and its impact on its workers, customers, community, and environment. The B Impact Assessment of the Company is posted on the B Lab website and was included in the Company’s inaugural benefit report in respect of the year ended December 31, 2021.
The Company’s public benefit, as provided in its Articles, is “to pioneer the way to healthier lives, stronger communities, and a more bountiful planet by making it easier for everyone to access the natural restorative power of plants.” Accordingly, this social focus includes contributing to non-profit organizations and charities, which are made on an ad hoc basis, concentrating first on those entities that have historically supported the business through education of existing and potential customers. The Company also supports non-profits that it believes can utilize the wellness aspects of its products (i.e., military veterans, adaptive athletes, educational organizations, etc.). By doing so, the Company believes that socially oriented actions will ultimately have a positive impact on the Company, its employees, and its Shareholders. The Company’s stated mission is to “unleash the healing power of botanicals with compassion and science benefitting the planet and all who live upon it.” Becoming a benefit company underscores the Company’s commitment to its purpose and its Shareholders.
In addition to being a benefit company, the Company is a “Certified B Corp”, as certified by B Lab, the US non-profit organization which administers this certification . Certified B Corps (also referred to as B Corps) are for-profit companies that use the power of business to build a more inclusive and sustainable economy. Certified B Corps are required to consider the impact of their decisions on all stakeholders: customers, workers, communities, and the environment. These requirements are aligned with the Company’s socially conscious founding principles, and formalizes its commitment to environmental, social, and governance issues for stakeholders. The Company’s status as a Certified B Corp is distinct from and has no impact on its status as a benefit company under the BCBCA. Though the Company has chosen to use B Lab’s criteria for its required annual impact assessment under the BCBCA, the Company is not required to do so and could select another criteria if it desired.
Provisions of British Columbia Law Governing Business Combinations
All provinces of Canada have adopted National Instrument 62-104 - Take-Over Bids and Issuer Bids and related forms to harmonize and consolidate take-over bid and issuer bid regimes nationally (“NI 62-104”). The Canadian Securities Administrators, or CSA, have also issued National Policy 62-203 - Take-Over Bids and Issuer Bids (the “National Policy”), which contains regulatory guidance on the interpretation and application of NI 62-104 and on the conduct of parties involved in a bid. The National Policy and NI 62-104 are collectively referred to as the “Bid Regime”. The National Policy does not have the force of law, but is an indication by the CSA of what the intentions and desires of the regulators are in the areas covered by their policies. Unlike some regimes where the take-over bid rules are primarily policy-driven, in Canada, the regulatory framework for take-over bids is primarily rules-based, which rules are supported by policy.
A “take-over bid” or “bid” is an offer to acquire outstanding voting or equity securities of a class made to any person who is in Canada or to any securityholder of an offeree issuer whose last address as shown on the books of a target is in Canada, where the securities subject to the offer to acquire, together with the securities “beneficially owned” by the offeror, or any other person acting jointly or in concert with the offeror, constitute in the aggregate 20% or more of the outstanding securities of that class of securities at the date of the offer to acquire. For the purposes of the Bid Regime, a security is deemed to be “beneficially owned” by an offeror as of a specific date if the offeror is the beneficial owner of a security convertible into the security within 60 days following that date, or has a right or obligation permitting or requiring the offeror, whether or not on conditions, to acquire beneficial ownership of the security within 60 days by a single transaction or a series of linked transactions. Offerors are also subject to early warning requirements, where an offeror who acquires “beneficial ownership of”, or control or direction over, voting or equity securities of any class of a reporting issuer or securities convertible into, voting or equity securities of any class of a target that, together with the offeror’s securities, would constitute 10% or more of the outstanding securities of that class must promptly publicly issue and file a news release containing certain prescribed information, and, within two business days, file an early warning report containing substantially the same information as is contained in the news release.
In addition, where an offeror is required to file an early warning report or a further report as described and the offeror acquires or disposes of beneficial ownership of, or the power to exercise control or direction over, an additional 2% or more of the outstanding securities of the class, or disposes of beneficial ownership of outstanding securities of the class below 10%, the offeror must issue an additional press release and file a new early warning report. During the period commencing on the occurrence of an event in respect of which an early warning report is required and terminating on the expiry of one business day from the date that the early warning report is filed, the offeror may not acquire or offer to acquire beneficial ownership of any securities of the class in respect of which the early warning report was required to be filed or any securities convertible into securities of that class. This requirement does not apply to an offeror that has beneficial ownership of, or control or direction over, securities that constitute 20% of more of the outstanding securities of the class.
Related party transactions, issuer bids and insider bids are subject to additional regulation that may differ depending on the particular jurisdiction of Canada in which it occurs.
Advance Notice Provisions
Pursuant to Article 29 in the Company’s Articles relating to the advance notice of nominations of directors, which we refer to as the Advance Notice Provisions, Shareholders seeking to nominate candidates for election as directors other than pursuant to a proposal or requisition of Shareholders made in accordance with the provisions of the BCBCA, must provide timely written notice to the Company’s Secretary. To be timely, a Shareholder’s notice must be received (i) in the case of an annual general meeting of shareholders, not less than 30 days prior to the date of the annual general meeting of shareholders; provided, however, that in the event that the annual meeting of shareholders is to be held on a date that is less than 50 days after the date on which the first public announcement of the date of the annual meeting was made, notice by the shareholder must be received not later than the close of business on the 10th day following the date of such public announcement; and (ii) in the case of any other general meeting of shareholders called for the purpose of electing directors (whether or not also called for other purposes), not later than the 15th day following the day on which the first public announcement of the date of the general meeting of shareholders was made; and (iii) if notice-and-access (as defined in National Instrument 54-101 – Communication with Beneficial Owners of Securities of a Reporting Issuer) is used for delivery of proxy related materials in respect of a meeting described in (i) or (ii) above, and the notice date in respect of the meeting is not fewer than 50 days prior to the date of the applicable meeting, the notice must be received not later than the close of business on the 40th day before the applicable meeting. The Advance Notice Provisions also prescribes the proper written form for a shareholder’s notice.
Impediments to Change of Control
The Company’s Articles do not contain any change of control limitations with respect to a merger, acquisition or corporate restructuring that involves us.
The material investment by BT DE Investments, Inc. in the debenture and the resulting significant ownership interest in the Company may have the effect of delaying or preventing change of control transactions, including transactions that some or all of our shareholders might consider to be desirable.
Ownership and Exchange Controls
Limitations on the ability to acquire and hold our shares may be imposed by the Competition Act (Canada). This legislation establishes a pre-merger notification regime for certain types of merger transactions that exceed certain statutory shareholding and financial thresholds. Transactions that are subject to notification cannot be closed until the required materials are filed and the applicable statutory waiting period has expired or been waived by the Commissioner of Competition, or the Commissioner. Further, the Competition Act (Canada) permits the Commissioner to review any acquisition of control over or of a significant interest in the Company, whether or not it is subject to mandatory notification. This legislation grants the Commissioner jurisdiction, for up to one year, to challenge this type of acquisition before the Canadian Competition Tribunal if it would, or would be likely to, substantially prevent or lessen competition in any market in Canada.
Indemnification of Directors and Officers
The Company is subject to the provisions of Part 5, Division 5 of the BCBCA. Under Section 160 of the BCBCA, the Company may, subject to Section 163 of the BCBCA:
(a)indemnify an individual who:
(i)is or was a director or officer of the Company;
(ii)is or was a director or officer of another corporation at a time when such corporation is or was an affiliate of the Company; or
(iii)at the Company’s request, is or was, or holds or held a position equivalent to that of, a director or officer of a partnership, trust, joint venture or other unincorporated entity, including, subject to certain limited exceptions, the heirs and personal or other legal representatives of
that individual (collectively, an “eligible party”), against all eligible penalties, defined below, to which the eligible party is or may be liable; and
(b)after final disposition of an eligible proceeding, pay the expenses actually and reasonably incurred by an eligible party in respect of that proceeding, where:
(i)“eligible penalty” means a judgment, penalty or fine awarded or imposed in, or an amount paid in settlement of, an eligible proceeding,
(ii)“eligible proceeding” means a proceeding in which an eligible party or any of the heirs and personal or other legal representatives of the eligible party, by reason of the eligible party being or having been a director or officer of, or holding or having held a position equivalent to that of a director or officer of, the Company or an associated corporation (A) is or may be joined as a party, or (B) is or may be liable for or in respect of a judgment, penalty or fine in, or expenses related to, the proceeding,
(iii)“expenses” includes costs, charges and expenses, including legal and other fees, but does not include judgments, penalties, fines or amounts paid in settlement of a proceeding, and
(iv)“proceeding” includes any legal proceeding or investigative action, whether current, threatened, pending or completed.
Under Section 161 of the BCBCA, and subject to Section 163 of the BCBCA, the Company must, after the final disposition of an eligible proceeding, pay the expenses actually and reasonably incurred by an eligible party in respect of that proceeding if the eligible party (a) has not been reimbursed for those expenses and (b) is wholly successful, on the merits or otherwise, in the outcome of the proceeding or is substantially successful on the merits in the outcome of the proceeding.
Under Section 162 of the BCBCA, and subject to Section 163 of the BCBCA, the Company may pay, as they are incurred in advance of the final disposition of an eligible proceeding, the expenses actually and reasonably incurred by an eligible party in respect of the proceeding, provided that the Company must not make such payments unless it first receives from the eligible party a written undertaking that, if it is ultimately determined that the payment of expenses is prohibited under Section 163 of the BCBCA, the eligible party will repay the amounts advanced.
Under Section 163 of the BCBCA, the Company must not indemnify an eligible party against eligible penalties to which the eligible party is or may be liable or pay the expenses of an eligible party in respect of that proceeding under Sections 160(b), 161 or 162 of the BCBCA, as the case may be, if any of the following circumstances apply:
(a)if the indemnity or payment is made under an agreement to indemnify or pay expenses and, at the time that the agreement to indemnify or pay expenses was made, the Company was prohibited from giving the indemnity or paying the expenses by the Company’s memorandum or Articles;
(b)if the indemnity or payment is made otherwise than under an earlier agreement to indemnify or pay expenses and, at the time that the indemnity or payment is made, the Company is prohibited from giving the indemnity or paying the expenses by the Company’s memorandum or Articles;
(c)if, in relation to the subject matter of the eligible proceeding, the eligible party did not act honestly and in good faith with a view to the best interests of the Company or the associated corporation, as the case may be; or
(d)in the case of an eligible proceeding other than a civil proceeding, if the eligible party did not have reasonable grounds for believing that the eligible party’s conduct in respect of which the proceeding was brought was lawful.
If an eligible proceeding is brought against an eligible party by or on behalf of the Company or by or on behalf of an associated corporation, the Company must not either indemnify the eligible party under Section 160(a) of the BCBCA against eligible penalties to which the eligible party is or may be liable, or pay the expenses of the eligible party under Sections 160(b), 161 or 162 of the BCBCA, as the case may be, in respect of the proceeding.
Under Section 164 of the BCBCA, and despite any other provision of Part 5, Division 5 of the BCBCA and whether or not payment of expenses or indemnification has been sought, authorized or declined under Part 5, Division 5 of the BCBCA, on application of the Company or an eligible party, the court may do one or more of the following:
(a)order the Company to indemnify an eligible party against any liability incurred by the eligible party in respect of an eligible proceeding;
(b)order the Company to pay some or all of the expenses incurred by an eligible party in respect of an eligible proceeding;
(c)order the enforcement of, or any payment under, an agreement of indemnification entered into by us;
(d)order the Company to pay some or all of the expenses actually and reasonably incurred by any person in obtaining an order under Section 165 of the BCBCA; or
(e)make any other order the court considers appropriate.
Section 165 of the BCBCA provides that the Company may purchase and maintain insurance for the benefit of an eligible party or the heirs and personal or other legal representatives of the eligible party against any liability that may be incurred by reason of the eligible party being or having been a director or officer of, or holding or having held a position equivalent to that of a director or officer of, the Company or an associated corporation.
Under Article 20.2 of the Company’s Articles, and subject to the BCBCA, the Company must indemnify an eligible party and his or her heirs and legal personal representatives against all eligible penalties to which such person is or may be liable, and it must, after the final disposition of an eligible proceeding, pay the expenses actually and reasonably incurred by such person in respect of that proceeding. Each eligible party is deemed to have contracted with the Company on the terms of the indemnity contained in the Company’s Articles.
Under Article 20.3 of the Company’s Articles, and subject to any restrictions in the BCBCA, the Company may indemnify any person. The Company has entered into indemnity agreements or employment agreements containing indemnification provisions with certain of the Company’s directors and officers. Under these indemnification provisions, an executive officer is entitled, subject to the terms and conditions thereof, to the right of indemnification by the Company for certain expenses to the fullest extent permitted by applicable law. The Company believes that these indemnification agreements are necessary to attract and retain qualified individuals to serve as directors and executive officers.
Pursuant to Article 20.4 of the Company’s Articles, the failure of an eligible party to comply with the BCBCA or the Company’s Articles does not invalidate any indemnity to which he or she is entitled under the Company’s Articles.
Under Article 20.5 of the Company’s Articles, the Company may purchase and maintain insurance for the benefit of any person (or his or her heirs or legal personal representatives) who: (1) is or was a director, officer, employee or agent of the Company; (2) at the request of the Company, is or was a director, officer, employee or agent of another corporation at a time when the corporation is or was an affiliate of the Company; (3) at the request of the Company, is or was a director, officer, employee or agent of a corporation or a partnership, trust, joint venture or other unincorporated entity; (d) at the request of the Company, holds or held a position equivalent to that of a director or officer of a partnership, trust, joint venture or other unincorporated entity; against any liability incurred by him or her as such director, officer, employee or agent or person who holds or held such equivalent position.
The Company has an insurance policy covering its directors and officers, within the limits and subject to the limitations of the policy, with respect to certain liabilities arising out of claims based on acts or omissions in their capacities as directors or officers.
Exhibit 10.25
[* * *] BRAND LICENSE AND OPTION AGREEMENT
This [* * *] Brand License and Option Agreement (this “Agreement”) is entered into as of January 5, 2023 (the “Effective Date”), by and between JMS Brands LLC, a limited liability company organized and existing under the laws of the State of Colorado and any predecessor in interest (“Licensor”), and Charlotte’s Web, Inc., a corporation organized under the laws of the State of Delaware (“Licensee”). Licensor and Licensee are referred to throughout this Agreement each as a “Party” and collectively as the “Parties.”
RECITALS
WHEREAS, Licensee is engaged in the business of manufacturing, selling and distributing CBD-derived products, more specifically hemp-infused CBD format with THC no greater than 0.3%;
WHEREAS, Licensor owns and holds certain intellectual property including proprietary trademarks, products, formulations, recipes, standard operating procedures and other processes, trade secrets and technology (the “Technology”) relating to Licensor’s brand known as [* * *] (“[* * *] Brand”);
WHEREAS, Licensee wishes to obtain from Licensor an exclusive, irrevocable license to the [* * *] Brand and the Technology, to manufacture, use, import, sell, have sold and distribute Licensee Products worldwide (the “Territory”), and Licensor desires for the Licensee to so utilize the [* * *] Brand and Technology, on and subject to the terms and conditions set forth herein; and
WHEREAS, Licensor wishes to grant to Licensee an exclusive option to purchase the [* * *] Brand and Technology pursuant to the terms of that certain Purchase Agreement attached hereto as Exhibit C (the “Purchase Agreement”).
NOW, THEREFORE, in consideration of the premises and the mutual promises and conditions hereinafter set forth, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound, hereby agree as follows:
AGREEMENT
1.License of Technology. Subject to the terms and conditions of this Agreement, Licensor hereby grants to the Licensee, during the Term and in the Territory, an irrevocable, exclusive, non-transferable, sublicensable right and license to the [* * *] Brand and the Technology set forth on Exhibit A hereto, and all intellectual property rights embodied therein, to develop, make, have made, use, import, sell, have sold and otherwise commercially exploit existing and new products, including without limitation tinctures, sprays, capsules, topicals, cosmetics, and beverages (collectively, the “Licensed Products”). The Technology shall expressly include all know-how relating to the Technology and the Licensed Products, including the use, manufacture or formulation thereof, that is owned or controlled by Licensor as of the Effective Date, whether or not patented or patentable and whether or not maintained as trade secret, and including Licensor’s proprietary formulations, recipes and processes for Licensed Products. The Technology may not be used by Licensee for any purpose other than the exercise of the license granted in this Section 1 without the prior written consent of Licensor in Licensor’s sole discretion. The license granted by this Section 1: (a) may not be transferred by Licensee without Licensor’s consent except as otherwise allowed in this Agreement; (b) does not create any rights of ownership on the part of Licensee (all rights of ownership being retained by Licensor); and (c) covers only the Technology in existence on the date hereof and does not extend to any future improvements or developments of the Technology by Licensor subsequent to the date hereof.
2.License of Trademarks. Subject to the terms and conditions of this Agreement, Licensor hereby grants to the Licensee an irrevocable, exclusive, non-transferable, sublicensable right and license to use the trademarks, service marks, trade names, trade dress, symbols and logos set forth on Exhibit B as may be updated from time to time by written notice by Licensor to Licensee, and all applications and registrations thereof, and including the goodwill associated therewith (“Licensed Mark(s)”), solely in connection with the exercise of the license granted in Section 1 above, during the Term in the Territory. In the event Licensee wishes to use the Licensed Marks in connection with the sale of other products produced by Licensee and Licensor approves such use in its sole discretion, such approved products shall be added as “Licensed Products” under this Agreement, provided that ownership of all such approved products shall remain vested in Licensee. The license granted by this Section 2 may not be transferred by Licensee without Licensor’s consent except as otherwise allowed in this Agreement, and does not create any rights of ownership on the part of Licensee (all rights of ownership being retained by Licensor). Any use of the Licensed Marks by Licensee shall inure to the benefit of Licensor.
[Certain information indicated by [***] has been excluded from this Exhibit 10.25 because it is not material.]
3.Rights and Obligations Related to Technology and Licensed Marks.
a.Retained Rights. All rights not expressly granted by a Party under this Agreement are reserved by such Party. Except as expressly provided in this Section 3 or elsewhere in this Agreement, neither Party will be deemed by this Agreement to have been granted any license or other rights to the other Party's products, information or other intellectual property rights, either expressly or by implication, estoppel or otherwise.
b.Further Actions. To the extent any rights in and to the Technology (or any Improvement or other improvement thereto) or the Licensed Marks are deemed to accrue to the Licensee pursuant to this Agreement or otherwise, the Licensee hereby assigns any and all such rights, at such time as they may deem to accrue, to Licensor. The Licensee shall cooperate in the execution of any documents, or the taking of any other action, that is necessary to create, record or perfect Licensor’s sole and exclusive ownership of the Technology and the Licensed Marks, or to obtain, defend or protect registrations or applications for registration of such Technology and/or the Licensed Marks.
c.No Challenge. The Licensee acknowledges and agrees that all rights in and to the Technology and the Licensed Marks (including the goodwill related thereto) shall remain vested in Licensor both during the Term and thereafter, and that all use of the Licensed Marks by the Licensee and all goodwill derived therefrom shall inure solely to the benefit of and be on behalf of Licensor. The Licensee shall not: (a) assert rights in the Technology or the Licensed Marks other than the licensed rights conveyed in this Agreement, or challenge the distinctiveness of the Licensed Marks, the validity of Licensor’s rights in and to the Technology or the Licensed Marks or any application for registration thereof in any jurisdiction; (b) use the Licensed Marks in a manner which could, in the reasonable opinion of Licensor, dilute Licensor’s rights in the Licensed Marks, or which could otherwise prejudice or invalidate a registration or application for registration of any of the Licensed Marks; (c) take any action that will, in any way, diminish, alter or adversely affect Licensor’s rights in the Technology or the Licensed Marks or the reputation of Licensor, or otherwise damage the goodwill appurtenant to the Licensed Marks; (d) apply to register or register any Licensed Mark or any trade name, trademark, service mark, domain name or logo that is confusingly similar to any Licensed Mark, without Licensor’s prior written consent; or (e) use or adopt any trade name, trademark, service mark, domain name or logo that is confusingly similar to the Licensed Marks, without Licensor’s prior written consent.
d.Intellectual Property Notice Requirements. To the extent allowed by applicable rules and regulations, the Licensee shall include such trademark notices and other proprietary notices on all Licensed Products or related materials that bear any Licensed Mark or contain any Technology as may be reasonably required by Licensor in order to give appropriate notice of all intellectual property rights therein or pertaining thereto, as may be requested by Licensor and commercially reasonable under the circumstances. Such notices shall include appropriate notice symbols such as a superscript “TM” (™), “R” (®) or “C” (©) on the Licensed Product, displays, and advertising materials, all subject to Licensor’s approval and all applicable laws.
e.No Use by Licensor. Licensor and its affiliates will use all commercial reasonable efforts to cease any and all current or future uses of the [* * *] Brand and the Technology, including without limitation the Licensed Mark(s), by Licensor or any of its past or current distributors, vendors, suppliers, etc. in any public material, including, but not limited to, any use on any internet site. In connection therewith, Licensor agrees to remove all references to [* * *] used by Licensor or any of its affiliates within 10 business days.
f.Quality Control.
i.The Licensee shall maintain and preserve the quality of the Licensed Marks, and to use the Licensed Marks in good faith and in a manner consistent with the uses approved herein.
ii.The Licensee shall (a) ensure that all Licensed Products and related materials under the Licensed Marks are promoted, manufactured and distributed in a professional manner in compliance with all generally accepted industry standards, and (b) comply in all material respects with any and all laws, rules and regulations that are applicable to the promotion, manufacture and distribution of the Licensed Products and such related materials, and with any other quality standards mutually agreed by Licensor and Licensee from time to time. Licensee shall ensure that, if it receives notice or becomes aware of any violation or
[***] Indicates material that has been excluded from this Exhibit 10.25 because it is not material.
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potential violations of any of the applicable laws or regulations, Licensee will promptly take such actions as may be necessary to prevent any further violations and promptly provide written notice to Licensor of such violations or potential violations.
iii.Licensor shall have the right to verify compliance with the terms of this Agreement through the use of reasonable and appropriate inspection and verification processes and programs disclosed to and approved in writing by Licensee. If Licensor in good faith determines that a Licensed Mark is used in an improper or objectionable manner, or that the Licensed Products do not meet mutually agreed-upon quality control requirements, Licensor shall so notify the Licensee in writing and the Licensee shall have thirty (30) calendar days within which to: (a) reassure Licensor as to the propriety of the use of the Licensed Mark and quality of Licensed Products or (b) modify the proposed use of the Licensed Mark and quality of Licensed Products, and submit such proposed modifications for review by Licensor. If, at the end of such thirty (30) day period, Licensor is not satisfied with the proposed use of the Licensed Mark or quality of Licensed Products, Licensor may treat such failure as a material breach of this Agreement subject to Section 4(b)(i) hereof.
iv.The Licensee shall not use the Licensed Marks without the prior written approval of Licensor in accordance with the provisions of this paragraph. Within a reasonable period of time prior to any new use of any Licensed Mark by the Licensee hereunder, the Licensee shall provide to Licensor samples of the Licensed Product, packaging, advertising and promotional materials intended for use by the Licensee that will incorporate such Licensed Mark, as well as photographs or other appropriate evidence of the manner and format in which such Licensed Mark is intended for use in connection with the Licensed Product. Licensor shall promptly notify the Licensee of its approval or disapproval (which approval shall not be unreasonably withheld, conditioned or delayed) of the Licensee’s proposed use of such Licensed Mark, but in no event more than ten (10) calendar days after Licensor’s receipt of such samples, photographs and other evidence (“Review Period”). If Licensor objects to the Licensee’s proposed use of a Licensed Mark prior to the expiration of the Review Period, then the Parties shall cooperate in good faith to agree upon a mutually acceptable manner of use. If Licensor fails to object to the Licensee’s proposed use prior to the expiration of the Review Period, such proposed use shall be deemed approved by Licensor. Notwithstanding the foregoing, the Licensee shall not be required to seek Licensor’s prior written approval for any use of a Licensed Mark by the Licensee that is consistent with, or substantially similar in manner, scope and format as, any use that has been previously approved by Licensor in accordance with this paragraph.
v.Licensee, when manufacturing the Licensed Products, shall comply with applicable laws and regulations, including without limitation, the Federal Food, Drug and Cosmetic Act, and all corresponding regulations promulgated by the Food and Drug Administration, including established good manufacturing practices.
vi.All Licensed Products (including, without limitation, labels and packaging) shall comply with all applicable laws. Licensor shall reasonably assist Licensee in connection therewith, though Licensee shall ultimately be responsible for the Licensed Products’ compliance with applicable laws.
vii.Licensee will be responsible for making all disclosures, as may be necessary or required pursuant to applicable laws, regarding Licensee’s relationship with Licensor. Licensor will reasonably cooperate in providing any information required in such disclosures.
viii.All Licensed Products must be labeled with: (i) a date of manufacturing; and (ii) either an “expiration”, “sell by” or “best by” date.
ix.Licensor acknowledges that, so long as Licensed Products are of a quality at least as high in all respects as the various CBD products manufactured and sold by Licensor to date, such Licensed Products thereby meet the minimum quality standards required by Licensor under this Agreement.
g.Subcontracting and Sublicense.
[***] Indicates material that has been excluded from this Exhibit 10.25 because it is not material.
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i.The Parties acknowledge and agree that Licensee shall be entitled to engage subcontractors including, without limitation, affiliates of Licensee, in respect of the manufacture and sale of Licensed Products so long as any such subcontractor complies with all provisions of this Agreement.
ii.Licensee shall be free to sublicense the [* * *] Brand and the Technology in its sole and absolute discretion, so long as each such sublicensee complies with all provisions of this Agreement.
iii.No subcontracting or sublicensing under this Section 3(g) shall (A) relieve Licensee of its duties, responsibilities, obligations or liabilities hereunder; (B) relieve Licensee of its responsibility for the performance of any work rendered by any such subcontractor or sublicensee; or (C) create any legal relationship between Licensor and any subcontractor or sublicensee. As between Licensor and Licensee, Licensee shall be solely responsible for the acts, omissions or defaults of its subcontractors and sublicensees.
h.Prosecution and Maintenance. Licensor shall be solely responsible for, and have control of, preparing, filing, prosecuting, obtaining and maintaining the Technology and Licensed Marks. Licensor shall take such actions as it shall deem to be appropriate in its discretion in connection therewith, and shall pay all costs and expenses incurred by it in connection with the foregoing activities.
i.Assignment. Licensor shall, and shall cause Stanley Brothers LLC to, use best efforts to perfect the assignment of the applications for the Licensed Mark(s) pursuant to that certain Confirmatory Assignment of [* * *] Brand Ownership between Stanley Brothers LLC and Licensor dated December 9, 2022 (the “Assignment Agreement”), including without limitation by promptly filing with the US Patent and Trademark Office a Statement of Use upon Licensee’s request, and to take such further actions as are necessary to create, record or perfect the rights granted to Licensor under the Assignment Agreement and to Licensee under this Agreement and the Purchase Agreement.
j.Infringement. If Licensee learns of any activity by a third party that might constitute an infringement of Licensor’s rights in any of the Technology or Licensed Marks, or if any third party asserts that the Licensee’s use of the Technology or the Licensed Marks constitutes unauthorized use or infringement, the Licensee shall so notify Licensor immediately.
k.Enforcement. Licensee has the exclusive right, but not the obligation, to enforce its rights against any third-party infringement and to defend the Parties’ right to use the Technology and the Licensed Marks. If Licensee prosecutes any alleged infringement of the Technology or the Licensed Marks, or defends the right of either Party to use the Technology or the Licensed Marks, Licensee shall control such litigation and shall bear the expense of such actions. The Licensor shall make all reasonable efforts to assist Licensee therewith, including joining such action as a party or providing such evidence and expert assistance as the Licensor may have within its control. Licensee shall solely retain the award of any damages.
l.Non-Disparagement. The Licensed Marks, the Licensed Products, and the Technology shall not be used in a manner or environment that disparages or reflects adversely upon Licensor or the Technology or the Licensed Products, or places Licensor, its reputation, the Technology, the Licensed Marks, or the Licensed Products and associated goodwill in a negative light.
4.Term/Termination.
a.Term. This Agreement and the licenses granted hereunder shall have an initial term of one (1) year from the Effective Date hereof, unless earlier terminated pursuant to Section 4 (b) below (the “Initial Term”). Licensee, in its sole discretion, may renew the term hereof on an annual basis by providing one (1) week written notice prior to expiration of the then current term, subject to the annual renewal fee provision of Section 5(b) below (the “Renewal Term,” and collectively with the Initial Term, the “Term”).
b.Termination. This Agreement and the licenses granted hereunder may be terminated prior to the expiration of the Term as follows:
[***] Indicates material that has been excluded from this Exhibit 10.25 because it is not material.
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i.Termination by Licensor. This Agreement may be terminated by Licensor by written notice to Licensee solely upon the occurrence of any of the following: (i) failure of Licensee to pay any amounts owed hereunder when due; (ii) Licensee ceases operations, makes a general assignment for the benefit of creditors or is the subject of a voluntary or involuntary bankruptcy, insolvency or similar proceeding that is not dismissed within a reasonable period of time; or, (iii) any determination by any governmental or regulatory authority that this Agreement violates applicable laws, and the Parties, in spite of good faith and diligent negotiations, cannot amend the Agreement to be compliant with applicable laws. For the avoidance of doubt, Licensee’s material breach of any other provision of this Agreement shall not give Licensor a right to terminate or rescind this Agreement, but Licensor retains all other remedies in law or in equity on account of such material breach.
ii.Termination by Licensee. This Agreement may be terminated by Licensee at any time by giving Licensor thirty (30) calendar days written notice of termination.
iii.Sell-Off Period. For a period of three hundred and sixty (360) days after the date of termination (the “Sell-Off Period”), Licensee has the right to dispose of all inventory of the Licensed Products in its possession and all Licensed Products in the course of manufacture at the date of termination, in each case, in accordance with the terms and conditions of this Agreement and subject to Licensee’s continuing obligation to pay License Fee pursuant to Section 5 herein, provided, however, that if the Agreement is terminated and the Sell-Off Period extends into a new Renewal Term, no new License Fee is due. Upon termination of this Agreement, Licensee shall immediately cease all further manufacture of the Licensed Products.
5.Compensation and Payment.
a.License Fee. In consideration for the initial one-year license granted to Licensee, Licensee shall pay Licensor the sum of five hundred thousand dollars ($500,000) upon the execution of this Agreement (the “License Fee”). The License Fee and any Renewal Fee shall be paid by the Licensee to Licensor by wire transfer of immediately available funds to the bank account identified by Licensor in advance of such payment. Licensee’s failure to timely pay any portion of the License Fee will be a material breach of this Agreement by the Licensee. Without limitation to other relief, absent timely payment of the License Fee, Licensee has no rights to the [* * *] Brand in any manner, including use of the Technology and Licensed Marks. If any delay in payment is excused by Licensor, Licensee shall also pay interest at the rate of three percentage points (3%) above the average Secured Overnight Finance Rate during the period of default, as published by the New York Fed, or the maximum amount permitted by law, whichever is less, in each case calculated on the number of days such payment is delinquent with Licensor’s consent, compounded monthly.
b.Renewal Fee. If Licensee provides renewal notice as provided herein, Licensee shall pay Licensor the amount of five hundred thousand dollars ($500,000) on January 15th of each Renewal Term (the “Renewal Fee”).
6.Obligations; Purchase Option.
a.Obligations of Licensee.
i.Licensee shall be solely responsible for all costs associated with the Licensed Products, including producing, manufacturing, advertising, promoting, selling, and distributing the Licensed Products, including labor and procurement of raw materials and equipment specified in the standard operating procedures incorporated into the Technology. Without limitation, Licensee acknowledges and agrees that it is solely responsible for (i) procurement of all ingredients including raw materials; (ii) compliance with all applicable laws including without limitation relating to production, compliance tracking, sales and invoicing of License Products; and (iii) procurement and maintenance of all required licensing and permits and/or operating authorities, including proper zoning of production and distribution facilities.
b.Obligations of Licensor. Upon execution of this Agreement, Licensor shall:
[***] Indicates material that has been excluded from this Exhibit 10.25 because it is not material.
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i. Make the Technology and any documents or materials otherwise necessary to effectuate the licenses of the Technology and Licensed Marks contemplated herein available for Licensee, including for example manufacturing and quality control processes, formulations, standard operating procedures, and brand use guidelines.
ii.Until December 31, 2025, not sell or transfer the [* * *] Brand or Technology, including without limitation the Licensed Mark(s), and all intellectual property rights embodied therein. If Licensor sells the [* * *] Brand or Technology after December 31, 2025, then the purchaser must agree in writing to be bound by the terms and conditions of this Agreement, including without limitation the Option and the terms of the Purchase Agreement.
iii.Not grant any lien, security interest, mortgage or other encumbrance on the [* * *] Brand or Technology, including without limitation the Licensed Mark(s), and all intellectual property rights embodied therein.
iv.To the extent permitted by applicable law, grant to Licensee a priority security interest in all of the intellectual property rights relating to the Technology and [* * *] Brands, to secure Licensor’s obligations to license and sell to Licensee the Technology and [* * *] Brands. If (A) the representation and warranty made by Licensor in Section 7(b)(vi) becomes untrue at any time during the Term, (B) Licensor fails to execute and deliver the Purchase Agreement after Licensee’s exercise of the Option set forth in Section 6(c) hereof, or (C) Licensor ceases operations, makes a general assignment for the benefit of creditors or is the subject of a voluntary or involuntary bankruptcy, insolvency or similar proceeding that is not dismissed within a reasonable period of time, then Licensee shall have the right to foreclose on all or any part of the collateral. Any such foreclosure shall be without prejudice to any other remedy of Licensee hereunder, at law or in equity. Licensor agrees, from time to time, to take any act and execute and deliver any document reasonably requested by Licensee to transfer, create, perfect, preserve, protect and enforce this security interest.
c.Purchase Option.
i.Licensor hereby grants to Licensee an exclusive option, for the Term of the Agreement, to purchase the [* * *] Brand and the Technology, including the Licensed Mark(s) and all goodwill and intellectual property rights embodied therein (the “Option”).
ii.Licensee shall exercise the Option by providing written notice thereof to Licensor. Within ten (10) business days of such written notice, the Parties shall execute the Purchase Agreement, and Licensee shall pay to Licensor on the date of execution the sum of two million dollars ($2,000,000).
iii.Upon the execution of the Purchase Agreement and payment of the purchase price therefor, each Party covenants and agrees to execute and deliver any further agreements or undertakings and provide all necessary filings or other submissions to governmental and regulatory authorities required to enable the lawful transfer of the purchased assets to Licensee.
7.Representations and Warranties.
a.Representations and Warranties of Licensee. Licensee represents and warrants to Licensor as follows: (i) Licensee is a corporation duly organized and in good standing under the laws of the state it is organized in; (ii) the execution, delivery and performance of this Agreement by Licensee has been duly authorized by all necessary action on the part of Licensee’s directors and/or officers, and does not violate, conflict with, or require the consent or approval of any third party pursuant to any contract or legally binding obligation to which Licensee is subject; (iii) this Agreement constitutes the valid and binding obligation of Licensee enforceable against Licensee in accordance with its terms; and (iv) Licensee possesses all required licenses, permits or operating authorities necessary for its operations and the manufacture and sale of the Licensed Products and is in compliance with all applicable laws and regulations.
b.Representations and Warranties of Licensor. Licensor represents and warrants to Licensee as follows: (i) Licensor is a limited liability company duly organized and in good standing under the laws of the state it is organized in, (ii) the execution, delivery and performance of this Agreement by Licensor has been duly authorized by all necessary action on the part of Licensor’s directors, officers, member(s), and/or manager(s), and does not violate, conflict with, or require the consent or approval of any third party pursuant to, any state or local law or regulation applicable to
[***] Indicates material that has been excluded from this Exhibit 10.25 because it is not material.
6
Licensor or any contract or legally binding obligation to which Licensor is subject, (iii) this Agreement constitutes the valid and binding obligation of Licensor enforceable against Licensor in accordance with its terms, (iv) Licensor holds and maintains the right to convey the licenses granted hereunder, (v) to licensor’s knowledge, the use of the Technology or the [* * *] Brand, and the development, manufacture, use, import and sale of Licensed Products do not infringe or misappropriate the intellectual property rights of any third party, (vi) the Technology and the [* * *] Brand are not subject to any current or future licenses, options or other grants of rights, and are free and clear of any and all liens, security interests, mortgages and other encumbrances, and (vii) all items and information, to the extent it exists, identified in Licensee’s Due Diligence Checklist provided under cover of DLA Piper’s Letter dated November 22, 2022, has already been provided to Licensee.
8.Confidentiality; Non-Disparagement.
a.Confidentiality. At all times during the term of this Agreement (including any renewal term) and thereafter, each Party will not use or disclose and will otherwise keep confidential any trade secrets or proprietary information of the other Party (collectively, the “Confidential Information”) except to the extent required to perform its obligations under this Agreement. Without limitation of the foregoing, the party receiving Confidential Information (the “Recipient”) will hold the Confidential Information of the disclosing Party (the “Discloser”) in confidence and will (a) exercise the same degree of care, but no less than a reasonable degree of care, to prevent its disclosure as Recipient would take to safeguard its own confidential or proprietary information, and (b) limit disclosure of Confidential Information, including any notes, extracts, analyses or materials that would disclose Confidential Information, solely to those of its employees who need to know the information for purposes of performing its obligations under this Agreement and who agree to keep such information confidential. Upon expiration or termination of this Agreement, Recipient shall immediately return all Confidential Information to Discloser, provided that (i) Recipient may keep one copy of the Confidential Information in its files to monitor compliance with this Section 8(a), and (ii) Recipient is not required to delete copies of the Confidential Information securely stored on automatic back-up servers.
i.Limitations. Section 8(a) above does not apply to any information that: (a) is already lawfully in the Recipient’s possession (unless received pursuant to a nondisclosure agreement); (b) is or becomes generally available to the public through no fault of the Recipient; (c) is disclosed to the Recipient by a third party who may transfer or disclose such information without restriction; (d) is required to be disclosed by the Recipient as a matter of law or regulation (including, but not limited to, any securities laws in the United States or Canada) (provided that the Recipient will use all reasonable efforts to provide the Discloser with prior notice of such disclosure and use all reasonable efforts to assist Discloser in obtaining a protective order therefor); (e) is disclosed by the Recipient with the disclosing Party's approval; and (f) is independently developed by the Recipient without any use of the Confidential Information. In all cases, the Recipient will use all reasonable efforts to give the Discloser ten (10) calendar days' prior written notice of any disclosure of Confidential Information under this Agreement. The Parties will maintain the confidentiality of all Confidential Information learned pursuant to this Agreement for a period of ten (10) years from the date of termination of this Agreement.
b.Non-Disparagement Restrictions. During the Term and all times thereafter, neither Party shall take any action, including without limitation, statements, comments or communications, which is intended, or would reasonably be expected, to harm, disparage, or be derogatory or negative towards the other Party or its reputation or which would be reasonably expected to lead to unwanted or unfavorable publicity to such other Party.
c.FD Regulation. Licensor acknowledges that Licensee is subject to the reporting requirements of the Securities and Exchange Commission and the Canadian Securities Commission, and its common stock is traded on the Toronto Stock Exchange in Canada. Licensor agrees not to use any Confidential Information to purchase, sell, make any short sale of, loan, grant any option for the purchase of, or otherwise transfer or dispose of Licensee’s common or preferred stock (or other securities, warrants, or other forms of convertible securities outstanding or other rights to acquire such securities). Licensor acknowledges that: (i) a purpose of this provision relating to confidentiality is so that Licensee will be in compliance with Regulation FD promulgated by the Securities and Exchange Commission, the Canadian Securities Commission, and other applicable securities laws, and (ii) if the Licensor does not comply with the provisions of this Agreement, the
[***] Indicates material that has been excluded from this Exhibit 10.25 because it is not material.
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Parties may be deemed by such action to be in violation of such laws and regulations, which could have a material, negative impact on the Parties.
9.Injunctive Relief. The Parties agree that any breach of Sections 3(i), 6(c) or 8 by a Party shall cause the aggrieved Party irreparable harm for which money damages may be insufficient, and the aggrieved Party shall be entitled to seek injunctive relief from any court of competent jurisdiction, in addition to any other remedies that such Party may have at law or in equity.
10.Indemnification.
a.Licensee’s Indemnification. Licensee shall indemnify Licensor and hold Licensor harmless from and against any and all third party claims, liabilities, losses and expenses arising from (i) Licensee’s unauthorized use of the Technology or the Licensed Marks; (ii) Licensee’s failure to comply with applicable laws or to maintain all required licenses and governmental authorizations; (iii) any breach of Licensee’s representations and warranties set forth herein; and (iv) any liability to third parties as a result of Licensee’s sale of Licensed Products.
b.Licensor’s Indemnification. Licensor shall indemnify, defend and hold Licensee, its Affiliates, and their respective officers, directors, employees and agents (each, a “Licensee Indemnified Party”), harmless from and against any and all claims, demands, losses, costs, expenses, obligations, liabilities, damages, recoveries and deficiencies, including interest, penalties, reasonable attorneys’ fees, costs of investigation and any legal or other expenses or costs (“Losses”) incurred or suffered by any Licensee Indemnified Party arising out of, in connection with or resulting from any claim, allegation or judgment as to: (i) any violation or infringement upon any common law or statutory intellectual property rights of any third party that arises from or relates to the Technology or Licensed Marks, (ii) any breach in any of Licensor’s representations and warranties under this Agreement, or (iii) the failure of Licensor to comply with all applicable laws.
11.Limitation of Liability. EXCEPT FOR A PARTY’S BREACH OF SECTION 8, OR AMOUNTS PAYABLE WITH RESPECT TO INDEMNIFICATION CLAIMS UNDER SECTION 10, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR LOST PROFITS OR FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL, PUNITIVE OR EXEMPLARY DAMAGES IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, HOWEVER CAUSED, UNDER ANY THEORY OF LIABILITY.
12.Insurance.
a.For the duration of the Term, and for one hundred and eighty (180) days thereafter, Licensee will maintain third party provided insurance in types and amounts customary for the type of business it conducts, but in no event less than $2,000,000 per occurrence (which coverage may be a combination of primary and umbrella), and in any event reasonably adequate to cover any liabilities arising out of its obligations hereunder; provided, however, such insurance procured by Licensee for purposes hereof shall be in addition to any amount(s) required to otherwise be procured by any regulatory authority. Upon Licensor’s request, Licensee will provide to Licensor a certificate of insurance showing that such insurance is in place, which certificate shall demonstrate the amounts, exclusions and deductibles of such insurance coverage. Licensee shall notify Licensor in writing as to, and no less than thirty (30) calendar days prior to, the cancellation, termination or modification of the insurance coverage(s) described in the insurance certificate(s). Licensor shall be an additional insured on such certificates of insurance. Nothing in this Section 12 shall in any way be construed to limit Licensee’s liability under this Agreement.
b.For the duration of the Term, Licensor will maintain third party provided insurance in types and amounts customary for the type of business it conducts, but in no event less than sufficient to cover Licensor’s indemnification obligations hereunder. Upon Licensee’s request, Licensor will provide to Licensee a certificate of insurance showing that such insurance is in place, which certificate shall demonstrate the amounts, exclusions and deductibles of such insurance coverage. Licensor shall notify Licensee in writing as to, and no less than thirty (30) calendar days prior to, the cancellation, termination or modification of the insurance coverage(s) described in the insurance certificate(s).
13.Compliance with Laws.
[***] Indicates material that has been excluded from this Exhibit 10.25 because it is not material.
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a.In connection with this Agreement, Licensee shall comply with all laws, statutes, regulations, and ordinances of any governmental or regulatory authority that may be applicable to Licensee and its activities under this Agreement, including relating to the Licensed Products.
b.Without limiting the generality of the foregoing, each Party agrees that it has not given or promised to give, and will not make, offer, agree to make or authorize any payment or transfer anything of value, directly or indirectly, (a) to any government or public official; (b) any political party, party official or candidate for public or political office; (c) any person while knowing or having reason to know that all or a portion of the value will be offered, given, or promised, directly or indirectly, to anyone described in items (a) or (b) above; or (d) any owner, director, employee, representative or agent of any actual or potential customer of such Party, other than fair market payments for services performed by such individuals in accordance with applicable laws. Each Party agrees to comply with all applicable anti-bribery laws in the countries where such Party has its principal places of business and where it conducts activities under this Agreement. Additionally, each Party understands and agrees to comply with the U.S. Foreign Corrupt Practices Act (“US FCPA”), as revised, as well as similar applicable laws of other countries and to take no action that might cause such Party to be in violation of the US FCPA or similar applicable laws of the country where such Party conduct activities under this Agreement. Additionally, each Party will make all reasonable efforts to comply with any request for information, including answering questionnaires and narrowly tailored audit inquiries, to enable the other Party to ensure compliance with applicable laws, including any anti-bribery laws.
14.Employees; Agents; Representatives. Employees, agents and/or representatives, if any, of either Party, including Licensee’s affiliates, who perform services for either Party pursuant to this Agreement shall comply with the terms of this Agreement.
15.Relationship of Parties. The legal relationship of the Parties is exclusively that of licensor and licensee and no employer-employee, principal-agent, partnership, franchise, agency, joint venture or other legal relationship is created by this Agreement. Neither Party shall have the authority to enter into any contracts or other commitments on behalf of the other Party.
16.Successors; Assignment; Binding Agreement. Licensee may not assign or transfer Licensee’s rights or delegate its obligations under this Agreement without Licensor's prior written consent, provided that Licensee may assign this Agreement to an affiliate, or in connection with the merger, acquisition, consolidation or other change of control transaction, or the sale of all or substantially all of the business or assets to which this Agreement pertains. Licensor may freely assign this Agreement or any rights under this Agreement, or delegate any duties under this Agreement without the Licensee’s consent, except it may not do so with respect to any entity that would result in a violation of any law, rule, or regulation of any authority that governs the activities of Licensee or its affiliates, and provided that the assignee or transferee agrees in writing to be bound by all terms and conditions hereof. This Agreement inures to the benefit of, and shall be binding upon, the successors and assigns of the parties to this Agreement.
17.Modifications and Waivers. This Agreement may be amended only by a written agreement signed by both Parties. With regard to any power, remedy or right provided in this Agreement or otherwise available to any Party, no waiver or extension of time shall be effective unless expressly contained in a writing signed by the waiving Party, no alteration, modification or impairment shall be implied by reason of any previous waiver, extension of time, delay or omission in exercise or other indulgence, and waiver by any Party of the time for performance of any act or condition hereunder does not constitute a waiver of the act or condition itself.
18.Notices and Correspondence. All notices, demands, requests and other communications required or permitted hereunder shall be in writing and shall be (i) personally delivered with a written receipt of delivery; (ii) sent by a nationally recognized overnight delivery service requiring a written acknowledgement of receipt or providing a certification of delivery or attempted delivery; (iii) sent by certified or registered mail, postage prepaid, with return receipt requested; or (iv) sent by facsimile or electronic mail, to the attention of the individual shown below at the address/email set forth below, or to such other address, attention of such individual, as either Party may from time to time designate in writing to the other in accordance herewith. All notices shall be deemed effective when actually delivered as documented in a delivery or confirmation receipt or date of email transmission (absent any undeliverable notice).
[***] Indicates material that has been excluded from this Exhibit 10.25 because it is not material.
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If to Licensee: Charlotte’s Web, Inc. 700 Tech Court Louisville, CO 80302 Attn: Jacques Tortoroli, CEO [* * *] With copy of all Notices also sent by email to [* * *] | If to Licensor: JMS Brands LLC 2111 E Virginia Avenue Denver, CO 80209 Attn: Jesse Stanley, Member-Manager [* * *] With copy of all Notices also sent by email to [* * *] | ||||
19.Entire Agreement. This Agreement, including the attached exhibits, constitutes the entire agreement of the Parties hereto relating to the subject matter hereof and there are no written or oral terms or representations made by either Party other than those contained herein.
20.Publicity. Without the prior written consent of the other Party, neither Party shall disclose the terms and conditions of this Agreement, except disclosure may be made as is reasonably necessary to the disclosing Party's bankers, attorneys, or accountants or except as may be required by law.
21.Expenses. Each Party to this Agreement shall bear its own expenses in connection with the execution, delivery and performance of this Agreement and the transactions contemplated hereby, including without limitation all fees and expenses of its agents, representatives, counsel and accountants.
22.Governing Law; Jurisdiction. The validity, interpretation, construction, performance, and enforcement of this Agreement shall be governed by the laws of the State of Delaware, regardless of the choice of law provisions. The Parties each expressly waive and disavow any rights that may accrue under any other body of law. Any controversy or dispute arising out of or relating to this Agreement shall be resolved before tribunals, as noted below, located in Denver, Colorado. Any controversy or dispute shall first be submitted to mediation by a mediator agreed upon by the Parties, or if the Parties cannot agree upon a mediator, by JAMS, with mediation fees and costs equally shared by the Parties. If the controversy or dispute thereafter remains unresolved, such controversy or dispute will be resolved by binding arbitration under the commercial arbitration rules of JAMS. The arbitration will be administered by a single arbitrator agreed upon by the Parties, or if the Parties cannot agree upon an arbitrator, by JAMS. Any award or relief granted by the arbitrator will be final and binding on the Parties to this Agreement, may be entered as a judgment or order, and may be enforced, by any court of competent jurisdiction. The prevailing party shall be entitled to an award of that Party’s arbitration-related costs and reasonable attorneys’ fees, in addition to any other relief granted.
23.No Interpretation against Drafter. Each Party participated in the negotiation and drafting of this Agreement, assisted by such legal, financial, tax, and other counsel as it desired, and contributed to its revisions. Any ambiguities with respect to any provision of this Agreement will be construed fairly as to all Parties and not in favor of or against any Party.
24.Headings. The headings of Sections are provided for convenience only and will not affect the construction or interpretation of this Agreement.
25.Force Majeure. Neither Party shall be liable for any delay or failure to perform its obligations in this Agreement if such delay or failure to perform is due to any cause or condition reasonably beyond that Party’s control, including, but not limited to, acts of God, war, government intervention, riot, embargoes, acts of civil or military authorities, earthquakes, fire, flood, accident, strikes, inability to secure transportation, facilities, fuel, energy, labor or materials.
26.Survival. In addition to Licensee’s obligation to pay Licensor all amounts due hereunder, the Parties’ obligations under Sections 8, 9, 10, 11, 20, 22 and this 26, and all other provisions which by their nature are intended to survive this Agreement, shall expressly survive expiration or termination of the Agreement.
27.Invalidity. The invalidity or unenforceability of any term or terms of this Agreement shall not invalidate, make unenforceable or otherwise affect any other term of this Agreement which shall remain in full force and effect.
[***] Indicates material that has been excluded from this Exhibit 10.25 because it is not material.
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28.Severability. If any terms or provisions of this Agreement shall be found to be illegal or unenforceable, notwithstanding, this Agreement shall remain in full force and effect and such terms or provisions shall be deemed stricken.
29.Further Assurances. Upon a Party’s reasonable request, the other Party shall, at its sole cost and expense, execute and deliver all further documents and instruments, and take all further acts, as are reasonably necessary to give full effect to this Agreement.
30.Counterparts/Execution Date. The Parties may execute this Agreement in multiple counterparts, and electronically, each counterpart of which will constitute an original and all of which, when taken together, will constitute one and the same agreement. The Parties shall agree upon the date and time of execution of the Agreement and exchange signature pages as soon as practical with copies to legal counsel.
[***] Indicates material that has been excluded from this Exhibit 10.25 because it is not material.
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IN WITNESS WHEREOF, the parties have executed this Agreement intending to be legally bound as of the date set forth above.
LICENSEE LICENSOR
Charlotte’s Web, Inc. JMS Brands LLC
By: _/s/ Jacques Tortoroli_________________ By: _/s/ Jesse Stanley______________
Jacques Tortoroli, CEO Jesse Stanley, Member-Manager
Certain exhibits and attachments to this Exhibit 10.25 have been omitted pursuant to Item 601(a)(5) of Regulation S-K because the information contained therein is not material and is not otherwise publicly disclosed. The Company will furnish supplementally copies of these attachments to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 10.30
Subscription Agreement
October 11, 2022
THE OFFER AND SALE OF THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE OR ANY OTHER JURISDICTION. THERE ARE FURTHER RESTRICTIONS ON THE TRANSFERABILITY OF THE SECURITIES DESCRIBED HEREIN.
THE PURCHASE OF THE SECURITIES INVOLVES A HIGH DEGREE OF RISK AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN BEAR THE RISK OF THE LOSS OF THEIR ENTIRE INVESTMENT.
Charlotte’s Web Holdings, Inc.
700 Tech Court
Louisville, Colorado 80020
700 Tech Court
Louisville, Colorado 80020
Ladies and Gentlemen:
The undersigned (the “Investor”) understands that Charlotte’s Web Holdings, Inc., a public company incorporated pursuant to the laws of the Province of British Columbia (the “Company”), is offering an aggregate of 6,119,121 common shares, no par value (the “Subscription Shares”), in a private placement (the “Offering”). The Offering is made pursuant to the Promotional Rights Agreement, dated as of October 11, 2022, by and between the Investor and Charlotte’s Web, Inc. (the “PRA”). The Investor further understands that the Offering is being made without registration of the Subscription Shares under the Securities Act of 1933, as amended (the “Securities Act”), or any securities law of any state of the United States or of any other jurisdiction, and is being made only to “accredited investors” (as defined in Rule 501 of Regulation D under the Securities Act). Capitalized terms used and not otherwise defined herein have the meaning ascribed to them in the PRA.
In connection with the consummation of the transactions contemplated by the PRA and pursuant to the terms of the PRA, the parties hereto desire to enter into this Subscription Agreement in order to provide for the purchase and sale of the Subscription Shares and to grant certain registration rights to the Investors as set forth below.
In consideration of the foregoing and the mutual and dependent covenants hereinafter set forth, the parties hereto agree as follows:
1.Defined Terms. As used in this Subscription Agreement, the following terms shall have the following meanings:
“Affiliate” means, with respect to a Person, any other Person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, such Person. The term “control” (including the terms “controlling,” “controlled by” and “under common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise.
“Canadian Securities Laws” means, as applicable, the securities laws and regulations in each of the provinces and territories of Canada having application in respect of the Offering, all written instruments, rules and orders having the force of law of the securities regulators or regulatory authorities in each of the provinces and territories of Canada, and the rules of the Exchange.
“Closing” has the meaning set forth in Section 4.
“Closing Date” has the meaning set forth in Section 4.
“Common Shares” has the meaning set forth in Section 6(d)(i).
“Company” has the meaning set forth in the first paragraph of this Subscription Agreement.
“Effectiveness Date” has the meaning set forth in Section 9(a).
“Exchange” means the Toronto Stock Exchange or such other recognized Canadian stock exchange as the Common Shares may be listed on from time to time.
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
“GAAP” means generally accepted accounting principles as in effect in the United States.
“Governmental Authority” means any federal, provincial, territorial, state, local or foreign government or political subdivision thereof, or any agency or instrumentality of such government or political subdivision, or any self-regulated organization or other non-governmental regulatory authority or quasi-governmental authority (to the extent that the rules, regulations or orders of such organization or authority have the force of law), or any arbitrator, court or tribunal of competent jurisdiction, or the Exchange.
“Indemnified Parties” has the meaning set forth in Section 12.
“Investor” has the meaning set forth in the first paragraph of this Subscription Agreement.
“Losses” has the meaning set forth in Section 12.
“Material Adverse Effect” means a material adverse effect on the business, assets (including intangible assts), liabilities, financial condition, property, prospects or results of operations of the Company and its Subsidiaries, taken as a whole.
“Offering” has the meaning set forth in the first paragraph of this Subscription Agreement.
“OTCBB” means the OTC Bulletin Board.
“Permitted Transferee” means an Affiliate of the Investor.
“Person” means an individual, corporation, partnership, joint venture, limited liability company, Governmental Authority, unincorporated organization, trust, association or other entity.
“Personal Information” means the name of the Investor (or such Affiliate of the Investor) that beneficially owns the Subscription Shares, the registered address of the Investor or such Affiliate and the number of Subscription Shares then beneficially owned (or that may be deemed to be beneficially owned) by any such Person.
“PRA” has the meaning set forth in the first paragraph of this Subscription Agreement.
“Registrable Securities” has the meaning set forth in Section 9(a).
“Registration Deadline” has the meaning set forth in Section 9(a).
“Registration Statement” has the meaning set forth in Section 9(a).
“Rule 144” has the meaning set forth in Section 9(a).
“SEC” means the United States Securities and Exchange Commission.
“SEC Documents” means all reports, schedules, registration statements, proxy statements and other documents (including all amendments, exhibits and schedules required to be filed thereto) required to be filed by the Company with the SEC on or after January 1, 2022.
“Securities Act” has the meaning set forth in the first paragraph of this Subscription Agreement.
“Securities Laws” means the U.S. Securities Laws, the Canadian Securities Laws, and the State Securities Laws.
“State Securities Laws” has the meaning set forth in Section 3.
“Subscription Agreement” means this subscription agreement.
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“Subscription Shares” has the meaning set forth in the first paragraph of this Subscription Agreement.
“Subsidiary” means, when used with reference to a party, any corporation or other organization, whether incorporated or unincorporated, of which such party or any other Subsidiary of such party is a general partner or serves in a similar capacity, or, with respect to such corporation or other organization, at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the board of directors or others performing similar functions is directly or indirectly owned or controlled by such party or by any one or more of its Subsidiaries, or by such party and one or more of its Subsidiaries.
“Suspension Event” has the meaning set forth in Section 9(c).
“U.S. Securities Laws” means the Exchange Act, the Securities Act and all other applicable U.S. federal securities laws.
2.Subscription. Subject to the terms and conditions hereof, the Investor hereby subscribes for the Subscription Shares set forth in Appendix A hereto and the Company hereby agrees to sell the Subscription Shares set forth on Appendix A hereto to the Investor for the consideration described in Section 5, subject to the acceptance of Subscription Shares set forth in Section 3. The Investor acknowledges that the Subscription Shares will be subject to restrictions on transfer as set forth in this Subscription Agreement.
3.Acceptance of Subscription and Issuance of Subscription Shares. It is understood and agreed that this Subscription Agreement shall be deemed to be accepted by the Company only when it is signed by a duly authorized officer of the Company and delivered to the Investor at the Closing referred to in Section 4. Notwithstanding anything in this Subscription Agreement to the contrary, the Company shall have no obligation to issue any of the Subscription Shares to any Person who is a resident of a jurisdiction in which the issuance of Subscription Shares to such Person would constitute a violation of the securities, “blue sky” or other similar laws of such jurisdiction (collectively referred to as the “State Securities Laws”).
4.The Closing. The closing of the purchase and sale of the Subscription Shares (the “Closing”) shall take place by means of a virtual closing through the electronic exchange of signatures on October 11, 2022 or at such other time and place as is agreed to in writing by the parties hereto. The day on which the Closing takes place is referred to herein as the “Closing Date.”
5.Consideration for Subscription Shares. As consideration for the Investor’s entry into the PRA, subject to the terms and conditions set forth herein, at the Closing, the Company agrees to issue the Subscription Shares to the Investor. The Company shall deliver certificates, notice of uncertificated shares or ownership statements issued under a direct registration system representing the Subscription Shares to the Investor at the Closing bearing an appropriate legend referring to the fact that the Subscription Shares were sold in reliance upon an exemption from registration under the Securities Act.
6.Company’s Representations, Warranties, Covenants and Acknowledgements. The Company represents and warrants to, and covenants with, the Investor, and acknowledges that the Investor is relying thereon, that, as of the date of this Subscription Agreement and as of the Closing Date:
(a)Organization and Power. The Company and each of its Subsidiaries is a corporation, limited liability company, partnership or other entity validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation (as applicable) and has all requisite corporate, limited liability company, partnership or other entity power and authority to own or lease its properties and to carry on its business as presently conducted and as proposed to be conducted. The Company and each of its Subsidiaries is duly licensed or qualified to do business as a foreign corporation, limited liability company, partnership or other entity in each jurisdiction wherein the character of its property or the nature of the activities presently conducted by it, makes such qualification necessary, except where the failure to so qualify has not had, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.
(b)Authorization, Etc. The Company has all necessary corporate power and authority and has taken all necessary corporate action required for the due authorization, execution, delivery and performance by the Company of this Subscription Agreement and the consummation by the Company of the transactions contemplated hereby and thereby, and for the due authorization, issuance, sale and delivery of the Subscription Shares. The authorization, execution, delivery and performance by the Company of this
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Subscription Agreement and the consummation by the Company of the transactions contemplated hereby and thereby, including the issuance of the Subscription Shares do not and will not: (i) violate or result in the breach of any provision of the organizational documents of the Company; or (ii) with such exceptions that have not had, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect: (x) violate any provision of, constitute a breach of, or default under, any judgment, order, writ, or decree applicable to the Company or any of its Subsidiaries or any material mortgage, credit agreement or contract to which the Company or any of its Subsidiaries is a party; (y) violate any provision of, constitute a breach of, or default under, any applicable state, federal or local law, rule or regulation; or (z) result in the creation of any lien upon any assets of the Company or any of its Subsidiaries or the suspension, revocation or forfeiture of any franchise, permit or license granted by a Governmental Authority to the Company or any of its Subsidiaries, other than liens under federal or state securities laws. This Subscription Agreement has been duly executed and delivered by the Company. Assuming due execution and delivery thereof by each of the other parties hereto or thereto, this Subscription Agreement will be a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, reorganization, moratorium or other similar legal requirement relating to or affecting creditors’ rights generally and except as such enforceability is subject to general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law).
(c)Government Approvals. No consent, approval or authorization of, or filing with, any court or Governmental Authority is or will be required on the part of the Company in connection with the execution, delivery and performance by the Company of this Subscription Agreement and the PRA, or in connection with the issuance of the Subscription Shares except (a) those which have already been made or granted; (b) the filing of a Form D and current report on Form 8-K with the SEC; (c) filings with applicable state securities commissions; (d) filing of the report of trade as required by Form 72-503F Report of Distribution Outside Canada with the Ontario Securities Commission (the “72-503F Report of Trade”); and (e) applicable filings with the Exchange in connection with the listing and posting of the Subscription Shares (collectively, the “Required Filings”). The Company covenants to make all Required Filings in a timely manner and in compliance with all Securities Laws.
(d) Authorized and Outstanding Stock.
(i)The authorized capital of the Company consists of (a) an unlimited number of common shares (the “Common Shares”); (b) an unlimited number of proportionate voting shares (“PVS’”); and (c) an unlimited number of preferred shares, issuable in series (“Preferred Shares”).
(ii)As of October 11, 2022, (a) 145,509,531 Common Shares, no PVS’ and no Preferred Shares were issued and outstanding, and (b) 7,468,487 Common Shares, no PVS’ and no Preferred Shares were reserved for issuance upon the exercise of outstanding options and other convertible securities or the vesting of unvested awards.
(iii)All of the issued and outstanding Common Shares of the Company are, and when issued in accordance with the terms hereof, the Subscription Shares will be, duly authorized and validly issued and fully paid and non-assessable. When issued in accordance with the terms hereof, the Subscription Shares will be free and clear of all liens imposed by the Company, except for restrictions imposed by Federal or state securities or “blue sky” laws and except for those imposed pursuant to or identified in this Subscription Agreement.
(iv)Except as otherwise expressly described in this Subscription Agreement or the SEC Documents: (i) no subscription, warrant, option, convertible security or other right issued by the Company to purchase or acquire any shares of capital stock of the Company is authorized or outstanding; (ii) there is not any commitment of the Company to issue any subscription, warrant, option, convertible security or other such right or to issue or distribute to holders of any shares of its capital stock; (iii) the Company has no obligation to purchase, redeem or otherwise acquire any shares of its capital stock or to pay any dividend or make any other distribution in respect thereof; and (iv) there are no agreements between the Company and any holder of its capital stock relating to the acquisition, disposition or voting of the capital stock of the Company. No person or entity is entitled to any preemptive right granted by the Company with respect to the issuance of any capital stock of the Company.
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(e)Subsidiaries. Except as described in the SEC Documents, the Company, directly or indirectly, owns of record and beneficially, free and clear of all liens, all of the issued and outstanding capital stock or equity interests of each of its Subsidiaries. All of the issued and outstanding capital stock or equity interests of the Company’s Subsidiaries has been duly authorized and validly issued, and in the case of corporations, is fully paid and non-assessable. Except as described in the SEC Documents, there are no outstanding rights, options, warrants, preemptive rights, conversion rights, rights of first refusal or similar rights for the purchase or acquisition from any of the Company’s Subsidiaries of any securities of such Subsidiaries nor are there any commitments to issue or execute any such rights, options, warrants, preemptive rights, conversion rights or rights of first refusal.
(f)Private Placement. Assuming the accuracy of the representations and warranties of the Investor set forth in Section 7, the offer and sale of the Subscription Shares pursuant to this Subscription Agreement will be exempt from the registration requirements of the Securities Act and the prospectus requirements under Canadian Securities Laws.
(g)SEC Documents; Financial Information. Since January 1, 2022, the Company has timely filed (a) all annual and quarterly reports and proxy statements (including any amendments, exhibits and schedules thereto required to be filed by the Company with the SEC pursuant to the Exchange Act), and (b) all other reports and other documents (including all amendments, exhibits and schedules thereto required to be filed by the Company with the SEC pursuant to the Exchange Act), in each case (with respect to clauses (a) and (b)) required to be filed by the Company with the SEC pursuant to the Exchange Act except, in the case of clause (b), where the failure to file has not had, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. As of their respective filing dates, such SEC Documents complied in all material respects with the applicable requirements of the Securities Act, the Exchange Act and the rules and regulations of the SEC promulgated thereunder applicable to such SEC Documents, and as of their respective dates none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents comply as of their respective dates in all material respects with applicable accounting requirements as in effect at the time of filing and the rules and regulations of the SEC with respect thereto as in effect at the time of filing (except as may be indicated in the notes thereto or, in the case of the unaudited statements, as permitted by Form 10-Q promulgated by the SEC), and present fairly in all material respects as of their respective dates the consolidated financial position of the Company and its Subsidiaries as at the dates thereof and the consolidated results of their operations and their consolidated cash flows for each of the respective periods, all in conformity with GAAP, subject, in the case of unaudited statements, to normal, year-end audit adjustments.
(h)Internal Control Over Financial Reporting. The Company has disclosed, based on its most recent evaluation prior to the date hereof, to the Company’s outside auditors and the audit committee of its board of directors (a) any significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information and (b) any material fraud that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
(i)Disclosure Controls and Procedures. The Company has established and maintains disclosure controls and procedures (as such term is defined in Rule 13a-15 and 15d-15 under the Exchange Act) that are designed to provide reasonable assurance that material information relating to the Company, including its Subsidiaries, that is required to be disclosed by the Company in the reports that it files under the Exchange Act is reported within the time periods specified in the rules and forms of the SEC and that such material information is communicated to the Company’s management to allow timely decisions regarding required disclosure.
(j)Litigation. There is no litigation or governmental proceeding pending or, to the knowledge of the Company, threatened in writing, against the Company or any of its Subsidiaries or affecting any of the business, operations, properties or assets of the Company or any of its Subsidiaries which would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. Except as described in the SEC Documents, neither the Company nor any of its Subsidiaries is in default with respect to any order, writ, injunction, decree, ruling or decision of any court, commission, board or other government agency that is expressly applicable to the Company or any of its Subsidiaries which would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.
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(k)Compliance with Laws; Permits. Except as described in the SEC Documents, the Company and its Subsidiaries are in compliance with all applicable laws, except as has not had, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, and the Company and its Subsidiaries possess all permits and licenses of Governmental Authorities that are required to conduct their business, except as has not had, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.
(l)Taxes. The Company and each of its Subsidiaries has filed all tax returns required to be filed within the applicable periods for such filings (with due regard to any extension) and has timely paid all taxes required to be paid, except for any such failures to file or pay that have not had, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.
(m)Employee Matters. Except where the failure to comply has not had, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, the Company and its Subsidiaries are in compliance with all applicable laws relating to labor, employment, fair employment practices, terms and conditions of employment, and wages and hours.
(n)Environmental Matters. The Company and its Subsidiaries are in compliance with all applicable environmental laws and required environmental permits, except, in each case, where the failure to comply has not had, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. The Company and its Subsidiaries have not received within the past three years any written notice from any Governmental Authority of any violation or alleged violation of any environmental law or lack of any environmental permit in connection with their respective properties, except as has not had, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.
(o)Registration Rights. Except as provided in this Subscription Agreement or the PRA or disclosed in the SEC Documents, the Company has not granted any rights to register under the Securities Act any of its presently outstanding securities or any of its securities that may be issued subsequently.
(p)Investment Company Act. The Company is not, and immediately after giving effect to the sale of the Subscription Shares in accordance with this Subscription Agreement and the application of any proceeds thereof will not be required to be registered as, an “investment company” or a company “controlled” by an “investment company,” within the meaning of the Investment Company Act of 1940, as amended.
(q)Exchange. As of the date hereof, the Company’s Common Shares are quoted on the Exchange, and no event has occurred, and the Company is not aware of any event that is reasonably likely to occur, that would result in the Common Shares being removed or suspended from the Exchange.
(r)No Brokers or Finders. No Person has or will have, as a result of the transactions contemplated by this Subscription Agreement, any right, interest or claim against or upon the Company, any of its Subsidiaries or the Investor for any commission, fee or other compensation as a finder or broker because of any act of the Company or any of its Subsidiaries.
(s)Illegal Payments; FCPA Violations. Except as has not had, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, since January 1, 2022, none of the Company, any of its Subsidiaries or, to the knowledge of the Company, any officer, director, employee, agent, representative or consultant acting on behalf of the Company or any of its Subsidiaries (and only in their capacities as such) has, in connection with the business of the Company: (a) unlawfully offered, paid, promised to pay, or authorized the payment of, directly or indirectly, anything of value, including money, loans, gifts, travel, or entertainment, to any government official with the purpose of (i) influencing any act or decision of such government official in his or her official capacity; (ii) inducing such government official to perform or omit to perform any activity in violation of his or her legal duties; (iii) securing any improper advantage; or (iv) inducing such government official to influence or affect any act or decision of such Governmental Authority, except, with respect to the foregoing clauses (i) through (iv), as permitted under the U.S. Foreign Corrupt Practices Act of 1977, as amended or other applicable law; (b) made any illegal contribution to any political party or candidate; (c) made, offered or promised to pay any unlawful bribe, payoff, influence payment, kickback, unlawful rebate, or other similar unlawful payment of any nature, directly or indirectly, in connection with the business of the Company, to any person, including any supplier or customer; (d) knowingly established or maintained any unrecorded fund or asset or made any false entry on any book or record of the Company or any of its Subsidiaries for any purpose; or (e)
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otherwise violated the U.S. Foreign Corrupt Practices Act of 1977, as amended, the UK Bribery Act 2010, as amended, or any other applicable anti-corruption or anti-bribery law.
(t)Economic Sanctions. Except as has not had, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, the Company is not in contravention of any sanction, and has not engaged in any conduct sanctionable, under U.S. economic sanctions laws.
(u)Trading of Securities. Assuming the accuracy of the Investor’s representations and warranties set forth in Section 7 and subject to (i) final listing approval of the Exchange; and (ii) filing of the 72-503F Report of Trade, the Subscription Shares shall be listed and posted for trading in Canada on the Exchange and no prospectus or other document is required to be filed under the Canadian Securities Laws, no proceeding is required to be taken in connection therewith under Canadian Securities Laws, and no approval, permit, consent or authorization of regulatory authorities is required to be obtained by the Investor or the Company under Canadian Securities Laws to permit any trades.
7.Investor’s Representations, Warranties, Covenants and Acknowledgements. The Investor represents and warrants to, and covenants with, the Company, and acknowledges that the Company is relying thereon, that, as of the date of this Subscription Agreement and as of the Closing Date:
(a)The Investor has all requisite authority to purchase the Subscription Shares, enter into this Subscription Agreement and to perform all the obligations required to be performed by the Investor hereunder, and such purchase will not contravene any law, rule, or regulation binding on the Investor or any investment guideline or restriction applicable to the Investor.
(b)The Investor is a limited partnership, formed, organized and domiciled in the state set forth on the signature page hereto and is not acquiring the Subscription Shares as a nominee or agent or otherwise for any other Person.
(c)The Investor will comply with all applicable laws and regulations in effect in any jurisdiction in which the Investor purchases or sells Subscription Shares and obtain any consent, approval or permission required for such purchases or sales under the laws and regulations of any jurisdiction to which the Investor is subject or in which the Investor makes such purchases or sales, and the Company shall have no responsibility therefor.
(d)The Investor has received all the information that it considers necessary and appropriate to decide whether to acquire the Subscription Shares hereunder. In making its decision to purchase the Subscription Shares, the Investor has (a) conducted its own investigation of the Company and the Subscription Shares, (b) had access to, and an adequate opportunity to review, financial and other information as it deems necessary to make our decision to purchase the Subscription Shares, (c) been offered the opportunity to ask questions of the Company and received answers thereto, including on the financial information, as it deemed necessary in connection with its decision to purchase the Subscription Shares, and (d) made its own assessment and satisfied itself concerning the relevant tax and other economic considerations relevant to its investment in the Subscription Shares. In connection with the issuance of the Subscription Shares to the Investor, neither the Company nor any affiliate has acted as a financial advisor or fiduciary to the Investor.
(e)The Investor understands that the sale of the Subscription Shares is conditional upon such sale being exempt from the requirements to file and obtain a receipt for a prospectus or registration statement or to deliver an offering memorandum, and no prospectus or registration statement has been filed by the Company with any securities commission or similar regulatory authority in any jurisdiction in connection with the issuance of the Subscription Shares. As a result of acquiring the Subscription Shares pursuant to such exemptions:
(i)the Investor may be restricted from using some of the protections, rights and remedies otherwise available under applicable Canadian Securities Laws, including statutory rights of rescission or damages in the event of a misrepresentation;
(ii)the Investor may not receive information that would otherwise be required to be provided to it under applicable Canadian Securities Laws; and
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(iii)the Company is relieved from certain obligations that would otherwise apply under applicable Canadian Securities Laws.
(f)The Investor understands and accepts that the purchase of the Subscription Shares involves various risks, including the risks outlined in the SEC Documents and in this Subscription Agreement. The Investor represents that it is able to bear any loss associated with an investment in the Subscription Shares.
(g)The Investor understands that it may not be able to resell any of the Subscription Shares except in accordance with limited exemptions available under applicable Securities Laws. The Investor acknowledges that it is solely responsible for (and the Company is not in any way responsible for) the Investor’s compliance with applicable resale restrictions and has not relied upon any statements made by or purporting to have been made on behalf of the Company or its legal counsel with respect to such matters. The Investor agrees that it will comply with and be bound by all applicable Securities Laws concerning the subscription, purchase, holding and resale of the Subscription Shares and will not resell any of the Subscription Shares except in accordance with the provisions of applicable Securities Laws.
(h)The Investor acknowledges that the ability to transfer the Subscription Shares is limited by, among other things, applicable Securities Laws. The Investor also acknowledges that any certificates, notice of uncertificated shares and/or ownership statements issued under a direct registration system representing the Subscription Shares will bear the legends set forth in Section 14 hereof.
(i)The Investor confirms that it is not relying on any communication (written or oral) of the Company or any of its Affiliates, as investment or tax advice or as a recommendation to purchase the Subscription Shares. It is understood that information and explanations related to the terms and conditions of the Subscription Shares provided in the PRA, this Subscription Agreement or otherwise by the Company or any of its Affiliates shall not be considered investment or tax advice or a recommendation to purchase the Subscription Shares, and that neither the Company nor any of its Affiliates is acting or has acted as an advisor to the Investor in deciding to invest in the Subscription Shares. The Investor acknowledges that neither the Company nor any of its Affiliates has made any representation regarding the proper characterization of the Subscription Shares for purposes of determining the Investor’s authority to invest in the Subscription Shares.
(j)The Investor is familiar with the business and financial condition and operations of the Company, all as generally described in the SEC Documents (to the extent required to be described therein pursuant to the Exchange Act). The Investor has had access to such information concerning the Company and the Subscription Shares as it deems necessary to enable it to make an informed investment decision concerning the purchase of the Subscription Shares.
(k)The Investor understands that, unless the Investor notifies the Company in writing to the contrary at or before the Closing, each of the Investor’s representations and warranties contained in this Subscription Agreement will be deemed to have been reaffirmed and confirmed as of the Closing, taking into account all information received by the Investor.
(l)The Investor understands that no securities commission, stock exchange, governmental agency, regulatory body or similar authority has passed upon the merits or risks of an investment in the Subscription Shares or made any finding or determination concerning the fairness or advisability of this investment nor is there any government or other insurance covering any of the Subscription Shares.
(m)The Investor confirms that none of the Company nor any of its directors, employees, officers, representatives, agents or affiliates have made any representations (written or oral) to the Investor
(i)regarding the future value of any of the Subscription Shares;
(ii)that any person will resell or repurchase any of the Subscription Shares; or
(iii)that any person will refund the purchase price of the Subscription Shares.
(n)The Investor confirms that the Company has not given any guarantee or representation as to the potential success, return, effect or benefit (either legal, regulatory, tax, financial, accounting or otherwise) of an investment in the Subscription Shares.
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(o)The Investor has such knowledge, skill and experience in business, financial and investment matters that the Investor is capable of evaluating the merits and risks of an investment in the Subscription Shares. With the assistance of the Investor’s own professional advisors, to the extent that the Investor has deemed appropriate, the Investor has made its own legal, tax, accounting, and financial evaluation of the merits and risks of an investment in the Subscription Shares and the consequences of this Subscription Agreement. The Investor has considered the suitability of the Subscription Shares as an investment in light of its own circumstances and financial condition and the Investor is able to bear the risks associated with an investment in the Subscription Shares, and it is authorized to invest in the Subscription Shares.
(p)The Investor is an “accredited investor” as defined in Rule 501(a) under the Securities Act. The Investor agrees to furnish any additional information requested by the Company or any of its Affiliates to assure compliance with applicable U.S. Securities Laws in connection with the purchase and sale of the Subscription Shares. The Investor acknowledges that the Investor has completed the Investor Questionnaire contained in Appendix B and that the information contained therein is complete and accurate as of the date thereof and is hereby affirmed as of the date hereof. Any information that has been furnished or that will be furnished by the Investor to evidence its status as an accredited investor is accurate and complete, and does not contain any misrepresentation or material omission.
(q)The Investor is acquiring the Subscription Shares solely for the Investor’s own beneficial account, for investment purposes, and not with a view to, or for resale in connection with, any distribution of the Subscription Shares. The Investor understands that the Subscription Shares have not been registered under any Securities Laws by reason of specific exemptions under the provisions thereof which depend in part upon the investment intent of the Investor and of the other representations made by the Investor in this Subscription Agreement. The Investor understands that the Company is relying upon the representations and agreements contained in this Subscription Agreement (and any supplemental information) for the purpose of determining whether this transaction meets the requirements for such exemptions.
(r)The Investor understands that the Subscription Shares are “restricted securities” under applicable federal securities laws and that the Securities Act and the rules of the SEC provide in substance that the Investor may dispose of the Subscription Shares only pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act, and the Investor understands that, except as otherwise expressly provided herein, the Company has no obligation or intention to register any of the Subscription Shares or the offering or sale thereof. Consequently, the Investor understands that the Investor must bear the economic risks of the investment in the Subscription Shares for an indefinite period of time.
(s)The Investor agrees: (A) that, on and from the period commencing on the date of issuance of the Subscription Shares and ending on the expiration or earlier termination of the PRA in accordance with its terms (the “Lock-Up Period”), the Investor will not, directly or indirectly, sell, assign, pledge, give, transfer, or otherwise dispose of the Subscription Shares or any interest therein, or make any offer or attempt to do any of the foregoing, except for sales, assignments, pledges, gifts, transfers or other dispositions made to Permitted Transferees in accordance with the terms hereof; (B) that, after the expiration of the Lock-Up Period, the Investor will not, directly or indirectly, sell, assign, pledge, give, transfer, or otherwise dispose of the Subscription Shares or any interest therein, or make any offer or attempt to do any of the foregoing unless the transaction is registered under the Securities Act and complies with the requirements of all applicable Securities Laws, or the transaction is exempt from the registration provisions of the Securities Act and all applicable requirements of Securities Laws; (C) that the certificates, the notice of uncertificated shares or ownership statements issued under a direct registration system representing the Subscription Shares will bear a legend making reference to the foregoing restrictions unless such legend is removed in connection with a transfer pursuant to Securities Laws; and (D) that the Company and its Affiliates shall not be required to give effect to any purported transfer of such Subscription Shares, except upon compliance with the foregoing restrictions.
(t)The Investor acknowledges that neither the Company nor any other Person offered to sell the Subscription Shares to it by means of any form of general solicitation or advertising, including but not limited to: (A) any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio or (B) any seminar or meeting whose attendees were invited by any general solicitation or general advertising.
(u)The Investor acknowledges that the Company may complete additional financings in the future and there is no assurance that such financings will be completed or available and if available,
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that they will be on reasonable terms. Any such future financings may have a dilutive effect on shareholders of the Company at such time, including the Investor, and that if such future financings are not available, the Company may be unable to fund its ongoing development and the lack of capital resources may result in the failure of its business venture.
(v)There is no person acting or purporting to act in connection with the Offering contemplated herein on behalf of the Investor who is entitled to any brokerage or finder’s fee. If any person establishes a claim that any fee or other compensation is payable by the Investor for services provided to the Investor in connection with this subscription for the Subscription Shares offered hereby, the Investor covenants to indemnify and hold harmless the Company with respect thereto and with respect to all costs reasonably incurred in the defense thereof.
(w)If required by applicable Securities Laws or by any securities commission, stock exchange or other regulatory authority, the Investor and, if applicable, each Permitted Transferee, will execute, deliver, file and otherwise assist the Company in filing, such reports, undertakings and other documents with respect to the subscription for and issuance of the Subscription Shares, which such filings, reports, undertakings and other documents shall be redacted in a manner reasonably agreed between the Investor and the Company and subject to Securities Laws.
(x)The Investor acknowledges that counsel to the Company, being each of DLA Piper LLP and DLA Piper (Canada) LLP, is acting solely as counsel to the Company, and not as counsel to the Investor. As such the Investor acknowledges that neither DLA Piper LLP nor DLA Piper (Canada) LLP has acted for, represented, or provided any legal advice to the Investor in any way. The Investor acknowledges and agrees that the Company has given the Investor the opportunity to seek, and are hereby recommending that the Investor obtain, independent legal advice with respect to the Subscription Shares and the subject matter of this Subscription Agreement and, further, the Investor hereby represents and warrants that the Investor has sought independent legal advice or waives such advice.
(y)The Investor acknowledges that counsel to the Company, and its partners, employees, agents and representatives assume no responsibility or liability of any nature whatsoever for the accuracy or adequacy of any such publicly available information concerning the Company or as to whether all incorporation concerning the Company that is required to be disclosed or filed by the Company under applicable Securities Laws has been so disclosed or filed.
(z)The Investor is not a “control person” of the Company, as that term is defined in the Securities Act (British Columbia), will not become a “control person” of the Company by virtue of its subscription for Subscription Shares hereunder and the Investor does not intend to act in concert with any other person or persons to form a control group of the Company.
8.Conditions to the Parties’ Obligations.
(a)Conditions to Obligations of the Investor. The obligations of the Investor to purchase the Subscription Shares from the Company under this Subscription Agreement are subject to (i) the representations and warranties of the Company contained in Section 6 being true and correct as of the Closing in all respects with the same effect as if made on the Closing Date, (ii) the full and valid execution of the PRA by the parties thereto, (iii) all required approvals and consents being obtained, including regulatory approvals for the Offering deemed necessary by the Investor, and (iv) the Company having obtained conditional approval of the Exchange for the Offering and the listing of the Subscription Shares.
(b)Conditions to Obligations of the Company. The obligations of the Company to issue and sell the Subscription Shares to the Investor under this Subscription Agreement are subject to (i) the representations and warranties of the Investor contained in Section 7 being true and correct as of the Closing in all respects with the same effect as if made on the Closing Date, (ii) the full and valid execution of the PRA by the parties thereto, (iii) all required approvals and consents being obtained, including regulatory approvals for the Offering deemed necessary by the Company, and (iv) the Company having obtained conditional approval of the Exchange for the Offering.
9.Registration.
(a)The Company agrees that, within two hundred and ten (210) days after the Closing Date (the “Registration Deadline”), it will file with the SEC a registration statement registering the resale of the
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Subscription Shares held by the Investor (such Subscription Shares, the “Registrable Securities”) (the “Registration Statement”), and shall use its commercially reasonable efforts to have the Registration Statement declared effective as soon as practicable after the filing thereof, but no later than the 90th calendar day (or 120th calendar day if the SEC notifies the Company that it will “review” the Registration Statement) following the Registration Deadline (the “Effectiveness Date”). The Company agrees to cause such Registration Statement, or another shelf registration statement that includes the Registrable Securities to remain effective until the earliest of (i) the date on which the Investor cease to hold any Registrable Securities, or (ii) on the first date on which the Investor are able to sell all of their Registrable Securities under Rule 144 promulgated under the Securities Act (“Rule 144”) without limitation as to the manner of sale or the amount of such securities that may be sold.
(b)The Investor agrees to disclose to the Company (i) its beneficial ownership, as determined in accordance with Rule 13d-3 of the Exchange Act, of the Registrable Securities to the Company (or its successor) upon request to assist the Company in making the determination described above; and (ii) information regarding the distribution of such Registrable Securities as is required by law to be disclosed in the Registration Statement. The Company’s obligations to include the Registrable Securities for resale in the Registration Statement are contingent upon the Investor furnishing in writing to the Company within a reasonable time prior to the filing of such Registration Statement (or any supplemented prospectus and/or amended Registration Statement) such information regarding the Investor, the securities of the Company held by the Investor and the intended method of disposition of such Registrable Securities as shall be reasonably requested by the Company to effect the registration of such Registrable Securities, and execution of such documents in connection with such registration as the Company may reasonably request that are customary of a selling stockholder in similar situations. If the SEC prevents the Company from including any or all of the Registrable Securities proposed to be registered for resale under the Registration Statement due to limitations on the use of Rule 415 of the Securities Act for the resale of the Company’s securities by the Investor or otherwise, (i) such Registration Statement shall register for resale such number of Company securities which is equal to the maximum number of Company securities as is permitted by the SEC and (ii) the number of Company securities to be registered for each selling shareholder named in the Registration Statement shall be reduced pro rata among all such selling shareholders. In no event shall the Investor be identified as a statutory underwriter in the Registration Statement unless requested by the SEC; provided, that if the SEC requests that the Investor be identified as a statutory underwriter in the Registration Statement, the Investor will have an opportunity to withdraw from the Registration Statement.
(c)The Company may amend the Registration Statement so as to convert the Registration Statement to a Registration Statement on Form S-3 at such time after the Company becomes eligible to use such Form S-3. Further, the Investor acknowledges and agrees that the Company may delay filing or suspend the use of any such registration statement if it determines that in order for such registration statement not to contain a material misstatement or omission, an amendment thereto would be needed, if such filing or use could materially affect a bona fide business or financing transaction of the Company or in the event that filing such registration statement would require premature disclosure of information that could materially adversely affect the Company or would require premature disclosure of information that could materially adversely affect the Company (each such circumstance, a “Suspension Event”), provided, that the Company shall use commercially reasonable efforts to make such Registration Statement available for the sale by the Investor or its Permitted Transferees of such securities as soon as practicable thereafter; provided, however, that the Company may not delay or suspend the Registration Statement for more than one hundred twenty (120) consecutive calendar days, or for more than one hundred eighty (180) total calendar days, in each case in any consecutive 12-month period.
(d)Upon receipt of any written notice from the Company of the occurrence of any Suspension Event during the period that the Registration Statement is effective or if as a result of a Suspension Event the Registration Statement or related prospectus contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made (in the case of the prospectus) not misleading, the Investor agrees that it will (i) immediately discontinue offers and sales of the Subscription Shares under the Registration Statement (excluding, for the avoidance of doubt, sales conducted pursuant to Rule 144) until the Investor receives (A) (x) copies of a supplemental or amended prospectus that corrects the misstatement(s) or omission(s) referred to above and (y) notice that any post-effective amendment has become effective or (B) notice from the Company that it may resume such offers and sales, and (ii) maintain the confidentiality of any information included in such written notice delivered by the Company unless otherwise required by applicable law. If so directed by the Company, the Investor will deliver to the Company or destroy all copies of the prospectus covering the Subscription Shares in the Investor’s possession; provided, however, that this obligation to deliver or destroy all copies of the
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prospectus covering the Subscription Shares shall not apply to (i) the extent the Investor is required to retain a copy of such prospectus (A) in order to comply with applicable legal, regulatory, self-regulatory or professional requirements or (B) in accordance with a bona fide pre-existing document retention policy or (ii) copies stored electronically on archival servers as a result of automatic data back-up.
(e)For each Registration Statement covering the Registrable Securities, the Company shall provide to the Investor, without charge, at least one conformed copy of such Registration Statement and any amendments thereto (including financial statements and schedules, documents incorporated or deemed to be incorporated therein by reference, and all exhibits), such documents to be provided promptly after their filing with the SEC.
(f)In connection with each Registration Statement covering the Registrable Securities, the Company shall use its commercially reasonable efforts to cause all Registrable Securities relating to such registration statement to be listed or quoted on the OTCBB or any securities exchange, quotation system or other market on which similar securities issued by the Company are then listed or quoted.
10.Participation Rights.
(a)Subject to Sections 10(c), (d) and (e), in the event that the Company retains a placement agent duly registered or licensed in Canada and/or the United States (a “Placement Agent”) to place Common Shares (such Common Shares, “New Common Shares”) pursuant to a best efforts marketed prospectus offering transaction (and which, for greater certainty, does not include an “at-the-market” offering) (such transaction, a “Proposed Transaction”), the Company shall, subject to Securities Laws, provide the Investor a right to participate in such proposed issuance and the Investor shall have the right (the “Participation Right”) to purchase up to its proportionate share of such New Common Shares at the same purchase price ultimately offered under the Proposed Transaction. In connection with any such issuance of New Common Shares, if the Investor elects to exercise its Participation Right, then the Investor shall contribute to the Company an amount of cash equal to the purchase price (as set forth in the Participation Rights Notice, as defined below) payable for its proportionate share of the New Common Shares (less any placement fees payable to the Placement Agent, as applicable), in exchange for such New Common Shares and shall otherwise comply with any terms and conditions established pursuant to the Proposed Transaction (including any requirement that the Investor purchase Common Shares through the Placement Agent, as applicable) and provided such terms and conditions are substantially the same as those applying to other investors under the Proposed Transaction.
(b)Participation Rights Procedures.
Subject to Sections 10(c), (d) and (e),
(i)the Company shall give the Investor at least ten days prior written notice (the “Participation Rights Notice”) of the proposed closing date of any proposed issuance of New Common Shares, which notice shall set forth in reasonable detail the proposed use of proceeds in connection with such New Common Shares and the proposed terms and conditions of such issuance (including, without limitation, purchase price). If the Investor wishes to exercise the Participation Right, it must do so by delivering an irrevocable written notice to the Company within five days after delivery of the Participation Rights Notice, which notice, if it relates to the exercise of its Participation Right, shall set forth the number of New Common Shares the Investor desires to purchase, up to its proportionate share;
(ii)the Company may, in its reasonable discretion or pursuant to good faith negotiations with the Placement Agent, as applicable, with respect to any issuance pursuant to this Section 10, impose such other reasonable and customary terms and procedures as it may determine, including setting a closing date, rounding the number of New Common Shares to the nearest whole New Common Shares and/or requiring customary closing deliveries in connection with such issuance, provided that such terms and conditions are set forth in the Participation Rights Notice and are no more burdensome than the terms and procedures imposed on the other investors under the Proposed Transaction; and
(iii)in the event and to the extent that, subsequent to the procedure set forth in this Section 10, any New Common Shares are not acquired by the Investor, the Company shall be free to issue such New Common Shares to any other Person.
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(c)The Investor acknowledges that, between the time it receives a Participation Rights Notice and the time the Company settles the terms of the Proposed Transaction, the terms of the offering of New Common Shares may change from those described in the Participation Rights Notice. The Company agrees to maintain communications with the Investor during this period for the purposes of keeping the Investor informed with respect to changes to the details set forth in the Participation Rights Notice. The Participation Right is intended to allow the Investor the opportunity to participate in an offering of New Common Shares on the terms on which other investors in the Proposed Transaction participate only. As long as the Company keeps the Investor informed of changes to the details set forth in the Participation Rights Notice on a timely basis and allows the Investor not less than five days (or such lesser number of days as the Investor may agree) to consider participating on the ultimate terms of an Proposed Transaction, the Company shall not be required to start a new ten business day period for delivery of a new Participation Rights Notice each time terms of the Proposed Transaction change.
(d)The Participation Right terminates on the date on which the Investor’s ownership of Common Shares falls below 1% of the then outstanding Common Shares.
(e)Nothing in this Participation Right shall obligate the Company to undertake any offering of securities. The Participation Right shall be temporarily suspended to the extent that such right materially interferes or conflicts with a take-over bid, a statutory plan of arrangement or an amalgamation, as may in good faith be determined by the Company’s board of directors consistent with the directors' fiduciary duty to act in the best interests of the Company.
11.Collection Of Personal Information. The Investor hereby consents to the collection, use and disclosure by the Company and any other of its authorized representatives of the Personal Information of the Investor and recognizes that this disclosure may result in the disclosure of some or all of the Personal Information becoming public information and, without limiting the foregoing, consents to the disclosure of such Personal Information to the Company and any of its other authorized representatives or to any Governmental Authority; provided that no Personal Information of the Investor shall be provided to the Company, any of its Subsidiaries or any of its other authorized representatives and none of the Company nor any of its Subsidiaries or any other of its authorized representatives shall disclose to the public or any Governmental Authority any Personal Information about the Investor or the Offering, in each case other than as required by applicable law or any Governmental Authority; provided further that the Company shall notify the Investor in writing prior to disclosure of any Personal Information (other than information contained in the 72-503F Report of Trade) and, if requested by the Investor and permitted by applicable laws, use commercially reasonable efforts to seek confidential treatment of such Personal Information at the Company’s cost and expense (the disclosure conditions set forth in this paragraph, the “Disclosure Conditions”).
Subject to the Disclosure Conditions, in order to permit the Company to comply with the requirements of the Personal Information Protection and Electronic Documents Act (Canada), the Investor expressly consents to the disclosure by the Company in any submission or filing that the Company may be required to make with any Governmental Authority of any Personal Information.
The Investor hereby acknowledges and agrees that it (i) will be notified by the Company in writing prior to the delivery of the Personal Information to applicable Governmental Authorities, that the Personal Information will be collected by the applicable Governmental Authority under the authority granted pursuant to Canadian Securities Laws, and that the Personal Information will be collected by the applicable Governmental Authority for the purposes of the administration and enforcement of applicable Canadian Securities Laws, and (ii) has authorized the indirect collection of the Personal Information by the applicable Governmental Authority, subject to the Disclosure Conditions.
The Personal Information will not be placed on the public file of any Governmental Authority. However, freedom of information legislation may require the Governmental Authority to make this information available if requested.
If the Investor has any questions about the collection and use of the Personal Information and/or the Governmental Authority’s indirect collection of the Personal Information, the Investor hereby acknowledges and agrees that it has been notified to contact the Inquiries Officer, Ontario Securities Commission, 20 Queen Street West, 22nd Floor, Toronto, Ontario M5H 3S8, Telephone: (416) 593-8314, Toll free in Canada: 1-877-785-1555, Facsimile: (416) 593-8122, Email: exemptmarketfilings@osc.gov.on.ca.
12.Indemnification. From and after the Closing:
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(a)The Company agrees to indemnify and hold the Investor and the officers, employees, directors, partners, members, attorneys and agents of the Company, each Person, if any, who controls the Investor within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, and each Affiliate of the Investor within the meaning of Rule 405 under the Securities Act and the directors, partners, members, attorneys and agents of such Person(s) (collectively, the “Indemnified Parties”), harmless against any and all losses, claims, damages and liabilities (including any out-of-pocket legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) (collectively, “Losses”) incurred by the Indemnified Parties directly that are caused by any untrue statement or alleged untrue statement of a material fact contained in this Subscription Agreement or the PRA, the Registration Statement or any other registration statement which covers the Subscription Shares (including, in each case, the prospectus contained therein) or any amendment thereof (including the prospectus contained therein) or caused by any omission or alleged omission to state therein a material fact necessary in order to make the statements therein (in the case of a prospectus, in the light of the circumstances under which they were made), not misleading.
(b)The Investor agrees that, from the date of this Subscription Agreement, none of the Investor or any Person acting on behalf of the Investor will engage in any hedging or other transactions or arrangements (including, without limitation, any short sale or the purchase or sale of, or entry into, any put or call option, or combination thereof, forward, swap or any other derivative transaction or similar instrument) designed or intended, or which could reasonably be expected to lead to or result in, a sale, loan, pledge (except as collateral to any financing source in the ordinary course) or other disposition or transfer (whether by the Investor or any other Person) of any economic consequences of ownership, in whole or in part, directly or indirectly, of any Subscription Shares prior to the Closing, whether any such transaction or arrangement (or instrument provided for thereunder) would be settled by delivery of securities of the Company, in cash or otherwise, or to publicly disclose the intention to undertake any of the foregoing.
13.Company Covenants. From and after the Closing, the Company will use commercially reasonable efforts to (i) make and keep public information available, as those terms are understood and defined in Rule 144, (ii) file in a timely manner all reports and other documents with the SEC required under the Exchange Act, as long as the Company remains subject to such requirements, and (iii) provide all customary and reasonable cooperation necessary, in each case as required to enable the Investor to resell the Subscription Shares pursuant to Rule 144.
14.Legend. The certificates, notice of uncertificated shares or ownership statements issued under a direct registration system representing the Subscription Shares sold pursuant to this Subscription Agreement will be imprinted with legends in substantially the following form:
“THE OFFER AND SALE OF THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. THE SECURITIES MAY NOT BE OFFERED, SOLD, PLEDGED, OR OTHERWISE TRANSFERRED EXCEPT (1) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OR (2) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE STATE SECURITIES LAWS AND THE SECURITIES LAWS OF OTHER JURISDICTIONS, AND IN THE CASE OF A TRANSACTION EXEMPT FROM REGISTRATION, UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT THAT SUCH TRANSACTION DOES NOT REQUIRE REGISTRATION UNDER THE SECURITIES ACT OR SUCH OTHER APPLICABLE LAWS.”
15.Investor’s Costs. The Investor acknowledges and agrees that all costs incurred by it (including any fees and disbursements of any counsel retained by the Investor) relating to the subscription of the Subscription Shares shall be borne by the Investor.
16.Waiver, Amendment. Neither this Subscription Agreement nor any provisions hereof shall be modified, changed, discharged or terminated except by an instrument in writing, signed by the party against whom any waiver, change, discharge or termination is sought.
17.Waiver of Jury Trial. THE INVESTOR IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY LEGAL PROCEEDING ARISING OUT OF THE TRANSACTIONS CONTEMPLATED BY THIS SUBSCRIPTION AGREEMENT.
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18.Submission to Jurisdiction. With respect to any suit, action, or proceeding relating to any offers, purchases, or sales of the Subscription Shares by the Investor (“Proceedings”), the Investor irrevocably submits to the jurisdiction of the federal and state courts located in the Borough of Manhattan in New York City, which submission shall be exclusive, unless none of such courts has lawful jurisdiction over such Proceedings.
19.Governing Law. This Subscription Agreement shall be governed by and construed in accordance with the laws of the State of New York.
20.No Partnership. Nothing herein shall constitute or be construed to constitute a partnership of any kind whatsoever between the Investor and the Company.
21.No Third-Party Beneficiaries. This Subscription Agreement is for the sole benefit of the parties hereto and their respective successors and permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other Person any legal or equitable right, benefit or remedy of any nature whatsoever, under or by reason of this Subscription Agreement; provided, however, the Investor hereto hereby acknowledges that the Persons set forth in Section 12 are express third-party beneficiaries of the obligations of the parties hereto set forth in Section 12.
22.Section and Other Headings. The section and other headings contained in this Subscription Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Subscription Agreement.
23.Counterparts and Electronic Means. This Subscription Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which together shall be deemed to be one and the same agreement. Delivery of an executed copy of this Subscription Agreement by PDF, electronic facsimile transmission or other means of electronic communication capable of producing a printed copy will be deemed to be execution and delivery of this Subscription Agreement as of the date hereinafter set forth. If less than a complete copy of this Subscription Agreement is delivered to the Company, the Company and its respective advisors are entitled to assume that the Investor accepts and agrees to all the terms and conditions of the pages not delivered, unaltered.
24.Notices. All notices and other communications provided for herein shall be in writing and shall be deemed to have been duly given if delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid to the following addresses (or such other address as either party shall have specified by notice in writing to the other):
| If to the Company: | Charlotte’s Web Holdings, Inc. 700 Tech Court Louisville, Colorado 80020 Attention: General Counsel E-mail: Legal@charlottesweb.com | ||||
| If to the Investor: | MLB Advanced Media, L.P. 1271 Avenue of the Americas New York, New York 10020 Attention: General Counsel E-mail: [* * *] | ||||
[***] Indicates material that has been excluded from this Exhibit 10.30 because it is not material.
25.Entire Agreement. This Subscription Agreement, together with the PRA and any related exhibits and schedules thereto, constitutes the sole and entire agreement of the parties to this Subscription Agreement with respect to the subject matter contained herein, and supersedes all prior and contemporaneous understandings and agreements, both written and oral, with respect to such subject matter. Notwithstanding the foregoing, in the event of any conflict between the terms and provisions of this Subscription Agreement and those of the PRA, the terms and conditions of this Subscription Agreement shall control.
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26.Successors and Assigns. This Subscription Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. The Company may assign this Subscription Agreement at any time in connection with a sale or acquisition of the Company, whether by merger, consolidation, sale of all or substantially all of the Company's assets, or similar transaction, without the consent of the Investor. The Investor may, upon prior written notice to the Company, assign its rights hereunder to any Permitted Transferee of Registrable Securities; provided, that such purchaser or transferee shall, as a condition to the effectiveness of such assignment, be required to execute a counterpart to this Subscription Agreement agreeing to be treated as an Investor whereupon such Permitted Transferee shall have the benefits of, and shall be subject to the restrictions contained in, this Subscription Agreement as if such Permitted Transferee was originally included in the definition of the Investor herein and had originally been a party hereto.
27.Binding Effect. The provisions of this Subscription Agreement shall be binding upon and accrue to the benefit of the parties hereto and their respective heirs, legal representatives, successors, and assigns.
28.Survival. All representations, warranties and covenants of the Company and the Investor contained in this Subscription Agreement shall survive the acceptance of the subscription by the Company and the Closing.
29.Notification of Changes. The Investor hereby covenants and agrees to notify the Company upon the occurrence of any event prior to the Closing which would cause any representation, warranty, or covenant of the Investor contained in this Subscription Agreement to be false or incorrect. The Company hereby covenants and agrees to notify the Investor upon the occurrence of any event prior to the Closing which would cause any representation, warranty, or covenant of the Company contained in this Subscription Agreement to be false or incorrect.
30.Severability. If any term or provision of this Subscription Agreement is invalid, illegal, or unenforceable in any jurisdiction, such invalidity, illegality, or unenforceability shall not affect any other term or provision of this Subscription Agreement or invalidate or render unenforceable such term or provision in any other jurisdiction.
31.Further Assurances. Each of the parties to this Subscription Agreement shall, and shall cause their Affiliates to, execute and deliver such additional documents, instruments, conveyances and assurances and take such further actions as may be reasonably required to carry out the provisions hereof and to give effect to the transactions contemplated hereby.
32.Time of Essence. Time shall be of the essence hereof.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the Investor has executed this Subscription Agreement the date first written above.
| INVESTOR: | |||||
MLB Advanced Media, L.P., by MLB Advanced Media, Inc., its general partner By: /s/ Noah Garden Name: Noah Garden Title: Chief Revenue Officer | |||||
State/Country of Domicile or Formation: Delaware
The offer to purchase Subscription Shares as set forth above is confirmed and accepted by the Company as to 6,119,121common shares.
Charlotte’s Web Holdings, Inc. | |||||
By: /s/ Jacques Tortoroli Name: Jacques Tortoroli Title: Chief Executive Officer | |||||
Signature Page to Subscription Agreement
APPENDIX A
Subscription Shares to Be Acquired
| 6,119,121 common shares | |||||
APPENDIX B
Investor Questionnaire
(See attached)
Certain attachments to this exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K because the information contained therein is not material and is not otherwise publicly disclosed. The Company will furnish supplementally copies of these attachments to the Securities and Exchange Commission or its staff upon request.
Exhibit 10.31
EXECUTION VERSION
PROMOTIONAL RIGHTS AGREEMENT
This PROMOTIONAL RIGHTS AGREEMENT (this “Agreement”) is between MLB Advanced Media, L.P. (“MLBAM” or “Licensor”), on its own behalf and on behalf of Major League Baseball Properties, Inc. (“MLBP”), the Office of the Commissioner of Baseball (“BOC”), The MLB Network, LLC (“MLBN”) and the Major League Baseball Clubs (each a “Club,” and collectively, the “Clubs”), and the entity identified below (“Licensee”). Capitalized terms utilized herein are defined throughout.
WHEREAS, in connection with the Licensee Brand, Licensee desires to use for promotional purposes, and Licensor desires Licensee to use for promotional purposes, subject to Licensee’s completion of NSF Internationals’ Certified for Sport® certification for any of Licensee’s products in the Business Category (the “NSF Certified for Sport Certification”), certain Licensed Properties pursuant to the terms of this Agreement;
THEREFORE, the parties agree as follows, in all respects subject to the standard terms and conditions (the “Terms and Conditions”) attached as Exhibit A, which are made a part hereof.
A.Licensee: Charlotte’s Web, Inc.
B.Licensee Brand: The Licensee Brand shall be Charlotte’s Web and Charlotte’s Web Sport, and subject to Licensor’s prior written approval (not to be unreasonably withheld, conditioned or delayed), all other brands utilized by Licensee in the Business Category (as defined below) from time to time. The Licensee Brands may be represented by those trademarks, service marks and logos (“Marks”) of Licensee provided by Licensee to Licensor in connection with the Program and approved by Licensor “Licensee Marks” (as may be amended from time to time).
C.License Period: The License Period shall commence on October 11, 2022 (the “Effective Date”) and remain in full force and effect until December 31, 2025 (the “License Period”).
D.Territory: The Territory shall be the fifty states of the United States of America and the District of Columbia. Notwithstanding the foregoing, if a Jewel Event is held at the Toronto Blue Jays’ regular season home ballpark (“Blue Jays Park”) during the License Period, Licensee shall be entitled to exercise the marketing rights and benefits, and use the assets, identified in Section G, in Canada, during such Jewel Event, solely within Blue Jays Park; provided, however, that Licensee shall only be permitted to feature, make available, or include within such Blue Jays Park Licensee’s products in the Business Category in compliance with applicable law that have received NSF Certified for Sport Certification in accordance with applicable law.
For the purposes of this Agreement:
•“Club Pages” shall mean the Club-branded pages within the Portal and shall not include the MLB Pages.
•“Force Majeure Event” means, with respect to either party, an event or condition that is caused by facts and circumstances that are beyond the reasonable control of such party, which wholly or partially prevents or delays the performance of any of the duties, responsibilities, or obligations (except for the payment of money) of such party, including the enactment, imposition, or modification of any applicable law(s) that occurs after the Effective Date and that prohibits or materially impedes the performance of the obligations of the parties under this Agreement; compliance with any order or regulation of any governmental authority; war or war-like action (whether actual, pending, or expected and whether de jure or de facto); arrest or other restraint of government (civil or military); blockade or embargo; insurrection, civil disturbance, riot, or national emergency; epidemic, pandemic or national health emergency (other than any of the foregoing arising as a result of COVID-19); act of God, fire, landslide, lightning, earthquake, hurricane, storm, flood, drought, wash-out, or explosions; nuclear reaction or radiation or radioactive contamination; act of terrorism or sabotage; strike or other labor trouble (but excluding a Work Stoppage); failure of a utility provider; or interruption of or delay in transportation.
•“Interactive Media” shall mean the Internet as currently defined in the Communications Act of 1934, as amended, and any other networks commonly referred to as or part of the Internet.
[Certain information indicated by [***] has been excluded from this Exhibit 10.31 because it is not material.]
•“Jewel Event” shall mean the All-Star Game, the Home Run Derby, and each game of the Wild Card, Division Series, League Championship Series, and World Series.
•“MLB Pages” shall mean MLB-branded pages within the Portal and shall not include Club Pages.
•“Portal” shall mean the Club Pages and the MLB Pages located within that group of web site pages on the Internet controlled by Licensor.
E.Business Category: The Business Category shall include the following products, solely to the extent each such product has received NSF Certified for Sport Certification; provided, however, Licensee’s use of the Licensed Properties in connection with such products in the Business Category may be limited as set forth in this Agreement. For purposes of clarity, Licensee may not utilize the rights set forth in this Agreement in connection with products listed below that have not received NSF Certified for Sport Certification.
Cannabidiol (CBD) including the following CBD product lines:
•CBD Topicals
•CBD Sleep Aid
•CBD Oil Drops
•CBD Chewables / Gummies
During the License Period, the parties shall discuss the inclusion of certain of Licensee’s Canine CBD products and other potential products within the definition of the Business Category upon a mutually agreed upon third party’s review of said products, which in all cases shall be subject to Licensor’s approval.
F.Consideration:
1.MLB Rights Fee. Licensee shall pay to Licensor the annual payments set forth below in rights fees as consideration for the rights and exclusivities set forth in this Agreement (the “MLB Rights Fee”). The MLB Rights Fee for calendar year 2022 shall be due within thirty (30) days of the Effective Date. For the avoidance of doubt, all rights and exclusivities set forth in this Agreement are included in the MLB Rights Fees, unless explicitly stated otherwise. The MLB Rights Fee payments for 2023-2025 by Licensee shall be made as follows in accordance with Section XVIII “Payment Terms” of Exhibit A:
a.For calendar year 2023: four equal installments paid during each calendar quarter of 2023 on January 5, April 1, July 1, October 1
b.For calendar year 2024: two equal installments paid on January 5, 2024 and July 1, 2024
c.For calendar year 2025: two equal installments paid on January 5, 2025 and July 1, 2025
| Year | MLB Rights Fee | ||||
| 2022 | $500,000 | ||||
| 2023 | $8,000,000 | ||||
| 2024 | $10,000,000 | ||||
| 2025 | $12,000,000 | ||||
| Total | $30,500,000 | ||||
Of the MLB Rights Fee paid by Licensee, Licensor will provide Licensee with $[* * *] USD (net) in media value based on Licensor’s standard rate card (the “Net Media Value Included in MLB Rights Fee”) during each calendar year from 2023-2025 to be fulfilled by MLBAM and/or MLBN pursuant to a mutually agreed upon Media Plan.
[***] Indicates material that has been excluded from this Exhibit 10.31 because it is not material.
2
2.Revenue Share. At such time that the aggregate Gross Revenue (as defined below) from MLB Branded Licensee Products (as defined herein), reaches $18,000,000 USD, Licensee shall thereafter remit ten percent (10%) royalty on all Gross Revenue generated from MLB Branded Licensee Products (as defined herein) to Licensor (the “MLB Revenue Share”). For the avoidance of doubt, Licensee shall have no obligation to pay any royalty to Licensor in connection with the sale and/or distribution of any Licensee products and services other than the MLB Branded Licensee Products. Licensee shall remit the MLB Revenue Share to Licensor no later than forty five (45) days after the end of each calendar quarter in accordance with Section XVIII “Payment Terms” of Exhibit A. Licensee shall also submit to Licensor documentation sufficient to evidence the applicable Gross Revenue and MLB Revenue Share. For purposes of calculating the MLB Revenue Share, “Gross Revenue” shall be defined as all income received from the sale of MLB Branded Licensee Products prior to any deductions.
3.Equity Grant. In exchange for the rights grant to Licensee hereunder, Licensor shall receive, subject to the approval of, and/or terms or conditions imposed by, the Toronto Stock Exchange, that number of common shares in Licensee as is equal to four percent (4%) of the fully diluted outstanding common shares and proportional voting shares (calculated on the basis of post-conversion to common shares) outstanding at the close of business the day prior to the date of issue, of Charlotte’s Web Holdings, Inc., a British Columbia corporation. The definitive terms of such equity issuance shall be set forth in a separate Subscription Agreement to be entered into as of the Effective Date between Licensee and Licensor (the “Subscription Agreement”). In the event that the Subscription Shares (as defined in the Subscription Agreement) are not issued to Licensor pursuant to the terms of the Subscription Agreement within ninety (90) days of execution of this Agreement, Licensee shall be obligated to pay an additional [* * *] USD ($[* * *]) as part of the MLB Rights Fee during the License Period (the “Subscription Shares Credit Payment”). The Subscription Shares Credit Payment shall be paid in calendar year 2023 in four (4) equal installments of [* * *] USD ($[* * *]) each payment on the dates set forth in Section F.1.a above.
G.Promotional Rights Program (the “Program”): The Program shall consist of the following:
1.General. Subject to the terms, conditions and limitations set forth in this Agreement, Licensor grants to Licensee, and Licensee hereby accepts and agrees to exercise, the rights to use the Licensed Properties and to otherwise exploit the rights described herein, in the Territory during the License Period.
2.Exclusivities.
(a)MLB Designations: Licensor hereby authorizes Licensee to use, and shall not authorize any other third party promoting goods or services in the Business Category to use, the designations “Proud Partner of Major League Baseball”, “Official Partner of Major League Baseball” and “Official Partner of [each MLB Jewel Event]” in connection with such party’s promotion of the goods or services in the Business Category.
Further, Licensor hereby authorizes Licensee to use, and shall not authorize any other third party to use the designation “Official CBD of Major League Baseball”.
(b)Licensed Properties: Licensor shall not license or authorize to any third party promoting goods or services in the Business Category the right to: (i) use the Licensed Properties via Offline Media; (ii) use the Licensed Properties via Interactive Media; and (iii) operate, sponsor or promote any sweepstakes, contest, giveaway or other similar consumer promotion offering MLB assets as prizing (e.g. tickets, licensed merchandise, discounts for MLB.com Shop), in each of cases (i) – (iii), in connection with such third party’s promotion of goods or services in the Business Category.
(c)Canine CBD Products: Licensor shall not license or authorize to any third party promoting Canine CBD products the right to use the Licensed Properties to promote such Canine CBD products.
“Offline Media” shall mean any non-interactive mediums including, but not limited to, broadcast media, out-of-home, print, radio, point of sale, product packaging and Premiums.
3.Media Plan for Interactive Media.
(a)In furtherance of the Interactive Media and MLBN broadcast advertising to be published in accordance with this Agreement, the parties shall execute periodic media plans (each, and collectively, the “Media Plan”). Each Media Plan for Interactive Media advertising to be published shall be executed in a form insertion order (“Insertion Order”) subject to the IAB Standard Terms and Conditions for Internet Advertising for Media Buys One Year or Less v.3.0 (“IAB Terms”), as such terms are modified by this Agreement. For the
[***] Indicates material that has been excluded from this Exhibit 10.31 because it is not material.
3
avoidance of doubt, in the event of any conflict between the terms of this Agreement and any Insertion Order, the terms of this Agreement shall control.
(b)An Insertion Order executed in furtherance of a Media Plan may include any of the following elements:
(i)Banner Ads. On dates, at frequencies and locations and of various sizes to be determined by Licensor, MLBAM shall deliver impressions of rotating banner advertisements on both of MLB Pages and Club Pages (subject to availability) (“Banner Ads”), the number, location and landing page of such Banner Ads to be specified in the Media Plan.
(ii)Email. Licensor shall distribute promotional email(s) to each email address for which users opted-in to receive such email from MLB.com as determined by Licensor. Such email shall be distributed on specified date(s) and linking to a mutually agreed location promoting the Program, as set forth in the Media Plan.
(iii)Commercials. Licensor shall deliver impressions of fifteen second (:15) “pre-roll” commercials and “mid-roll” commercials (if available) as determined by MLBAM on both of MLB Pages and Club Pages (subject to availability) to run before video highlights featured on the Portal, as set forth in the Media Plan.
(iv)Gameday video mid-roll. Licensor shall deliver gameday video mid-roll on the MLB Pages as determined by MLBAM.
(v)MLB Mobile Application Ads. Licensee shall deliver fixed Banner Ads to be published by Licensor via an MLB baseball-themed mobile application (e.g. MLB At Bat, MLB Ballpark), as set forth in the Media Plan.
(vi)Roadblock(s). On separate calendar day(s) of the Term, such day(s) to be mutually agreed upon by Licensor and Licensee, Licensor shall publish fixed advertisements of sizes and at locations to be determined by Licensor across the home page of the MLB Pages (both desktop and mobile). Such fixed advertisements shall promote the Program and shall be published in accordance with the Media Plan.
(vii)MLBAM and Club Controlled Social Media Locations. On dates and in a manner to be determined by Licensor, Licensee shall receive rights and benefits exercised via social media which promote the Program, subject to the Terms of Use and Privacy Policy of the applicable MLB and Club (subject to availability) social media platform and subject to any other rule, regulation or law, including the applicable MLB and Club social media policy then in effect. The number, frequency and timing of such posts shall be set forth in the Media Plan.
Licensee acknowledges that: (x) Licensor does not control advertising on or by or the policies or practices of Facebook, Twitter, Instagram or any other social media site where Licensor operates pages and posts content; (y) Licensor’s control of the applicable social media accounts described herein may be modified, limited or extinguished at any time by the entity in control of the social media site without prior notice; (z) Licensor cannot control or dictate content that may be placed on any Club’s or any of MLB’s official social media pages or accounts by operation of the social media site; and (iv) Licensor may elect to discontinue operating or maintaining any of its social media accounts or pages at any time, in its sole discretion and shall provide Licensee with (1) reasonable notice of the decision to discontinue such accounts, and (2) a make-good for the loss of the assets.
(viii)MLB.TV Video. Licensor shall deliver the following assets to Licensee in connection with the MLB.TV video product (or any successor product): (w) thirty second (:30) video mid roll, (x) accompanying unit, (y) mobile thirty second (:30) video mid-roll and (z) thirty second (:30) gameday video.
(ix)Data.
•Beginning in 2023, the parties agree to use reasonable efforts in working together to effectuate data sharing related to this Agreement. Pursuant to a mutually agreed upon Media Plan, Licensor may utilize its database in order for it to (x) target fans with Licensee advertising for higher quality and fewer wasted impressions; (y) predict fan behavior with statistical
[***] Indicates material that has been excluded from this Exhibit 10.31 because it is not material.
4
analysis; and (z) create profiles to target Licensee customers. Licensee acknowledges that the sharing of any personally identifying data collected via the MLB Pages or Clubs Pages shall require end users to be presented with an opt in or other similar disclosure authorizing such data sharing with Licensee. Licensor acknowledges that the sharing of any personally identifying data collected via Licensee’s websites and other platforms shall require end users to be presented with an opt in or other similar disclosure authorizing such data sharing with Licensor. All end user data must be transferred encrypted via secure FTP or similar secure transfer mechanism reasonably acceptable to the parties.
•The parties will comply with all applicable privacy and data protection laws, the then-current MLB.com privacy policy or Licensee privacy policy, as applicable, and regulations established for the collection, storage, use and dissemination of personally identifiable information and the terms of their respective privacy statements.
4.Marketing Rights.
(a)Licensee Website; Licensee Brand Apps; Licensee Brand Social Media. Licensee shall have the non-exclusive, non-transferable, non-sublicenseable limited right and license to display the Licensed Properties in the following manner: (i) on Licensee’s premiere flagship website (“Licensee Website”), (ii) within any Licensee Brand focused downloadable software application of Licensee, (iii) on Licensee-controlled and Licensee Brand focused social media locations and platforms, including, but not limited to Facebook, Twitter and YouTube, and (iv) otherwise via Interactive Media. All uses shall be subject to the approval of Licensor as set forth in Exhibit A and shall be solely for the purpose of promoting the Program. The Licensed Properties shall function as a link to a location on the Portal as agreed by the parties with respect to each applicable use. The parties acknowledge and agree that in the event Advertiser (as defined in the IAB Terms) makes any use of Licensed Properties via YouTube or any other similar third-party platform, Licensor may claim (for copyright protection purposes) any Licensed Properties appearing at such location, in accordance with the applicable third party’s terms of use and other policies. Licensee acknowledges and agrees that in no event shall the Licensee Website be referred to as an official website of MLB or be presented to Licensee Website users in a manner which is likely to create the impression or actually creates the impression that such Licensee Website is associated with MLB.
(b)Offline. Licensee may use the Licensed Properties in Offline Media (including on Licensee’s packaging as expressly approved by Licensor and as further set forth in Section G.10 below), subject to Exhibit A, Section I.E.2.
(c)Players. Licensee may only utilize the name, likeness, image and endorsement of any then-active or retired MLB player with whom Licensee has reached an Agreement for use of such player’s name, image, likeness and endorsement, which shall be executed by Licensee and such current or former player, such agreement (a “Player Deal”). If and to the extent Licensee requires the rights or approval for use of any Club Marks in conjunction with any Player Deal, Licensor shall reasonably assist in the acquisition of such Club Marks.
(d)Portal Recognition. If and to the extent Licensor publishes a webpage or similar location wherein Licensor identifies its national sponsors, Licensee shall receive recognition in a manner and size commensurate to other similarly situated MLB sponsors, which may include a hyperlink to Licensee’s primary flagship website and/or the publication of a Licensee mark or logo.
5.Sweepstakes and Promotions. Licensee may conduct mutually agreed upon sweepstakes and promotions (all sweepstakes, contests and consumer promotions hereunder the “Sweepstakes”), subject to Licensee’s full compliance with applicable laws and the terms and conditions of this Agreement, utilizing the Licensed Properties, Premiums, or tickets to MLB games and events in the Territory and during the License Period.
6.Jewel Event Activation and Signage. Licensor shall recognize Licensee in LED ribbon board messages at each All-Star Week event or exhibition (including the All-Star Game, All-Star Sunday Exhibition (“ASE”), the Home Run Derby and Workout Day (“WOD”)) and each game of the Wild Card, Division Series, League Championship Series, and World Series, at least as frequently and in the same prominence as other comparable MLB national sponsors.
7.Electronic Video Insertion. Subject to the availability of the relevant technology, beginning in 2023, Licensee will receive, [* * *], electronic virtual signage (EVI) bearing the Licensee Brand to be featured during MLBN showcase games broadcast throughout the Regular Season:
[***] Indicates material that has been excluded from this Exhibit 10.31 because it is not material.
5
(a)MLBN Batters Eye EVI: Licensee shall receive [* * *] of Batters Eye position EVI during each of [* * *] MLBN showcase games broadcast throughout the Regular Season.
(b)MLBN Pitcher’s Mound EVI: Licensee shall receive Home Plate position EVI for [* * *] during each of [* * *] MLBN showcase games broadcast throughout the Regular Season.
8.Hospitality.
(a)Tickets. Licensor shall provide to Licensee, free of charge, the following quantities of tickets to the following games played or events conducted during each calendar year of the License Period which Licensee may use for internal business purposes or in connection with Sweepstakes authorized hereunder, subject to approval as otherwise set forth in this Agreement, provided Licensee has the right to purchase additional tickets for games or events to which tickets are sold (including Regular Season game tickets) from Licensor at face value and subject to availability and pursuant to the terms and conditions of Licensor’s ticket policies with respect to MLB partners:
| Event | Number of Tickets or Invitations | ||||
| Wild Card Series | [* * *] Strips* | ||||
| Division Series | [* * *] Strips* | ||||
| League Championship Series | [* * *] Strips* | ||||
| World Series | [* * *] Strips* | ||||
| All-Star Game | [* * *] tickets | ||||
| Play Ball Park | [* * *] tickets | ||||
| All-Star Workout Day | [* * *] tickets | ||||
| All-Star Sunday | [* * *] tickets | ||||
*A “Strip” shall consist of one ticket to each game of the applicable series.
“Regular Season” shall mean official Major League Baseball games other than Jewel Events.
(b)Unique Access. In each calendar year of the License Period, Licensee will be afforded the following rights to unique access, [* * *], for use for internal business purposes or in connection with consumer promotions authorized hereunder, subject to approval as otherwise set forth in this Agreement:
(i)[* * *];
(ii)[* * *]; and
(iii)[* * *].
(c)Hotel Accommodations. Licensor shall secure on Licensee’s behalf and at Licensee’s sole cost, a commercially reasonable number of hotel rooms (taking into consideration the number of tickets provided to Licensor) at preferred MLB rates and at the primary MLB hotel for each All-Star Week during the License Period upon notice to Licensor no later than the date communicated to Licensee each calendar year by Licensor.
9.Pass Through Rights. During the License Period, Licensee shall have the right to extend the rights granted herein with respect to the Licensed Properties to select and approved Licensee product retailers at which Licensee sells its products in the Business Category located in the Territory (“Licensee Retail Partners”) in order to develop custom marketing programs, in all cases subject to Licensor’s prior written approval (such approval not to be unreasonably withheld, conditioned or delayed); provided, however, that Licensor shall withhold approval (and it shall be deemed reasonable to do so) in the event that such Licensee Retail Partner sells
[***] Indicates material that has been excluded from this Exhibit 10.31 because it is not material.
6
any THC Product (as defined below) from any distribution or retail channel. As of the Effective Date, the Parties hereby acknowledge and agree that Vitamin Shoppe, GNC, Kroeger and Life Time Fitness are hereby approved as Licensee Retail Partners so long as each of those approved Licensee Retail Partners continues to operate in a manner consistent with operations today and does not fall out of good standing with Licensor (such examples of falling out of good standing being: selling counterfeit Licensor goods, distributing or making available any THC Product(s), or engaging in litigation against any MLB Entity). For purposes of this Agreement, “THC Product” means any hemp product that includes more than 0.3% of the psychoactive compound delta-9-tetrahydrocannabinol (THC) on a dry weight basis (or such different percentage if and to the extent the 2018 Farm Bill, PL 115-334 is amended).
Notwithstanding the foregoing, (i) such extension of rights to Licensee Retail Partners shall not constitute, or be construed as constituting, an assignment of Licensee’s rights or obligations pursuant to this Agreement; (ii) Licensee shall remain responsible for the performance of its obligations under this Agreement, such that Licensor shall have the right to enforce directly against Licensee or any of the pass through recipients the performance of any such obligation due from such pass through recipients; (iii) Licensee shall, at its own expense, assist Licensor in such enforcement; (iv) the pass through recipients shall not be third party beneficiaries of this Agreement and shall not be entitled to claim any right, compel any performance or maintain suit under this Agreement; (v) all materials used in connection with any rights exercised pursuant to this Agreement shall be subject to Licensor’s final approval and shall be designed and produced by Licensee or by Licensee’s pass through recipients pursuant to reasonable written guidelines set forth by Licensor; (vi) in all materials featuring the corporate identification of a pass through recipient the Licensee Brand shall be promoted more prominently than the names or marks of any pass through recipient and shall be the focus of the materials and a Licensee/Licensor Mark must be featured prominently; and (vii) Licensor reserves the right to reject any materials that are determined to have a reasonable likelihood of creating the impression in the minds of consumers that any pass through recipient not already having a relationship with Licensor, is a sponsor of Licensor. The pass-through rights granted to Licensee herein do not prevent Licensor from granting sponsorship rights to, or conducting sponsorship promotions with, any of Licensee’s marketing partners.
With respect to all advertising created pursuant to the rights set forth in this section, Licensee shall comply with the following guidelines, which may be amended or updated from time to time with reasonable prior notice to Licensee: (a) all Promotional Materials must include prominent use of “compliments of Charlotte’s Web” or “compliments of CW Sports” (or such other mutually agreed upon materially similar line) and must clearly be a Licensee-driven promotion/message; (b) all Promotional Materials must include prominent use of Composite Marks; (c) all Composite Marks must be at least fifty percent (50%) larger, in Licensor’s reasonable estimation, than the logos of any Licensee Retail Partner and are subject in each instance to the approval of Licensor in its sole discretion (including the depiction of all third party marks therein); (d) a qualifier (or credit line, as directed by Licensor) shall be required for any and all third party marks used in the creative materials (and Licensee shall be responsible for all Clearances associated therewith). Examples of such qualifiers include, but are not limited to, “available exclusively through” or available exclusively at”; (e) Licensee must notify Licensor of a reasonable estimation of the quantity and distribution of all such Promotional Materials; and (f) Licensee must provide a final version of all approved Promotional Materials and/or messages for Licensor’s records.
10.Product Packaging; Marketing & Promotion. Licensee shall be permitted to feature both the MLB silhouetted batter logo and an official MLB Designation on Licensee packaging and in retail advertising, marketing and promotion for only preapproved Licensee products (collectively, “MLB Branded Licensee Products”) which such preapproved products shall be expressly communicated to Licensee (with Licensor meaningfully consulting with Licensee on such products). Licensee shall be responsible for including all necessary disclosures as required by applicable law on such MLB Branded Licensee Products and within any and all associated marketing in connection therewith. For purposes of clarity, upon Licensee’s receipt of NSF Certified for Sport Certification for its tincture product, such certified tincture product shall be approved as an MLB Branded Licensee Product. Licensor may approve or disapprove such Licensee products in its sole discretion for any reason; provided, however, that the parties will work together to enable Licensee to create at least one (1) MLB Branded Licensee Product no later than [* * *] after the Effective Date. Any approved MLB Branded Licensee Product must include both the MLB silhouetted batter logo and an official MLB Designation on the approved packaging.
Upon expiration of this Agreement or termination of this Agreement pursuant to Section IX(B), Licensee shall be permitted to continue making available/selling existing inventory of MLB Branded Licensee Products (but under no circumstances shall Licensee be permitted to produce any additional MLB Branded Licensee Product or advertise/market the existence of any such MLB Branded Licensee Product) for a period of one hundred (100) days after such expiration or termination date (the “Selloff Period”). All MLB Branded Licensee Products sold during the Selloff Period shall be subject to the Revenue Share set forth in Section F.2 and the MLB Revenue Share (along with the required supporting documentation) shall be remitted to Licensor no later than thirty (30) days after the conclusion of such Selloff Period. For purposes of clarity, there shall be no selloff period and Licensee must immediately cease making available any MLB Branded Licensee Product (and dispose of or destroy of any existing
[***] Indicates material that has been excluded from this Exhibit 10.31 because it is not material.
7
inventory and provide evidence of such disposal or destruction to Licensor) in the event this Agreement is terminated pursuant to Section IX(A). This section shall survive the expiration or termination of this Agreement.
11.Press Release. Licensee and Licensor will collaborate on one (1) mutually agreed joint press release to announce the partnership. The parties will work together to amplify press exposure across national media outlets & industry trade journals.
12.Educational Content. Beginning in 2023, Licensor will work with Licensee in order for Licensee to produce educational content which may include case studies and MLB personnel testimonials, documenting the use of Licensee’s product throughout the License Period which educational content shall be at Licensee’s sole cost and expense (and not deducted from any payment made by Licensee to Licensor hereunder). In addition, the Parties will collaborate to create informative materials to help highlight the partnership between Licensor and Licensee and educate the public on the benefits of CDB. Without limiting the foregoing, the foregoing educational content shall include a minimum of [* * *]. Licensor shall provide Licensee with reasonable access to MLB front office personnel and support for such educational content. Licensee shall be responsible for obtaining all Clearances and approvals with respect to the case studies and testimonials and shall be responsible for all hard costs associated therewith, including, but not limited to, production, editing, location agreements and talent procurement. Licensee may integrate these materials, subject to all Clearance obligations, on its owned and operated channels. Such materials may also be included on certain Licensor owned and operated channels as set forth in a Media Plan.
13.MLB Partners. Licensor shall provide Licensee with introductions and reasonable access to MLB business partners, Clubs, other licensees and associate networking groups to foster business development efforts and to assist Licensee in driving new business. The foregoing may include, but is not limited to, (i) inclusion in Licensor’s internal communication to the Clubs and (ii) participation in educational sessions (i.e., opportunities and access to introduce the MLB Branded Licensee Products to appropriate Club health & wellness officials/representatives).
14.MLB References. After Licensor’s successful use of Licensee’s products, Licensor shall use its reasonable efforts to make certain personnel available to serve as a business reference for Licensee in mutually agreed upon manners.
15.Custom Season Brand Engagement Platform. Beginning in 2023, Licensor shall create a season-long brand engagement platform integrating Licensee branding and utilizing national and digital MLB controlled assets. The details of such season-long platform shall be set forth in a mutually agreed upon Media Plan and may include the following:
(a)[* * *]
(b)[* * *]
(c)[* * *]
(d)[* * *]
(e)[* * *]
16.Use of MLB’s Facilities. Licensor will provide Licensee with access to MLB’s New York headquarters [* * *], subject to prior approval of Licensor (it being understood that the specific date and conference room location of the meeting will be subject to availability and meeting size); provided, however, that any associated food and beverage costs (and any other costs) shall be the sole cost and expense of Licensee.
17.Jewel Event Product Integration. During all Major League Baseball Jewel Events, Postseason games and Licensor owned special events played within the United States (e.g., Field of Dreams), only those of Licensee’s products in the Business Category that have obtained NSF Certification or have been preapproved by Licensor will be integrated into the participating team’s clubhouses in a manner to be determined by Licensor.
18.All-Star Week Health & Wellness Event. Beginning in 2023, Licensee shall be afforded presenting partner status for [* * *] during the License Period. In connection with such presenting partnership, Licensee will receive marketing assets which may include (but are not limited to) [* * *]. In addition, Licensee shall have the ability to (i) bring a reasonable number of Licensee ambassadors to each event, (ii) capture
[***] Indicates material that has been excluded from this Exhibit 10.31 because it is not material.
8
certain preapproved content at such event, and (iii) capture lead generation at or in connection with such event subject to Licensor approval (not to be unreasonably withheld, conditioned or delayed).
19.Community Program. Beginning in 2023, Licensee and Licensor will meet at least [* * *] a year to discuss and align on joint community initiatives to customize a meaningful program that may be amplified through community activation, Jewel Event exposure and MLB media assets.
20.MLB Network Assets. Each calendar year during the License Period, Licensee shall receive [* * *] on MLBN throughout the Regular Season the content of which shall be mutually agreed upon; provided, however, that during calendar year 2023, Licensee shall receive [* * *]. Any further short form spots may be purchased by Licensee using the Net Media Value Included in MLB Rights Fee (to the extent available). Beginning in 2023, Licensee’s brand shall also be integrated into MLBN studio shows which may include a live call to action, billboards, live talent custom reads, branded features, branded topic bars or commercial adjacency. The details of such integrations will be set forth in the mutually agreed upon Media Plan.
21.NSF Certification. Licensee shall use its good faith efforts to seek NSF certified for sport certification for all of the products listed in the Business Category section of this Agreement during the License Period.
AGREED TO AND ACCEPTED BY:
MLB ADVANCED MEDIA, L.P., by MLB ADVANCED MEDIA, INC, its General Partner: By /s/ Noah Garden Name Noah Garden Title Chief Revenue Officer | CHARLOTTE’S WEB, INC. By /s/ Jacques Tortoroli Name Jacques Tortoroli Title Chief Executive Officer | ||||
Certain exhibits and attachments to this exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K because the information contained therein is not material and is not otherwise publicly disclosed. The Company will furnish supplementally copies of these attachments to the Securities and Exchange Commission or its staff upon request.
[***] Indicates material that has been excluded from this Exhibit 10.31 because it is not material.
9
Exhibit A
STANDARD TERMS AND CONDITIONS
I. Licensed Properties. The “Licensed Properties” shall mean the MLB Marks, MLB Designations, MLB Intellectual Property, and MLB Footage as follows and Licensee must include the then-current applicable title or presenting sponsor(s) for the medium to be utilized for each, as designated by Licensor, and for which Licensor shall provide Licensee advance written notice:
A.[* * *]
[* * *]
B.[* * *]
C.[* * *]
D.[* * *]
E.[* * *]
1.[* * *]
2.[* * *]
(a)[* * *]
(b)[* * *]
(c)[* * *]
3.[* * *]
4.[* * *]
5.[* * *]
6.[* * *]
7.[* * *]
8.[* * *]
9.[* * *]
10.[* * *]
11.[* * *]
12.[* * *]
I.Licensee’s License. In exchange for the rights granted, Licensee (i) shall make the payments and perform the other obligations set forth herein, (ii) shall, within a reasonable period following the Effective Date, commence in good faith to exploit the rights granted in this Agreement, (iii) hereby authorizes Licensor to depict Licensee’s corporate identification, Licensee Brands or Licensee Intellectual Property in promotional literature without compensation during the License Period, subject to Licensee’s prior approval, provided that such marks are used only in a manner to promote Licensee’s sponsorship hereunder and/or its association with MLB games or events,
and (iv) shall promote its rights relating to MLB as provided herein and as may be additionally agreed to in writing by Licensor and Licensee.
III.Approvals.
A.[* * *]
B.[* * *]
C.[* * *]
D.[* * *]
IV.Premiums, Use of Tickets, and Consumer Sweepstakes.
A.[* * *]
B.[* * *]
C.[* * *]
D.[* * *]
E.[* * *]
F.[* * *]
G.[* * *]
H.[* * *]
1.[* * *]
2.[* * *]
3.[* * *]
4.[* * *]
5.[* * *]
6.[* * *]
7.[* * *]
8.[* * *].
V.Representations and Warranties.
A.Each party hereby represents and warrants to the other that: (a) it has full power and authority to execute and deliver this Agreement and perform its obligations hereunder; (b) it has duly executed and delivered this Agreement; (c) this Agreement constitutes the legal, valid and binding obligation of it, enforceable against it in accordance with the terms hereof; and (d) its execution, delivery, and performance of this Agreement will not conflict with, result in the breach of, or constitute a default under any arrangement or agreement to which it is a party or by which it is bound.
[***] Indicates material that has been excluded from this Exhibit 10.31 because it is not material.
A-2
B.In addition to any other representations and warranties set forth in Section V.A above, Licensor further represents and warrants that: (i) it has the right to grant the rights and benefits granted to Licensee hereunder, including those rights licensed hereunder (including with respect to the Licensed Properties), (ii) it will perform under this Agreement as set forth herein and in a proper, competent, timely and professional workman-like manner; and (iii) as of the Effective Date, no existing MLB rules, provisions in existing sponsorship agreements of any MLB Entity, or applicable law would prohibit, prevent, or impede Licensee from receiving the rights and benefits contemplated to be provided to Licensee hereunder.
C.NO MLB ENTITY MAKES ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, EXCEPT FOR THE EXPRESS REPRESENTATIONS AND WARRANTIES MADE BY LICENSOR IN SECTION V.A AND SECTION V.B ABOVE. THE MLB ENTITIES EXPRESSLY DISCLAIM ANY AND ALL OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE SUBJECT MATTER OF THIS AGREEMENT, WHETHER EXPRESS, IMPLIED, OR STATUTORY, INCLUDING WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF MERCHANTABILITY, IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, IMPLIED WARRANTY OF NON-INFRINGEMENT OR IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF PERFORMANCE.
D.LICENSEE MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, EXCEPT FOR THE EXPRESS REPRESENTATIONS AND WARRANTIES MADE BY LICENSEE IN SECTION V.A. LICENSEE EXPRESSLY DISCLAIMS ANY AND ALL OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE SUBJECT MATTER OF THIS AGREEMENT, WHETHER EXPRESS, IMPLIED, OR STATUTORY, INCLUDING WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF MERCHANTABILITY, IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, IMPLIED WARRANTY OF NON-INFRINGEMENT OR IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF PERFORMANCE.
VI.Indemnification.
A.Licensee shall indemnify, defend and hold harmless Licensor and the MLB Entities and each of their respective former or current subsidiaries, affiliates, owners, shareholders, partners, members, directors, officers, employees, agents, representatives, successors and assigns (each, an “MLB Indemnitee” and collectively, the “MLB Indemnitees”) from all damages, fees, expenses, and costs (including reasonable attorneys’ fees and expenses) (“Claims”) resulting from any actual or alleged third party claim made, or action or suit instituted, arising out of or related to (i) any actual or alleged unauthorized use of or infringement of any trademark, service mark, copyright, patent, process, method or device by Licensee in connection with the Program (including in connection with the MLB Branded Licensee Products) including, without limitation, MLB Intellectual Property (not involving assertions to any claim of right or interest in or to the Licensed Properties or MLB Intellectual Property created or contributed by Licensor as authorized and used in the Program pursuant to this Agreement); (ii) any actual or alleged defects or deficiencies in any of Licensee’s products or services (including Licensee’s products in the Business Category) or the use thereof, or false advertising, fraud, or misrepresentation related thereto including with respect to Licensee’s receipt of NSF certified for sport certification (not involving a claim of right or interest in or to the Licensed Properties as authorized and used in the Program pursuant to this Agreement); (iii) false advertising, deceptive marketing, fraud, misrepresentation, and unfair competition (including failure to include any disclosures in product packaging and/or related marketing required by applicable law for products in the Business Category), by Licensee, its agents, representatives, employees or those under its supervision or control or with respect to any materials created or contributed by Licensee as authorized and used in the Program; (iv) any unauthorized use of the Licensed Properties or any of the MLB Proprietary Rights by Licensee, its agents, representatives, employees, or those under its supervision or control in connection with this Agreement and the rights granted to Licensee hereunder; (v) any breach by Licensee of this Agreement; (vi) any actual or alleged libel or slander against, or invasion of the right of privacy, publicity or property of, or violation or misappropriation of any other similar right of, any third party by Licensee, its agents, representatives, employees, or those under its supervision or control in connection with this Agreement and the rights granted to Licensee; (vii) Licensee’s promotional, marketing, or advertising activities involving or related to the Program, including, but not limited to any Licensee product packaging or alleged or actual errors, omissions or misconduct in the design and execution of any Sweepstakes hereunder; (viii) any text or graphical links from the Licensee Site to the Portal or third party sites or the pages and sites connected to such links including, without limitation, claims relating to transactions on or through Licensee’s links or the pages and sites connected thereto; (ix) any actual or alleged claims relating to injuries or illness caused by, directly or indirectly, any of Licensee’s products or any contents placed in Licensee’s products (including products in the Business Category and MLB Branded Licensee Products); or (xii) any actual or alleged claims or allegations of physical or emotional injury, wrongful death, or loss of consortium relating to the use of any of Licensee’s products (including products in the Business Category and MLB Branded Licensee Products).
[***] Indicates material that has been excluded from this Exhibit 10.31 because it is not material.
A-3
B.Licensor shall indemnify, defend and hold harmless Licensee and its former or current owners, shareholders, affiliates, partners, members, directors, officers, employees, agents, representatives, successors and assigns from all Claims resulting from any actual or alleged third party claim made, or action or suit instituted, arising out of or related to (i) challenges to Licensor’s authority as agent for the MLB Entities to license the Licensed Properties in connection with the Program; (ii) assertions to any claim of right or interest in or to, and/or any other claim of ownership or exclusive use related to, the Licensed Properties as authorized and used in the Program including Licensee’s use of third-party marks and logos as directed by Licensor, pursuant to this Agreement; (iii) grossly negligent acts or omissions of Licensor or Licensor’s officers, agents, representatives, or employees in the performance of their obligations pursuant to this Agreement; (iv) any actual or alleged libel or slander against, or invasion of the right of privacy, publicity or property of, or violation or misappropriation of any other right of, any third party by Licensor, its agents, representatives, employees, or those under its supervision or control; (v) Licensor’s promotional, marketing, or advertising activities involving or related to the Program, including, but not limited to any alleged or actual errors, omissions or misconduct in the design and execution of any sweepstakes or contest hereunder; or (vi) any breach by Licensor of this Agreement.
C.The party seeking indemnification hereunder shall give prompt written notice, cooperation and assistance to the indemnifying party relative to any such Claim and the indemnifying party shall have the option to undertake and conduct the defense of such Claim (including, without limitation, selecting in its sole discretion, counsel therefore) and to engage in settlement thereof at its sole discretion. The indemnifying party, shall, upon request by the indemnified party, allow the indemnified party, at its own expense, to participate in the defense of any such Claim. The indemnified party shall have the right to approve any negotiated settlement and such approval shall not be unreasonably withheld or delayed. Any withholding of approval for any settlement requiring admission of guilt or liability on the part of the indemnified party shall be deemed reasonable. Notwithstanding the foregoing, to the extent that Licensee is defending and indemnifying Licensor in an action arising hereunder involving, as a litigated issue, the use of the Licensed Properties, Licensor shall have reasonable approval rights over all substantive court papers and approval rights over the selection of counsel by Licensee (such approval rights not to be unreasonably withheld, conditioned, or delayed). For the avoidance of doubt, the foregoing shall not limit an indemnified party’s right to indemnification under this Agreement.
D.Licensee shall reasonably assist Licensor, to the extent necessary and at Licensor’s sole cost and expense, in the protection of any of the MLB Rightsholders’ rights in the Licensed Properties, and Licensor, in order to protect and enforce the Licensed Properties and the goodwill associated therewith, may commence or prosecute any claims or suits in its own name (it being understood that nothing herein shall be deemed a waiver of Licensor’s rights under applicable laws and governing rules of civil procedure regarding impleading or interpleading parties in a litigation). Licensee shall notify Licensor in writing of any infringements of rights in the Licensed Properties by others of which Licensee is or becomes aware. Licensor shall have the sole right to determine whether or not any action shall be taken on account of such infringements. Licensee shall not institute any suit or take any action on account of any such infringements or imitations without first obtaining the written consent of Licensor. Licensee is not entitled to share in any proceeds received by Licensor (by settlement or otherwise) in connection with the Licensed Properties from any formal or informal action brought by Licensor pursuant to this section.
E.The indemnities provided hereunder shall survive the termination or expiration of the License Period.
VII.Insurance.
A.Without limiting any other obligation or liability of either Party under this Agreement, Licensee agrees that as of the Effective Date (except as otherwise set forth below), through the entire License Period and for not less than three (3) years thereafter, it shall procure and maintain insurance coverages with terms and conditions and limits that are specified below (or the equivalent limits in Canadian Dollars (CAD)). In the event that any required insurance is written on a claims-made basis and the policy(ies) are not renewed with the same insurance carrier, then an extension of coverage shall be obtained starting with the expiration date of the original policy date through a period of three (3) years following the termination or expiration of this Agreement to cover claims that occurred during the original policy(ies) period.
(i)Workers’ Compensation in compliance with state statutory laws, covering employees, volunteers, temporary workers and leased workers, including Employers’ Liability with minimum limits of: $1,000,000 Each Accident; $1,000,000 Disease, Each Employee; and $1,000,000 Disease, Policy Limit.
(ii)An Insurance Services Office occurrence based Commercial General Liability Insurance Policy, providing coverage for bodily injury and property damage and personal and advertising injury including
[***] Indicates material that has been excluded from this Exhibit 10.31 because it is not material.
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contractual liability and products/completed operations liability coverage with minimum limits of: $1,000,000 Each Occurrence; $2,000,000 General Aggregate; and $2,000,000 Products/Completed Operations Aggregate.
(iii)Umbrella Liability Insurance, in excess of subsections (a), (b) and (c) above, with minimum limits of: $10,000,000 Each Occurrence; and $10,000,000 General Aggregate.
(iv)Cyber Liability or equivalent Professional Liability Insurance, including Network Security Liability, Multimedia, Advertising Liability, Information Asset Coverage, Data Breach, Privacy Liability and Network Business Interruption Insurance, with a minimum limit of $10,000,000 Each Claim
B.All insurance policies must be issued by an admitted insurance carrier with an A.M. Best rating of A-8 or better. The MLB Entities must be named as Additional Insureds under the policies listed in sub-sections (ii) (using ISO Form CG2010 or its equivalent) and (iii)-(v) above. Additional insured coverage shall be extended to include products-completed operations coverage. Further, coverage for the MLB Entities shall apply on a primary and non-contributory basis irrespective of any other insurance, whether collectible or not. All liability insurance policies must provide Cross Liability coverage (separation of insureds or severability of interest provisions) and may not contain an Insured versus Insured exclusion. The Commercial General Liability policy shall not include any exclusions or limitations for: (1) third-party-over actions; or (2) communicable disease, including but not limited to COVID-19, coronavirus or other related or similar illnesses or conditions. No policy shall contain a self-insured retention. No policy shall contain a deductible in excess of $25,000 and all deductibles shall be the sole responsibility of Licensee and shall not apply to any of the MLB Entities. All Licensee policies shall be endorsed to provide a waiver of subrogation in favor of the Additional Insureds. All policies shall be endorsed to provide that in the event of non-renewal or material modification, Licensor shall receive thirty (30) days written notice thereof. Licensee shall furnish Licensor with certificates of insurance evidencing compliance with all insurance provisions noted above no later than the Effective Date and annually prior to the expiration of each required insurance policy. Licensee shall provide Licensor with copies of its insurance policies and/or endorsements upon request. The insurance requirements set forth will in no way modify, reduce, or limit the indemnification herein made by Licensee. Receipt by Licensee of a certificate of insurance, endorsement or policy of insurance which is more restrictive than the contracted for insurance shall not be construed as a waiver or modification of the insurance requirements above or an implied agreement to modify same, nor is any verbal agreement to modify same permissible or binding.
VIII.Privacy and Data Protection Laws. Each party will comply with all applicable privacy and data protection laws and regulations established for the collection, storage, use and dissemination of personally identifiable information and will comply with the terms of its own privacy statement.
IX.Termination.
A.Licensor shall have the right to terminate this Agreement on written notice upon the occurrence of any one or more of the following events if: (i) Licensee fails to make any payment due hereunder, and if such non-payment continues for ten (10) days after written notice of such default is sent to Licensee (in which event all payments due to Licensor under this Agreement shall then become due regardless of payment dates provided herein); (ii) Licensee admits in writing it is unable to pay its debts when due; or makes any assignment for the benefit of creditors or an arrangement pursuant to any bankruptcy law; (iii) Licensee files or has filed against it any petition under the bankruptcy or insolvency laws of any jurisdiction that is not dismissed within sixty (60) days; (iv) Licensee appoints or suffers appointment of a receiver or trustee to administer all or substantially all of its business or property; (v) Licensee is adjudicated a bankrupt or an insolvent; (vi) Licensee forms or suffers formation of any committee of its creditors for the purpose of monitoring Licensee’s financial affairs of or enforcing such creditors’ rights; (vii) Licensee undergoes a change in majority or controlling ownership, including a merger, that is not pre-approved in writing by Licensor; (viii) Licensee materially changes the conduct of its business as the same is now conducted (e.g., sells and markets THC Products); provided, that (a) Licensor shall not exercise its rights under this subsection (viii) in bad faith and (b) prior to exercising its rights under this subsection (viii) Licensor shall have good faith conversations with Licensee in an effort to avoid termination to the extent practicable; (ix) Licensee produces and distributes products that are found to be harmful or defective (in any material respect), as determined by a national medical institution, federal governmental agency or court of competent jurisdiction; (x) Licensee materially breaches this Agreement in a manner which is incapable of cure (as determined by Licensor acting reasonably); (xi) Licensee materially breaches any other term or condition of this Agreement (including, fails to maintain the insurance required herein) and fails to cure such breach within thirty (30) days after notice of such breach is received by Licensee; provided, that, if Licensee has taken commercially reasonable steps to cure such breach within such thirty (30) day period, but the failure is of a type or character that is not reasonably susceptible of cure within such thirty (30) day period and would otherwise be capable of cure by Licensee using commercially
[***] Indicates material that has been excluded from this Exhibit 10.31 because it is not material.
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reasonable efforts, then Licensor, in its sole discretion, may elect to extend such period by an additional thirty (30) days, or (xii) Licensee’s NSF certification for any of Licensee’s products that are promoted using the rights granted to Licensee under this Agreement is suspended, cancelled or revoked.
B.Licensee, in its discretion, may terminate this Agreement on written notice to Licensor if Licensor breaches this Agreement and fails to commence to cure such material breach within thirty (30) days after notice of such breach is received by Licensor; provided however, sole and exclusive remedy for licensor’s failure to make available any advertising or promotional opportunities provided for hereunder shall be a mutually agreed make good as set forth herein.
C.In the event Licensee terminates this Agreement in accordance with Section IX.B, then Licensor shall promptly refund any portion of the MLB Rights Fee already paid to the Licensor and allocable to the period after the date of such termination (prorated by calendar day), and in all cases within thirty (30) days after the effective date of such termination.
X.Limitation on Liability. EXCEPT AS OTHERWISE SET FORTH IN SECTION X.C BELOW:
A.IN NO EVENT WILL EITHER PARTY’S (AND IN THE CASE OF LICENSOR, LICENSOR AND THE MLB ENTITIES AND, IN THE CASE OF LICENSEE, LICENSEE AND ITS AFFILIATES) CUMULATIVE LIABILITY PURSUANT TO THIS AGREEMENT TO THE OTHER PARTY EXCEED THE AMOUNTS PAID TO LICENSOR FOR THE YEAR OF THE LICENSE PERIOD AT THE TIME THE EVENTS GIVING RISE TO A CLAIM HEREUNDER OCCURRED; AND
B.IN NO EVENT WILL EITHER PARTY (AND IN THE CASE OF LICENSOR, LICENSOR AND THE MLB ENTITIES AND, IN THE CASE OF LICENSEE, LICENSEE AND ITS AFFILIATES) BE LIABLE TO THE OTHER PARTY for INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY DAMAGES OF ANY KIND (INCLUDING, WITHOUT LIMITATION interruption of business or loss of business or business opportunities) ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT, REGARDLESS OF THE FORM OF ACTION WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT PRODUCT LIABILITY, OR ANY OTHER LEGAL OR EQUITABLE THEORY, EVEN IF SUCH PARTY HAS BEEN ADVISED OR IS AWARE OF THE POSSIBILITY OF SUCH DAMAGES.
C.Notwithstanding any provision herein to the contrary, the limitations and exclusions set forth in this Section shall not apply to (i) either party’s indemnification obligations under Section VI; (ii) a breach of either party’s obligations regarding Confidential Information or data security obligations set forth herein; (iii) either party’s gross negligence or willful misconduct; or (iv) Licensee’s obligation to pay amounts due to Licensor hereunder
D.THE PARTIES AGREE THAT THE FOREGOING REPRESENTS A FAIR ALLOCATION OF RISK HEREUNDER.
XI.Sole and Exclusive Remedy.
In the event Licensor is unable to deliver any of the marketing or sponsorship rights and benefits set forth in this Agreement during the License Period, Licensee acknowledges and agrees that its sole and exclusive remedy shall be mutually agreed upon substitute rights and benefits to be provided by Licensor to Licensee (“Substitute Assets”); provided, however, in all cases any such Substitute Assets shall have a value not less than that of the applicable undelivered rights and benefits. If Licensor is unable to deliver any of the marketing or sponsorship rights and benefits set forth in this Agreement during the License Period, Licensor shall promptly notify Licensee in writing, and Licensor and Licensee shall consult regarding Substitute Assets therefor for a period of up to sixty (60) days. If, following such consultation, the parties are unable to agree upon Substitute Assets, the provisions of Section XXI.A (Dispute Resolution) will apply with respect to such determination.
XII.Acknowledgment of Rights and Goodwill.
A.Proprietary Rights.
(i)[* * *]
(ii)[* * *]
(iii)[* * *]
[***] Indicates material that has been excluded from this Exhibit 10.31 because it is not material.
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B.Promotional Intellectual Property. [* * *]
1.Licensee Intellectual Property. [* * *]
(i)[* * *]
(ii)[* * *]
(iii)[* * *]
(iv)[* * *]
[* * *]
2.MLB Intellectual Property. [* * *]
(i)[* * *]
(ii)[* * *]
(iii)[* * *]
3.[* * *]
4.[* * *]
5.[* * *]
6.[* * *]
7.Licensee’s Reservation of Rights. [* * *]
XIII.Clearances.
[* * *]
XIV.MLB Players.
A.[* * *]
B.[* * *]
C.[* * *]
XV.Film or Videotape Footage and Photographs.
A.[* * *]
B.[* * *]
XVI.Disposal of Stock.
[* * *]
XVII.Major League Baseball Event Activities.
[* * *]
[***] Indicates material that has been excluded from this Exhibit 10.31 because it is not material.
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XVIII.Insertion Order Terms. The following terms shall expressly modify the terms and conditions applicable any Insertion Order executed by the parties in furtherance of the Media Plan:
A.[* * *]
XIX.Payment Terms.
A.All payments due hereunder by Licensee to Licensor will be made in U.S. dollars and within thirty (30) days or receipt of written invoice from Licensor via ACH or wire transfer of immediately available funds to the following account (or any other account designated in writing by MLBAM to Licensee):
[* * *]
B.Any payments of any compensation due to Licensor pursuant to this Agreement received more than ten (10) business days after the due date therefor shall require Licensee to pay to Licensor, in addition to the amounts due on such payments, interest on such amounts at 1% on a per month basis (or, if lower the maximum rate allowed by applicable law), for the period of the delinquency, without prejudice to any other rights of Licensor in connection with such delinquency.
XX.Force Majeure; Work Stoppage.
A.If a party is unable to perform any of its obligations under this Agreement (other than a payment obligation) due to a Force Majeure Event (except to the extent of a Work Stoppage, which is governed by Section XX(B)), upon delivery of written notice to the other party, such non-performing party’s obligations shall be abated for the duration of the Force Majeure Event. Notwithstanding the foregoing, if a Force Majeure Event results in (i) Licensee being prohibited, prevented, or materially impeded from receiving a material right or benefit hereunder (or any right or benefit associated with such rights or benefits such as exclusivity or category protection) contemplated to be provided to Licensee under this Agreement, or (ii) the value of any of the rights and benefits contemplated to be provided to Licensee being materially reduced, then Licensor and Licensee shall consult regarding the potential for substitute rights and benefits therefor for a period of up to thirty (30) days. For clarity, the foregoing shall apply to a Force Majeure Event that has ended, but for which there are continuing effects that materially reduce the value of any of the rights and benefits hereunder to be provided to Licensee. If, following such consultation, the parties are unable to agree on substitute rights and benefits, Licensor shall provide to Licensee an equitable adjustment of the MLB Rights Fee in the amount of the lost value that has not been compensated by agreed-upon substitute rights and benefits. If the parties are unable to agree on the determination of the equitable adjustment or the amount of the lost value, the provisions of Section XXI.A (Dispute Resolution) will apply with respect to such determination. Any equitable adjustment due pursuant to this Section XX.A shall be paid within forty-five (45) days of the determination of such equitable adjustment pursuant to this Section XX.A.
B.Notwithstanding anything contained in this Agreement to the contrary, in the event a regular Major League Baseball season during the License Period is shortened for thirty (30) game days or more as a result of a labor dispute between the Major League Baseball owners and the Major League Baseball Players Association (the year during which such dispute occurred, a “Work Stoppage Year”), then the MLB Rights Fee for such Work Stoppage Year shall be reduced (such reduction, the “Work Stoppage Reduction”) hereunder on a percentage basis, the numerator of which shall be the number of dates during the regular season and postseason of such Work Stoppage Year on which at least one Major League Baseball game was scheduled to be played (collectively, “Game Days”) and was not played because of the aforementioned labor dispute, and the denominator of which shall be the total number of Game Days in that year. The Work Stoppage Reduction shall be provided to Licensee in the form of a credit or offset against amounts payable to Licensor for the following Major League Baseball season during the License Period; provided, that if a Work Stoppage Year occurs in the final Major League Baseball season of the License Period, the Work Stoppage Reduction shall be provided to Licensee in the form of a refund, payable within forty-five (45) days following the date of the final game of the World Series that was scheduled to take place during such Work Stoppage Year.
XXI.Miscellaneous.
A.Dispute Resolution. The parties intend that all problems and disputes of any nature relating to this Agreement or arising from the transactions contemplated hereby shall be resolved through the procedures of this Section XXI(A), provided, however, that neither party shall be under any obligation to invoke the procedures of this Section XXI(A) with respect to disputes for which injunctive relief is sought. It is the intention of the parties that
[***] Indicates material that has been excluded from this Exhibit 10.31 because it is not material.
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they continue to perform their respective obligations during the pendency of any dispute subject to this Section XXI(A).
1.Discussions between the Parties.
(a)Contract Manager Level. The parties will initially attempt to resolve disputes arising in the ordinary course of the parties’ performance under this Agreement at the contract manager level. For Licensee this shall be the Chief Marketing Officer and for Licensor this shall be the Senior Vice President of Sponsorship.
(b)Escalation. If, after a reasonable period of time, not to exceed five (5) business days, the contract managers have not been able in good faith to resolve any dispute, each party will prepare a written statement outlining the dispute and attempted resolution and submit the statements to Licensee’s Chief Financial Officer and Licensor’s EVP of Revenue who will discuss the dispute and attempt in good faith to resolve it.
2.Arbitration. Any controversy or claim, other than those specifically excluded, between or among the parties not resolved through the procedures set forth in Section (XXI)(A)(1) above, shall at the request of a party be determined by arbitration (which request shall be at least ten (10) business days following the escalation set forth in Section (XXI)(A)(1)(b) above. Any arbitration to be conducted in connection with this Agreement shall be administered by JAMS in accordance with the provisions of this Paragraph and the JAMS Comprehensive Arbitration Rules and Procedures (“JAMS Rules”) in effect as of the commencement of the applicable arbitration proceeding, except to the extent the then-current JAMS Rules are inconsistent with the provision of this Paragraph, in which case the terms hereof shall control. The decision of the arbitrator shall be binding on the parties and judgment thereon may be entered in any court, whether federal or state, having jurisdiction over the parties. The losing party shall have the right to ask the arbitrator to reconsider the decision and brief the issue at its expense. Such arbitration shall be subject to the following additional provisions:
(a)Any arbitration pursuant to this Paragraph shall be conducted in New York, New York.
(b)The arbitration shall be conducted by one (1) arbitrator, which arbitrator shall be selected in accordance with the JAMS Rules, and which arbitrator shall have had at least fifteen years’ experience in general commercial transactions, sponsorship and promotional agreements and contract disputes.
(c)In connection with any arbitration proceeding: (i) no arbitrator shall have been employed or engaged by either party hereto and its consultants within the previous five (5) year period; (ii) the arbitrator shall be neutral and independent of the parties to this Agreement; (iii) no arbitrator shall be affiliated with any party’s auditors; and (iv) no arbitrator shall have a conflict of interest with (including, without limitation, any bias towards or against) either party hereto.
(d)The award of the arbitrator shall be accompanied by a written statement of the reasons upon which the award is based. The arbitrator shall apply law governing this Agreement in rendering his/her decision. The arbitrators shall not have the power to modify this Agreement. The arbitrator will have no authority to award damages excluded by this Agreement, except as may be required by statute. The fees and costs of the arbitrator shall be borne equally by the parties.
(e)The parties will reasonably cooperate in the exchange of documents relevant to any dispute or claim. Deposition or interrogatory discovery may be conducted only by agreement of the parties and/or if ordered by the arbitrator. In considering a request for such deposition or interrogatory discovery, the arbitrator shall take into account that the parties are seeking to avoid protracted and costly discovery in connection with any arbitration proceeding hereunder.
B.Injunctive Relief. Either party also may, without waiving any remedy under this Agreement, seek from any court of competent jurisdiction located in New York County, New York State, any interim or provisional relief that is necessary to protect the rights or property of that party, pending the establishment of the arbitral tribunal. Each of the parties consent to the jurisdiction and venue of any such court and waive any argument that any such court does not have jurisdiction over such party or such dispute or that venue in any such forum is not appropriate or convenient.
[***] Indicates material that has been excluded from this Exhibit 10.31 because it is not material.
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C.Choice of Law. The validity, construction, and enforceability of this Agreement and all matters or disputes arising under, in connection with or related to this Agreement shall be governed by the laws of the State of New York, without regard to its conflict of law principles, applicable to contracts entered into and performed entirely within that State.
D.Responsibility for other MLB Entity Acts and/or Omissions. If any MLB Entity other than Licensor takes any action (or fails to act) in a manner that would constitute a breach of this Agreement, such act or omission shall be deemed a breach of this Agreement by Licensor.
E.Selection Process. Licensee acknowledges that its selection as a Licensee by Licensor is based upon, among other things, the high regard in which the Licensee Brand and Licensee are held by the general public and by Licensor, but it is not based upon the results of any quality comparison between the Licensee Brands and other competitive products or services. Licensee agrees that it shall not represent otherwise to any third party or to the general public.
F.Credit. Licensee must include the following credit line in an appropriate place in/on any use of the MLB Marks: “Major League Baseball trademarks and copyrights are used with permission of Major League Baseball. Visit MLB.com.”
G.Non-Disparagement. Each party agrees that neither it nor any of its officers, and directors, will directly or indirectly, in any capacity or manner, make, express, transmit speak, write, verbalize or otherwise make any public statement to the media that is intended be construed to be derogatory or critical of, or negative toward, the other party hereto or any of its directors, or officers. The parties acknowledge and agree that employees of any MLB Entity whose role is journalistic in nature shall not be prohibited from any news reporting activities by virtue of this Paragraph.
H.Compliance with Laws. Each party shall comply with all applicable laws with respect to its obligations pursuant to this Agreement and performance hereunder.
I.Spyware and Adware. The parties shall not use any Spyware or Adware in connection with this Agreement. The parties will not distribute any commercial message, or authorize any third party to distribute any commercial message, by means of Spyware or Adware in connection with the Portal or the Licensee Website. “Spyware” or “Adware” is any software (including but not limited to software generally known as “cookies”) which has been downloaded to and/or installed on an Internet user’s computer, web browser, application or other device, either without the user’s consent or not in compliance with the applicable website privacy policy(ies) on which such software is installed, and facilitates the distribution of any commercial message to the user.
J.Severability. The determination that any provision of this Agreement is invalid or unenforceable shall not invalidate this Agreement, and the remainder of this Agreement shall be valid and enforceable to the fullest extent permitted by law.
K.No Joint Venture or Partnership. This Agreement shall not create a joint venture, partnership, principal-agent, employer-employee or similar relationship between Licensor and Licensee. Licensee shall have no right to obligate or bind Licensor in any manner whatsoever, and nothing herein contained shall give or is intended to give any rights of any kind to any third persons.
L.Waiver. This Agreement, or any term hereof, may be modified, amended or waived only by a written instrument duly executed by both parties, and a failure by either party to enforce any term of this Agreement will not constitute a waiver by that party of such term or any other term of this Agreement. No written waiver shall excuse the performance of any act other than those specifically referred to therein.
M.Notices. All notices under this Agreement shall be in writing and deemed properly made upon receipt at the following addresses:
Notices to Licensor: General Counsel MLB Advanced Media, L.P. 1271 Avenue of the Americas New York, New York 10020 | Notices to Licensee: Legal Department Charlotte’s Web, Inc. 700 Tech Court Louisville, CO 80020 | ||||
[***] Indicates material that has been excluded from this Exhibit 10.31 because it is not material.
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N.Assignment. This Agreement is personal to each party and may not be sold, assigned, sublicensed, pledged, encumbered or otherwise transferred by a party without the prior written consent of the other party (such consent not to be unreasonably withheld, conditioned or delayed); provided, however, that Licensor may assign this Agreement to any MLB Entity capable of fulfilling all rights and obligations hereunder. This Agreement shall be binding on any permitted assignee or any successor in interest of either of the parties hereto.
O.Subcontractors. Licensee may sublicense or subcontract to a third-party in connection with the design and/or development of creative materials and/or packaging created in connection with this Agreement; provided, however, Licensee shall cause such third-party to comply with the applicable terms of this Agreement and Licensee shall remain liable for any acts or omissions of such third-party. In the event that Licensee uses any subcontractor, Licensee shall enter into a written agreement with such subcontractor with terms at least as protective of Licensor’s rights and interests as this Agreement. Upon request, Licensee will provide information to Licensor regarding such subcontractors that Licensee uses in accordance with the foregoing.
P.Entire Agreement; Amendments. This Agreement, when fully executed (including all Exhibits attached to this Agreement), constitutes the entire agreement of the parties with respect to the subject matter hereof and the provisions hereof supersede any and all prior and contemporaneous agreements, representations or understandings, oral or written, between the parties with respect to the subject matter hereof. This Agreement may be amended only by a document signed by both parties hereto.
Q.Confidentiality. The parties agree that the terms of this Agreement, any proposal, financial information or proprietary information provided by or on behalf of one party to the other, and all non-public information or materials disclosed by one party to the other shall be kept strictly confidential and shall not be disclosed unless required by law or requested by governmental regulatory authority, provided that each party may disclose such terms to its affiliates, provided that such entities shall maintain the confidentiality of such materials or information, and each of the parties may disclose such terms to their respective accountants and legal, financial and marketing advisors, provided that such entities, accountants and advisers agree to treat such information as confidential. Each party shall be liable for breaches of the confidentiality provisions of this Agreement by their respective accountants and legal, financial and marketing advisors.
R.Press Releases. Subject to Section G.11 above, each party may release press announcements regarding any details contained in this Agreement once both Licensor and Licensee have agreed to its content in accordance with the approval requirements set forth in this Agreement.
S.Time of the Essence. Time is of the essence of all parts of this Agreement.
T.Survival of Provisions. Sections F.2, G.10 and Sections VI (Indemnification), VII (Insurance), IX (Termination), X (Limitation on Liability), XII (Acknowledgment of Rights and Goodwill), XVI (Disposal of Stock) and XXI (Miscellaneous) of Exhibit A shall survive any termination or expiration of this Agreement.
U.Agreement Negotiated by Parties; Counterparts. Licensee acknowledges and agrees that it has reviewed this Agreement with its counsel and understands and agrees to every provision contained herein. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. The exchange of signature pages by facsimile transmission, by electronic mail in “portable document format” (“.pdf”) form, or by any other electronic means intended to preserve the original graphic and pictorial appearance of a document, or by combination of such means, shall constitute effective execution and delivery of this Agreement as to the parties and may be used in lieu of and deemed the original Agreement for all purposes.
V.Partner Managers; Regular Meetings. Each of Licensor and Licensee shall designate one or more employee(s) (“Partner Managers”) that will be responsible for coordinating and working directly with the other party to effect the parties’ mutual intentions, to provide ongoing support to the other party in connection herewith, to effect the terms and conditions of this Agreement, and to discuss and explore on a non-binding basis additional mutually beneficial partnership and other opportunities for the parties. In furtherance of the foregoing, the Partner Managers shall endeavor to meet (in person or virtually) periodically during the License Period on a schedule to be mutually determined by the Partner Managers (provided such meetings shall take place at least quarterly). The parties acknowledge and agree that specific Partner Managers may change over time due to reassignment, attrition, or otherwise.
[***] Indicates material that has been excluded from this Exhibit 10.31 because it is not material.
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[***] Indicates material that has been excluded from this Exhibit 10.31 because it is not material.
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Exhibit 21.1
Charlotte’s Web Holdings, Inc.
Subsidiaries
•Charlotte’s Web, Inc. (Delaware)
•Abacus Products, Inc. (British Columbia)
•Abacus Health Products, Inc. (Delaware)
•Abacus Wellness, Inc. (Delaware)
•CBD Pharmaceuticals, Ltd. (Israel)
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-262006), as amended, pertaining to the CWB Holdings, Inc. 2015 Stock Option Plan, as amended, and the Charlotte’s Web Holdings, Inc. Amended 2018 Long-Term Incentive Plan of our report dated March 23, 2023, with respect to the consolidated financial statements of Charlotte’s Web Holdings, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 2022.
/s/ Ernst & Young LLP
Denver, Colorado
March 23, 2023
Denver, Colorado
March 23, 2023
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13A‑14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES‑OXLEY ACT OF 2002
I, Jacques Tortoroli, certify that:
1.I have reviewed the 2022 Annual Report on Form 10‑K of Charlotte’s Web Holdings, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
Date: March 23, 2023
| /s/ Jacques Tortoroli | ||
Jacques Tortoroli
Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13A‑14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES‑OXLEY ACT OF 2002
I, Jessica Saxton, certify that:
1.I have reviewed the 2022 Annual Report on Form 10‑K of Charlotte’s Web Holdings, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
Date: March 23, 2023
| /s/ Jessica Saxton | ||
Jessica Saxton
Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the 2022 Annual Report of Charlotte’s Web Holdings, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission (the “Report”), I, Jacques Tortoroli, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as added by §906 of the Sarbanes-Oxley Act of 2002, that:
| 1 | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |||||||
| 2 | To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. | |||||||
Dated: March 23, 2023
| /s/ Jacques Tortoroli | ||
Jacques Tortoroli
Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the 2022 Annual Report of Charlotte’s Web Holdings, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission (the “Report”), I, Jessica Saxton, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as added by §906 of the Sarbanes-Oxley Act of 2002, that:
| 1 | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |||||||
| 2 | To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. | |||||||
Dated: March 23, 2023
| /s/ Jessica Saxton | ||
Jessica Saxton
Chief Financial Officer
(Principal Financial and Principal Accounting Officer)