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CHARLOTTE’S WEB HOLDINGS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

Caution Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q ("Form 10-Q") contains statements that are,
or may be considered to be, "forward-looking statements." Forward-looking
statements are neither historical facts nor assurances of future performance.
Instead, they are based on current beliefs, expectations or assumptions
regarding the future of the business, future plans and strategies, operational
results and other future conditions. All statements other than statements of
historical fact included in this Form 10-Q regarding the prospects of
Charlotte's Web Holdings, Inc., ("Charlotte's Web", the "Company" or "we") the
industry or its prospects, plans, financial position or business strategy may
constitute forward-looking statements. In addition, forward-looking statements
generally can be identified by the use of forward-looking words such as "plans,"
"expects" or "does not expect," "is expected," "look forward to," "budget,"
"scheduled," "estimates," "forecasts," "will continue," "intends," "the intent
of," "have the potential," "anticipates," "does not anticipate," "believes,"
"should," "should not," or variations of such words and phrases that indicate
that certain actions, events or results "may," "could," "would," "might," or
"will," "be taken," "occur," or "be achieved," or the negative of these terms or
variations of them or similar terms. Furthermore, forward-looking statements may
be included in various filings that the Company makes with the SEC 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. (All
capitalized and undefined terms used in this section shall have the same
meanings hereafter defined in this Quarterly Report on Form 10-Q.)

The following discussion and analysis of financial condition and results of
operations should be read in conjunction with, and is qualified in its entirety
by, the unaudited condensed consolidated financial statements and the
accompanying notes in this Form 10-Q and the sections entitled "Item 1A. Risk
Factors" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our Annual Report on Form 10-K for the
year ended December 31, 2021. Except for historical information, the discussion
in this section contains forward-looking statements that involve risks and
uncertainties, as discussed in the "Cautionary Note Regarding Forward Looking
Statements." Future results could differ materially from those discussed below
for many reasons, including the risks described in Item 1A-"Risk Factors" in our
Annual Report on Form 10-K for the year ended December 31, 2021 and in Part II,
Item 1A-Risk Factors" of this Form 10-Q.


Management report of Charlotte’s Web Holdings, Inc.


For purposes of this discussion, "Charlotte's Web," "CW," "we," or the "Company"
refers to Charlotte's Web Holdings, Inc. and its subsidiaries: Charlotte's Web,
Inc. and Abacus Products, Inc., and its wholly-owned subsidiaries; Abacus Health
Products, Inc., Abacus Wellness, Inc. and CBD Pharmaceuticals Ltd. The results
herein have been prepared in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP").


The amounts are presented in thousands of United States dollars, unless otherwise specified.


BUSINESS OVERVIEW


Charlotte's Web Holdings, Inc., a Certified B Corp headquartered in Denver,
Colorado, 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, the LOFT, during the second quarter of
2020 at which the Company conducts its
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production, distribution, and quality control activities, and has expanded its
R&D. Charlotte's Web product categories include full spectrum hemp extract oil
tinctures (liquid products), gummies (sleep, stress, immunity, exercise
recovery), capsules, CBD topical creams and lotions, as well as products for
pets. Charlotte's Web products are distributed to more than 15,000 retail doors
and 8,000 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 March 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 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 evidences 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 Stanley Brothers USA Holdings Purchase Option ("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.

The company holds the #1 market share position in major retail channels, including all food/drug/mass retail in the United States, all retail of natural specialties in the United States and e-commerce, based on market share data from leading third-party analysts such as Nielsen Holdings, SPINS SARLand Brightfield grouprespectively.

The company grows its proprietary hemp domestically in United States on rented farms in the northeast Colorado and sources high-quality hemp through contract farms in Kentucky and Oregon.

The Company continues to invest in R&D efforts to identify new product
opportunities. Management plans to expand CW's production capacity, sales and
marketing infrastructure, and to find opportunities for continuous improvement
in the supply chain and proactively define the competitive landscape. The
Company plans 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, 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 aims to support the Company's
product portfolio with studies and science-based innovation. CW Labs is
currently engaged in double-blind, placebo-controlled human clinical trials
addressing Hemp-based solutions for several need states.
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CW Labs is located in Louisville, Colorado at the Company's production and
distribution facility and the Hauptmann Woodward Research Institute on the
campus of the University at Buffalo's Jacobs School of Medicine and The Center
for Integrated Global Biomedical Sciences through which it fosters
collaborations throughout the State University of New York network of 64
national and international research and medical institutions. In November 2019,
the Company announced collaboration between CW Labs and the University at
Buffalo's Center for Integrated Global Biomedical Sciences to advance Hemp
cannabinoid science through a research program that provides a better
understanding of the therapeutic uses of cannabinoids.

Selected financial information


                                                                     As of 

and for the three months ended

                                                                                   March 31,
                                                                          2022                     2021
Total revenues                                                    $              19,356       $        23,407
Cost of goods sold                                                                7,643                 9,770
Gross profit                                                                     11,713                13,637
Selling, general, and administrative expenses                                 20,355                   23,786
Operating loss                                                                  (8,642)              (10,149)
Other income (expense), net                                                        (84)                   105
Change in fair value of financial instruments and other                             100               (2,696)
Income tax expense                                                                    -                  (34)
Net loss and comprehensive loss                                   $             (8,626)       $      (12,774)
Total assets                                                      $          160,824          $    295,553
Total liabilities                                                 $           37,672          $     52,534




Revenue


The majority of the Company's revenue is derived from sales of branded products
to consumers via the Company's DTC e-commerce website, and distributors, retail
and wholesale B2B customers.

                                                                            Three Months Ended
                                                                                March 31,
                                                                                            2022                   % (Decrease)     2021
Total revenue                                                                                      $       19,356                $ 23,407               (17.3) %
Direct-to-consumer ("DTC") revenue                                                                    13,138                       16,130               (18.5) %
Business-to-business ("B2B") revenue                                                                   6,218                        7,277               (14.6) %



Total revenue for the three months ended March 31, 2022 was $19,356, a decrease
of 17.3% compared to the three months ended March 31, 2021. DTC e-commerce
revenue decreased 18.5% year-over-year. The decrease was attributable to lower
traffic at the Company's online store, wildfire shipping delays, and an
industry-wide consumer shift to lower-priced CBD products; primarily gummies and
topical products, where Charlotte's Web is the market share leader. The
decreased online traffic, was due to lessened promotional frequency, partially
offset by stronger subscriptions and higher conversion rates. B2B revenue
decreased 14.6% compared to the three months ended March 31, 2021, due to
reduced shipments to some of the Company's largest retail customers after the
warehouse closure and some supply chain challenges on top selling clinic SKUs.
This was partially offset by new retail distribution in grocery, natural, and
pet retail, following the passing of Assembly Bill 45 in California.


Cost of Goods Sold


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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, the mix of product
sold, third-party quality costs, transportation, overhead allocations and
changes in inventory provisions.


The components of cost of goods sold are as follows:

                                                                      Three Months Ended
                                                                          March 31,
                                                                        2022                2021     % (Decrease)
Cost of goods sold                                                            $   7,643            $       9,770                 (21.8) %
Inventory expensed to cost of goods sold                                          5,866                    7,213                 (18.7) %
Inventory provision, net                                                              -                      333                (100.0) %
Other production costs                                                              923                    1,437                 (35.8) %
Depreciation and amortization                                                       854                      787                   8.5  %



Cost of goods sold decreased 21.8% for the three months ended March 31, 2022
compared to the three months ended March 31, 2021, primarily due to lower unit
sales volume, lower shipping costs, product mix and a decrease in inventory
provisions.

Depreciation and amortization expense for the three months ended March 31, 2022
and March 31, 2021 was $2,078 and $2,668, respectively, of which $854 and $787,
respectively, was expensed to cost of goods sold. The remaining depreciation and
amortization expenses of $1,224 and $1,881, respectively, was expensed to
Selling, general, and administrative expenses. The decrease in depreciation and
amortization is attributable to us writing off all of our intangible assets in
December 2021.

Gross Profit

The primary factors that can impact gross profit margins include the volume of
products sold, the mix of revenue between DTC e-commerce and B2B, the mix of
products sold, the promotional and sales discount rate, third-party quality
costs, transportation costs, and changes in inventory provisions.

Gross profit for the three months ended March 31, 2022 and March 31, 2021 is as
follows:


                                               Three Months Ended
                                                    March 31,
                                                           2022             2021     % (Decrease)
Gross profit                                                     $  11,713        $            13,637     (14.1) %
Percentage of revenue                                              60.5  %                    58.3  %



Gross profit decreased 14.1% for the three months ended March 31, 2022 compared
to the three months ended March 31, 2021. The decrease is primarily related to
lower net revenue in both the DTC and B2B channels which we discussed above
while, partially offset by lower period expenses, improved product mix and a
decrease in inventory provisions.

Selling, general and administrative expenses

The total selling, general and administrative expenses are as follows:

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                                                                         Three Months Ended
                                                                             March 31,
                                                                             2022                 2021         % (Decrease)
Selling, general, and administrative expenses                                      $      20,355         $                 23,786            (14.4) %




Total Selling, general, and administrative expenses for the three months ended
March 31, 2022 and March 31, 2021 were $20,355 and $23,786, respectively. The
14.4% decrease was primarily attributable to a decrease in personnel, legal and
professional services costs along with lower depreciation and amortization.
Depreciation and amortization expensed to Selling, general, and administrative
expenses for the three months ended March 31, 2022 and March 31, 2021 were
$1,224 and $1,881, respectively.


Total research and development expenses expensed to Selling, general, and
administrative expense for the three months ended March 31, 2022 and March 31,
2021 were $1,170 and $1,308, respectively. Research and development expenses
primarily include personnel costs related to our R&D science division as well as
R&D related projects advancing Hemp cannabinoid science through research
programs that provide a better understanding of the therapeutic uses and of
cannabinoids.

Total change in fair value of financial and other instruments

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


                                                                            Three Months Ended
                                                                                 March 31,                           % (Decrease)
                                                                       2022                   2021
Change in fair value of financial instruments and
other                                                             $          100       $          (2,696)                    (103.7) %



Total change in fair value of financial instruments and other for the three
months ended March 31, 2022 and March 31, 2021 was $100 and $(2,696),
respectively. For the three months ended March 31, 2022, the change in fair
value of financial instruments and other was primarily driven by the revaluation
of the fair value of the Company's SBH Purchase Option for $100. For the three
months ended March 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. The fair value of Company's warrant liabilities is revalued
at each reporting date with changes primarily based on changes to the Company's
share price input to the Black-Scholes option pricing model. The fair value of
the Company's SBH Purchase Option is revalued at each reporting date with
changes primarily based on changes in financial projections of Stanley Brothers
USA and the probability and timing of exercise.
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Cash and capital resources

From March 31, 2022 and December 31, 2021the Company had total current liabilities of $17,794 and $20,170respectively, and the cash and cash equivalents of $14,497 and $19,494, respectively, to meet its current obligations. The Company estimates that it will be cash neutral in 2022.


The Company's primary sources of liquidity are its Net cash flows, and sales of
its securities from time to time. The Company's ability to fund operating
expenses and capital expenditures for the next twelve months and thereafter will
depend on its future operating performance which will be affected by general
economic conditions, financial, regulatory, FDA, and other factors including
factors beyond the Company's control. From time-to-time, management reviews
acquisition opportunities and if suitable opportunities arise, may make selected
acquisitions to implement the Company's business strategy.


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 and comprehensive loss, the level of accounts
receivable, accounts payable, accrued liabilities and unearned revenue and
deposits; (ii) investing activities, including the purchase of property and
equipment; and (iii) financing activities, including debt financing and the
issuance of capital shares.


The Company has an asset backed line of credit with J.P. Morgan for $10,000 with
an option in certain circumstances to increase the line of credit to $20,000.
The current maturity date is March 23, 2023. The line of credit agreement
requires compliance by the Company with certain debt covenants. As of March 31,
2022 and December 31, 2021, the Company was not in compliance with certain debt
covenants since March 9, 2022 and through May 16, 2022, the line of credit has
been on hold. As of March 31, 2022 and May 16, 2022, there are no amounts drawn
on the line of credit.

The Company filed the final short-form base shelf prospectus on May 5, 2021 with
Canadian regulators, with a term of 25-months, which allows 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 expires 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 at-the-market
equity program ("ATM Program"). 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, if any, will be sold
at the prevailing market price at the time of sale under the ATM Program. As of
January 4, 2022, the ATM Program ceased to be available to the Company. The
Company could reestablish this ATM once it becomes eligible for short-form
registration on Form S-3, which could be as early as January 2023.

Cash flow

Cash flow from operating activities

Net cash used in operating activities for the three months ended March 31, 2022
and March 31, 2021 were the following:

(in thousands)                                                          

Three months completed March, 31st,

                                                                      2022                      2021
Net cash used in operating activities                           $         (4,679)       $             (8,706)



For the three months ended March 31, 2022, the decrease in cash used in
operations is primarily due to an improvement in the net operating loss compared
to the same period in the prior year as well as favorable working capital,
including lower accounts payable, inventory and prepaid expenses. Additionally,
there was a decrease in cash outflows related to cultivation payments for the
three months ended March 31, 2022.

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Cash from investing activities

Net cash used in investing activities for the three months ended March 31, 2022
and March 31, 2021 were the following:

(in thousands)                                      Three Months Ended March 31,
                                                         2022                   2021
Net cash used in investing activities        $       (271)                  

$(9,065)



For the three months ended March 31, 2022, the decrease in cash used in
investing activities was driven by lower capital expenditures as the build-out
of the LOFT was substantially completed in 2020. For the three months ended
March 31, 2021 the outflow mainly related to the SBH Purchase Option that was
executed for total consideration of $8,000.

Cash provided by financing activities

Net cash provided by financing activities for the three months ended March 31, 2022 and March 31, 2021 were the following:

(in thousands)                                                         Three Months Ended March 31,
                                                                      2022                     2021
Net cash used in financing activities                           $            (47)       $               16




For the three months ended March 31, 2022, the change was primarily due to the
vesting of restricted stock units. For the three months ended March 31, 2021,
the change was primarily due payment of offering costs related to the ATM
Program. 

Off-balance sheet arrangements

As of March 31, 2022 and December 31, 2021, 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


                                                       March 31,       December 31,
                                                          2022             2021

Dated secured promissory notes November 13, 2020(1) $1,037 $

1,037

Total due from related party (current portion notes
receivable)                                           $    1,037      $       1,037



(1)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 is secured by equity
instruments with certain founders of the Company, is carried at amortized cost,
bears 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. Interest income is recognized based upon the contractual interest rate and
unpaid principal balance of the promissory note. As of December 31, 2021, the
founders owed the Company $1,037 consisting of principal and interest. 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
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will accrue through the payment date. The founders' equity instruments securing
the promissory note remained in place and interest will continue to accrue on
the note. On March 22, 2022, the Company and the founders amended the agreement
to increase the equity instruments securing the promissory note and to extend
the maturity date to November 13, 2023. As a result of this amendment and the
liquid and quantifiable value of the shares pledged, the Company does not
believe there is an estimated credit loss on the note receivable as of March 31,
2022. The Company will continue to evaluate the note receivable for changes to
credit loss estimates through the extended maturity date.


Prepaid expenses


On April 16, 2021, pursuant to the amendment to the Name and Likeness Agreement
between the Company and Leeland & Sig LLC d/b/a Stanley Brothers 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 to Leeland & Sig LLC d/b/a Stanley Brothers Brand Company, on behalf of
the seven 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 three months ended March 31, 2022 and March 31, 2021, the
Company recognized $420 and $0, respectively, of selling, general, and
administrative expenses in the condensed consolidated statements of operations
and comprehensive loss related to this agreement. The remaining $604 and $1,025
is presented in prepaid expenses on the condensed consolidated balance sheets as
of March 31, 2022 and December 31, 2021, respectively.


Financial instruments


On March 2, 2021, the Company entered into the SBH Purchase Option with Stanley
Brothers USA. The SBH Purchase Option was purchased for total consideration of
$8,000. Certain founders of the Company, who are or were also employees, are the
majority shareholders of Stanley Brothers USA.

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
statements of operations and comprehensive loss for the period. The use of
assumptions for the fair value determination includes a high degree of
subjectivity and judgment using unobservable inputs (level 3 on the fair value
hierarchy), which results in estimation uncertainty. Changes in assumptions that
reasonably could have been different at the reporting date may result in a
higher or lower determination of fair value. Changes in fair value measurements,
if significant, may affect performance of cash flows. For the three months ended
March 31, 2022 and March 31, 2021, a $100 gain and $0, respectively, related to
the SBH Purchase Option was recognized as a change in fair value of financial
instruments and other in the statements of operations and comprehensive loss. As
of March 31, 2022 and December 31, 2021, the SBH Purchase Option represents a
financial asset of $13,100 and $13,000, respectively, in the condensed
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. Additional assumptions used in
the model include expected volatility, expected term (years), risk-free interest
rate, and weighted average cost of capital.


Accounts payable

Aidance is the manufacturer of nearly all Abacus products. The former Chief
Executive Officer of Abacus, and a former officer of the Company, also serves on
Aidance's Board of Directors. For the three months ended March 31, 2022 and
March 31, 2021, the Company made purchases of $673 and $1,537, respectively,
from Aidance. Payment terms on purchases are due 30 days after receipt. As of
March 31, 2022 and December 31, 2021, the Company has an liabilities due to
Aidance presented in accounts payable in the condensed consolidated balance
sheets of $294 and $119 as of March 31, 2022 and December 31, 2021,
respectively.

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Recently Adopted Accounting Principles

See footnote 2 to the audited consolidated financial statements filed in the Company’s Form 10K on March 24, 2022 for more information on recently adopted accounting principles.

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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 2 of our notes to condensed
consolidated financial statements for a discussion on recently adopted and
issued accounting pronouncements.


Fair value option


The Company has elected the fair value option in accordance with ASC 825-10
guidance to record its SBH Purchase Option. Under ASC 825-10, a business entity
shall report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting date. The SBH
Purchase Option is classified as a financial asset in the condensed consolidated
balance sheets and is remeasured at fair value at each reporting date, with
changes to fair value recognized in the statements of operations and
comprehensive loss 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.


Impairment of long-lived assets

The Company reviews intangible assets with indefinite useful lives for
impairment at least annually and reviews all intangible assets for impairment
whenever events or changes in circumstances indicate the carrying amount of the
assets may not be recoverable. Long-lived assets, such as property and equipment
and intangible assets subject to depreciation and amortization, as well as
indefinite lived intangibles and goodwill are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value of these
assets may not be recoverable or that the useful life is shorter than the
Company had originally estimated. Recoverability of these assets is measured by
comparison of the carrying amount of each asset or asset group to the future
undiscounted cash flows the asset or asset group is expected to generate over
their remaining lives. If the asset or asset group is considered to be impaired,
the amount of any impairment is measured as the difference between the carrying
value and the fair value of the impaired asset or asset group. If the useful
life is shorter than originally estimated, the Company amortizes the remaining
carrying value over the new shorter useful life. Impairment losses are recorded
in selling, general, and administrative expense in the condensed consolidated
statements of operations and comprehensive loss. There were no impairment losses
recognized for the three months ended March 31, 2022 and 2021.


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
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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 condensed consolidated financial statements. The Company may be
subject to examination by tax authorities where the Company conducts operations.
The earliest income tax year that may be subject to examination is 2018. The
Company has recorded an uncertain tax position as of March 31, 2022 and December
31, 2021. The Company's policy is to recognize interest and penalties on taxes,
if any, within operations as income tax expense.

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